Archive for August 2010

Ed’s Daily Summary for August 31st: See you in September   32 comments

I think we are all glad to get out of August.

AT: -0.03 to $12.50 (-0.24%)–bought at $12.62
GLD: 1.17 to $122.08 (0.97%)–bought at $119.00
INTC: -0.29 to $17.67 (-1.61%)–bought at $18.52
LYSDY: -0.45 to $8.75 (-4.89%)–bought at $7.274
NIV: -0.01 to $2.01 (-0.50%)–bought at $2.22
TMF: 1.77 to $54.96 (3.33%)–bought at $52.50
VCLT: 0.22 to $82.92 (0.27%)–bought at $81.50

OVERALL: -0.6%

Lynas dragged me down today, although I am still way up on it. What, me worry?

Intel was the other painful one, but I am actually looking at the lower price as a greater opportunity. It is rare to get a company like Intel for this cheap, so I am just looking for the bottom on it. I would love to see it get down to $15.75. Can you imagine getting Intel with a 4% dividend yield? Cha-ching!

Posted August 31, 2010 by edmcgon in Market Analysis, Portfolio

Be afraid…be VERY afraid!   4 comments

Did you notice how the market started dropping after the Federal Reserve’s August 10 meeting minutes were released? Here is why.

Imagine you’re a passenger in a car. The car starts making a funny noise, the engine starts smoking, and the car starts to slow down. Then the couple in the front seat start arguing about what they need to do next, with the wife telling the husband to slow the car down, and the husband telling her he just needs to press on the gas pedal a little more.

Folks, we are the passengers in this economic car. Are you ready to get out and push yet?

Posted August 31, 2010 by edmcgon in Economy

The tooth fairy stimulus plan and Ed’s dollar idea   22 comments

Although I am not a fan of Nobel Prize-winning economist Paul Krugman, I enjoyed how he took apart Ben Bernanke’s statement last Friday (from Krugman’s blog):

Bernanke more or less admitted that the economic situation has developed not necessarily to America’s advantage, nothing like the growth he was predicting six months ago. But he argued that 2011 will be better, because … well, it was hard to see exactly why. He offered no major drivers of growth, just a general argument that businesses will invest more despite huge excess capacity, and consumers spend more despite still-huge debts and home prices that are likely to resume their decline.

Oh, and sure enough, he declared that inflation expectations are well-anchored, although the market says otherwise.

So: I guess this speech marked a small step toward QE2 and all that. But mainly the message was that just around the corner, there’s a rainbow in the sky.

So I’m going to have another cup of coffee, but skip the pie (in the sky).

However, as soon as I start to enjoy Krugman, he has to go and blow it by saying something stupid:

But the stimulus wasn’t nearly big enough to restore full employment — as I warned from the beginning. And it was set up to fade out in the second half of 2010.

Fortunately, The Atlantic’s business and economics editor Megan McArdle provides the almost Krugman-esque snark necessary to toss Paul himself under the bus for his insanely stupid idea:

Did anyone think we were going to get a stimulus big enough to restore full employment?

How much unemployment reduction you get for a given amount of stimulus spending is, obviously, at best an imperfect estimation. But let’s take the CBO’s estimates as representing a rough consensus of those who favor stimulus: for our $800 billion, we got a reduction of 0.7 to 1.8 percentage points.

Full employment is perhaps 4.5-5%. If we assume that stimulus benefits increase linearly, that means we would have needed a stimulus of, on the low end, $2.5 trillion. On the high end, it would have been in the $4-5 trillion range.

I’m going to go out on a limb and say that even if Republicans had simply magically disappeared, the government still would not have been able to borrow and spend $2.5 trillion in any reasonably short time frame, much less $4-5 trillion. The political support for that level of government expansion simply wasn’t there among Democrats, much less their constituents. Even if they had found the political will, I doubt that government institutions could have effectively channeled that much new spending. And assuming away those two problems, would lenders really have been available to fund 18% deficits at rock-bottom rates?

The CBO’s numbers imply that even if we’d gotten a much larger stimulus–$1.3 trillion, say–unemployment would at best be something under 9%. The economy would still be underperforming.

If course, linearly-scaling stimulus benefits is a pretty heroic assumption. Maybe they build on each other, so that the next $800 billion delivers twice the unemployment reduction of the first. On the other hand, maybe stimulus has diminishing marginal returns, and the next $800 billion delivers half the stimulative benefits; given that most things eventually exhibit diminishing returns, given that we hopefully did the best projects first, and given all the institutional bottlenecks on the spending, I find this at least as plausible as the notion of increasing returns to stimulus.

Basically, we aren’t going to get the kind of insane Keynesian stimulus that Krugman says we need, short of a magic tooth fairy coming along and leaving a few thousand dollars under the pillows of all Americans.

Mind you, I see what Krugman is saying, and he is right in a sense. Inevitably, the only way out of a Keynesian recession is to keep spending until you’re out. Where Keynesian economics fails is recognizing that there are even limits to inflationary stimulus. Eventually, a fiat currency like the dollar reaches a point where the amount of inflation needed to climb out of recession is beyond reason, basically because the currency’s value has dropped to virtually nothing.

Don’t get me wrong: I am NOT suggesting we move to a gold standard, as the Austrian economists would have us do. While a gold standard is less susceptible than a fiat currency to political machinations, it is still not perfect. Gold supplies rise and fall.

We need a new currency system. My own idea is a fiat currency tied to population size, with stringent rules about adding money to and subtracting money from the economy. Basically, whenever we add someone to the economy (either through immigration or birth), we would add money into the system. Whenever we lose someone from the economy (either through emigration or death), we would remove the same amount of money. If the government decided we needed to add money into our economy for whatever reason, it would need to be equally disbursed to all U.S. citizens, thereby ensuring that all citizens are capable of handling any inflationary impacts.

As we have seen with the current system, adding money into the system via the banks doesn’t work when banks won’t lend or spend. While we would have the same risk by giving the money directly to the people, at least any inflation created will not strengthen bank balance sheets at the expense of individuals.

Posted August 31, 2010 by edmcgon in Economy

Ed’s Daily Preview for August 31: Dave Fry withdrawal   2 comments

I know it is going to be a rough day when Dave Fry doesn’t post his daily summary of the market action from the previous day. Don’t tell him, but I am getting to the point where I would be willing to pay for his daily summary. So if I get the shakes today, you’ll know what’s happening…

After the train wreck that was the U.S. markets yesterday, the overseas markets seem to be carrying on that theme in the overnight trading, with Japan looking the worst of all, as the Nikkei 225 was down 3.55% (the yen is still on a run upwards in the currency markets). On the bright side, the Mongolia Index was up 2.97% (I want my Mongolian ETF! KHAAAAAAAAAAAAN!).

I am not sure today’s economic reports/news will make much of a difference. Yesterday’s news was positive, and the markets got slammed anyway. The markets are waiting for the unemployment reports later this week, with tomorrow’s ADP employment change report being the first in a string of reports to give us a read on the U.S. jobs situation.

In other words, don’t expect any positive market movements today, even with positive economic reports. As we saw yesterday, even with light volume, the sellers are outnumbering the buyers. The best you can hope for is the high frequency trading machines take over the markets today and give you a melt-up.

Posted August 31, 2010 by edmcgon in Market Analysis

Ed’s Daily Summary for August 30th: Rare Earth Bonds   7 comments

If I could combine rare earth miners and bonds, what an investment that would be! At the very least, I’d slaughter the indexes on days like today…

AT: -0.14 to $12.53 (-1.10%)–bought at $12.62
GLD: -0.10 to $120.91 (-0.08%)–bought at $119.00
INTC: -0.41 to $17.96 (-2.23%)–bought at $18.52
LYSDY: 0.60 to $9.20 (6.98%)–bought at $7.274
NIV: -0.02 to $2.02 (-0.98%)–bought at $2.22
TMF: 0.69 to $53.19 (1.31%)–bought at $52.50 (*bought today*)
VCLT: 0.88 to $82.70 (1.08%)–bought at $81.50

OVERALL: 0.9%

I can live with a nearly one percent return every day. Of course, doing that every day is the hard part.

Posted August 30, 2010 by edmcgon in Market Analysis, Portfolio

Buy Direxion Daily 30 Year Treasury Bull 3X Shares (TMF)   8 comments

Is there a bond asset bubble, or is it something else entirely? (For some reason, I can’t get the song Turning Japanese out of my head.)

I think most people would agree there is far too much money flowing into government treasuries. But what happens if the bubble bursts? What happens then will probably be very BAD (sorry for the technical jargon there).

In the meantime, I decided it is time to take the plunge and took a small position in the 30 year Treasury ETF with 3 times leverage. I bought it at $52.50.

My inspiration for this move? CNBC’s Gary Kaminsky:

The fact that so many people think that [the bond asset bubble] is true tells me that it’s not. Is it a coincidence that many who expound this “truth” are the ones who manage and trade equities? The rationalization by these people losing so many assets into bond funds—does this create a legitimate bubble?

We have pointed out numerous times on The Strategy Session that the movement of price and yield is concurrent with the idea that we have had a secular change, with people less concerned about return on capital, and more focused on investment caution.

Think of the tech bubble ten years ago. Was there a safety component driving it? How about the housing bubble?

Of course not. Thus, I don’t buy this thesis at all. Yet, the vast majority claims it to be true.

He is right that many of the people calling this a bubble are the same ones who are losing money because of it.

But there is another aspect to it also. Have you noticed who one of the big buyers of treasuries has been lately? The Federal Reserve. This is creating an artificial demand for treasuries, as the Fed sucks off supply which banks and other investors would normally be buying. As long as the economy shows weakness, the Fed will keep doing this. (Now I have the old Paul Simon tune One Trick Pony in my head.)

After looking at the treasury ETFs, TMF stands out from the crowd. Normally, a leveraged ETF loses something with the daily ups and downs of it’s underlying commodity/equity/bonds. But when an investment goes parabolic, like treasuries have lately, leverage works so much better! In August, TMF is up 20%. Year-to-date, it is up 61%. Off of the 52 week low, it is up 84%.

Of course, past results yadda yadda yadda. And I am the last person to normally hop on the train after it has left the station. That is why I am only taking a small position in TMF. If the economic reality (aka the fact we aren’t going anywhere fast) continues to support this position, I may add more later.

Finally, this is the first time I have ever seen a leveraged ETF paying a quarterly dividend. Granted, if the principal goes up like it has, the 1.76% dividend yield will be chicken feed. But every little bit helps.

Posted August 30, 2010 by edmcgon in Economy, Portfolio Moves

Monday Monday   14 comments

Sorry for not having much to say today. But looking over the markets, nothing stands out to me.

All the index ETF’s seem to be floating in their ranges right now, so they can go either way. That puts short-term plays on hold.

Of the potential long-term stocks, Intel is still the only one I see as a buying opportunity at the moment, although there are a few more popping onto my screener. But they aren’t what I consider cheap yet.

What stocks have caught your eyes? Or is there one you have been following, just waiting for the right opportunity to buy it cheap? Let me hear your ideas today!

Posted August 30, 2010 by edmcgon in Market Analysis, Strategy