Month: July 2014

Until now, whenever Warren Buffett’s preferred mode of industrial transportation – that would be trains – derailed, it would usually involve spilling generous amounts of oil into the surrounding area, far more than any hypothetical pipeline disaster to date would have resulted in. Then, in an apparent first, overnight a train derailed in Montana and spilled fuselages of Boeing 737 airplanes into the Clark Fork River. One wonder if all of these airplane orders had been funded by the Ex-Im bank.

From King5.com:

The investigation continues into the derailment of a train near the town of Superior, Montana Thursday night.

 

Some of the cars carried aircraft components.

 

Nineteen cars on the westbound train derailed. Three of the cars contained aircraft parts and ended up in the Clark Fork River. Sources tell KING5 the parts were heading to Boeing in Renton.

 

Crews spent the night and into this morning cleaning up.

Photos from the derailment site:

In any event, since the capital order will have to go through twice, expect a bumper month when it comes to July Durable Goods, and thus Q3 GDP. In retrospect, the “derailed airplane fuselage” theory of economic growth may soon replace the “broken window” falacy as a means to “boost” the US economy.

via Zero Hedge http://ift.tt/1rye9E3 Tyler Durden

Leaving aside the defeat in the World Cup, last week was good for the US.  Auto sales and US  jobs data were stronger than expected. These provided a nice sedative for some anxiety over the steep contraction in Q1 and the decline in real consumption in April and May.  

 

On the other hand, the euro zone PMIs were, well, meh.  The ECB continues to emphasize its policy divergence from the US, though it will take on more organizational qualities, like meetings every six weeks rather than monthly, some record to be published afterward, and a modest rotation of central bank voting, as the Federal Reserve/   

 

A collapse in overall household spending in Japan in May and BOJ Kuroda’s warning that inflation will likely ease over the coming months means that Japan’s monetary spigot remains wide open for as far as the eye can see.  The BOJ is buying twice the dollar amount of assets as the Federal Reserve to aid an economy a third of the size.  

 

The yen appreciated by almost 4% against the US dollar in H1.  Despite the clear reminder that the size of base money growth, or central bank balance sheets, does not simply translate into foreign exchange prices, many still expect the euro to decline through this channel.  The ECB met last week with the euro actually higher against the dollar than when it met in May and announced cuts it is rate corridor, including a negative deposit rate.  In May, the ECB estimated that its TLTRO facility could add around 400 bln euros initially.  Last week, it was the overall program that was emphasized and this was estimated to be around one trillion euros.  

 

The dollar rose against most of the major currencies last week.  The Dollar Index held important technical support near 79.70 early in the week.  By the end of the week, it was approaching the lower end of a band of resistance that extends from 80.30-80.45.   A move above there would signal scope toward 81.00.

 

Sterling and the Canadian dollar were the two exceptions to the dollar’s firmer tone, gaining about 0.7% and 0.3% respectively.  Sterling was helped by strong PMI data and conviction that the BOE will be the first to hike rates.  Many economists seem to be over-correcting.  After seeing the first hike in H2 2015, as the BOE had seemed to guide, a number of forecasts now call for late 2014.  

 

Given that sterling’s appreciation on a trade-weighted basis (~4.3% in Q2) is tantamount to some tightening, average earnings growth that is practically non-existent, and a CPI that is likely to fall in the coming months, we continue to think Q1 15 offers the most likely window for the first hike.  

 

Against the dollar, sterling has rallied a nickel in five weeks and reached its best level since 2008.   It rose each of the five sessions last week  against the euro to trade at two-year highs.    It is in need of some consolidation. 

 

Initial support is seen in the $1.7090-$1.7100 area.  A break of this support area, which contains retracement targets and a two-week trend line, could shake out some of the weak longs. Buyers can be expected to emerge on dips, and this may limit the pullback to another half cent.  

 

Sterling does not appear as stretched against the euro as it is against the dollar, from a technical perspective.  Long sterling against the euro is a high confidence trade among leveraged participants. The euro is expected to continue to trend lower to reach the low from July 2012 near GBP0.7755.  It had reached GBP0.7920 before the weekend.   A bounce toward GBP0.7960-80 would offer a new entry opportunity.  

 

The Canadian dollar’s advance was partly continued momentum from the stronger than expected retail sales, and CPI reports the previous week (June 20).  It also was a question of market positioning as the stale bears capitulated. It did not appear that the Canadian asset markets were the primary attraction.

 

The US dollar set a base last week in the CAD1.0620-30 area.   The technical indicators we use suggest a low is near, but they would not rule out another push that could extend toward CAD1.0580-CAD1.0600.  On the upside, a move back above CAD1.0720-40 would likely confirm a low is in place.  

 

The strong US data and the push from the ECB made the euro’s downside the path of least resistance, especially given that the euro reached a 6-week high (just above $1.3700).   Our reading of the technical condition is consistent with our assessment that neither the US jobs data nor the ECB meeting was game changers.  This means the euro will likely remain range bound.  The narrow range may be something like $1.3570-80 to $1.3630-45.  The broad range is $1.3500-$1.3700.  

 

US 10-year yield rose last week, and this appeared to encourage dollar buying against the yen.  The 10-year yield approached 2.70%, its highest level since late April.  The dollar resurfaced above its 200-day moving average  (~JPY101.80) to almost reach JPY102.30, its best level in two weeks,  However, US yields fell back off and finished the week just below 2.64%.  This sucked the momentum from the dollar, and it was left straddling the JPY102.00 area.   That might be the range in the days ahead: JPY101.80-JPY102.30.  

 

An evaporation of domestic and foreign demand, as evidenced by the larger than expected drops in both retail sales and exports, coupled with the continued jawboning by the central bank, managed finally to turn back the Australian dollar, but not before it reached new 7-month highs just above $0.9500. The RSI is neutral, and the MACDs are crossing down.  The 5-day moving average is poised to cross below the 20-day average in the days ahead.  

 

We suspect there are many late longs that are trapped amid recent talks of a move back to parity. This suggests that bounces will be sold, but a break of $0.9320 may force selling in the hole.  Even if, as we suspect, the Australian dollar is in a broad trading range, the lower end of it is still at a distant (given the low volatility) $0.9200.  

 

The head and shoulders pattern that dollar has carved out against the Mexican peso in June remains intact, though it is not looking particularly promising.   The month-end/quarter-end, the US jobs data followed by the US holiday clouded the price action.  To strengthen this pattern, the dollar needs to fall back below the neckline near MXN12.96.  A move now above MXN13.05 would likely negate the pattern, whose price target is back in the MXN12.80 area.  

 

 

Due to the US holiday, the Commitment of Traders Report was not available.

via Zero Hedge http://ift.tt/1qXTrLi Marc To Market

By: Brad Thomas at: http://ift.tt/146186R

Early in 2012 I noted how cheap Royal Dutch Shell (RDSA) appeared. Certainly the stock looked cheap, though when trading options I need more than just a cheap stock.

Importantly, in this instance the availability of ultra-long term December 2016 expiration options (trading on the Amsterdam exchange) also seemed cheap, which is what I require, so I bought some options. What follows is the story of that adventure. I think it’s illustrative of the importance of buying yourself time, ensuring you stick with your trading plan and trade methodically.

In early April 2012 RDSA was trading at €26.1, a mega cap stock (once the largest stock in the world by market cap) trading for a price to book ratio of 1.25x, P/Sales ratio of 0.45x, a forward P/E of about 8x, and sporting a dividend yield of about 5% – that seemed cheap, very cheap! I certainly didn’t think that there could be much in the way of downside in that stock! Well, I was right but I certainly wasn’t expecting it to be more or less unchanged 2 years later!

At the start of April 2012 the December 2016 €28 strike was trading at €2.0. This equated to an implied volatility of about 20%. Like I said, I thought that was cheap, but little did I know at the time that implied volatility would drop even further to a record low of 15% some two years later!

Anyway, on the 13 April 2012 I bought 50 options on RDSA with December 2016 expiration and €28 strike at €2.0 – which equated to €10,000 (the vertical green line on the graph below). This option had some 5 years to expiration, so I had a lot of time. I thought that RDSA would be materially higher after just 2 years, but to be safe rather than sorry I bought the option with the most time to let this trade “work”. Normally when I trade, if I can go further out I will, and with RDSA being so liquid the opportunity existed.

Well, how wrong was I? Some 18 months after buying the option, it was worth half the value I paid for it, even though the price of RDSA was more or less unchanged at that time! This certainly wasn’t amusing.

However, all was not lost. At the start of 2014 the option still had 24 months to run and I was still “confident” in my hunch that RDSA would trade materially higher in the not too distant future.

Fast forward to the 22nd of May 2014 (two years after buying the option) and it was trading at €2.27. Also, there were December 2018 expiration options available. To “buy myself more time” I decided to sell the December 2016 expiration, €28 strike call options at €2.27 (netting some €11,350). I then put all the proceeds of this sale into the December 2018 expiration €30 strike call options at €1.82. I was able to buy 62 contracts (an increase from 50).

On Friday this option closed at €2.49, which with 62 contracts equals €15,438 (about a 50% return). Let’s not count our chicks before they’re hatched, because this trade isn’t over. If I want to see this trade through then I guess I have to wait until the end of 2018, and goodness knows what will happen between now and then.

The moral of the story is this: things rarely turn out the way you expect, but as long as you have time on your side you can be pleasantly surprised by how lucky you can get.

 

– Brad

PS: In the Capex Assymetric Trader alert service, I share similar trading ideas on a weekly basis. Try the service out by SIGNING UP at an introductory offer of just $7.

 

“Markets can remain irrational longer than you can remain solvent.” – John Maynard Keynes

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Submitted by Simon Black of Sovereign Man blog,

In the fall of 1239 AD, Batu Khan and his Golden Horde were making great progress in their rapid advance into Europe.

The Mongol Empire was in the midst of global conquest, and Batu’s army had been devastating cities across the Russian plain.

He stopped briefly after taking Chernihiv (in northern Ukraine) and sent his cousin Mongke with a vanguard force to probe Kiev, the capital of Kievan Rus.

At the time, Kievan Rus was one of the greatest powers in Europe, forming a loose federation of Slavic principalities that stretched from the Black Sea to the White Sea.

Kiev had been founded nearly eight centuries before, and by 1239 it was a grand capital with some 50,000 inhabitants. Mongke was quite taken with it. And, not wanting to destroy it, he sent an emissary to discuss terms for their surrender.

Apparently Kiev’s Prince Mikhail had just watched the movie 300… because he put the Mongol emissary to death.

Now, if I could paraphrase the Princess Bride, history gives us a couple of very clear rules– (1) Never get involved in a land war in Asia; and (2) Never go in against a Sicilian when death is on the line.

But only slightly less well-known is this: (3) Never slight a guy named Batu Khan, especially when his army is called the ‘Golden Horde’.

Batu responded to Mikhail’s poor manners by laying waste to the city. Martin Dimnik’s work “The Dynasty of Chernigov” describes the carnage in gruesome detail, saying that people “drowned in a pool of blood.”

To their credit, though, the Kievans fought bravely. They lacked the Mongolian weaponry and tactics, but they fought with sticks and knives… hand to hand, house to house, man to man.

Resistance is in their DNA. So it’s no surprise that, several centuries later, people were out in the streets fighting against their own government. Sticks and knives, once again, againt tanks and automatic weapons.

This time they won. Sort of.

Every 10-15 years this place has a major revolution. And each time it’s precipitated by one basic principle: money.

All people really want is to be in a place where they can improve their lives… where their children can have a brighter future than they did.

The system in Ukraine did not provide those conditions. It was designed for a tiny political and banking elite to enrich themselves at the expense of everyone else.

This revolution was borne from economic frustration, plain and simple.

Yet each time this happened in the past, all they really did was change the players… not the game. They just ended up with a different set of criminals in charge.

This time around there seems to be serious effort to at least change the rules.

Many are talking about major revisions to the Constitution (leading one local journalist to ask– “Why don’t we use the American Constitution? It was written by really smart guys, it has worked for over 200 years, and they’re not using it anymore…”)

He’s right. Much of the West, in fact, has descended into the same extractive system as Ukraine.

There’s a tiny elite showering itself with free money and political favors at the expense of everyone else.

Dow 17,000 means that a handful of people at the top are making boatloads of money thanks to quantitative easing, some upper-middle class are doing fairly well, and the average guy pays higher prices for food, fuel, education, medical care, etc.

It’s not just the US. France, for example, is simply not a place where you can work hard and expect to improve your life anymore. In Greece and Spain, half of the nations’ young men are broke and unemployed.

And along they way, they have all set aside civil liberties and turned into vast police states.

Ukraine may be in the midst of turmoil right now, but they at least hit the big giant reset button and are looking to build something new.

The West, meanwhile, continues down its path of more debt, more money printing, more regulations, and less freedom. How long can this really go on without consequence?

via Zero Hedge http://ift.tt/1vHCcOl Tyler Durden

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Having surrendered our independence for the quick, easy fix, we will inevitably surrender our health, liberty and freedom.

As we celebrate the declaration of political independence from Empire today, a question arises: how independent are we today in our day-to-day lives? The flip side of independence is dependence: not just on Empire, but on painkillers, central banks, government intervention, silence, complicity.

Dependence limits freedom. The dependent person, household or nation cannot truly be free; their actions and choices are severely limited, and the deeper their dependence, the greater the erosion of their will to become less dependent.

People speak of the cost of independence and liberty in militaristic terms. But in day-to-day life, independence boils down to not being dependent on systems you have no control over.

Independence isn't taken from us; we surrender it. We surrender it for all kinds of reasons; it's often easier to accept dependence than struggle to maintain our independence.

Our culture has developed a self-destructive response to pain: we want any sort of pain, physical, spiritual, financial, to go away immediately and magically. We don't care about the mechanism, just make it go away.

But pain is not just a random event: it's a message that we need to listen to. Pain communicates that something is damaged, dysfunctional, not working or in conflict. Pain tells us we need to understand the sources of the pain and seek a systemic solution.

There are many sources of physical and mental pain, and they cannot be lumped into one category. But in all cases, there are systems and there are sources of the pain, and since life, ecosystems, economies and organisms are complex interactive systems of systems, there is often not one source but multiple layers of interacting sources.

Consider the common ailment of back pain. I've suffered from it, as have many people. While there are many potential sources and causes, we're designed to prefer the easiest, quickest fix, which is generally a painkiller pill.

The quick fix does not address the source or solve the underlying problem: it simply makes the symptoms go away. It eliminates the message that something's wrong and needs to be addressed in a fundamental way.

A great many back problems arise from lack of fitness, poor habits and being overweight. In many cases, the long-term solution requires a complete revamping of habits, diet, fitness, and a reworking of our understanding of the mind/body system.

This is a lot more trouble than taking a pill, so many of us resist changing all these major systems that affect each other within the overall system of our well-being.

But eliminating the message and the symptoms doesn't fix anything. What it does do is make us dependent on the fix. A dose of highly addictive heroin is called a fix for good reason: like any other painkiller, the addict depends on it to fix the pain and the symptoms that are shouting that something's terribly wrong.

This is why I call the Federal Reserve's interventions monetary heroin: the global financial meltdown caused pain, and rather than deal with the sources of financial dysfunction, the Fed chose the highly addictive fix of zero interest rates, unlimited credit and easy money.

Every month, the Fed mainlines this fix into the financial system to make the pain go away: the pain that's telling us the system is broken, dysfunctional, destructive.

And so now we're hooked, dependent: whether we understand it or not, we have surrendered our independence and our ability to learn from pain and directly address the sources of the dysfunction.

Free money, in all its guises–welfare, corporate welfare, subsidies, tax breaks, bribes–is the easy fix, the easy pill that makes the symptoms go away.

What happens to systems that ignore symptoms? They break. Whatever is causing the pain continues unaddressed, and so it gets worse. Making the symptoms go away doesn't fix the underlying causes; in a terrible irony, it enables the problem to spread and grow even more destructive.

Becoming dependent on the fixes issued by the Federal Reserve and the central state does not solve the problems causing the pain; it simply makes us dependent on the quick, easy opiate.

Having surrendered our independence for the quick, easy financial fix, we will inevitably surrender our health, liberty and independence. Our democracy has already been gutted by the financial fix, and our claims of independence ring hollow.

Do we want to be free from political and financial pain, or free from systemic dysfunction? To truly be free, we must first free ourselves from dysfunction and the siren-song of dependence on the quick, easy and oh-so addictive fix.

via Zero Hedge http://ift.tt/1qGCJm1 Tyler Durden

Yet another in a long stream of relatively esteemed hedge fund managers has decided enough-is-enough and is shuttering his firm. The reason? Same as the rest… As WSJ reports, Steve Eisman, who emerged as one of the stars of the financial crisis with a winning bet against mortgages, has wound up his fund because he believes that "making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy."

As WSJ reports,

Steve Eisman, who emerged as one of the stars of the financial crisis with a winning bet against mortgages, is shuttering his hedge-fund firm, according to people familiar with the matter.

 

…

 

While Emrys gained 3.6% and 10.8% in 2012 and 2013, respectively, its performance lagged behind that of the bull market. It was down this year, one of the people said.

Mr. Eisman's profile grew at the hedge-fund where he previously worked, FrontPoint Partners, which was once owned by Morgan Stanley and where he had managed more than $1 billion. Besides his bet against mortgages, he was known for shorting, or betting against, for-profit education companies and lobbying against the industry in Washington. He was featured in the best-selling book about the financial crisis, "The Big Short."

 

…

 

In a May regulatory filing, the firm wrote it believed that "making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy."

 

Instead, Emrys echoed what many stockpickers have said in recent years about larger factors affecting their ability to invest as they had historically. "While individual company analysis will always be important," it said, "the health, or the change in the health, of the financial system is the starting point of all analysis."

*  *  *

That about sums it up – there is no alpha; it's all beta (levered beta) and the smartest money knows how that ends…as we noted previously, no lesser manager than Baupost's Seth Klarman explained the mirage…

"Born Bulls"

 

In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, the stock market, heading into 2014, resembles a Rorschach test. What investors see in the inkblots says considerably more about them than it does about the market.

 

If you were born bullish, if you’ve never met a market you didn’t like, if you have a consistently short memory, then stock probably look attractive, even compelling. Price-earnings ratios, while elevated, are not in the stratosphere. Deficits are shrinking at the federal and state levels. The consumer balance sheet is on the mend. U.S. housing is recovering, and in some markets, prices have surpassed the prior peak. The nation is on the road to energy independence. With bonds yielding so little, equities appear to be the only game in town. The Fed will continue to hold interest rates extremely low, leaving investors no choice but to buy stocks it doesn’t matter that the S&P has almost tripled from its spring 2009 lows, or that the Fed has begun to taper purchases and interest rates have spiked. Indeed, the stock rally on December’s taper announcement is, for this contingent, confirmation of the strength of this bull market. The picture is unmistakably favorable. QE has worked. If the economy or markets should backslide, the Fed undoubtedly stands ready to once again ride to the rescue. The Bernanke/Yellen put is intact. For now, there are no bubbles, either in sight or over the horizon.

 

But if you have the worry gene, if you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about. A policy of near-zero short-term interest rates continues to distort reality with unknown but worrisome long-term consequences. Even as the Fed begins to taper, the announced plan is so mild and contingent – one pundit called it “taper-lite” – that we can draw no legitimate conclusions about the Fed’s ability to end QE without severe consequences. Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to pay on juiced corporate earnings? Pretty clearly, lower than otherwise. Yet Robert Schiller’s cyclically adjusted P/E valuation is over 25, a level exceeded only three times before – prior to the 1929, 2000 and 2007 market crashes. Indeed, on almost any metric, the U.S. equity market is historically quite expensive.

 

A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla. The overall picture is one of growing risk and inadequate potential return almost everywhere one looks.

 

There is a growing gap between the financial markets and the real economy.

 

…

 

Six years ago, many investors were way out over their skis. Giant financial institutions were brought to their knees…

 

The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented.

 

But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs.

 

Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.

via Zero Hedge http://ift.tt/VoBMBE Tyler Durden