Thursday, December 31, 2015

Happy New Year?

2015 was a tough year for most traders. The broad averages went nowhere and there were few real trends to trade.

Oil and energy had an historic decline caused by overproduction as a result of new exploration technology developed over the last decade combined with a long period of historically low interest rates that spurred investment. Combined with a lack of will to control prices by the OPEC members oil has declined to a level that is not profitable for many of the new producers. This has resulted in a wariness on the part of bond investors for the low grade/high yield bonds of the oil patch. The worries over the fate of oil and junk bonds has been a drag on the overall stocks all year. This at a time when the U.S. Federal Reserve bank has finally initiated the long awaited first move to rise interest rates to a level that is more in line with history. And as they do this there are signs that the U.S. economy may be losing momentum. This business cycle is long in the tooth, as is this bull market in stocks.

With that said I think we may see a strong rally in the first months of the new year that is spurred in large part by a rally in energy. Most of this will be contrarian greed and short covering by speculators. There will probably be some stories out of the middle east and I would not be surprised if the Saudis start to talk up the price of oil with promises to reduce production. The can move the market with words right now.  (If they were Russians they would trade the market to their benefit.)

On the charts JNK does look to be trying to find a bottom. The dividend payers in the gas transportation area have been hit hard during this year and should rally as investors try to pick bottoms and secure dividends.

China may see more inflows than this year. And it may, MAY, finally be a good year for emerging markets, but only if the U.S. dollar is weakened by a slow U.S. economy and a Fed that is slow to raise rates. Time will tell.

Buy on the way up

Always control your risk and limit your losses

And cherish those you love.

Happy New Year,


Thursday, December 17, 2015

Late to the Party

In a widely anticipated move yesterday the U.S. Federal Reserve Board raised the target range for the Federal Funds Rate to .25-.50%. This comes after many months of jawboning the markets with promises to act when the time is just right. In the meanwhile the U.S. Dollar has appreciated massively against other main world currencies, in the process dragging the profits of multi-national corporations down and further depressing the prices of real commodities. Iron, gold, silver, wheat, corn, and of course oil depressed by a world that produces too much for demand as it is. China is wrestling with a slowdown in their economy, emerging markets that have overbuilt in the China trade over the years having debt problems of their own, and high yield/junk bond markets worldwide in a swoon. The junk debt of U.S. oil producers is in jeopardy resulting in concern over banks that may hold the debt. It is true that employment in the U.S. has rebounded and from ground level it appears the U.S. economy is firing on most cylinders. This is as auto loan debt is at historic levels along with student debt at similar heights, leading to the conclusion that these debts will be a drag on new spending and debt creation for some time. Surely the cycle is near a peak.

The Fed Fund rate increase in and of itself is probably of little consequence since it has been so low for so long. But the Fed also raised the rate that it pays to member banks on the reserves held at the Federal Reserve. There have been complaints of the banks not lending as they should with the easy money made available to them by the central bank for years. Now they will have increased incentive to leave money in the Fed. This seems a puzzle. Why increase the incentive for reserves to be held out of the economy? This is surely a tightening of economic policy in the real sense of the word. At a time when the rest of the world is still in an increasingly accommodative stance such policies will further strengthen the U.S. dollar and further constrain manufacturing in this country and further stimulate the imports of goods. How can this be good for the long term health of the U.S. economy? Debts remain high, manufacturing is declining. Eventually the strength of the U.S. dollar will correct and perhaps catastrophically so.

From the latest Fed statement:

"Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down. "

"The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on required and excess reserve balances to 0.50 percent, effective December 17, 2015."

Full Fed statement here

I think the Fed has inadvertently raised rates too early in an effort to avoid being early. They have missed the timing of the cycle by 180 degrees.

I am not a fan of debt creation but I am a proponent of defending the country against the predatory currency devaluations of the rest of the world. And the fact is that the world has indulged in the greatest debt creation in world history over the last couple of decades and the only way out is debt forgiveness in the form of devaluations of currency. The U.S. Federal reserve has made the same mistake that they did in the 1930's with the former Great Depression, only with great deliberation and hindsight.

I will add this:

Auto loans outstanding

Hyperbolically yours,


Friday, December 4, 2015

Jobs and Tech

This article presents other sides of the technology vs. jobs argument, but I believe that the forces of capitalism ensure that over the long term technology does cause decreased employment due to the fact that if tech is not productive it isn't used. It must be productive from an economic standpoint to survive, ie, it must make a return on the capital expenditure. This includes all of the costs of the technology; materials, labor, and intellectual input. Tech concentrates the... wealth of an industry. It is the few that own the tech, relatively, that reap the monetary gains. Monetary gain is the value of output minus the value of labor. The arguments against the net loss of long term employment caused by tech have been buttressed by the effects on inflation of increased productivity combined with wage pressures that has led to huge debt creation which has mitigated the immediate effects of job loss and wage pressures.
Automation is reducing the need for people in many jobs. Are we facing a future of stagnant income and worsening inequality?

Thursday, December 3, 2015

Fundamentals Rule

Just a thought.

Much of the glut of oil that has accumulated has been due to the long period of low interest rates and the way that this has enabled cheap exploration and easy drilling and other investment in production of products that otherwise would not be economical. But the cheapest oil comes from the traditional sources, still, and OPEC is desperate to keep the cash flow. The Saudi's to support their welfare society, and other smaller producers with the need of cash to survive the slowdown in Chinese demand that also impacts overall supply. So the price of oil declines as the glut in supply persists.

And this comes at a time when the "new technology" producers, to coin a phrase(?),(the frackers and miners) are increasingly needing profits to pay off the debt they have undertaken. Junk bonds are pressured and banks that hold that debt will be pressured. And of course we are getting to the point where wages are starting to rise, economic growth seems to show signs of life, and interest rates are under pressure to rise, if not just because the rise is 'overdue' from a policy standpoint, but perhaps in the case of high yield debt, due to the increased risk of the debt itself. We may see another example of reflexivity where interest rate rises increase the risk of defaults which causes interest rates to rise... etc.

If this scenario plays out it would lead to increased volatility in asset prices and increased volatility in derivatives. Near the end of the process, of course, would be decreased production of energy, rising prices of energy, and thus more reason for interest rates to remain high.

So, the fundamentals of supply and demand will always, in the end, remain supreme. It may be that the cheap oil will have to be exhausted before the world can move on to the less efficient energy. And that means we have been fooled by low interest rates that have led us to believe we could grow our economy on other sources of energy that does not have the energy ROI that led to the last 100 years of rapid growth.

Wasn't that cheery?

Control risk,