December 21, 2010

The twelve days of QE (ten)

On the tenth day of QE, Bernanke gave to me
        Ten billion POMO,
        Nine strippers dancing,
        Eight Netflix movies,
        Seven suckers shorting,
        Six bankers lying,
        Five tungsten bars,
        Four Priceline flights,
        Three sick banks,
        Two trillion cash,
        And a debt-fueled market rally.

Posted by: Hermit Dave at 09:58 AM | No Comments | Add Comment
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December 20, 2010

The twelve days of QE (nine)

On the ninth day of QE, Bernanke gave to me
        Nine strippers dancing,
        Eight Netflix movies,
        Seven suckers shorting,
        Six bankers lying,
        Five tungsten bars,
        Four Priceline flights,
        Three sick banks,
        Two trillion cash,
        And a debt-fueled market rally.

Posted by: Hermit Dave at 10:46 AM | No Comments | Add Comment
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December 19, 2010

The twelve days of QE (eight)

On the eighth day of QE, Bernanke gave to me
        Eight Netflix movies,
        Seven suckers shorting,
        Six bankers lying,
        Five tungsten bars,
        Four Priceline flights,
        Three sick banks,
        Two trillion cash,
        And a debt-fueled market rally.

Posted by: Hermit Dave at 09:51 AM | No Comments | Add Comment
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December 18, 2010

The twelve days of QE (seven)

On the seventh day of QE, Bernanke gave to me
        Seven suckers shorting,
        Six bankers lying,
        Five tungsten bars,
        Four Priceline flights,
        Three sick banks,
        Two trillion cash,
        And a debt-fueled market rally.

Posted by: Hermit Dave at 12:39 PM | No Comments | Add Comment
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December 17, 2010

Quick Friday market wrap

The stock market has become such a farce that the NYSE should just put a banner on the building:  "Sponsored by the U.S. Government".  Effectively, the government is issuing debt to buy equities, through the QE2 mechanism, in an attempt to paint the picture that pension funds are solvent.  To call the current situation fucked up would be an understatement.

I'm going to switch to a month-end posting of the fund battle results as the weekly thing is a pain in the ass, nobody reads this blog anyway, and monthly is enough for a long-term position.  For those who might care (namely me), the wealth fund is still up about 3% over the investment fund, even with all the year-end book-marking and daily precious metal raids.  I wouldn't be at all surprised to see this continue to narrow as we approach month-end.  End-of-year prints are notoriously hilarious.  Active traders will probably have a field day fading anything that's marked up too idiotically.

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The twelve days of QE (six)

On the sixth day of QE, Bernanke gave to me
        Six bankers lying,
        Five tungsten bars,
        Four Priceline flights,
        Three sick banks,
        Two trillion cash,
        And a debt-fueled market rally.

Posted by: Hermit Dave at 02:39 PM | No Comments | Add Comment
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December 16, 2010

The twelve days of QE (five)

On the fifth day of QE, Bernanke gave to me
      Five tungsten bars,
      Four Priceline flights,
      Three sick banks,
      Two trillion cash,
      And a debt-fueled market rally.

Posted by: Hermit Dave at 09:12 AM | No Comments | Add Comment
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December 15, 2010

Worthless market opinion

For a lot of reasons, the market looks extremely toppy here.  I think this is an excellent low-risk point to get short (I'd use the Nasdaq), stopping out on a new local high.  Entry:  ~ 54.45 on the applicable ETF (QQQQ).  Stop: 54.70 (only about 1/2%).  Potential upside:  looking for a move to about 50 (about 8%) in the short term.  If it got there, I'd take some profits and leave a runner to target about 45 (where there'd be one hell of a lot of support).

Update (close of market): With this going enough in the right direction, it can be held (at least) overnight without much increase in initial risk.  The Qs closed at 54.17, putting the trade up about 0.7%, and about 1% away from the inital stop, giving the trade a good buffer against opening gap risk.

Update 2 (next day close of market):  Even though the Qs (miraculously) never hit the stop-loss, this trade would have to be closed out at a tiny loss at the end of business today.  There is almost no overnight gap cushion left -- holding it would change the risk/reward profile dramatically.  This is a perfect example of the type of profile I like to trade, if I'm trading on pure speculation. Small downside, big potential upside.  If I'm right about the potential reward, I can bat less than 10% on this kind of trade and still end up a big net winner over time.

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The twelve days of QE (four)

On the fourth day of QE, Bernanke gave to me
        Four Priceline flights,
        Three sick banks,
        Two trillion cash,
        And a debt-fueled market rally.

Posted by: Hermit Dave at 08:45 AM | No Comments | Add Comment
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December 14, 2010

The twelve days of QE (three)

On the third day of QE, Bernanke gave to me
        Three sick banks,
        Two trillion cash,
        And a debt-fueled market rally.

Posted by: Hermit Dave at 12:47 PM | No Comments | Add Comment
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December 13, 2010

The twelve days of QE (two)

On the second day of QE, Bernanke gave to me
        Two trillion cash,
        And a debt-fueled market rally.

Posted by: Hermit Dave at 02:22 PM | No Comments | Add Comment
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December 12, 2010

The twelve days of QE (one)

On the first day of QE, Bernanke gave to me
        A debt-fueled market rally.

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December 09, 2010

Not-so-random thought of the day

In order to drive leftists even further around the bend, Palin should visit Russia on her overseas trip and declare that she can see her house from there.

Posted by: Hermit Dave at 06:49 PM | No Comments | Add Comment
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The crimes of the Fed

If you want an excellent (if a bit hyperbolic) summary of what was revealed by the Fed's recent forced document dump, read this.  Strong proof that, until the government deals with the Fed, your votes mean absolutely nothing.

(via Black Listed News)

Posted by: Hermit Dave at 12:25 PM | No Comments | Add Comment
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Silver and Gold

If there's one thing better than being right, it's being right and early enough to capture the entire move in an asset.  As far as silver and gold go, there's one person that outshines everyone in regard to their affection for precious metals.  That person, of course, is Yukon Cornelius:

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December 08, 2010

Protecting against an asset crash

Bonds almost always lead stocks for the simple reason that it's a much, much bigger market and a hell of a lot harder to play games with.  Stock traders are complete pikers compared to the bond boys.  So, it's somewhat unsettling to see bond yields rise fairly dramatically since the start of QE2. 

For example, the 10-year rate (arguably the most important point on the yield curve, as it's the most closely tied to mortgage rates, among other reasons) has increased almost 0.75%, going from about 2.5% to about 3.25%.  The iShares Barclays 7-10 Year Treasury Fund (ticker IEF) is down almost exactly 5% since the start of QE2 (bond prices move inversely to yields).  This is extremely bad news for housing prices and will eventually put heavy pressure on stocks.

There are other factors at play that might give us pause when it comes to asset prices.  The Fed's current attempt to generate inflation might fail, or they might be forced to change their policies.  Other nations could get completely sick of our approach to our predicament and start dumping assets wholesale (the Chinese have started tightening their monetary policy).  Some EU nations could try to stop the insanity and start letting countries and banks go under (Germany is starting to make serious noises about being sick and tired of trying to bail everyone out).  Hell, the EU itself could break up quite easily.

All this brings us back to the question of whether we should be in cash or holding a wealth preservation portfolio.  This is a hell of a difficult choice to make, but could be crucial to our long-term fiscal health.  Or can we have our cake and eat it too?  To a certain extent we can, by hedging our wealth preservation portfolio by going short the US stock market.

The way to do this would be to either sell futures or buy puts on a major stock market index.  The S&P 500 is probably the best index to use as a hedge.  For futures, one would sell an amount that would insure the notional value of one's wealth preservation portfolio.  Now, instead of just holding an outright position in risk assets, one would be effectively holding the spread between a wealth preservation portfolio and an investment portfolio.  There's a lot less total risk in this position, but most likely less upside as well.  It's also an expensive strategy to implement as one has to divide his funds evenly between the long and short positions.

A much less expensive strategy (in terms of up-front cash) to implement is to buy puts.  A put is one of the two types of options (the other being the call), and gives one the right (but not the obligation) to sell an asset at a specific price at a future date.  For example, one could own the March 2011 1050 puts on the S&P 500.  This would allow one to sell the index at 1050 (about 15% below the current market level) at the option expiry date in March.  This gives us protection against a major asset crash, while committing less than 10% of our total funds to doing so.  Of course, this strategy comes with a different price:  time decay.  Even if the market goes nowhere, one would lose the premium paid to insure his portfolio.  In the worst case (a completely flat market), this would cost us about 5-8% a year.

So, there are no completely free lunches -- hardly surprising.    The only way in which one gets burned by this type of hedging strategy is if we have a low-inflation economic recovery.  In that case, an investment fund would outperform a wealth preservation fund, causing us to lose on both sides of our positions (obviously I think this is just a tad unlikely, to say the least).  On the other hand, we could have a high-inflation economic collapse, giving us a win on both sides.  Most likely, we'll capture some outperformance by hedging, while significantly reducing our risk. For those with significant assets to protect, insuring at least part of one's portfolio against an asset crash is, in my opinion, a very good idea.

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December 06, 2010

Silver breaks $30 per ounce

How high is silver going?  Well, based on the silver/gold ratio alone, one can make a case for silver at $80 - $100 per ounce.  Also, as gold becomes increasingly unaffordable as jewelry for most people, a silver substitute would imply a continued rally.

I'm not much for price targets -- fundamental factors can change rapidly and Mr. Market will be the final determining factor in any event.  I simply note that, even though silver seems to be quite high at this price, one can make a case for it going much, much higher.

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December 03, 2010

Not-so-random thought of the day

The only problem I have with the Jews controlling America is that they're doing such a piss-poor job of it.

Posted by: Hermit Dave at 08:20 PM | No Comments | Add Comment
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Friday market wrap-up - 12/03/10

The markets went from hanging by a thread on Tuesday to another huge reversal as the dollar stopped strengthening. Currencies are now trading completely backwards -- the tail is firmly wagging the dog.  The Dollar rallied against the Euro as the situation in Europe further deteriorated, and then the ECB dramatically increased its pace of monetization.  In a remotely normal world, this would have further killed the Euro, but instead it immediately caused the Dollar to start selling back off.  Why?  Because of increased pressure on the Fed to step up their pace of monetization.  Bizarre, but that's the world in which we're living.

Current status of our fund battle:

Asset Start Current Change
Gold 1348.59 1413.43 4.81%
Silver 24.80 29.24 17.90%
DBC 25.69 26.36 2.61%
Dow 11215.13 11382.09 1.49%
Nasdaq 2540.27 2591.46 2.02%
S&P 500 1197.96 1224.71 2.23%
Wealth Fund $12,000 $12,837.82 6.98%
Investment Fund $12,000 $12,229.47 1.91%

The Wealth Fund completely took off vs. the Investment Fund and is now ahead by slightly over 5%.  There's every reason to believe that this trend will continue as long as the governments of the world continue to monetize all the bad debt.  Bank and Government debt will be defaulted on, one way or another.  A hard default is unacceptable to most, so we're starting to get a soft default -- inflating the debt away.  As I've stated many times previously, one does not want to be invested in the markets in this environment.  They'll most likely go up, but at a pace well below the rate of inflation.  I'll stick with a wealth preservation strategy, thank you.

No changes to the Ben Bernanke betting game, even though the recent data dump by the Fed indicates that Bernanke both made illegal trades and perjured himself in various testimonies.  In a sane world, the man would already be swinging from a lamp post or at least wearing an orange jumpsuit -- in this world, nobody cares with the exception of a handful of financial bloggers.  The Fed and the banks are holding the American people at fiscal gunpoint and nobody has the courage or political will do to anything about it.  So be it.

Current odds for Bernanke's fate as of the end of next year:

  • Strangled by Ron Paul -- 1000 to 1
  • Hung for Treason -- 100 to 1
  • Commits Suicide -- 75 to 1
  • Killed by bankrupt lunatic -- 50 to 1
  • Dead by other means / natural causes -- 35 to 1
  • Fled the country -- 25 to 1
  • Under indictment (or already jailed) -- 10 to 1
  • Forced out of the Fed but free -- 3 to 2
  • Still selling America down the river -- 3 to 2

Have a good weekend.  Got silver?

Posted by: Hermit Dave at 02:56 PM | No Comments | Add Comment
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All you really need to know about the stock market

If you think that the stock market rally in the face of declining economic fundamentals seems a tad suspicious, you're not alone.  Well, Zero Hedge has a single, simple graph that explains everything:

/images/TreasuryvsSPY.jpg

There's just a small correlation between Fed monetization and the rally in stocks, now isn't there?

Posted by: Hermit Dave at 10:46 AM | No Comments | Add Comment
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