Still No Sense In This Market

Taking a cue from Jim Cramer, I'm declaring this market too tough. Nothing is working. Sometimes I think that the only trade right now is to buy puts on major indices right before our president opens his mouth. No hard feelings to Mr Obama, yet.

Of course, I'll be looking for possible developments. There are possible trades out there, but they depend on answers to the questions below.

Is it really oil (meaning, of course, oil futures) bottom?

Can gold boom continue without India buying?

Can anybody in government get real about bank nationalization? Is it hard to understand that neither Citi (C) nor Bank of America (BAC) is solvent?

How many prime mortgages are subprime now?

Are we going to have corporate mortgage bailouts?

What about corporate long term lease bailouts?

And last, but not least: where is Tim Geithner?

My apologies to Todd Harrison for using his favorite format...


Full disclosure: at the time of publication author did not have any positions in C or BAC. Positions can change any time.

Strange Action in Gold

Last couple of months I'm closely watching action in gold. It doesn't stop amazing me. Below is a chart of streetTRACKS Gold Shares ETF (GLD).



(Click on picture to enlarge it).

GLD today crossed down its 13-day moving average. Usually it's a short term bearish signal. Add to that flat top on Feb 20 - Feb 23, another bearish sign. GLD might be a good short candidate, except for one little thing. Between Jan 23 and Feb 9 it formed an excellent head and shoulders pattern and also crossed down 13-day MA (marked on the chart). What did it do after that? Jumped right up. Means we already had perfect technical short case, and it was completely wrong call.

Now let's take look at fundamentals. Couple of known facts. First of all, India usually consumes about 30% of gold annually. But since last November, India sharply reduced gold imports and it didn't import any yet in February (data as of Feb 16). So we have buyer of 30% physical gold disappear from market and price is going up. The fact that future market volume exceeds volume of physical market by orders of magnitude is not surprising. But a little bit surprising is the fact that on NYMEX open interest of April contracts is almost five time bigger than that of June, which has second biggest open interest. It looks more like ETFs and other funds buying futures and rolling them over every month. Of course, it's hard to estimate the global future market, because NYMEX is not the biggest gold exchange.

Do we have a disconnect between physical and paper market of gold? If not, somebody came to market lately to take place of India. I can imagine only one country with money and possible desire to do that: China. But I didn't see any evidence that China is buying a lot of gold lately. If disconnect exists, then current price of gold is a function of pure paper market, caused by ETFs and other funds. In other words, a lot of hot money came to gold market lately.

It's very hard to predict behavior of hot money. That's why I'm very cautious about gold right now. If I'm going to enter short position, it's probably going to be GLD puts or something like that. And I'm not going to commit a lot of money to it. But chart looks tempting.


Full disclosure: at the time of publication author did not have any positions in GLD. Positions can change any time.

Stopped Out of Spiders

Today's action on the market stopped me out of Spiders (SPY). Well, this bear market rally was too small to make any meaningful money.


Full disclosure: at the time of publication author did not have any positions in SPY. Positions can change any time.

Buying Oversold Market

Bought some Spiders (SPY) today at the opening. Put a tight trading stop under. Market was way too oversold yesterday, time to try to make some money on it. Looks like I was right. Turnaround Tuesday worked this time.


Full disclosure: at the time of publication author had a long position in SPY. Positions can change any time.

Hidden Crisis

It's pretty bad now. I don't want to rub any salt into the wounds. But I'm quite surprised that all talks of current crisis miss out one critical component of it.

Structural crisis. All by itself it's not that scary. Often goes on unnoticed. Actually, after World War II we live in a permanent structural crisis. Just look how many new industries emerged, how many old ones died or changed completely, how completely life changed in the last 60 years. And it was the time of the fastest growth of economy in the known history. But bad things happened when structural crisis consides with financial one.

There are only two crises in US history which could be compared with the current one. It's Great Depression of 1930s and maybe even greater depression of 1873-1876. And both of those two crises had two things in common: structural crisis combined with financial one. In 1873 structural crisis was caused by railroad build up, which changed business radically and also overextended credit markets of the country and also overbuilt railroads. But it probably wouldn't be that bad without coinage act of 1873 which essentially introduced Gold Standard in the country and caused a severe deflation.

Great Depression is closer, there were a lot ob books written about it, but not many people point to structural crisis behind it. Yes, there was a huge financial crisis, caused by credit destruction and some political errors. But structural crisis was there as well, caused by shift from horse to automobile in transportation and to tractor in agriculture. This crisis was bigger than that of 1873, because structural change behind it literally changed everybody's life in developed world.

Current structural crisis is a little bit different. It has two causes: the Internet and globalization. And they should be taken together, because some aspects of globalization are impossible without the Internet. As with previous structural crises, you can't undo it's causes. It's impossible to shut down the Internet, and it's equally impossible to stop globalization. Those who think that protectionism is possible now just don't understand how tightly our world is interconnected now. Take apart any piece of more or less complex machinery made anywhere in the world, and you'll find parts from at least five countries in it. Railroads were here to stay in 1873, cars and tractors were here to stay in 1929, Internet and globalization are here to stay now.

The lesson from previous structural crises is simple: it takes time to get through it. No matter what measures anybody is taking, we need time to work it out. Political decisions can make crisis longer or shorter, they can make it much worse or soften its effects, but they can't magically make it go away. In time we will get through.

From investment perspective, structural crises can create huge opportunities. So far not that many businesses take full advantage of the Internet. We have very successful ones, like Google (GOOG) and Amazon (AMZN), not very successful but viable Yahoo (YHOO) and very promising Netflix (NFLX). There are some travel and niche retail businesses, but I expect many more to emerge soon. Our task as investors is to find winners.


Full disclosure: at the time of publication author had a long position in GOOG and no positions in other stocks mentioned, considering buying AMZN and NFLX on weakness. Positions can change any time.

In The New Range

Dow Jones index quietly moved below November 20 low. On slightly below average volume at that. Technically what we see right now is as bad as possible. Remember, in November Dow only spent two days below 8000. Now it's sitting there since February 11 without any intention of going back up. It's going down mostly slowly, but surely.

Looks like Dow is settling in a new range. In October, we saw it in 8500-10000 range, since November, in range of 8000-9000. Now it's in 7000-8000 range if we are lucky.

Just amazing how this is similar to Dow's behavior in 1929-1932. Same picture: drop, oscillation in range, another drop, another range.

But there is a silver lining in current storm. There are almost no bulls in media right now. Probably they are sitting licking their wounds. Good. That means when current range is settled, we will have another period of range trading. I'm almost optimistic. Just remember, when not every cloud has a silver lining, every silver lining has a cloud.

Random musings: who is buying all that gold? If Indians are mostly out of the market, who replaced them? Maybe China quietly buys gold instead of Treasuries? Unfortunately, no way to know right now. We'll find out, eventually. Of course, China can't completely retire from Treasuries market, but they might redirect just a little bit to gold, and that'll be enough to cause current bull market. Pure speculation on my part, of course.

Economics Is Not Rocket Science

In fact, Economics is much more complex than rocket science. Many people don't know that actually rocket science is extremely simple: it's described by relatively simple differential equation, which has an exact analytical solution, which is called "Tsiolkovsky equation". Rocket technology is extremely complex, but science under it is simple.
Economics is not simple. It's not simple for two reasons. First, the most important reason: economy is interaction of people. You can never create exact math describing people interaction. Second reason is that all math describing economy is always oversimplified. Even the most complex math found in some papers is simplified and many assumptions are doubtful, to say the least.
Here's the example. Let's take the simplest equation:

M * V = P * Q

It supposedly describes relation between money mass, money velocity, amount of goods and prices of said goods. Every component of this equation is oversimplified. First of all, all goods are different, and similar goods are sometimes sold at different prices, so equation should possibly look like:

M * V = SUM(PQ)

Next comes M. What kind of money mass is it? Is it M1, M2, M3 or something completely different?

V isn't much better. Thing is, different industries have different money velocities. They also have different velocities in different time of year.

All together, the more you look at it, the less sense it makes. This equation, obviously, should be taken for some period of time. But time periods are different, and how you can compare Q1 with Q3 of any given year? And situation is changing all the time, but dynamics is not reflected in this equation.

So next time somebody tells you that Economics is not rocket science, agree immediately. It's much, much more complex.