Saturday, May 11, 2013

Do As I Say Not As I Do? Bill Gross Edtion

So is Bill Gross really more bullish on US treasuries. Just reading the headlines at the WSJ and like this excerpt from the article at Business Insider, you would think so.

 Bill Gross Has Significantly Boosted His Bet On US Treasuries

NEW YORK, May 9 (Reuters) - PIMCO Total Return Fund, the world's largest bond fund, increased its U.S. Treasuries holdings to the highest in over a year in April, data from the firm's website showed on Thursday.

The fund, which has roughly $292.9 billion in assets and is run by Bill Gross, increased its holdings of U.S. Treasury securities to 39 percent in April, up from 33 percent in March.

However, this appears to be a case of more do as I say and not as I do. The same day many of these article came, Bill gross tweeted the following.

Additionally, Gross wrote the following in his May letter to shareholders.

The easiest answer to the question of what to buy is to simply take your ball and go home. If the rules aren’t fair, don’t play. That endgame however, results in a Treasury bill rate of 10 basis points or a negative yield in Germany, France and Northern EU markets. So a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing. PIMCO’s advice is to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond. While this Outlook has indeed claimed that Treasuries are money good but not “good money,” they are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate.

This is only conjecture on my part, but it appears that Gross is feeling institutional pressure to play the game despite expressing dismay surrounding the ramifications of monetary policy. As the adage says, it is better to be wrong in a group than right all alone... or something to that effect.

When Interest Rates rise, It will Be A Whole New Game- Schiff

In my opinion, the rest of this panel really has their heads in the sand. I will not go into a great detail here, but an analysis of the liquidity preference and treasury bonds (which shows the recent and anticipated spat of Fed actions is unprecedented on any scale) suggests a rise in short-term interest rates will either lead to large leaps in inflation or a significant pull down in the Fed balance sheet. The Fed's actions is pushing the monetary base to an estimated 27 cents per unit of nominal GDP. This is just unprecedented considering that the high end of the range in almost all periods was just 9 cents. This level, in itself, just pushes the risks of a destabilizing event off the charts.


Friday, May 10, 2013

Correction- Dividends Cuts Are Pointing Towards Recessionary Conditions

A little while ago I stated that the count of dividend cuts in the S&P 500 had trailed off in March, suggesting an alleviation of potentially recessionary conditions. Well I guess I was wrong and think the data call I use was slow to pick up on the changes in dividends. Either way, the below chart shows the rolling 3-month change in dividend cuts for companies in the S&P 1500.

Dividend cuts still remain elevated and are above levels that have in the past indicated elevated risks of a recession. 

Currency Wars and Banker Peer Pressure- Schiff

You Are So Predictable

Interesting and scary at the same time...... how far are we from Minority Report?

Predictive analytics is technology that not only gives organizations the power to predict the future but also to influence the future. And the reason it has that difference is because predictive analytics predicts for you, me, everyone -- one person at a time whether you're gonna click, lie, buy, die; whether you're gonna default on your credit card statements; whether you're gonna commit an act of fraud; whether you're gonna vote for this presidential candidate or that presidential candidate. And because the predictions are on that level -- and that's really the defining characteristic of this technology of predictive analytics - it enables organizations to improve their operations -- to operate more effectively. That's what defines a functioning society is how all these organizations are serving you, interacting with you, treating you, contacting, not contacting you, medically treating you, campaign volunteers are knocking on your door, insurance providers approve or don't approve your application.

Blowing More Air Into the Same Bubble

It is such a  faulty argument to state the thesis that a rising (stocks/other) market will lead to higher economic growth or spending. People's spending habits change on  fluctuations in permanent income and not the investment gains.

Dollar Over Y100 Could Be Good For Global Growth ?

That is unless central banks are targeting (inadvertently even) exchange rates.......


5/9 Edition of Volume Off the High Trades

A lot names here also. First time in a while where I remember there was more than handful of names making both new highs and coming off the highs with volume...

5/9 Edition Of High Volume High Trades

A relatively large list of stocks and funds (the Yen trade maybe) making new highs on volume....

Remember When the Whole Idea of a Currency War was Dismissed?

Tweeted by Zerohedge

No currency war here- with the Koreans, Australians and others cutting their interest rates to stem altered capital flows and currency swings-  nothing to see here.

Thursday, May 9, 2013

Value Investing Conference 2013 Keynote Speaker: Gary Shilling

Dr Doom (Roubini) Sees the Light

FED ECONOMISTS: Stocks Are The Cheapest They've Been In 50 Years

Yes, research brought to you by the same folks who did not see the housing bubble developing and were telling people to take out adjustable rate mortgages in the years between 2005 and 2007. As reported by the Business Insider....

New York Fed economists Fernando Duarte and Carlo Rosa are out with a new article on Liberty Street Economics titled, "Are Stocks Cheap? A Review of the Evidence."

The answer: judging by the equity risk premium (ERP), stocks are about as cheap as they've ever been.
The ERP is the excess return that stocks are expected to provide over the risk-free rate, and it's typically calculated as the expected future return of stocks – based on historical averages, or forecasting models, depending on whichever one is chosen for the calculation – minus the risk-free rate (typically the yield on a U.S. Treasury bond) over comparable time horizons.

NY Fed historical equity risk premium chart 
 Fortunately, this research has already been debunked and proven to be utter nonsense. Brought to you by the Hussman et. al. circa 2007.

Chart: The Whole Truth – The Fed Model since 1948
The profile of actual market returns looks nothing like this. Rather, the profile of actual market returns - especially over 7-10 year horizons - looks much like the simple, humble, raw earnings yield, unadjusted for 10-year Treasury yields (which are too short in duration and in persistence to drive the valuation of stocks having far longer "durations").

On close inspection, the Fed Model has nearly insane implications. For example, the model implies that stocks were not even 20% undervalued at the generational 1982 lows, when the P/E on the S&P 500 was less than 7. Stocks followed with 20% annual returns, not just for one year, not just for 10 years, but for 18 years. Interestingly, the Fed Model also identifies the market as about 20% undervalued in 1972, just before the S&P 500 fell by half. And though it's not depicted in the above chart, if you go back even further in history, you'll find that the Fed Model implies that stocks were about as “undervalued” as it says stocks are today – right before the 1929 crash.

Yes, the low stock yields in 1987 and 2000 were unfavorable, but they were unfavorable without the misguided one-for-one “correction” for 10-year Treasury yields that is inherent in the Fed Model. It cannot be stressed enough that the Fed Model destroys the information that earnings yields provide about subsequent market returns.

Over time, Fed Model adherents are likely to observe behavior in this indicator that is much more like its behavior prior to the 1980's. Specifically, the Fed model will most probably creep to higher and higher levels of putative "undervaluation," which will be completely uninformative and uncorrelated with actual subsequent returns. 

Historically, readings from the Fed Model explain just 3% of the variation in S&P 500 total returns over the following year, 2% of the variation in 7-year returns, and just 1% of the variation in subsequent 10-year returns.

In contrast, the simple raw operating earnings yield explains 8% of the variation in subsequent 1-year returns, 41% of the variation in 7-year returns, and fully 52% of the variation in subsequent 10-year returns.
The popularity of the Fed Model will end in tears. The Fed Model destroys useful information. It is a statistical artifact. It is bait for investors ignorant of history. It is a hook; a trap.

The moral of the story, you hear the words 'Fed Model' in relation to valuation, just turn your brain off.


A Trading Question to Ponder Regarding the Big Banks

Saw an article this morning on Bloomberg stating.....

Goldman Sachs Group Inc. (GS), which generated about half its revenue from trading last quarter, posted losses from that business on two days in the first three months of 2013, compared with one day a year earlier.

further still

JPMorgan Chase & Co. and Bank of America Corp. (BAC) had perfect trading records in the first quarter, making money on every day of the period, while Morgan Stanley posted losses in eight sessions. Citigroup Inc. doesn’t disclose money-losing days. 

Two days of losses in the quarter? Perfect trading days. Do you know of ANYONE who experiences no trading losses, except for maybe Bernie Madoff? It is just a statistical impossibility to experience no trading losses, unless you have rigged the system. I don't know how this is not a bigger deal.

5/8 Edition of Volume Off the High

Just a few names here. I was thinking that I may revisit the initial performance research for the volume movers list, and not only pull it forward through the present, but see if I cannot expand it to include other potential strategies.

High Volume High 5/8 Edition

A mass of stocks and funds making new highs on heavy volume....