Posts Tagged ‘Technical Analysis’
Tuesday, October 28th, 2008
Jeff DeGraaf, ISI head of technical analysis says Tuesday’s rally is far more credible than the past rally a couple weeks ago.
“This is the 6th best rally in the S&P since 1925,” he says. “If you look at volume and breadth it makes me more bullish than I’ve been in quite a while.”
With sentiment so bearish, “we have a condition that would set itself up for some type of mean reversion probably to 1100,” he says.
Short assets vs. assets shows that there is far more money betting the market down than up, and today’s rally is more reliable than the most recent one.
As a result, “the best market strategy right now is a call spread on the S&P selling the upside around 1100,” he concludes.
What’s the bottom line? Sell the rip!
To see DeGraaf’s entire analysis please watch the video.
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Tags: Amp, Rally, risk, S&P500, Technical Analysis, Video
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Tuesday, October 7th, 2008
Jeff deGraaf, Head of Technical Analysis at ISI, who appeared on CNBC’s On The Money today, suggests that we are merely in the 5th inning of this bear market, or about 250 days into a typical 600-day bear market downturn. Usually, the first part of the bear market consists of the unwind from the previous boom cycle. He suggests that we still have yet to see the second part of the downturn.
click image to watch video
deGraaf made the point that if you’re a long-term position oriented investor, this is probably [only]the 5th inning of the bear market. If you’re a short term tactical investor, there’s been enough things washed out that you could get 150-200 “handle” rally.
The burning question that remains to be answered is, “How much like other bear market patterns in the last 40 years is this one?”
Here are the charts deGraaf discussed:
At this stage, 57% of S&P 500 stocks have now made 52-week lows.
Based on the 1973-1974 bear market deGraaf points out where we are in terms of the timeline.
Then, he makes a comparison to the 2001-2002 bear market, again pointing out where we are in terms of that one.
“What you need from our standpoint to tactically be a bull is for the market to send you a message that it wants to go up,” said deGraaf.
Here are some things to look for:
- Market Breadth
- [Between] 5 to 1 and 3 to 1 advance/decline ratios
- Preferably, with the market doing it on its own volition,
- Without government intervention, and
- Not contrived by government policy.
Following deGraaf’s comments, John Najarian pointed out that the CBOE VIX (Volatility Index) is signalling a great likelihood of a great number of 35 point plus days (down 60 pts. today) on the S&P 500 and more 500+ point days in the Dow, to the upside (or downside). Currently the VIX index has reached an all time highs in the mid 50% range.
The relative strength of the US dollar is promising too, but getting to a stronger dollar on the basis of the weakening Euro in the midst of the vaporization of some large European banks, like Fortis, will be painful, to say the least, as resultant losses are forcing more liquidations in equity markets during the last few wildly volatile trading sessions.
Is the bottom in yet? Not likely, and not for some time yet.
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Tags: Amp, Banks, Bear Market, Chart, Dollar, Euro, Market Patterns, Markets, Rally, risk, S&P 500, S&P500, Technical Analysis, Trading, US Dollar, Video
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Monday, September 1st, 2008
The Devil’s Dictionary, was originally published by Ambrose Bierce. Think of him as the forgotten brother of Mark Twain. Both had remarkably similar lives, were good friends, and lived in San Francisco around the same time. Bierce, however, followed a different path than Twain. While both had similar humour, and were equals in their genius, Bierce clearly was the better when it came to wit. Public figures quaked in fear of his satirical pen, and newspapers sales soared when he was published. Over the years, many of his jabs at the establishment appeared in local newspapers and were later collected into The Devil’s Dictionary, one of the greatest works of satire of the 19th century.
We present you with Norgate Investors’ Services version of the Devils Dictionary for financial markets.
Analyst recommendations: –
Strong Buy – Buy
Buy - Hold
Hold – Sell
Sell – It’s too late.
Arbitrageurs: – large traders who feed on plankton.
Averaging down: - lowering the average price of entry by adding to a losing position.
Averaging down should only be attempted when you are really angry at a market.
Back–testing: – the art of adjusting trading system parameters so as to ensure maximum profit in the past and zero profit in the future.
Black-box system: – a trading system that is available for sale, but is so good that its rules can’t be disclosed. Black-box systems are generally only available for sale because the vendors have a sense of philanthropy.
Cancel-if-close: - a limit order that is cancelled if it appears likely to be hit. Some brokers do not accept cancel-if-close orders.
Carbon credits: - A scheme developed by brokers requiring traders to purchase millions of dollars of carbon credits at the end of each financial year to offset the printing of their contract notes.
Charting: - “join-the-dots” for adults.
Central Banks: - big market players, with no stop-losses. The Bank of Thailand once bet 40% of its foreign reserves in a day. It lost.
Computerised system testing: - torturing the data until it confesses. See: back-testing
Contrary opinion: - the idea that when the market dumps a security, you should look to buy it. The trick appears to be to make sure that the market has finished doing the dumping, and is not just waiting for you to buy so that it can really start dumping. See: Institutional investor.
Cycle analysis: - a method of analysis that allows losing trades to be organised into regular patterns.
Derivatives: – securities that are identified by acronyms - CHIPS, COBRAS, LEAPS, PERQS, STEERS, TRIPS, ZEPOS – all of these things are derivatives. Unfortunately, little else is known about them.
Daytrading: - an activity that takes place in between meaningful periods of employment.
Dot.com bubble: - tulip-mania for the X-generation.
Dow Jones Industrial Average: – a widely reported stock index that was designed in the late 11th century and has stood the test of time.
Drawdown: - A figure that immediately grows when a trading system transitions from paper trading to real trading.
Eurodollars: - U.S. Dollars, of course.
False Break: – an actual break of a trendline that triggers a losing trade. False breaks confirm the usefulness of trendline analysis. Only those breaks that are false cause problems, and those breaks don’t count, because they are false.
Fast market: - an official market condition, during which floor brokers may scalp you with impunity. At other times, they have to be careful about it. See: slippage
Figures: - market-sensitive measures of economic activity, such as “Non-Farm Payrolls” and “Durable Goods Orders”, that are published every day in the U.S., much to the annoyance of players on the other side of the world, who can’t get to sleep.
Float (initial public offering): - stock that is offered to you because other people have turned it down. The guiding principle in relation to floats is as follows: “never participate in a float that you are able to participate in.”
Forex market: - a private casino, which is run by large international banks, mainly so that they can have some fun.
Fundmental analysis: – a method of analysis that provides compelling reasons for why a stock shouldn’t fall in price when it does.
“Fundamentally sound”: - the condition in which an economy finds itself immediately after a stock market collapse.
Gold carry trade: - in the gold carry trade, institutions called gold banks borrow gold from the central bank at the gold lease rate, which may be 1%. They can then sell this gold and invest the proceeds in Treasury Bills, which may yield 4%. The central bank keeps the gold on its books, figuring that it can trust a gold bank. Of course, the gold bank is “short” the gold until it pays it back, and it must take care that the gold price doesn’t get away from it. This may, or may not, explain a lot about the gold market of the 1990s.
Greeks, the: - Delta, Gamma, Rho, Theta and Vega. In option pricing models, the Greeks are partial derivatives that express local sensitivities. Just remember the names of about three of them, and then slip them into the conversation occasionally. No one will pick you up on it.
Hedge Fund: - a fund that pools money from rich investors, in order to play with it. Hedge Funds are private concerns, which means that they can play wherever they like. Mutual Funds, on the other hand, accept money from the public, and can only play where they are supervised.
Hedger: - a guy you can’t beat when you’re playing him at futures. When a hedger loses a bet in the futures market, he makes up for it in the cash market. When a speculator loses a bet in the futures market, he really loses it.
Index Funds: – funds with no sense of fun.
In-house analyst: – an employee of a broking house who dresses mutton up as lamb and advertises it on special.
Institutional investor: - someone who dumps a stock big-time, a day or two after you’ve bought it, for no apparent reason.
Limit moves: - An unexpected but welcome holiday for pit traders invariably caused by fat-finger-syndrome-suffering Japanese traders.
Live feed: - a technology that enables the instant incorporation of bad ticks into a charting program.
Long Term Capital Management: - a large hedge fund, whose capital only managed to last for a short time.
Lunch: – when you ring your broker on a Friday afternoon to be told he’s still at lunch, it means he’s still drinking.
Market Depth: - a trading screen that shows orders queued up on both sides of a market. Unfortunately, it doesn’t show the orders belonging to people who don’t like to queue.
Market report: - a concise explanation of why a market traded up or down. 99% of market reports are drawn from other market reports. The remainder are whimsical.
Maximum Adverse Exeuction: - The employment status of a trader at Société Générale in January 2008 after losing the bank €4.9 billion.
Money-management: - the art of hiding trading losses from a spouse.
Non–executive Director: – a person who’s job it is to fill a chair at a Board meeting, so that no chairs are empty.
Option Pricing Model: - a mathematical model, that can calculate the fair price of an option. If the market price differs from the fair price, you can bet accordingly. If the market price then moves further away from the fair price, you can say: “Hey, that’s not fair!”
Over-bought: – a market is considered to be in an over-bought condition when everyone else appears to have bought it, but you haven’t.
Peak oil: - The point in time at which your highly leveraged long crude oil position enters an impossibly steep downtrend.
Personal computer: - an indispensable aid to the modern investor. Investors who are new to computers should consider the following advice:
Always approach your P.C. in a confident manner. Computers can sense fear and indecision. Remember – you are in charge! You can always shut the thing down (unless you’re using Win98).
Position trade: - a short-term trade that is in deficit, and will be closed out as soon as it breaks even, however long that takes.
Price/Earnings Ratio: - a ratio that indicates whether the price of a stock is attractive in relation to last year’s earnings. A low number indicates a bargain. However a low number can also indicate a lemon. If a company starts going down the tube, its stock price will appear very attractive in relation to last year’s earnings. The P/E Ratio is a versatile indicator.
Random Walk Theory: – the theory that market prices follow a random walk, much like that of a drunken sailor. The weakness of the theory lies in the fact that little scientific research has been done into drunken sailors.
Rumours: - the time-honoured basis for the making of trading decisions. Rumours about stocks tend to get thicker as they are spread.
Seasonal analysis: - the assumption that other people who trade Heating Oil Futures know nothing about winter.
Slippage: - the difference between the price at which you expect a market order to be filled and the price at which it is actually filled. See: Orange Juice Futures.
Stochastics: – a technical indicator so-named because the name sounds technical.
Stop-loss: – the trader’s equivalent of a condom. It’s something you know you should have used after it’s too late.
Support: - a line drawn on a chart, the breaking of which is deemed extremely significant, even if the only people trading the stock at the time are two of three ladies at the tennis club.
Support/Resistance: - supposed allies that flee at the first sign of trouble.
Tankan Index: - a closely watched figure, that measures the extent to which the Japanese economy is tanking.
Technical analysis: – subjective analysis of the markets dressed up in a lab coat.
Technical indicator: – a transformation of a price series that contains less information than the series itself. Different technical indicators throw away information in different ways.
Tech wreck: - the end of the dot.com bubble. Surprisingly enough, many observers predicted the wreck accurately. As time goes on, more and more of these observers come forward.
They: - the members of a powerful international conspiracy who target small, private traders in order to make their lives miserable. For instance, “they ran the market to my stop and then turned it around.”
Trading floor: - the traditional venue for the negotiation of securities, now made redundant by screen trading. Trading floors that remain open serve a valuable purpose as colorful backdrops to market reports on television.
Trading genius: - a reckless spirit in a bull market.
Trendline analysis: – a form of analysis that works best on a computer screen, where lines can be erased and re-drawn without trace.
Zero-sum game: – a game in which the players slug it out and the broker wins.
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Tags: Banks, Brokers, Carry Trade, Central Banks, Chart, Collapse, Credit, Crude Oil, Derivatives, Dollar, Earnings, Economi, Economic Activity, Economy, EFU, energy, Euro, Gold, Hedge Fund, Hedge Funds, humour, Information, International, Japan, Long Term Capital, Long Term Capital Management, Markets, Mutual Funds, oil, P/E, Php, Rally, risk, Technical Analysis, Trading, Treasury Bills
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Tuesday, June 17th, 2008
Exclusive Interview
Nick Barisheff,
President and CEO,
Bullion Management Group Inc.
This week we interview Mr. Nick Barisheff, President & CEO, Bullion Management Group, and discuss with him the importance of gold bullion. Mr. Barisheff founded Bullion Management Group Inc. in 1997, and is the portfolio manager of BMG BullionFund, Canada’s only open-ended fund investing purely in gold, silver, and platinum bullion.
For a PDF version, click here:[PDF] Interview with Nick Barisheff, BMG Inc. Here is the interview:
GreenLightAdvisor.com: What’s the most important thing people need to understand about gold?
Nick Barisheff: Many people think gold is a commodity like copper, zinc or pork bellies, but it has 3,000 years of history as money. It was money that no government created by edict. It was just adopted for usage by itself, and it was and still is the best form of money. Currently, we have a 37-year global experiment in paper money. All prior paper money experiments ended in hyperinflation, with the currencies becoming worthless. All previous hyperinflations were contained within a single country, but this time, because of the reserve status of the US dollar, it is likely to be global in nature.
Right now, the price of gold is rising while most currencies are losing purchasing power as well as their value against gold. Gold comes back into its monetary role when there’s a loss of confidence in the financial system or in paper money, and that’s when people are attracted to it.
Before 1971, the monetary system was governed by the Bretton Woods Agreement. Under that agreement, the US dollar was backed by gold, and other currencies were pegged to the dollar. Other countries could trade their US dollars for gold. Essentially, US gold indirectly backed all other currencies. Then things changed. As the US was getting into the Vietnam War and into President Johnson’s policy of guns and butter, US gold reserves started declining. Countries holding dollars were presenting their US dollars and asking for gold in return, and that led to US gold reserves dropping from a peak of 22,000 tonnes to 8,800 tonnes. On August 15, 1971, President Nixon “closed the gold window” and stopped the exchange of US dollars for gold. Closing the gold window was a euphemism, but basically the US declared bankruptcy. When you can’t meet your obligations when they are due, that’s what it is. So from that point in time, we’ve had 37 years where the entire world has been on a global fiat currency monetary system.
Since 1971, when the dollar was freed from the constraints imposed on a currency backed by gold, the US has experienced increasing federal government and current account deficits. The US is now borrowing $800 billion annually to fund its consumption of foreign-made goods and commodities, and the federal government is running a deficit of almost $350 billion. At some point, foreigners will become unwilling to continue funding US expenditures, forcing the Federal Reserve to expand the money supply at a faster pace. This will result in rising inflation, rising interest rates and a continuous decline in the US dollar.
GLA: We’ve had the fastest money supply growth in almost 40 years that’s resulting in increased inflation. Why would an investor want to go into T-bills, given that interest rates don’t even cover half of the stated inflation rate, which we know isn’t even the real inflation rate?
NB: For the first time in history, we have an unlimited ability, by all central banks, to print, however much money we want, so to speak. Apart from the US M3 money supply growing at about 20%, we also have India and China growing theirs at about the same rate. China is at 18%, India is at 20%, and Russia is at 45%. As China or India sell goods to the US, they take in US dollars and they print yuan or rupees against those US dollars. Japan’s a little different; there, individuals and corporations can take their US dollars and buy US assets themselves. In China you have to turn your US dollars in to the central bank.
In today’s inflationary environment, many who invest in fixed income investment do not appreciate that instead of being “safe” investments, they are in fact guaranteed losses of purchasing power when you take inflation and taxation into account. We have done some analysis into a systematic withdrawal from our Fund for those investors requiring income. Based on the fact that precious metals have a long track record of staying ahead of inflation, an investor would be far better off in precious metals in terms of maintaining principal after inflation and having more after-tax cash flow to spend.
GLA: What did you think of John Embry’s (Sprott Asset Management) recent article about the manipulation of the price of gold? His assertion was that the central banks are deliberately keeping gold below $1,000 per ounce.
NB: John and Eric Sprott have recently written an extensive report called Not Free, Not Fair. The report brings forth a great deal of evidence that the precious metals markets may be manipulated. While it may seem like there’s a conspiracy to suppress the gold price, I think it’s simpler than that. It’s a well know fact that it is the job of central banks to manage their country’s currency, that’s part of their mandate. Central banks understand that gold is a currency, but one that they can’t expand as easily as paper money. I don’t think there is any lack of understanding on the part of central bankers that gold is an alternative currency.
GLA: Isn’t gold considered to be just a commodity with no real monetary role anymore?
NB: I’d like to refer to an article by Tony Fell , and it’s particularly interesting, given that he was chairman of RBC Capital Markets at the time of writing. He talks about how gold has three attributes: it’s a commodity, a store of value and a currency. He says so many people now think of gold only as a commodity or jewellery, or as an archaic relic, that there’s a feeling of “who needs it anymore?” People don’t think of it as money.
However, the daily sales volume gives a conclusive indicator that gold is much more than an industrial commodity. The physical turnover of gold by members of the UK’s London Bullion Marketing Association is about *$25 billion per day. We’re talking about net turnover between the LBMA members. The volume is estimated at 7-10 times that amount.
It’s pretty clear that these are currency transactions. That’s why gold, silver and platinum trade on the currency desks of all the banks and brokerages, not the commodity desks.
What people need to know is that gold is a currency [like dollars or euros or yen]. Gold is not trading at these volumes as a commodity or as some archaic relic.
GLA: What are your thoughts on technical analysis, given that gold is a currency?
NB: Technical analysis works if you’re looking at widely distributed stocks like the S&P 500, for example, where there are many, many transactions that accurately reflect public sentiment. The price of gold, however, can be impacted by one country, or one very wealthy individual who wakes up one morning and decides to buy, and then you can throw the charts away. Or when a government decides to sell or a government intervenes. I’ve looked at technical analysis for gold in the past and tried to back-test with various techniques and found that they don’t work more often than they do. In the most recent case, there is no justification for the drop in gold price; it should have been rising because nothing has fundamentally changed. In fact, the fundamentals got worse and the gold price should have rallied. None of the problems went away; nothing was solved; the conditions are as bad as or worse than they were previously. So the drop in gold’s price has been a false decline.
GLA: So, it’s the value of paper currency that changes, not the value of gold [so to speak]?
NB: One of the attributes of gold as money is that you can’t simply create it at will, like paper money. It’s no one else’s promise of performance and it’s not someone else’s liability. It’s not going to zero, no matter what. And, whether we’re moving the measuring stick of inflation or deflation really doesn’t matter, because the way gold should be measured is in terms of purchasing power. It doesn’t matter if gold is priced at $1,000 in paper money per ounce or $2 in paper money per ounce, it will retain its purchasing power in either circumstance.
The first important step in the big picture of understanding gold is that it is a store of wealth with a 3,000 year history, and it’s money. Over the long term, it retains its purchasing power. That’s why they say that an ounce of gold will always buy a man’s suit.
Apart from that, the US dollar is down 85% in purchasing power since 1971. In 1971 you could buy a car with 100 ounces of gold; a car was about $3,500 and gold was $35 an ounce. With 1,000 ounces, or about $35,000, you could buy a house. Today, you could buy several cars or a luxury car with 100 ounces, and a mansion with 1,000 ounces. You could also buy more units of the Dow Jones Industrial Average with your ounce today than you could in 1971. So that ounce has preserved its purchasing power while currencies have lost over 80% of their value.
GLA: Apparently, in the last 40 or 50 years, there’s only been three years that there was net selling by gold investors, three years out of almost half a century. Is this true?
NB: People who hold bullion tend to hold it for a long time, as the core of their entire wealth. It’s not sold once you understand its basic characteristics, because you have to have a reason to sell it, you have to use it to buy something better. I tend to look at investment performance as to whether I end up with more gold ounces or less gold ounces rather than percentage returns; you get a different conclusion then. For example, if you had invested 44 ounces in the Dow in 2000, you would now get back only 14 ounces.
This current cycle is not a conventional bull market in precious metals; I think we’re in the midst of a change in the global monetary system. This is not going to be like a typical commodity cycle where we go up for four years and down for four years; I think we’re witnessing a transition into another monetary system, whatever form that may take. At the end of this period the US dollar will no longer be the world’s reserve currency.
GLA: What happens if the US dollar ceases to be the standard?
NB: What happened when the British pound ceased to be the standard? It just ceased to be the standard. Its decline in value is still ongoing. It’s happened to every empire throughout history: the British, the Roman, the Greek, the Spanish, the Persian, and the Chinese. Every single empire ended up debasing their currency in order to maintain the empire.
GLA: Is gold likely to increase further going forward or has it topped and investors have missed out?
Currently, we have a lot of noise in terms of the credit contraction, real estate bubble, record high debt at all levels, dangerous derivatives vulnerabilities and unsustainable US current account and trade deficits. These could still blow up into bigger problems at any time. However let’s hope they get resolved or at the very least postponed somehow.
But there are two factors that are not changeable in all of this.
First: The US has to print money on an accelerating basis. Has to – because of the underfunded Social Security and Medicare obligations – which at present are about $60 trillion. If you took all of the net earnings of US individuals and companies it would not be enough to pay that off. You can’t tax people enough and politically you cannot tell everybody, “Sorry, we can’t give you your Social Security – we don’t have the money. And no Medicare either.” So they have to keep printing money.
Second: The issue of Peak Oil – it used to be a debate as to when the production of oil would peak. Now it looks like that has already happened, in March 2006. As a result we have a situation where oil production is declining while demand is increasing, particularly from India and China. This will result in ever-increasing oil prices, and also increasing prices for almost every product and service.
As these two forces – increased money printing and peak oil – interact, the result is a declining dollar alongside constantly increasing oil prices. This leads to even greater oil price increases in an effort to offset the dollar decline. These two highly inflationary factors are working in tandem, and they can’t be changed.
Therefore, as oil rises and the dollar declines, commodities – and particularly precious metals – will continue to rise.
GLA: What’s the relationship between oil and gold?
NB: There’s not necessarily a great deal of correlation between the two in the short term. However, in the longer term, the correlation has been in the order of about 16 barrels of oil for every ounce of gold.
GLA: Has that been consistent long term and what is the outlook for precious metals?
NB: With only short-term fluctuations, this ratio has held up over the long term. At this point the price of gold is undervalued compared to the price of oil. Gold should be closer to $1,500 an ounce if you use this measure.
On top of this kind of inflationary issue eroding financial confidence, we’re at peak production in gold. When the price of gold was low, miners employed high-grading to get the most easily attainable gold out of the ground. As the price rises, miners resort to lower-grade mining, which has become worthwhile – but in some cases you have to sift through tonnes of ore for each ounce.
Platinum, for instance; it takes six months to get an ounce of platinum out of roughly 10,000 tonnes of ore. Right now, almost all the platinum produced originates in South Africa, and the mines are miles underground, and electricity intensive. Power shortages in South Africa are interfering with production and slowing things down. All these forces are coming together, slowing production and driving up prices.
With silver, most of the aboveground reserves have been depleted – most of the silver that is produced is consumed each and every year. Silver also has two demand drivers – monetary and industrial. The number of industrial applications are growing every year while the monetary demand has also been growing in the past few years. It is important to remember that “silver” means “money” in several languages.
GLA: Why is gold so important as an element of diversification for investors?
NB: Take a look at the cycle from 1968 to 1982 – during that time it took stocks the whole 14 years to break even. If you factor inflation into it, it actually took until 1995. So stocks didn’t look so good in the past cycle, and they are not looking very good now. The DJIA is well below its inflation-adjusted highs. Its performance is much worse when measured in gold ounces. The DJIA has declined from a high of 44 ounces of gold in 2000 to about 14 today, but if you look at a chart the Dow appears to be at new highs. It’s like taking the Zimbabwe stock market and saying, “Look how well Zimbabwean stocks have done; the market was up 8,000%.” But what if we adjust for the 100,000% inflation in that country? Not so good, is it?
BMG BullionFund is internally diversified. We buy physical gold, platinum, and silver in equal amounts. While some people like to focus on gold, they would miss out on the fact that silver and platinum have both outperformed gold since the beginning of this cycle in 2002.
GLA: What do you do about inflation?
NB: First, it is important to look at real inflation. What is real inflation? The real number is around 9%, not 3%. The calculations the government uses for the Consumer Price Index (CPI) are really meaningless as a true inflation indicator. The real definition of inflation is an increase in the money supply that leads to an increase in prices. Prices do not increase on their own unless you have a shortage; when you increase the money supply, what you’re really doing is debasing the currency, and as the purchasing power of the currency declines prices appear to be rising. So with the US money supply (M3) growing at 20%, Canada’s growing at 9%, and most other countries’ growing at around 15%, that’s going to result in rising prices and real inflation.
If you take real inflation into account, Wainwright Economics suggests that the appropriate bullion allocation for a bond investor’s portfolio is 18%, and for the equity investor’s portfolio 40%, and that’s just to break even with inflation. Although this may sound incredible, think of the 1970s. How much bullion was required just to break even in an equity portfolio? Bullion went up 2,300%, while equities were flat on a nominal basis. Inflation was 15%.
So without even getting wrapped up in a discussion about the complex subject of money, those two points are fairly straightforward. Ibbotson Associates confirmed that precious metals are the most negatively correlated asset class to the traditional financial assets, so it gives the biggest bang for the buck for the least amount of allocation. In the process you also achieve a more balanced, diversified portfolio. Advisors would do well to have an allocation to precious metals to protect their clients from under-diversification.
GLA: Do you think this pullback in gold is an opportunity to add to positions at this time?
NB: Yes as long as there hasn’t been a major change in the fundamentals that drive the price. When these pullbacks occur, you always get some technical interpretations, whether it’s conventional technical analysis or Elliot Wave, coming out with the idea that the bull market in precious metals is over and that it’s now going down forever and so on.
When these things happen, you have to ask if anything changed fundamentally to justify that decline. If nothing changed fundamentally, the only conclusion you can draw is that something’s wrong in the technical interpretations. In all likelihood the technical interpretation is wrong because there’s been an intervention by monetary authorities. Technical analysis only works when the markets are working freely.
GLA: Well, whatever it is they’re trying to do to knock the price down, once again, he who wins in the end is he who has the most ounces and the most shares. It’s got to have been a good year for you with gold prices up 10%, silver up close to 19% and platinum prices over 30%.
NB: Yes, it has. We have grown assets year-over-year by 80% this year alone, so it’s been a substantial increase, and performance-wise, we’re about 20% year-to-date.
GLA: Thank you very much for sharing your knowledge with us.
*All amounts expressed in US dollars, unless otherwise noted.
For a PDF version, click here: [PDF] Interview with Nick Barisheff, BMG Inc.
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Tags: Amp, asset class, Banks, Barisheff, BMG Inc., Bullion, Canada, Central Banks, Chart, China, Commodities, Commodity, Consumption, Correlation, CPI, Credit, Currency, Derivatives, DJIA, Dollar, Earnings, Economi, Economics, electricity, Euro, Fed, Federal Reserve, fiat, Fixed Income, Focus, Gold, Gold Bullion, India, inflation, interest rates, interview, Japan, M3, Markets, Medicare, Metals, Mining, oil, Oil Prices, physical gold, Platinum, precious metals, Real Estate, risk, Russia, S&P 500, Silver, South Africa, Technical Analysis, The Big Picture, Trading, Trillion, UK, US Dollar, Value, Yuan
Posted in China, Commodities, Credit Markets, Economy, Gold, India, Markets, inflation | 1 Comment »
Thursday, March 27th, 2008
March 27, 2008 - Donald Dony, The Technical Speculator, offers the following explanation of how the strengthening of the yen to a twelve year high against the US dollar has had a profoundly negative effect on global markets, in the past and during the most recent 6-7 months. We would also add that while Mr. Dony does a great job of explaining this concept, he also points out in the present tense that as the cheap money is quickly evaporating, so is the global market.
Our sense is that the yen broke through par, a level (usd/yen<100) that required intervention (which came last week), primarily by the BoJ to maintain it at levels that are more supportive of Japan’s economy. For this reason, it may be that if the yen has reached a turning point, that a new round of carry trade in the yen could provide stimulus and/or support to global markets at these levels. Change that to evaporated, past tense.
Global equity traders had, for many years, a ready source of funds at almost no interest charge. Traders have been shorting the Yen and using the funds to purchase stocks, currencies and high-yielding securities around the world. However, as of mid-2007, that “free bank account” is becoming more and more costly. The Yen carry trade is starting to unwind with very negative results for stocks.
But what is the “Yen carry trade”? Simply put, it is borrowing at very low interest rates in Yen and using the loan to buy higher yielding assets elsewhere. During the past 12 years, the trade has become standard business practice for many institutional investors. Perhaps the most popular form of the strategy exploits the yield gap between U.S. and Japanese fixed income securities. Another plus that came with the Yen/U.S. cross was from the dollar’s rise against the yen. Investors make their profit when they reverse the trade and pay back the Yen loan.
But all of this endless liquidity is quickly coming to an end and with bearish consequences to global equity markets.
Chart 1 illustrates the tight connection of the Japanese currency with global stocks. With every major rise of the Yen throughout 2007, there was a mirrored decline in the Dow Jones World Stock Index. Quite simply, the global equity markets began to fall when the tap was turned off to cheap money. Traders are now forced to buy back massive Yen short positions and sell assets to pay for it.
And what is happening to the Yen?
Chart 2 shows the Japaneses currency is breaking through a decade old resistance levels and surging to new highs. And this trend shows no signs of reversing. The upside target is 120.
Bottom line: The bearish impact of the advancing Yen is clearly apparent on global stock markets. World equities appear to have been propped up largely due to the availability of foreign liquidity. As this “cheap money” is quickly evaporating, so is the global bull market.
Donald W. Dony FCSI, MFTA
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Tags: Carry Trade, Chart, Cheap Money, Credit Market, Currency, Dollar, Economy, Fixed Income, interest rates, Investment, Japan, liquidity, Markets, risk, Stock Markets, Technical Analysis, US Dollar, usd
Posted in Markets | 2 Comments »
Thursday, March 27th, 2008
Mar. 27, 2008 - Bespoke Investment Group - Recently released short interest figures from both the NYSE and Nasdaq show that short interest as a percentage of float is currently at record levels. On the NYSE, the mid-month short interest report hit a level of 4.15%, which is record high. On the S&P 500, short interest is even higher. As of mid March, 5.4% of the float of S&P 500 listed companies were sold short. This represents an increase of 53% over the last year!
On a sector by sector basis, short interest also remains at elevated levels.
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Tags: Investment, Investment Strategy, Markets, Technical Analysis
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Tuesday, January 29th, 2008
Jan. 29, 2008 - Short and UltraShort Funds provide investors with highly liquid inverse exposure to the markets as represented by widely held benchmark indices.
Check out these charts for a couple of good examples. Most investors have difficulty grasping the idea of taking ’short’ positions or bets against the very markets that they are investing in. These new ’short’ ETFs do not require a great deal of sophistication or a margin account for the average investor to get some portfolio insurance.
iShares FTSE Xinhua 25 (FXI) vs. ProShares UltraShort FTSE Xinhua 25 (FXP)
iShares MSCI Emerging Markets (EEM) vs. ProShares Short MSCI Emerging Markets (EUM)
ProShares Ultra Financials vs. Proshares UltraShort Financials (Dow Jones Financial Index(sm))
If you believe that there is more downside to come, then its still not too late to get some downside protection.
Don Coxe, in his recommendations from Basic Points, January 2008, warns:
The financial crisis is not centered in stock markets. Its primary locus is in financial derivatives, and in their impact on the stock prices of leading banks. Until the downward drift of bank stocks and the upward drift of derivative debt yields are reversed, the stock market will continue to slide. Keep overall equity exposure to minimums, and emphasize quality.
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Tags: Amp, Bank stocks, Banks, Basic Points, Chart, Derivatives, Don Coxe, Emerging Market, Emerging Markets, ETF, EUM, Financials, FTSE, FXP, Investment, Investment Strategy, Markets, Proshares, SKF, Stock Markets, Technical Analysis, ultrashort, upw, uyg
Posted in EEM, ETFs, EUM, FXI, FXP | No Comments »
Tuesday, January 22nd, 2008
Jan. 22, 2008 - Here are some more clippings about the ‘carry-trade’ at the heart of global market volatility:
Jan. 21 (Bloomberg) — The Australian and New Zealand dollars fell against the yen as concern over a slowing U.S. and global economy spurred a reduction in holdings of higher- yielding assets bought with funds from Japan.
The New Zealand currency traded near the lowest in almost two months versus the yen as a slump in Asian stocks deterred investors from so-called carry trades. Australia’s dollar also declined against the U.S. currency after a government report showed producer prices rose by less than economists estimated, prompting traders to pare bets the central bank will raise interest rates from an 11-year high next month.
Inserted from <http://www.bloomberg.com/apps/news?pid=20601081&sid=ah9E711dlJh4&refer=australia>
Australia’s 11-year high benchmark rate of 6.75 percent and New Zealand’s record 8.25 percent rate drew investors in the past as part of the carry trade strategy. Those rates compare to 0.5 percent in Japan. The risk in the carry trade is that swings in exchange rates erode profits from interest-rate differentials.
The carry trade strategy involves borrowing in countries where interest rates are low, and investing where returns are higher.
Commodities, which make up about 60 percent of Australian exports and 70 percent of New Zealand’s, tumbled since the beginning of last week. Falling global economic growth may reduce demand for commodities these countries export, such as metals.
Inserted from <http://www.bloomberg.com/apps/news?pid=20601081&sid=a3dRGK0srjXo&refer=australia>
Another nervous week as the ‘carry trade’ unwinds. Many equity indices and Yen crosses are poised at key support levels: ‘necklines’ of ‘head-and-shoulders’ patterns or the lower edge of the big trading band of the last year or so. Leading the pack South are GBP/JPY and Sweden’s OMX Index, closely followed by the Dow Jones Industrial Average and FTSE 100. These have already seen weekly closes below these key levels and should, one by one, topple all the other ones over too. An unseemly scramble is likely if not next week then in February; at-the-money implied volatility could soar.
Energy products and most metals eased, many thinking if not talking recession, and Baltic Dry and Capesize Freight Indices have halved since their peak at the end of last year. Even the more pessimistic are saying contraction will be shallow and short and that by Q3 2008 things will be mended and economic growth will pick up. We feel this is way too simplistic and that the unravelling of all the mess in the financial system will probably take the whole of this year (and then some more).
A ‘flight to quality’ has resulted in Treasury yields moving lower, US ones leading the way to multi-month lows with yield curve steepening seeing two-year TNotes at a mere 2.39% (lowest yield since September 2004). Credit spreads against junk bunds are at July’s record highs. The US dollar has been contained in relatively small ranges around last week’s levels although the Swiss franc did dip very briefly to a new record low (1.0838) as did the Czech koruna (17.318). Sterling has regained some of its composure, EUR/GBP down from a record £0.7614, and the Yen had the best all round performance, dipping to 105.92 to the greenback.
Stock indices are all lower, the New Zealand bourse for a staggering twelve consecutive days while Jakarta and Mumbai are down nearly 8% this week alone. US and European indices lost roughly 5%, many now lower than they were at any point in 2007.
Inserted from <http://www.fxstreet.com/technical/market-view/weekly-market-commentary/2008-01-21.html>
The Japanese currency climbed against higher yielding currencies as investors looked for safe havens amid the turbulence in equity markets. The yen carry trade, where the low-yielding currency is sold to purchase riskier, high-yielding assets, proved a popular investment strategy in the first half of 2007 as stable equity market conditions ensured a healthy appetite for risk.
But the deepening financial market gloom since August has seen carry trades scaled back since the beginning of this year.
The real test of carry trade activity is the relationship between the yen and the New Zealand dollar. The yen fell 15 per cent against the Kiwi between January and August last year as the latter’s interest rate hit 8.25 per cent against Japan’s 0.5 per cent. But the Kiwi has since lost nearly all these gains, and was down 4 per cent this week to Y82.05 as the yen continued its rally.
Inserted from <http://www.ft.com/cms/s/0/0600819a-c634-11dc-8378-0000779fd2ac.html>
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Tags: Asia, Australia, Bloomberg, Carry Trade, Commodities, Credit, Currency, Dollar, Economi, Economists, Economy, Emerging Markets, energy, Euro, FT.com, FTSE, interest rates, Investment, Investment Strategy, Japan, Markets, Metals, Miscellaneous, OMX, Rally, Recession, REW, risk, spreads, Sweden, Technical Analysis, Trading, US Dollar, Yield Curve
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Wednesday, January 16th, 2008
Jan. 16, 2008 - Back on January 4, 2008, we wrote that “On days the yen falls to the euro [or dollar], stocks almost always rise; when the yen strengthens to the euro [or dollar], stocks fall. Its almost always a short term concern and the volatility it brings with it can be dramatic, but opportunistic.
Well, here we are facing the latter, as recessionary winds are putting pressure on the US dollar. This article provides a very good overview and it may be that some of this weeks heavy selling across the strongest sectors in the market could be attributed to the pressure on Yen/Dollar carry trade. Read on…
***
At a time where all the news looks grim - from awful results that forced Citigroup to cut its dividend, to bad US retail sales figures that deepened recession fears, to the ZEW survey showing German business confidence at a 15-year low (and, we might add, Wednesday’s FT report that confidence in the UK property market has hit its lowest level since the housing crash of the early 1990s) - the “potentially scariest news of all” is the resurgence of the yen, according to John Authers in Wednesday’s Short View column.
Some analysts are more sanguine, predicting the yen’s surge will be temporary. But Authers points out the Japanese currency’s jump on Tuesday to less than Y107 to the dollar - for the first time since June 2005 - broke what Nomura called the trend of “reasonably steady weakening against the dollar that had been happening since 1994″.
This is important, in Authers’ view, because the yen has become a gauge for risk aversion in the markets.
When traders feel confident, they borrow in yen to fund investments elsewhere. This yields easy profits unless the yen suddenly appreciates. A rising yen betokens fear.
Hence its close correlation with the equity indices, and with equity volatility. Share prices fall, and volatility rises, when the yen does well
The yen’s rise has “nothing to do with fundamentals”, notes Authers. Indeed, the Bank of Japan on Tuesday reduced its economic assessments of four of its nine regions and admitted the economy was slowing, reducing the chances of a rate rise.
A strong yen is not good news for anyone — including the Japanese, he warns. Falls this year have left the Nikkei 225 stock index in a bear market, down 23.4 per cent from its high of July last year. Fears that the revived yen will damage exporters have contributed to the damage.
Are there any signs of light?, asks Authers.
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Tags: Bank Of Japan, Bear Market, Blog, Carry Trade, Citigroup, Correlation, Currency, Dollar, Economi, Economy, Euro, FT.com, Investment, Japan, John Authers, Lt, Markets, Nikkei 225, Recession, risk, Technical Analysis, UK, US Dollar
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Wednesday, January 16th, 2008
Even though it was a foreign term to most investors six months ago, the TED spread (3-month Libor minus 3-month Treasury) has quickly become one of the main indicators investors look to as a gauge of stress in the credit markets. While the indicator rose to historically high levels as 2007 came to a close, since the start of ‘08, the TED spread has been in a rapid descent, indicating that stress in the credit markets is showing signs of improvement. Today the TED spread fell to its lowest level since August 13th.
Three-month LIBOR, which is one component of the TED spread (along with 3-month Treasuries), was also highly elevated as 2007 came to a close, but since then it has also come down sharply. In fact, as of today, 3-month LIBOR closed below the Fed Funds Rate for the first time since June 2003.
Does the rapid decline in the TED Spread and 3-month LIBOR have any impact on the stock market going forward? Since 1985, this marks the 12th occurrence where LIBOR traded below the Fed Funds rate after trading above that level for at least 100 days. Below we highlight the performance of the S&P 500 one and three months following each occurrence. While the S&P 500 outperforms its average performance over the one-month period, over a three-month period, its performance is inline with average, indicating that any major positive impact on stocks is short lived.
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Tags: Blog, Credit, Credit Market, Credit Markets, Currency, Desc, Economy, Fed, Investment, Investment Strategy, Lt, Markets, Miscellaneous, Technical Analysis, Trading, US Stocks
Posted in Uncategorized | 1 Comment »
