Sa-wing Batta!

If you played, coached, or spectated little league baseball or watched Ferris Bueller’s Day Off, then you’re familiar with the age-old, friendly taunt of “Hey batta batta batta batta, sa-wing battaaaa.” During early morning Halloween hours, the Bank of Japan(BOJ) provided the treat of all Halloween-day treats for speculators around the world. They announced additional quantitative easing that set the stock markets around the world on FIYA! BOJ Governor Kuroda went and grabbed the 50oz special big-boy bat and took a monster swing at deflationary forces.

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What a miraculously well timed announcement on the heels of the Federal Reserve reiterating the completion of its own QE program. Of course, the Fed’s not really wrapping up just yet as it will continue to roll as opposed to liquidate the assets it has purchased over the last 5 years. The Nikkei’s intraday move was over 4%. Most of the major indexes around the world gained over a percent today thanks to the “good” news.

Japan’s central bank will be upping its bond asset purchases to $60B(all numbers in this post are in USD) a month or $730B annually. The US dollar amount will fluctuate as the Yen weakens against it, however the BOJ will keep steady at about $6.7 trillion yen a month. They claim that the move is temporary until inflation targets have been sufficiently met. Yeah, about that temporary thing? Along with the bond purchase announcement, the BOJ also stated that they’ll be buying up Japanese ETFs and REITs to the tune of almost $7 billion and $1 billion a year, respectively. That’s a lot of dough to be tossing around and my guess is that it’ll drive enough positive sentiment that from a political standpoint, nobody’s going to want to sign off on terminating the purchases. Imagine the negative perception along with a move down in animal spirits. As they say in Jersey, dey don’t want nuttin ta’doo wit dat.

Additionally, the BOJ coordinated the announcement with the Government Pension and Investment Fund of Japan (GPIF), the largest pension entity in the world, which 1 day earlier stated they would be upping their own stock purchase program. Specifically, the GPIF announced it was paring back its Japanese debt holdings from 60% of its portfolio to only 35%. An unheard of allocation choice for a pension entity considering the lack of conservatism. They might as well have said “we’re all in on stocks.” They’ll be doubling their equity exposure to 50% of the portfolio.

Rational economic thought behind these massive moves is how will the unintended consequences manifest themselves down the road? Kuroda, like all central bankers, assures the public that they can control the inflationary forces that they so desperately desire. Maybe for a little bit. Maybe forever. Recall Kyle Bass’s thesis as the BOJ is walking a fine line. At this point in the game, it’s hard not to believe that central bankers really do have everything under control. This is despite the fact that monetary and economic policies in the advanced economies have no parallels in history, and in the short-term, things seem to be working out brilliantly on a statistical basis. It is difficult not to observe all the activity while thinking that the unintended, and most probably, uncontrollable consequences will be the ultimate arbiters of the societal value behind these unprecedented steps taken by the central banks of the westernized nations.

In the meantime, enjoy the ride and the implacable rise in financial asset prices. Actually, in a November 2013 report, McKinsey stated the impact of ZIRP on asset prices is inconclusive. Specifically, they state, “…we find little evidence that ultra-low interest rate policies have boosted equity prices in the long term. In the United States, the evidence on whether action by the Federal Reserve has lifted the housing market is also unclear, because it is difficult to disaggregate the impact of these measures from other forces at work in the market.” That’s curious.

One would think logically that there would be a direct correlation between record low mortgage rates and new home purchases. Combine that with a ridiculously low WACC for the biggest financial players and Americans said hello to their new landlords, yield-starved institutional investors and astute corporate vultures. It would also be logical to assume that when an entity can borrow at 1% and buy back its own stock yielding 2.5%, that there would be positive arbitrage opportunities. The fact that those opportunities lead to reduced share counts, increase earnings, and thus drive up stock prices has no correlation to ultra-low interest rates.

D-short presents a perfect illustration of the “low-correlation” effects of ZIRP and QE on the stock market.

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As I was saying, enjoy the ride. Buy every damn dip. Just buy and hold. Buy, buy, buy! In reality, I continue to think that raising cash levels due to a true lack of value across multiple sectors is prudent portfolio management. That doesn’t mean liquidate your portfolio. It just means that raising cash levels for potential bargains that avail themselves may prove more profitable than simply sitting in holdings that have already accumulated a very nice gain over the last few years. Look at the E&P’s off of oil’s slide. Myself, I don’t think we’re going to see an avalanche down to $30’s like we saw after the fall from the $150’s. Toe-dipping into the really well managed opportunities that possess prime shale or offshore acreage appears to be presenting quality value. Observe the P&C insurance players as well. They held up remarkably well in the most recent sell-off and continue to report tremendous profitability, however, in the face of a softening price cycle.

Just be careful. If you think momentum ignition and government intervention(jawbone or real) are fictional notions that don’t affect volatility, then have a look at this ZH chart.

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Coming back to our little baseball reference, America was the 3rd and most valuable batter in this game of QE. Japan is hitting clean-up and protecting America’s own aggressive batting strategy. At some point, the 5th man in the lineup needs to show his power capabilities as well and drive in some runs. That 5th batter is Europe and Draghi is wielding the bat. If the game of central banks is to continue unimpeded, then he needs to put down the 36oz timber and go get his own corked 50oz bat to stave off deflationary forces in Europe. That damn German 3rd base coach keeps getting in the way though and giving the signal to sacrifice bunt.

Lastly, if you have kids, then take them to the wealthy neighborhoods to fill their bags full of candy. If you’re at home and not trick or treating, then give out the giant sized candy bars. You’ll be loved by the neighborhood children. If you’re in your 20’s and single, then go party it up with all the Halloween hotties(female or male) dressed to impress tonight…and be safe. Happy Halloween readers!

A Read of the Tea Leaves and an Update to the ETF Portfolios

Well how about that correction in the S&P 500? Everyone suffered the 6% downward move and now we can all resume earning wealth…or can we? Is there some negative energy left in these markets? The tea leaves tell me that the corrective move is not over. As a reminder, just reading the tea leaves is about as antiquated as can get for a method of analysis. Looking at some squiggles on a chart and then making wholesale investment decisions is dangerous, but still, I think it’s one of the practical components on the speculator’s tool belt.

Let’s start by taking a look at the S&P 500, using SPY(weekly) as our proxy, and then we’ll move into some complimentary areas that may help shape the analysis. Bear in mind with Plunge Protection out there and HFT pace-setting through momentum ignition, all analysis is completely nullified should new highs be strongly set and the uptrend is fully resumed. Now prepare to be over-charted.

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I think when this correction resumes, we’re looking at an endpoint underneath the 50-Day EMA(blue line). I think it’ll kiss that into the 165ish area before bottoming out. I just don’t believe that a 6% move down is the end of it. In 2013, all the corrective moves capitulated at the Bollinger mid-point. From the wide ranging fear that I observed, that just doesn’t feel appropriate for the correction here to start 2014.

Take a look at the VIX for moment. Yeah, yeah, I know the VIX is played out but it still provides clues as just one chart of many in attempting to get a better feel for market action.

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The markets haven’t seen fear like that since 2011. Another one of my favorite indicators, the NYMO, is indicating some further weakness. I’ve previously commented on the NYMO’s ability to help traders get positioned for market action. It’s hitting not one, but two indicators providing a signal for a resumption to the downside. Observe:

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I have no worries that the major uptrend will resume after the corrective washout. These markets have been in need of a steam release for some time, but the obvious path of least resistance is upward. Those little exhalations near the end of 2013 essentially counted as non-moves, so a little fear and loathing is healthy for the uptrend to renew with some vigor going into the 2nd quarter. There are a couple of additional asset classes that may potentially shed a little light as to further direction subsequent to the completion of the corrective move. First, there is the yield on the 10-year Treasuries:

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Okay, all kidding aside on my make-believe and totally fake “Rhombus of Hades” pattern, a downside move in yields in combination with ZIRP will continue to push market players into equities; especially if that yield pushes much lower to potentially 2.4% or even as low as 2%. I’m not saying that yields aren’t going to go higher in the long-term, just that the near-term outlook is presenting a potentially downward path in yields.

The Nikkei has maintained a fairly solid correlation with the S&P 500 and its action looks constructive as it may be basing for a resumption of its own uptrend. The two indicators below are the MACD and Full Stokes.

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One last set of charts I’d like to share is the Equity Hedging Index(“EHI”). The EHI is one of the many proprietary models that can be found at SentimentTrader.com. It’s a contrary indicator, meaning lower extremes in the chart should produce a rally in the markets and vice versa. The EHI aggregates several inputs such as cash raising, Put purchases, and various other factors in order to construct a usable indicator. For more details, visit the site and take a free trial to see if the service is right for you. As I’ve stated on numerous occasions, I do not receive any compensation from them and I’m quite confident they don’t even know the MarginRich blog exists. Fortunately for my readers, Jason Goepfert, proprietor of SentimentTrader, is cool enough to allow people to republish his work as long as it’s not excessive and the work is credited.

Here’s a current read of the EHI.

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And in case you need a visual on how well the EHI has performed in assisting traders see where some of the bigger turns have been occurring, observe the following chart from January 14th, 2014.

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It’s not perfect, but then again, no single indicator is. If using technical analysis, it’s best to observe a wide variety of charts and cumulatively interpret them, so that one may obtain a more productive assessment. But this is all rubbish really because bias inherently sways emotions and thought process, and thus the analytical outcome must be considered questionable. If this sort of analysis is all you rely on, such as what I do here for the blog, then more power to you. For the record, before committing my own capital I analyze a broad swath of data; not just squiggles. Occasionally, squiggles may be all it takes to ascertain that a function-able trade has presented itself, but I like to mix fundamental analysis in combination with micro or macro economic reads.

It is decidedly better to test quantifiable inputs to statistically determine, so to speak, probable outcomes when attempting to make valid trading decisions. Have a read of this Price Action Lab blog entry. Based on his analysis, Mr. Harris states that the market is in mean-reverting mode. Long story short, he basically states that the market is fragile and so any suitable catalyst could cause a correction.

My conclusion is that I wouldn’t pick now to be throwing all my chips into the middle of the table as if everything is all clear. There are enough signals out there stating that one should trade with caution, especially if attempting to position long. It may be best to wait in cash, but if you gots the stones and the know-how, then it appears a nice set-up is forming for shorting or Put option strategies.

Before I bid you adieu, just want to let readers know that I’ve created a new link up top called Portfolio Updates. That’s where I’ll be placing the ETF portfolio updates from the January post titled, A Few Sample ETF Portfolios to Watch. I would describe the results thus far as interesting, but not all that compelling just yet. If you haven’t read the article then click the link and have a read, then check the updates to see how they are stacking up.

Some legendary thoughts on Japan

By now it is readily apparent hopefully, that Japan has been running all out with the Nikkei up 67% in less than year.  Very impressive.  Abe(Prime Minister) and Kuroda(BoJ Head) have followed through on their commitment to flood the country with liquidity and even though they rang the loudest cowbell(“I gotta feeva.  And the only prescription…is more cowbell!” – Walken voice) about their intentions, many have missed out on the trade so far.   I read a very thorough analysis in January before 20% and 31% upward runs in the DFJ and DXJ, respectively.  Those are two of Wisdom Tree’s ETF’s that offer probably the most simple and best exposure to the move in Japan.  Even though the trade is due for a breather, according to some of the most informed and experienced money managers around, there is still a lot of room left to run.

Here’s a synopsis of Stanley Druckenmiller’s thoughts on Japan from the recent Ira Sohn conference, “Japan’s long term outlook is much more favorable as the country has experienced 15 years of deflation and central bank policy is supporting Japan’s stock market.  He sees the Nikkei gaining for 18 months and exports bolstered by a depreciating yen.  To play this trend, Druckenmiller favors Japanese domestic companies that benefit from reflation.  He feels this could be the beginning of a secular bull market in Japan.  Kuroda in Japan is doing QE x3 of the US relative to equity market capitalization.  He actually thinks the Japanese QE makes sense, because they’ve been in deflation, particularly their currency strengthening against everyone else in the world. He believes when the US economy improves and the Fed tightens, it will overwhelm the growth and cause the market to crash. He does not expect that in Japan, because it has been in a long-term deflation.”  If you don’t know who Druckenmiller is, step your game up.

Here’s some more thoughts on Japan from probably the first big time hedgie to nail the trade, Dan Loeb, before everyone else got in:  “It’s a huge game change, and there’s a lot more room to go,” Loeb said of the yen’s decline, “The structural reform, which should be announced before the election, is going to really be the big game changer over there…We have the potential to get this right, to have a similar kind of massive improvement in the performance of Japanese corporations with the backdrop of the support of government.  It’s a really critical time.”  Loeb did not make any specific recommendations on where to invest in Japan but compared the growth to the 1980s before the country began its “Lost Decade.”  Loeb is arguably the hottest macro guy out there right now next to Gundlach.  And what’s funny is they’re both fixed income guys who have been nailing macro trades in equities.

And some last thoughts on Japan from the living legend of Technical Analysis, Louise Yamada:  “…both the Yen and the Nikkei moves are the real deal.  Today’s leap over 100 is huge for the Yen.  “Yamada and others expected it to take longer for the currency to break through such time-tested resistance.  Now that it’s happened the Yen is in a spot that should be familiar to U.S. investors: the rally is “due for a rest” but the momentum just won’t stop. It’s looks like a legitimate breakout in the Nikkei and clearly a legitimate decline in the currency,”  What’s that mean?  As Yamada often says “the greater the damage the longer the time it will take to recover.”  The Nikkei and yen have spent 3 decades marking time and making doubters of the world.  Extended or not, rallies that tear through resistance so vigorously seldom reverse immediately.  Like Druckenmiller, if you don’t know Louise then step your game up.

If allocating a portion of your portfolio to the Japanese opportunity, then here’s a chart to consider as a matter of timing from the great site Kimble Charting Solutions:clip_image002Coming back to the ETF’s, both obviously specialize in Japanese equities.  The DXJ invests in Japanese equities but it hedges risk by trading the Yen versus the Dollar to “neutralize currency exposure.”  The DFJ(which I like better) invests specifically in Japanese small-cap dividend players.  Depending on where you stand on the reflation of Japan, both ETF’s offer compelling 12 – 24 month opportunities.

And touching on the thesis for gold, here’s an update with an interesting recent graph of small speculators from the Commitment of Traders reporting by the COMEX.  Small specs are your non-giant institutions i.e. banks, large hedge funds, and commercial producers.  Each of those types of entities have their own CoT classification.  The small specs tend to be wrong very often at the extremes and this graph, courtesy of the outstanding services of SentimenTrader, clearly paints a picture of extreme sentiment towards the precious metals as the small specs have a net short position for the first time in 23 years.clip_image004Even if one has enough exposure to PM’s, I think the graph is compelling and it’s worth noting some old words of wisdom here I read this morning, courtesy of LB at WSD:

o From Sir John Templeton we get this nugget of wisdom: “It is impossible to produce superior performance unless you do something that is different from the majority.”

o Warren Buffett advises, “Be fearful when others are greedy and greedy when others are fearful.”

o And Silicon Valley venture-capitalist extraordinaire, Bill Gurley, says, “You can only make money by being right about something that most people think is wrong.”

To conclude with a little monetary opinion, here’s a link to an article about monetary policy that is somewhat in opposition to some of the stances I have shared.  It’s always good to read a qualified opposing opinion.  Keep in mind, I do not completely disagree with the thoughts of the article but I’m not sure the author is framing up his argument correctly as he completely fails to mention or expound on potential sovereign insolvency or derivative exposure at the country and institutional level.  None the less, worth a look:  http://markdow.tumblr.com/day/2013/05/12.

Read, Read, and Read some more.  Good luck out there.