From a good post by Mish on how overpriced oil is at $100:
High oil prices, like high metal and food prices, are just a result of a carry-trade gone wild.
From a good post by Mish on how overpriced oil is at $100:
High oil prices, like high metal and food prices, are just a result of a carry-trade gone wild.
Since the futures opened on Sunday, silver has fallen $13. For a standard 5,000 ounce contract this is $65,000, more than three times the COMEX margin. Today alone silver is off $15,000 per contract. It is just plain silly to claim a conspiracy against silver, and even sillier to claim that margins were hiked for nefarious reasons. Margin had to be hiked to keep up with the price of silver and its volatility, to protect the exchanges and winning traders (and to protect losers from themselves).
Like I said a two weeks ago at $45 when I discussed buying near-term puts on silver in anticipation of the bubble popping, I think the metal’s run is over. I suspect that it may establish a new normal in the $10-20 range for the coming decade or so, until the next secular inflation cycle is upon us.
Longs are playing with fire here. This market is at least as dangerous as 2007 or 2000. What happens when this multi-decadal asset mania fizzles out, like they all do? The last 12 months show that it won’t give up the ghost without a fight, but it is very long in the tooth, as is this huge rally. Also, the short-term action of smooth rallies followed by sudden drops is uncannily similar to 2007.
Stocks left the atmosphere in 1995, but since 2000 gravity has been re-asserting itself. After extreme overvaluation comes extreme undervaluation. On today’s earnings and dividends, even average or “fair” multiples would put the Dow near 4000, right back to 1995.
Charts from Stockcharts.com
A note on gold and the dollar:
I suspected a few weeks ago that gold had a rally coming, and now that we’ve seen it I’d be careful to use stops and not get too confident.
I still like gold for preservation of purchasing power through this secular bear market in real estate and stocks, but when financial markets turn down again in earnest it won’t be spared. Remember, it kept going to new highs in late 2007 and early 2008 after stocks had peaked, but then tanked with everything else when panic hit. Cash is still king, especially in US dollars and Treasury bonds. We may have only seen the start of this deflation.
Thanks to Pej for finding this:
Chanos relays a great quote from Milton Friedman: He was brought to watch the Chinese built a canal, and when he asked why they were using shovels and not bulldozers, he was told that machinery was being eschewed in order to create more jobs. Friedman replied with something like, “Oh, I thought you were building a canal. If it’s jobs you want, why don’t you give them spoons?”
Like the Chicago school that he founded, Friedman was great on most issues except for money. He couldn’t come to terms with the idea that the very existence of a central bank and legal tender laws create insurmountable moral hazard and will always lead to bubbles.
Ok, so how big is China’s commercial real estate bubble? Under construction right now, there are 25 square feet of office space for every person in China.
Family savings are being invested as down-payments for investments in highly-speculative developments. The bust will take care of a lot of the middle class’s much-touted savings.
Here’s a snapshot from the latest S&P 500 earnings file (paste the following link into your browser or google “S&P 500 earnings” for the whole Excel file: www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS):
The average estimate for 2009 earnings is now under $40 (for a PE of 27 using today’s price), since Q3 and Q4 have been revised way down from earlier this year. Now analysts think Q4 could only come in $1 better than Q1, which was horrible.
These numbers make you wonder if accountants used up all of their tricks to boost the bottom line in Q2. The reality of shrinking sales and margins can’t be hidden forever.
The estimates for 2010 and 2011 earnings are now $45 and $61, respectively, and 2009 dividends are projected at $22 (back to 2005 levels from $28 in 2008, for a piddling 2% yield). Even if profits recover as projected, the market will have to maintain the current extreme multiple in order to deliver gains over the next two years. We are already trading at 18X 2011 earnings! The PE at the peak in 2007 was 19, and look at where that got us.
My own take on earnings is that we will be lucky to see $30 in 2010 or 2011 for that matter. The debt overhang remains, and underlying asset values are so much lower than they were 12 months ago that another huge round of write-offs is needed, which will directly hit the bottom line. Households are digging in, and banks are still pulling in credit. The consumer economy is not coming back, and corporate America will take years to adjust.
Stock prices are so far from fundamental support of any kind that this market has to be counted among the greatest bubbles of all time. Many observers understand that this is a bubble, and are wondering what it will take to bring prices back in touch with reality. My answer is nothing — the market will simply turn with social mood, which has no master but god. The facts are always there, but traders aren’t always in the mood to check.
The Indian stock market since 1990:
I suspect that this market will end up back at 2002-2003 levels. Manias like this tend to be completely retraced, like the oil bubble from ’04 to ’08, which sports a similar chart to the above, complete with a big B-wave bounce that should be peaking soon, though by looking at this chart alone I wouldn’t rule out $80:
Thought I’d take a look at some other wild markets:
Russia hasn’t made much of a retracement, only about 25%, but if the US markets fall from here you can bet it will join them.
Shanghai is ready to rumble (about a Fibonacci 38% retracement, just like the S&P 500):
Brazil’s Bovespa – about a Fibonacci 62% bounce:
Why not check out the Swiss? Ok, they’re not so wild — just a 33% retracement here, but a remarkably similar pattern to the S&P 500. Also, it is worth noting that the Franc went from roughly $0.83 to $0.93 over this period, so this was a much larger rally when priced in dollars, like many of the other foreign markets.
WIth foreign markets sporting high valuations and high exchange rates, it looks to me like the US dollar is going to be where it’s at going forward. Shorts that capture the exchange rate movement along with stock moves would be attractive.
Robert Prechter said back in February that some aspects of this bounce would resemble the euphoria of the all-time top in equities. Well, when I looked at the market today and saw that Amazon has rocketed up to its 2000 and 2007 peaks (albeit on pathetic and waning volume this go-around) and sports a 60+ PE, I got a tingle of that giddy feeling I had when I was buying puts hand over fist on stocks like this two years ago. Back then the whole market looked like this, but there are some great set-ups being formed this summer.
We are now solidly overbought as well as ridiculously overvalued. We may be witnessing the last gasp of the great post-1995 equity bubble.
Source: Yahoo! Finance
A word of caution: when the NASDAQ runs like this, it can keep on going for weeks, so don’t get run over going short-term short. This kind of momentum should drive the VIX under 20 before long. That would signal near-total complacency in the face of economic fundamentals whose only parallel, and there can no longer be any dispute here, lies with the Great Depression: link to pdf from Sprott Asset Management.
This is deflation, a contraction of money and credit. Hardy anybody argues about that anymore. So what happens next? Will Obama and the bailout maniacs inflate a new bubble in green energy in their new, green deal? Maybe, but it would only be a limited bubble, not the worldwide craze in any and all non-dollar assets that we saw the last time around.
Don’t assume that any new bubbles at all will form for a long, long time. The mood has shifted from risk to hoarding. Now that people have been burned by everything from dot-coms to gold miners and are scared to death of losing their jobs, they are going to hang onto the one thing that still works: Washington Wallpaper, the little notes that promise, “I owe you nothing but more of these IOUs.
Deflation will rage, until it doesn’t. We are still early in this phase, since among the public there is still a healthy fear of the dollar and paper money in general. But over the next year, as commodities and foreign currencies slide still lower and consumer prices stay solidly and noticeably negative, people will forget about the deficit and the $100 trillion in debt at just the wrong time.
This is the rule of maximum pain for the maximum number. The dollar is not yet ready to fail because it is too feared and despised. But when people let their guard down and sell for $450 the Krugerrands that they are paying $900 for today, take all that they have, because then the real fun will begin.
Just as the public will get too complacent about holding I-owe-you-nothings (Doug Casey’s phrase), Congress and Obama will get too complacent about printing them up, and the whole debt-based money system will come crashing down. I don’t pretend to know how it will play out (hyperinflation or just plain-old, “sorry, we can’t pay” default), but it will be visibly ugly, and I am glad I’ll only be watching it on TV. This won’t be pretty anywhere, but the US is not a civilized country anymore, and it has a most uncivil government.
Bottom line: Bailouts will waste our savings and remaining credit, and exacerbate the flight of capital and talent from the US.
I was extremely surprised on Monday when the House rejected the first version of the Crime of ’08, but I remain certain that an essentially identical bill will become law. When it does, maybe as early as the end of this week, any ensuing rally (and there is no guarantee that a rally will occur) will last a few weeks at most and lead to a very powerful decline as the reality of the depression sinks in this winter. (Obama’s inauguration should be another huge disappointment, just more false hope to be sold.)
The bailout will cost the economy jobs because it is a transfer of savings from intelligent, prudent hands that are likely to deploy it productively to those that create nothing but distortions in the marketplace. The financial scamsters have balance sheets in such horrible shape that it could take up to $5 trillion to recapitalize them, so it is a certainty that this $700 billion is just a first installment to keep the lights on, but not enough to enable them to start taking risks again.
You can lead an investor to credit, but you can’t make him borrow.
On the demand side of the credit equation, the citizenry is fed up with debt. People are saddled with enough of it already, and with their homes and investments falling in price, they feel compelled to save, not borrow. Anyone willing to take a consumer loan right now is the most reckless sort of borrower and should learn to live on earnings alone. Smart car shoppers pay cash, and smart house shoppers are biding their time. It is a bad policy to finance consumption anyway, including home purchases. What’s wrong with renting and saving up?
Many companies have a need for short-term funding, but this is just to put out fires, not to invest in productive capacity. Interest rates on those loans should be high in order to justify the risk of supporting businesses that might be dependent on a bubble economy and therefore deserve to fail. The short-term commercial money market got way out of hand in recent years and contributed to a lot of wasteful expansion, so it is healthy for it to contract.
Today’s ISM numbers are just a taste of what is to come. The industrial sector will need to scale down massively because it expanded too much during the boom. Responsible executives are in no mood to borrow and build. It won’t do any good to offer them even extremely low interest rates because if they invest right now it will be hard for them to generate a positive return.
Companies will start to invest again when the contraction runs its course, when assets and labor are attractively priced and executives perceive a resuscitation in demand. There is nothing the government can do to speed along this process but get out of the way and let the reorganization take place.
Beanie Baby economy.
Think of the economy as a large corporate conglomerate with lines of business in a dozen sectors from Beanie Babies to soybean milling. The company has a line of credit at its disposal, in case it wants to take advantage of opportunities.
The Beanie Baby line was generating great profits until two years ago, but last year kids moved on to Hello Kitty, and the company has had to take some big write-downs on unsold inventory. During the mania, the head of the Beanie Baby division was the highest paid employee outside the executive suite, and the adjustment has been very hard on him. He won’t accept that Beanie Babies were just a fad, but insists that the continuity of this line of business is absolutely critical to the future of the company, and he is clamoring for more funding to make up for the losses on inventory and keep the factory running.
Of course, any CEO worth his stock options knows not to throw good money after bad, and a good executive would probably liquidate the whole Beanie Baby operation and maybe find another use for those employees.
What we have here, though, is a former Beanie Baby division head as CEO, and a board of directors that itself got caught up in the craze and won’t let go of the hope that it can be resuscitated through a capital infusion and a good ad campaign. They decide to drain the company’s accounts and draw down its line of credit so that their favorite employees can keep their jobs and the factory can restock on Beanie Baby materials.
Month after month, the company makes the division’s hefty payroll, and even issues bonds to keep going, but despite their best efforts at advertising, the public just won’t buy more Beanie Babies, even at huge discounts. They have been burned by Beanie Babies and aren’t about to get caught up in that nonsense again.
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The soybean division, on the other hand, is generating solid profits on account of increased demand for protein in Asia, and they make a presentation requesting funding for a line of tofu. The expected returns look great, and equipment can be bought very cheaply because of the recession. The CEO explains that he is sorry, but the company’s cash and credit have tapped out to keep the essential Beanie Baby division going. All of the soybean profits are to be channeled there as well, and he appreciates the contribution.
The ambitious managers in the soybean division get fed up with this ridiculous and nepotistic company, and decide that their talents would be better rewarded in Hong Kong. Investors eventually make the same decision regarding their capital, and the company’s bonds and shares plunge. The exectutives now see which way the wind is blowing and start embezzling funds, and eventually the heap of the company ends up in bankruptcy court.