Last fall, Dow Jones launched the Global Dow index, composed of 150 stocks from around the world. A quick glance at its 10-year chart shows that stock prices have only so far blown off the froth from 2006 and 2007:
Source: wsj.com
Stocks are driven by mood, and mood today seems to be highly coordinated around the globe, so rather than scrutinize the twists and turns in the Dow, DAX or Nikkei, perhaps this new index is the best reference.
What is most striking about this picture, as opposed to that of the S&P500, Eurostoxx 50, or Nikkei, is that stock prices are only 2/3 of the way back to the 2002 lows, as opposed to right upon them.
This says to me that even this first stage of the crash has further to run. Fundamentals are deteriorating with blazing speed, but market participants remain in secular bull market mode. Too many are still buying the dips, or at least ignoring their losses and hoping for a rebound. The stock market is still viewed by most Americans as the best way to save for retirement, and the myth persists that if only your time horizon is longer than a decade or so, stocks will always beat cash.
This wave off of the November lows is looking weaker and weaker. We had our chance for a strong bounce like the one after the crash of ’29 (the Dow was up about 45% from November ’29 to April ’30), and all we could muster was about 20%.
Today’s action is a pretty strong indication that panic has been lurking just below the surface. With the sell-off in bonds possibly having run its course, precious metals stalling out at resistance, and a very low put/call ratio indicating extreme trader optimism, the news of the Great Pork Package and latest bankers’ bailout may be just the catalyst we need for a sell-off. Hope is fading fast.
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Oh, and it is worth mentioning that John Mauldin reports that a contact at S&P told him that the latest quarter’s earnings are apparently coming in at a NEGATIVE $7 for the index. I have been saying all along, that if this is a depression (it is), PE’s should bottom out at well under 10 and even dividend yields should be in the double digits. Whatever figure you come up with as a final bottom target for the S&P, it should be a very low multiple of very low earnings.
March and June GE puts at the 5 strike are *incredibly* cheap. AIG was my grand slam last year, I’m hoping for a repeat performance with GE.
This is incredible to watch.
You’re right. Thanks for the idea. I was short AIG from about 55 to 40, and LEH from 60 to 8. The death blow hasn’t been my style, but that may be a better and better way to play. A year from now we’ll be looking at all kinds of consumer and even industrial bankruptcies… not to mention REITs.
By the way, I got some April AMZN puts this AM. How that thing is trading where it was 12 months ago is beyond me.
I have to offer a little plug here. I started using Interactive Brokers today, and that platform is just stunning. I don’t know what is better, the data feed or $1.00 commissions.
LOL, yeah, IB is awesome, just be aware that if you have any problems you’ll probably wait a few days for some clueless customer service agent to help you out. But I usually don’t encounter problems anyway.
I see you’re still hanging on to the GDX short trade, and I tend to agree, I think we will see people selling gold to accomplish dollar deleveraging again soon, but I’m definitely starting to get a little nervous.
Right now my main dilemma is between putting more money into puts or keeping it out of the market and safe from counterparty risk altogether.
Yeah, shorting gold and gold stocks has been painful of late. It is not a big position, but I have never seen more bullishness than this so I am holding on.
I was able to get a helpful person from IB on chat the other day — might have helped that it was 3AM eastern time, or maybe I just got lucky.
I am not yet that concerned about the OCC breaking down. If wave 5 just goes down to 600 or so on the S&P, I wouldn’t think that that would generate too many margin calls. The NEXT wave down though, the one to 200, might break everything. As we go down from here, I’m going to be closing all of my shorts, including long-term puts. At 680, if we get there, I will be totally out. If stuff like oil or DBA or gold gets cheap enough, I might pick up a bit to play the bounce, but I hold more and more cash all the time, less of course what the Treasury takes.
Mike, your thinking is refreshingly clear.
1. Do you also hold some analysts in particularly high regard?
2. Is it too naive to ask for a weekly “recommended asset allocation” page?
Hi Leonard,
Well, I like Robert Prechter and Steve Hochberg of Elliott Wave International, and I always enjoy hearing what Jim Grant and Marc Faber have to say. Wall Street analysts are just part of a sales force, so their advice is worthless except to gauge the zeitgeist.
I publish a disclose of my market positions in the disclosure section, but make no promises to keep it very current. Besides, that is just what I am doing with my own, very risk-oriented capital. Most people should be basically all cash right now, with maybe a touch of gold. Others may want to just trade the S&P a bit — everyone’s situation and abilities are different.
That said, if you want to be as safe as possible, the allocation would be mostly short-term treasuries with a touch of gold, leaning more towards gold at lower prices. The gold percentage would also tend to increase a bit each year.
At any rate, you should usually be able to figure out my general take on things from posts and comments. In this litigious age, I am not going to give personalized advice or maintain a model portfolio here. If and when I open a money management or advisory business, that will offer a way to do that.
Hahah, I don’t have a subscription, but I love the title of this article: “The Bubble is in Treasury Shorts”
http://secure2.thestreet.com/cap/login/rm_mbp_yho_nflow.jsp?cm_ven=YAHOO&cm_cat=PREMIUM&cm_ite=003190&flowid=3835a74392&url=http%3A%2F%2Fwww.thestreet.com%2Fp%2F_yahoo%2Frmoney%2Fbonds%2F10463179.html
Open shares in TBT went from 7 million on Oct 31 to 63 million today.
Of course, I’m long TLT calls, so I’m just talking my book
That’s great! I would have been all over TLT at 101 but I was frustratingly unable to do anything about it because my funds were in transfer. I did buy some straight up 10-year bonds in an other account though.
I’ve noticed it seems to be an iron law of investing that your funds transfers will always get held up so that you miss your best trades by a day.
Since so many people are waiting for treasuries to crash, it makes me think they won’t (although I have other good reasons to come to the same conclusion – but “deflation” is certainly not it). And USD falling against other currencies is not a safe bet either, since all currencies today are mismanaged fiat currencies backed by corrupt governments. What gives? I think what’s gonna happen is that (and this is not an original idea by any means) ALL currencies are gonna sink at various rates against Gold. This is a probable way that the market can follow the rule of causing the maximum pain. The deflationistas betting on falling gold prices and/or paper money retaining purchasing power will get crushed, inflationistas get crushed with non-falling treasuries and the dollar. Surprising and disappointing as it may seem, the much mocked and derided gold bugs may be the only ones surviving.
BTW Mike, still waiting for Gold to do the “disappointing fall” thing you talked about.
Also, gold bugs may be crushed by governments trying to steal their gold.
NOW everybody is in pain.
Hey Andy,
That’s an interesting thesis, but my take is that there are *way* more inflationistas than deflationistas out there, and most of them are betting on exactly the scenario you describe, by going into gold as their primary anti-dollar bet, rather than trying to short Treasuries or the dollar vs. other currencies too much.
That said, I’m not placing anti-gold bets with anything that could be described as a “significant” chunk of my capital.
As far as your second post goes, it seems Marc Faber may someday be the kingmaker with his suggestion of investing in “farmland in the middle of nowhere, where politicians will not want to bother you.”
“there are *way* more inflationistas than deflationistas out there”.
Hmmm…the way I see it deflation is all over the MSM. It’s the flavor of the day. Commentators are jumping all over themselves declaring deflation is here to stay. NY Times has been using the “deflation” word pretty frequently which is a huge contrary indicator in my book. Ironically, it seems to me that we may be in a deflation “bubble”. Even idiot Ben is on the deflation bandwagon. He has a great track record of being absolutely wrong on everything – so there you go.
Just came up with a word for the deflation bubble – “dubble”.
I don’t know anyone who is bearish on gold right now except for people who were bearish the last two times we were over 900. Buying gold is such a no-brainer at this point, anyone can see that.
Andy, until stocks, real estate, automobiles and sneakers start going up in price, I’m sticking to my deflation guns. It only feels like the word deflation is everywhere because it was nowhere for the last 8 years. Just 7 months ago the gold bugs were looking at 12% YOY CPI and screaming hyperinflation.
Holy short squeeze, Batman!
Another thing… Even if you think talk of deflation is everywhere, why is everyone buying gold? Because they think this deflation is not “real” (just forced de-leveraging) or that the money printing will quickly turn it to inflation.
“Short squeeze” is right, I said to one of my coworkers just before the mortgage subsidy news broke, “Even Maria is getting bearish, this doesn’t make any sense.”
Bailouts point the way lower.
Me thinks that people who *really* know what’s going on are still a tiny minority. A majority within that minority can hardly be called mainstream. Hard as it may be to believe, there is a vast sea of people out there who don’t have a clue – at all. They think things will start getting back to normal 5-6 months down the line. A have a ton of friends and a bunch of family members who roll their eyes just on hearing the word “Gold” come out of my mouth. Gold, IMHO, is far from a mania. 95% of the population at this time probably doesn’t own gold, doesn’t know what the hell it is and why they should be holding a piece of lifeless metal. They will be devastated when the coming currency crisis tsunami hits them in their sleep thus fulfilling the maxim of maximum pain for the maximum number. I am not a gold bug, but I think Gold did a classic bear trap thingy last year. Just my 2 cents.
There is no sign of inflation (oil plunged 20% this week!), so that doesn’t explain the interest in gold. No, it’s being driven by more general fears of a total financial and/or political meltdown. Think of the rich people in the “developing” world. If you were a Russian billionaire, wouldn’t you sleep better with some gold?
When New York Times publishes an article extolling the virtues of Gold, provided it exists by then, that will be the top in my book.
Oil is being kept down. The premium between Brent crude and WTI is not inverted for no reason. To think that the government is full of good intentions and committed to maintaining the “integrity” is foolish. Those who think that there is no manipulation of oil and gold prices have probably never done a single trade in the commodity futures market.
I meant the “integrity of markets”…hehe
Aww, c’mon… do you really think the feds would waste money trying to fight the commodities markets? They need that dough to give to the banks. Manipulation is not a useful thesis for trading. It is a boogyman, a deus ex machina that frustrated traders bring out when they don’t understand something.
Oil is low because demand is dropping like a rock, especially in the states, where it is easiest for people to cut back.
I trade hundreds of oil contracts every day including the WTI/Brent spread on the ICE exchange. WTI is “broken” because it’s practically overflowing the tanks at Cushing, so the price has to come down to move the inventory, same as in any market.
There are also a lot of speculators storing oil and selling (or planning to sell) it in back months to take advantage of the contango. If I had to guess, I’d say whoever’s buying it is going to lose serious money on the trade.
“Oil is low because demand is dropping like a rock, especially in the states, where it is easiest for people to cut back.”
Oh yeah? Heh, I guess that must be because public transportation is so wildly advanced and available in the US. I guess we can just trash the whole interstate highway thing.
Where I live, it takes 20 miles one side to go to work and there is no public transportation to speak of. Somehow I don’t find cutting back my gas consumption even possible. The real boogeyman is your “deflation” thesis.
“Aww, c’mon… do you really think the feds would waste money trying to fight the commodities markets? They need that dough to give to the banks.”
The feds can print all the money they need. It’s not exactly a scarce resource for them.
“I trade hundreds of oil contracts every day including the WTI/Brent spread on the ICE exchange.”
Sure, but have you made any money?
“a deus ex machina that frustrated traders bring out when they don’t understand something.”
On my down day, I probably understand the markets 10 times better than you do. If you really think there is no manipulation, then my saying otherwise will not change your mind. Let time be the judge. Your deflation thesis is about to be blown to smithereens.
There’s really no point in continuing this bickering. The idea of manipulated oil markets is self-evidently preposterous, yet you will remain tenaciously committed to it come hell or high water.
As you say, our trading statements will judge who’s correct and who isn’t. Maybe I’ll post the results of my GDX puts when they expire in June and we’ll see how it turned out.
“Another thing… Even if you think talk of deflation is everywhere, why is everyone buying gold?”
As I have said before, no one owns gold or is buying gold other than a handful of people. Absolutely everyone I know owns stocks. When my neighbors are all telling me to buy gold, I will sell my position. My guess is that will come in about three years from now.
Tom, you are right. Few people own gold. Even so, the urgency to buy it comes in waves, even among the financially aware. I admit, these days I feel a strong compulsion to buy more as a hedge against calamity, but the trader in me says to wait and even hedge my existing position.
This seems to be the 4th mini-mania in gold in the last 12 months, and each time bullishness has breached 90%, the price has shortly thereafter taken a tumble.
The last such times were March, July and early October 2008. March and April 2006 also comes to mind as a mini-mania.
Oh! So THIS was the “disappointing fall” in Gold you were talking about…
http://uk.reuters.com/article/businessNews/idUKTRE51G3GG20090217
Still shorting Gold? Better get out while you are still solvent. Wondering why it’s powering higher despite gold-oil ratio being out of whack? Good luck figuring it out with your “oh-no-there-is -no-manipulation-and-the-govt.-loves-us-all” thesis. I am sure it was “demand” which caused oil to rocket higher to $140 before crashing to $35. Thinking that world demand can change so fast as to cause such a huge spike/crash is even beyond idiocy. Yeah, you may have had some winnings in the fiat money casino known as the stock market, but if your chips..er..dollars are worthless, it doesn’t mean very much.
It’s $987 an ounce as of this moment.
One of the funniest thing about gold bugs is how they go all Captain Ahab on you if you put even a tiny piece of your portfolio into a short gold trade.
Of course, if it doesn’t work out instantly (or at all) they think your entire capital must have been devastated. It’s like they assume you put the entire thing into that one trade. Maybe that’s because that’s how they trade with their own accounts?
If paper dollars are truly *worthless* then every gold bug on earth should be hoping the price goes down so they could exchange more and more of their green little scraps into the yellow metal.
Anyway Andy, congrats on hanging on and not making any gold trades, now you could (if you so desired, which you never will) trade your metal for a bit more of those worthless dollars you hate so much. Also, Jim Cramer said to buy gold today, so you’ve got that going for you, which is nice.
You’ll probably still be counting your gains in terms of worthless fiat bits of paper when gold is $10,000 an ounce, possibly stuck in some stock exchange which has been shuttered.
Also keep in mind that the real value of your nominal gains is decreasing with every increase in the gold price.
Dude, what is up with you and gold? If you bothered to read this blog you would know that I like and own the stuff, but that I just believe the technicals are bad here (and after today, they are horrible). You can’t be 100% bullish on something all the time just because it makes sense fundamentally in the long run.
FYI, I actually keep a running tally of my net worth in ounce equivalents. If I were all gold all the time, aside from external income, that figure, and my actual physical tally, could not continue to grow, now could they?
I don’t understand why Quantitative Easing is a bad thing or why it would cause inflation. X owes money to a bank and cant repay; Central Bank buys this loan from the bank and puts it on its books forever. The debt is extinguished: X won’t pay, and this ‘debt’ sits on the central bank’s books until it writes it off. How does this create inflation?
Mike any updates on where Dow is heading now? Could we see a crash upto 6000 on dow or we are headed higher from here?
I get your point, and I hope you are right, cuz I need to load up again
. How much of a pullback are you expecting here anyways? (It just clocked past $1000 today).
I will be almost all cash if we hit 680 on the S&P. I have limit orders in for my huge basket of puts. That is not to say that 600 would surprise me. It would definitely not, but I am not going to get greedy.
From right here, it could go either way… there is a strong case for a waterfall this afternoon into next week. The VIX is still low, and painted 42 for a moment the morning — astonishing complacency considering the prices. The 10 day put : call ratio is still not so elevated either. Both of these leave us room on the downside in the near term. That said, we are of course oversold, so we could bounce well into the 800s at any time.
Frankly, this is a creepy market, this drip, drip, drip. I don’t know what to do with it near term, which doesn’t matter to me anyway, since I am a position trader and play the multi-month swings. To wrap up, we are not done with this leg down, but we could still bounce. If we do, I will put on more shorts.
I added to my PM shorts this AM. This looks suspiciously like topping activity, though of course gold and the dollar are correlated now and the dollar has plenty of room to the upside. My puts are mostly long-dated, so I figure my horizon is far enough out so that even 1050 gold next week wouldn’t kill me. Actually, I would prefer a manic vertical move like that to signal the end — this slow climb is grinding me down.
Mike,
Do you have any feeling about the safety of Swiss Cantanol Banks and, more specifically, the Zurcher Cantanol Bank?
Tom
Tom,
That is a very good question. They are a conservative bank by all accounts, but they are a commercial bank. Plenty of conservative commercial banks failed in the 1930s. I would be surprised by their failure *this* year or even next, but when things really get rolling and even Switzerland’s unemployment and bankruptcy figures soar after their export markets crash, who knows?
If you have the means, there are much better options. Whatever you do here, don’t make the same mistake as those poor saps at UBS. File the forms!
Which banks do you recommend to put money for long term that won’t be going out of business?
You really don’t need a bank for savings — you can use treasurydirect or a treasury-only money market fund. Just use one of the big banks for a checking account, though you can even write checks from most MM funds.
You can also buy Treasuries through brokers. Interactive Brokers is conservative and cheap for this.
Mike:
I think you are a good trader and have great feel for the markets (which is why I come here, BTW). However, I have some concerns as far as your outlook for Gold is concerned (and the deflation thesis as well). If you think that Gold is at an intermediate top in an ongoing bull run, then I’m with you totally. But, if you think that Gold is headed downwards after a manic top around the $1000 target in the next few days/weeks then I will be concerned and will have to discount your opinions as far as the gold market is concerned. The reason gold market concerns me so much is that at this point I wouldn’t put my money anywhere near the USD or treasuries (except for the very short term) and also I don’t think that any other currency is a safe haven at this point.
My strategy right now is to extricate fiat profits whenever they come and convert a portion of them into gold on a regular basis.
Mike
Great blog. Just wanted to point out another option besides selling your long term puts. Instead of selling those puts outright, one thing you could consider doing is legging into a spread by selling the same number of puts at a lower strike. I generally consider doing this if the lower strikes sell for more than twice what I bought the original puts for. So for example, if I bought my original spy 70 puts at 5.00 each when the S&P was at 1000 and now the spy 65 puts are selling for 10.00 each, I’ll take profits by selling one 65 put for every 70 put that I hold. That way, I’ve left some upside for myself if things deteriorate much more than expected, but I’ve protected profits too. The downside, obviously, is that you have potentially left some money on the table by not selling the puts you already hold for the highest possible price. If I can double my money or more, though, I’m not going to be too upset about that.
Interesting strategy, but I think the market will rally hard and long after we finish wave 1, so I am just looking to get out. I don’t try to pick the exact bottom — I have been gradually selling my puts into the slide.
BTW, today’s bounce is probably part of a clearing rally that will set us up for the big drop. It was long overdue, but yesterday was almost certainly not the bottom. The NASDAQ, Russell and Nikkei need to break cleanly through their November lows first, which will likely put the S&P under 700.
But really, guys… anyone who knows what they are doing has been short for 18 months now. Enjoy your profits and protect them. Don’t chase this thing, because when it ends, the rally could give you whiplash.
I recently got in touch with my former boss, and the subject of the current economic crisis came up. Well, all I can say is that I was just completely stunned at the level of ignorance still prevalent among “the masses” (having already drilled into the brains of all my present friends, relatives and acquaintances the “real” stuff, I no longer remembered what real ignorance looked like) . She – and this is a 50 yr. old person we are talking about – thought that the crisis was a just a media fed spiral and if only they would stop talking about it, it would go away. Now there is just so many things wrong with that, that I wont even try bothering with them here. So if anyone who is at least reading this blog (and others like it) feels that they have got it bad, just think about the amount of pain coming the way of people like these. And they constitute the majority. I shiver just thinking about what the future holds.
Even Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan administration, admits gold price manipulation by the US Govt. Here ya go:
http://www.counterpunch.org/roberts02242009.html
Efficient markets – yeah right!
Soon the emperor (i.e. the dollar) will be naked for everyone to see.
CNBC is now cheerleading “deflation”:
I think that’s it for the “deflation” theory.