Monthly Archives: January 2015

Charting the markets: the S&P 500

I’ve been catching up with some recent market outlook reports from some of my favorite traders/writers and market-watchers.

For those who are actively trading (or watching) this market, one of the big topics being tossed about recently is the future direction of the S&P 500. Today we’ll take a quick look at some recent market commentary on the US benchmark share index, as well as some other major market indices.

Before we jump into the S&P 500 charts, let’s get a quick view of the markets and the economy as a whole. Here’s what Frank Barbera had to say in his July 7 market-wrap for FSO:

At this time it appears that going forward, instead of the data simply not getting any worse, the markets will increasingly demand to see tangible improvement, proof that things are in fact getting better. As it happens, to date there is virtually no evidence that a material change for the better is underway. As a result, markets have entered correction mode which was predictable given the huge overshoot on the upside seen in recent weeks.

In my view, the odds are high that on the corporate front, the rally of the last few months has been about “hope” for improved results, and has been largely predicated on huge cost cutting steps implemented throughout the corporate world. In the weeks ahead we may see a market that softens further as it becomes clear the tangible proof the markets want to see in both earnings and economic figures is not immediately at hand.

Frank goes on to add that this current recession is not a cyclical affair, but is “most likely a structural contraction”. This carries wider implications for the strength of consumer spending, corporate revenues, and resulting stock market valuations (P/E multiples). Read on for more of Frank’s overview.

Also at FSO, Carl Swenlin had recently (July 10th) pointed to a technical break of the S&P 500’s neckline support, saying that a resulting decline down to 810 was likely. However, Swenlin also noted that the neckline violation could mark “the end of a correction and a bear trap”, though he did not find this scenario likely.

Chris Puplava follows up this discussion of the S&P pattern in a July 15 wrap-up entitled, “A Bipolar Market”. As you can see from the charts included in Puplava’s article, the S&P 500 made a quick recovery move to the upside after briefly breaking the neckline support.

Which brings us to the vital question:

The question now is which will be the final outcome, a break above resistance or a break below support?

Brian Shannon at AlphaTrends has also been keeping a keen eye on the S&P 500 in recent days. Yesterday, Brian shared some charts of the S&P 500 and thoughts on a possible (bullish) inverted head & shoulders pattern on the weekly chart. He cautioned that we’d still have to see more positive movement on the daily charts to take this pattern seriously.

For those who’d like to hear more about Brian’s technical view of the market, check out this very recent (7/15/09) stock market analysis video on Youtube.

An individual in a crowd: Gustave Le Bon quote

Related posts:

1. Good quotes about losers (and losing).

2. “Know Thyself”: Richard Russell on identity.

Jim Rogers + Marc Faber talk plunge on Bloomberg

Famed contrarian investors and thinkers, Jim Rogers and Marc Faber appeared on Bloomberg TV to discuss the May 6 market drop.

Here’s a little excerpt from Bloomberg’s print coverage:

“Investors should consider paring their holdings after a plunge in U.S. stocks yesterday, according to Jim Rogers and Marc Faber.

Equities had a “normal correction” and were “overdue for a sell-off” after rallying from last year’s low, Rogers, Singapore-based chairman of Rogers Holdings, told Bloomberg Television today. “The market was overbought, ahead of itself and due for a correction,” Faber, publisher of the Gloom, Boom & Doom report, said in a separate interview yesterday.…”

You’ll find the Bloomberg TV interviews with Faber and Rogers linked within the story (scroll down to the bottom of the article or see the “video” tab at the top). Always interesting to hear from our favorite straight shooters at times like these.

Geithner’s gift to Pimco, BlackRock, et al.

Last week, in our post on the Fortune profile of Bridgewater Associates and its chief, Ray Dalio, I mentioned that we’d be keeping an eye on whether or not Bridgewater would join the rather select group of investors eligible to invest in the Treasury’s public-private investment partnership (PPIP).

As it turns out, Bridgewater has decided not to invest in the PPIP. Ray Dalio offers his reasons for not joining the plan in this letter to investors, excerpt courtesy of Clusterstock.

I’m not sure I understand all the issues at work here, but the gist of the argument seems to be that Dalio sees a clear conflict of interest for the few investment firms eligible to be the “fund managers” that would purchase toxic assets from banks.

He also sees a great deal of political risk for investors in the plan, due to perceived collusion among the group:

Then there is the issue about the political risk, which we are more concerned about because there will be such a limited number of managers being allowed to participate in this program that it raises possibilities (or at least perceived possibilities) of them colluding because they all know each other. Either these investments will make a lot of money for their investors or the government will lose a lot of money — in either case, there will be reasons for politicians to complain and to focus on the five winners to see how they “abused” the system.”

Today, Bloomberg reports that Geithner’s plan to rid banks of toxic assets will benefit Pimco and Bill Gross, among others.

“Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.’s Bill Gross.

The plan may reward investors with 20 percent annual returns on “really ‘toxic’” mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with “non-recourse” government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a March 27 report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.

Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors. Federal Reserve Chairman Ben S. Bernanke said March 20 that “credit market dysfunction” is countering efforts to fix the economy.”

Bloomberg calls it “Geithner’s non-recourse gift” that keeps on giving. Nice work, if you can get it.

Related artices and posts:

1. Treasury’s very private asset fund – WSJ.com.

2. Geithner’s gift to Pimco – Bear Mountain Bull.

3. On PPIP and Geithner’s amazing power grab – Finance Trends.

Stan Druckenmiller talks trading: Bloomberg interview

Stanley Druckenmiller, a hedge fund Hall of Famer, speaks with Bloomberg TV at the Robin Hood Investment Conference and shares his thoughts on IBM and Amazon, technological innovation, his trading methods, and the current state of the hedge fund industry.

A few notes and quotes from Stan Druckenmiller’s latest interview (watch the full interview below):


On IBM: Druckenmiller is short IBM. Sales have been declining since 2009. The cloud and Amazon’s AWS is “killing” IBM. Says Druckenmiller, “I think the truth teller in companies is free cash flow and the free cash flow [declined considerably] since last year.”.

Amazon: Thinks Jeff Bezos is an incredible businessman who “creates monopolies”. AWS is killing it and the market doesn’t fully realize how important this area is for Amazon’s revenues. Notes that his Amazon long is not as big a position as his IBM short. 

Note: You’ll find a bit more about Amazon’s stock and the AWS service in our recent post, “Amazon: long term AMZN chart and thoughts”.

Google and innovation: “If you want to be long innovation, you should be long Google. If you want to be short innovation, you should be long IBM. I do not want to be short innovation.” 

Trading style and conviction: “I only focus on what is black or white and kind of sift out the gray area, so yes, in my investing style I have always made big concentrated investments. I don’t believe in diversification. I don’t believe that’s the way to make money.”. 

Echoing Mark Twain’s famous quote, Druckenmiller prefers to “put all your eggs in one basket and watch that basket carefully.” He builds concentrated positions in his high conviction investments and only talks about the ideas he feels strongly about.

Hedge funds: Druckenmiller thinks the current crop of hedge fund managers are not producing returns that would justify the standard 2 and 20 fee structure. 

Citing his former colleagues George Soros, Nick Roditi, and Paul Tudor Jones, he adds, “We were expected to make 20 percent a year in any market. In fact, if the markets were down more than 20 percent, we were expected to make more because that’s where the opportunity was.”. 

He is amazed that managers today earn their huge fees while returning 8 percent a year. He finds it ironic that his own returns over the past decade, which he still finds subpar (“they stink”), are superior to what’s out in the market today.

Stan advises current investment managers to take more risk: “You are not going to make money talking about risk adjusted returns and diversification. You’ve got identify the big opportunities and go for them.”

On David Tepper: “I think David Tepper is awesome and if he’d take my money, I’d give him some but I think his fund is closed”. 

Japan and QE. “If there’s one thing we’ve found, it’s that QE will just wear you out. If you continue to print money, that money just spills out into financial assets.”. He points out a strong seasonal period for Japanese stocks that has endured throughout their long secular bear market.

Note: Stan Druckenmiller said more about QE and its effect on U.S. economy in this recent CNBC interview

Great investments and mistakes: Druckenmiller shares a great story about how his emotions led him to ignore years of experience and investing discipline during the height of dot com bubble. He also notes that he salvaged that same terrible year, 2000, by taking a sabbatical and building new bearish trades, including “the biggest negative bet on the economy I’d ever made”, upon his return. 

Being right vs. making money: “It’s not about whether you’re right or wrong in our business. It’s about whether you make money.”.

You’ll hear more from Stan Druckenmiller about his positions and charitable endeavors in the full Bloomberg interview clip and in our related posts, below. 

If you enjoyed this post and would like to see more, please subscribe to our free RSS updates and follow Finance Trends on Twitter.

Related posts

1. Amazon: long term AMZN chart and thoughts.

2. Nassim Taleb and Stan Druckenmiller talk crisis on Bloomberg TV.

Nikkei, Dow, Russell 2000 lead Finviz futures gainers YTD

Year-to-date futures gainers (via Finviz), a quick update.

 

US indices near the top of the list include S&P 500 up 18.8%, DJIA up 18.9% and Russell 2000 up 23.6%. The Nikkei 225 tops all with a 32% gain YTD.

Gold and silver continue to under perform this year (after a decade-long bull move), while corn takes second-to-last place with a -29.5% YTD performance.

Painful lessons for Chrysler lenders

Another important article from the Financial Times that I wanted to add to the blog (after adding it to the Finance Trends twitter page), this time on the subject of Chrysler’s ‘dissident’ senior lenders.

Here’s an excerpt from, “Painful lessons for lenders in Chrysler debacle”:

“George Schultze will think twice before lending to another troubled company such as Chrysler.

Mr Schultze is one of a group of dissident Chrysler creditors who was rebuked by the US president and other lawmakers for tipping the company into bankruptcy. He rejected an offer aimed at slashing Chrysler’s debt in order to allow the carmaker to be sold. Mr Schultze and other investors – some of whom claim to have received death threats – say the deal is unfair because it does not honour their rights as senior lenders to get paid before other claims, such as a union benefit plan, are met.

They also argue that the deal was orchestrated by the US government, which held sway over the majority of the other lenders, namely a group of banks, following widespread bail-outs.

The question of whether the Chrysler creditors got a raw deal will be decided in a New York bankruptcy court over the next few weeks.

Already, the verdict on Wall Street and in the conference rooms of investment firms round the country is that, at the very least, the situation raises questions about the solidity of time-honoured lending principles and parts of the bankruptcy code. These rules dictate the pecking order for claims to be repaid when a company files for Chapter 11… “

As one distressed debt investor who was quoted in the article said, “Now there is a new risk: government intervention risk…And it is very hard to hedge.”.

So, who thinks that problems with uncertainty over bankruptcy procedures and contract law is a growing trend in the US?

Related articles and posts:

1. Justice for all, except bondholders – Globeanmail.com.

2. Chrysler’s greedy hedge fund holdouts get it right – Bloomberg.

Dasan on poker & investing

A little evening reading from rogue speculator & blogger, Dasan.

Being a bit of a poker player, Dasan has collected some of his thoughts on the parallels between poker and investing and put them down for us to read in a post entitled, “Fishes, Donkeys, Bulls & Bears…”.

Here’s an excerpt from that piece:

Element of Luck. No Limit Hold’em, for the uninitiated (is there anyone left in the US who hasn’t played Hold’em?) is a game consisting of luck and skill. Why is it so popular? Because it has a huge component of luck in the short run.

If I play one hand against Phil Helmuth, and just go all-in, he has no advantage over me. In fact, many beginning poker books advocate an extremely aggressive pre-flop game as a way to neutralize your disadvantage against more highly skilled players.

This is why you often see Helmuth go into a childlike tantrum when he raises the standard 3x raise and some amateur that raises him all-in pre-flop. This is an important point – in the short run, luck dominates, but in the long run, skill dominates.

Stock price movements are the same thing- in the short run they are close to random, and the most skilled analyst has no “edge” at all. In short periods, even lousy investors can make money in bull markets. But over medium to longer term periods, a skillful investor will completely blow away the performance of a lesser-skilled investor...”

While I’m not much of a card player, I can still appreciate the lessons drawn from Dasan’s post. I hope you will too; enjoy the piece!

Related articles and posts:

1. Knowing when to fold – Davian Letter.

2. Wisdom of Johnny Chan – The Kirk Report.

Michael Burry talks “Big Short”, America’s future at Vanderbilt

Michael Burry, the Scion Capital founder and subprime speculator profiled in Michael Lewis’, The Big Short, talks to Vanderbilt students about his now-famous subprime CDS short trade and the perils of America’s financial future in this video lecture.

Last week on Twitter, I retweeted DDI’s notes on Michael Burry’s talk, which gave rise to hopes that video of this talk might soon be available. Indeed, that video is now here and it has been making the rounds over the last few days.

Be sure to check DDI’s post for comments from the Q&A (Burry’s thoughts on farmland and capitalist innovation in Silicon Valley) that might have been edited out (?) of this video.

Burry’s talk adheres to a script early on, but as he warms up near the second half of this presentation on the causes of the housing collapse and the financial crisis, the vibe is a bit more loose and the information presented is excellent throughout.

Watching this clip, I get the feeling that we are witnessing a first-rate historical commentary on the pre and post-crisis environment. If economic historians don’t look back to Burry’s talks, or Tom Woods’ analysis of the crisis, they’ll be doing everyone a huge disservice.

If you want to know a great deal more about Michael Burry’s investments and his views on America’s current cultural and financial condition, check out our posts in the section below. Lots of valuable info, including an unedited Bloomberg interview transcript, will be found here.

Related articles and posts:

1. Michael Burry: macro star? (Bloomberg interview transcript) – Finance Trends.

2. Michael Burry bullish on farmland & gold (Bloomberg) – Finance Trends.

3. Michael Lewis on Charlie Rose: The Big Short – Finance Trends.

AIG bailout provides derivatives blueprint

Okay, at this point I think everyone is probably sick to death of hearing about AIG, and I wasn’t actually planning to add anything to our recent AIG-related posts.

Nevertheless, the Financial Times has a very worthwhile article today about the effects that the US government’s bailout of AIG will have on the derivatives market.

And since we’re all about trends here at Finance Trends Matter, it’d be careless of us to omit such important news. So let’s get into it.

Excerpt from, “Backing for AIG provides derivatives blueprint”:

“The US government’s decision to pay out all the money owed by AIG to its financial derivatives counterparties is widely regarded as a “blueprint” for the level of government support that can be expected in the derivatives industry.

Indeed, the list of counterparties shows that many banks benefited from the government’s decision to ensure AIG’s obligations were met, including some of the biggest dealers in the derivatives industry, such as Deutsche Bank, Goldman Sachs and Société Générale…

…The government’s support of the derivatives industry – in effect using taxpayer funds to prevent huge losses at some of the biggest banks active in the derivatives market – is a key reason why efforts have been able to continue to reduce the risk of many of the privately traded, over-the-counter derivatives sectors.”

Check out the full piece at the link above, and see our related articles and posts below for more on AIG’s payments to its counterparties.

Related articles and posts:

1. AIG funnels taxpayer cash to counterparties – Finance Trends.

2. AIG: $105 billion to counterparties – Big Picture.