Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

OH No its POMO (by BKudla)

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There are a lot of questions out there regarding POMO, what it is, what is does, its effects, and most importantly to me, can I profit from it.  So I did some research from the FED's site, Safehaven and Cantor Fitzgerald and aggregated these thoughts and articles into a post.  It was an eye opener for me.

What is POMO (Permanent Open Market Operations)
(From the FED). "The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC). "

Open Market Operations

Open market operation refers to Fed’s purchases and sales of bonds issued by the US
treasury. These transactions are with banks, public, and firms. When the Fed buys bonds
in the bond markets it pays for the bond by creating new Bank deposits at the Fed. These
new Bank deposits at the Fed add to banks excess reserves, and can therefore form the basis of a multiple expansion of the money supply through new loan creation by banks.

What is QE?
(From Chris Mack http://www.safehaven.com/) "QE, or more simply known as money printing, is a dilution transaction similar to issuing more shares for a stock. The dilution has two primary affects: a decrease in the value of the initial shares and a redistribution of wealth from the original owners to the new owners.
The most significant difference between stock dilution and currency dilution i.e. QE is of course that publicly traded companies tend to use the funds raised through dilution to add value by investing those funds – whereas governments don't add value by QE."

What is the Purpose of QE?

In the case of QE2, $900 billion will be diluted to purchase US treasuries so the primary benefactor of the QE will be the U.S. federal government and the financial institutions selling that debt. However, capital flows can rarely be controlled and the newly created money will find its way into other markets and asset classes.
Interestingly, the $100 billion per month figure that has been mentioned as the target rate for QE is almost exactly what is needed to roll over maturing treasuries coming due – so it could be argued that the plan is to effectively finance the U.S. federal debt which would eventually lead to a complete monetization of the treasury market. Supporting this argument is the recent projection made by ZeroHedge that the Federal Reserve will own more treasuries than China by the end of November.

How Does QE2 Size Compare to Other Markets ( From Bob, This is important)

In an attempt to measure the above affects, we can compare the size of the QE plan to the size of several markets.

  Outstanding $900B as
Percent of Market		 Diluted value of
$900B entering market
US GDP $14,500.00 6% $0.94
US Federal Debt $14,500.00 6% $0.94
M2 $8,750.00 10% $0.91
M1 $1,800.00 50% $0.67
Currency $900.00 100% $0.50
Treasuries $11,030.00 8% $0.92
Municipal $2,670.00 34% $0.75
MBS $8,860.00 10% $0.91
ABS $2,600.00 35% $0.74
Money Market $3,900.00 23% $0.81
Corp Bonds $6,720.00 13% $0.88
Silver $24.30 3703% $0.03
Gold $2,475.00 36% $0.73

If the QE funds went into the currency market, its value would fall in half. However, $900 billion is roughly 6 percent of U.S. federal debt. Inflation is defined by the growth in the money supply. If using M2, the QE plan would dilute the money supply by 10 percent. $900 billion represents 36% of the world's gold supply, so an equivalent move upward in price could be seen if the money finds its way into the gold market. QE is 37 times the size of the world's estimated silver supply so a flow of capital into the silver market could be explosive (see more here).

QE2 Projected to See Inflation Rise by 10-20%!

A dollar on November 1st is now worth 92 cents if measured in treasuries or 91 cents if measured with the money supply. It can be seen that inflation as measured by the growth in money supply is projected to increase by 10 to 20 percent on an annualized basis (see more here).

Conclusion

The result will be a double digit real negative interest rate and a carry trade opportunity to sell treasuries and other U.S. dollar secured paper at a cost of near 0 percent while accumulating real assets such as precious metals and other resources that cannot be diluted."

My thoughts.

The gold, silver, dollar markets are the most sensitive to the capital flows and where we can find the best bang for our speculation.

There is a story floating out there that Goldman Sachs has been accumulating Precious metals for a long time and at the same time you have JP Morgan and HSBC selling naked short.  I cannot help to wonder when Goldman sees the tipping point and force these guys to cover and bankrupt them.  They have been known to do this to their competitors.

The conclusion was the stunner for me.  The banks get to use my money to accumulate hard assets and stick me with the tax bill because it is being laundered through government instead of direct infusion to the private market. 

This simply reinforces in my mind, of my course of action in regards of owning hard assets and hard asset producers.  We may be digesting some sell the news in the markets after the QE announcement, but I intend to continue to scale in. If you are long the market, start paying very close attention to margin compression, as it will exceed end user sales growth, thus collapsing profits and cash flows.

Also an interesting read on the effect of QE from a different angle but the same conclusion.
http://danielamerman.com/articles/Monetize1.htm I know he is pitching something, but the article is extremely well written.

 

Leisa here:  Shout out to our Yazzer who is running in the Richmond Marathon today…

How to Get on POMO’s Side

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With today's announcement of over $100 billion POMO purchases in the coming weeks, I gave some thought as to how to try to get on the Right Side Of Ben, since I'm kind of sick of griping about POMO and would rather benefit from it.

Therefore, I've got large long positions in DBA, GDX, TLT, USO, and XOP. As of this writing, USO (crude oil) is the most profitable (thanks for the idea, capitalisa!)

I'd be interested to hear what other suggestions readers might have with respect to putting POMO to work for us instead of against us?

1110-pomo

November Update – Man, Do I Feel Richer! (by Goatmug)

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IN FED LANGUAGE, PRICE STABILITY MEANS A BLOW OFF TOP

Call it QE II, monetization, printing, or the precursor to QE III, call it what you like but just don't fight it.  The FED's overt action to inflate asset prices at any cost have trumped all market fundamentals and created an asset price surge into the stratosphere.  Chairman Bernanke states that he wants price stability, yet his definition of price stability must not include a normal ebb and flow, it must only include a moonshot ramp job.  I would contend that we have anything but price stability at the current moment.

I've captured a few sentences from Fed Governor Mishkin in a 2007 speech.  In this message he highlights the dual mandate that the Federal Reserve has in its role. 

 "According to this legislation, the Federal Reserve's mandate is "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Because long-term interest rates can remain low only in a stable macroeconomic environment, these goals are often referred to as the dual mandate; that is, the Federal Reserve seeks to promote the two coequal objectives of maximum employment and price stability. In the remainder of my remarks today, I will describe how these two objectives are consistent with our ultimate purpose of fostering economic prosperity and social welfare. I will then talk about some important practical challenges in implementing these goals. "

Let's examine how we are doing with those goals?  Maximum employment — QEII and low interest rates have done nothing for this goal.  Stable prices?  We'll dig more into this, but this is absolutely false and prices are getting more out of whack.  How about moderate long-term interest rates?  I'm going to suggest that this is also missing the mark.  QEII is about reducing interest rates so the US can meet its debt obligations and keep the illusion of US solvency intact.  If and when there is a rationalization to normal interest rates there will be no such thing as moderating interest rates.  Strike three in my opinion on the mandates and target goals of the Federal Reserve.

What's the purpose of all the QE?  You must know that Chairman Bernanke and former Chairman Alan Greenspan believe that greater stock prices will lead consumers to buy more and borrow more as the "wealth effect" creates in their mind a sense of having more money.  The notion that asset prices are increasing caused many in the early 2000's to lose all sense of rational expectations and believe that housing prices would always go up, that houses were the equivalent of ATM machines, that living off of one's credit cards is ok, and that all people deserve and are capable of being rich.  While the mistakes and poor thinking in the 2000's were quite real, I am optimistic that Amerikans have learned some lessons and won't fall for the old asset price wealth effect trick again.  Perhaps I'm naive, but I think many are now focused on living within their means and paying off debt, not incurring new and larger obligations.

September and October have provided almost all markets with out sized gains and have posted record results.  Clearly the economic fundamentals must reinforce and justify the rocket launch right?  Let's dig in and see where we are at.

 RAILS – http://railfax.transmatch.com/  and http://www.aar.org/NewsAndEvents/~/media/aar/railtimeindicators/2010-11-rti.ashx

Total Rail Traffic continues to outpace 2009 levels for the current week.  We are about 10% higher than those levels, yet are still down 4.2% from 2008 numbers. 

RAILS / RECESSION INDICATORS

Waste and Scrap shipments are on par with last years levels.  These shipments don't give us a clear indication of strength or weakness.  Motor vehicle shipments are greater than 2009's dismal levels, but this should give us reason to pause and temper our elation.

 

Food Stamps – SNAP PROGRAM – http://www.fns.usda.gov/pd/34SNAPmonthly.htm

 As I mentioned an earlier post this week, the Food Stamps Program continues to see greater and greater participation.  The SNAP data continues to highlight how bad things have been on mainstreet.  More families are drawing on the resources of the federal government and taxpayer for their food needs.

 COMMERCIAL REAL ESTATE DATA – http://web.mit.edu/cre/research/credl/rca.html

Moody's MIT Transaction Report – Commercial Real Estate

The CPPI continues to decline and show an erosion of value in the national commercial property price index.  The figures released for August show another 3.3% decline in values in actual transactions.

 HOME PRICE INFORMATION / LEADING INDICATORS - ECRI – http://www.businesscycle.com/resources/

The ECRI data on home prices continues to show no improvement in this critical area of the economy.  Real prices continue to reel and go lower through the August data release while leading indicators suggest that the pricing is simply flat.

MONSTER EMPLOYMENT INDEX REPORT – http://about-monster.com/employment-index

Jobs reports last week were surprisingly good and we see improvements in the weekly data.  Unfortunately we are not seeing an improvement in the unemployment rate as more workers that just gave up are now coming back in search of job opportunities.  Our unemployment rate is still at 9.6% and is quite sticky at that level.

Despite the good release, the Monster.com Employment Index dropped from a level of 138 to 136 in October.  Why new job listings on the web would decline here is actually interesting.  This is a really good report to watch and get some indication of where we are going. 

 On a separate note, Monster reported excellent earnings a couple of weeks ago.  I should have been on this as an investment possibility as the huge surge in the index would and should have been a tip off to the potential rebound in earnings for the company.  I'll continue to keep that in mind as I track this and highlight it as a potential trade in the future.

 6 MONTH EURIBOR – Euribor rates continue to climb.  Some of this increase is a result of the European nations holding firm and refusing to follow the stupid policies of our Federal Reserve.  The lack of "relative" stimulus provided in Europe is marked by higher interest rates.  Having said that, there are still real problems in Europe with countries like Ireland and Portugal, and don't forget our old friend Greece.

 No matter what, it is unmistakable that there are "interesting" things going on in the last month as the 6 month Euribor rates have climbed about 15 bps or 10%.  This is an inexact gauge but it is an item I watch every day in an attempt to measure stress in the banking system worldwide.

 CDS SPREADS -  http://www.markit.com/cds/cds-page.html

To continue on the thread that sovereign debt is still an issue, I wanted to include some data related to the CDS (Credit Default Swaps) pricing to offer protection against a default of one of these countries.  You must recall that earlier this year CDS prices exploded as the European debt crisis was unfolding again.  I am absolutely certain this will happen again just about the time when everyone forgets that these countries are really insolvent (like the US and every large bank).  For those that aren't accustom to looking at these, note that the spread is 992 which means that a person would pay 992 basis points (bps) for protection against a default in a specific bond issued by the Venezuelan government.  992 bps is 9.92% a year!  I personally never traded country specific CDS, but did do significant amounts of CDS in your investment grade corporate bond environment.  Back in the early 2000's we would write protection on names like General Mills and Kraft for around 40bps (for very short time frames (1 year).  While Venezuela is improving over the last week and month, Ireland, Spain, and Portugal CDS spreads are going nuts. 

Increases of 25% are an indication of stress in the system!  DO NOT GO TO SLEEP ON THIS!  Remember April, when every thought we were going to keep going higher and then we hit this little debt crisis?  Can you say "DO OVER?"

 

Venezuela

Spread  992

Daily Change  28.55

Weekly Change -91.92

28 Day Change -24.08

 

Ireland 

Spread – 607

Daily Change  17.69

Weekly Change 109.17

28 Day Change  182.55

 

Spain

Spread 264

Daily Change  15.98

Weekly Change  39.83

28 Day Change  56.18

 

Portugal 

Spread   464

Daily Change  14.89

Weekly Change  70.65

28 Day Change  78.57

WLI DATA – FROM ECRI -  http://www.businesscycle.com/resources/ Last week's WLI Data shows continued improvement in the leading indicators.  As I examine this data I find that since June 18th of this year the actual WLI data is showing a change of around 1% from that time.  At the same time though, the S&P 500 is up more than 6% from those levels.  It is clear that there might be improvement here in as shown by the WLI, but the market's rally may be ahead of itself.

COPPOCK TURN INDICATOR

The Coppock Turn Data continues to signal a turn south in the markets despite the exponential run in markets.  The turn indicator has been wrong for two months now, but since it is a lagging indicator (14 month average) we must expect that and use this as just another slow warning.  As usual I've tried to project levels in which it would actually signal a continuation of the positive trend, that level is at 12,300 on the Dow.  I don't put much weight on this indicator, but include it as another data point.

FINANCIAL CONDITIONS INDEX– http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND

As you all know, I like the Financial Conditions Index provided by Bloomberg because it is a composite of many fixed income and monetary (liquidity) measures.  The FCI is showing a value today of .15 which is once again over the critical 0 level.  This is an indication that there is an expansion in the economy, but probably more accurately there is a huge expansion in the amount of liquidity in markets.  We are nearing the  0.5 level we saw in April and this is going to either be a level of strong resistance coupled by the resurgence in a market correction, or it will give us an indication that the economy is truly recovering and going to be the basis for even greater levels in the stock and "asset" markets. 

BALTIC DRY GOODS INDEX – http://www.bloomberg.com/apps/quote?ticker=BDIY:IND

With the ever-increasing prices for copper and other commodities, one would think that spot rates for transporting these goods around the world would also be increasing.  In this case, that is actually not happening.  As I've posted many times, the BDI is subject to many issues other than simply that commodity prices are going higher.  First and foremost, I think the issue is that there is a ton of supply of ships available to move this cargo as shipping companies continued to order ships several years ago.  I have seen a few comments about purchasing some of the dry bulk shippers like DRYS.  Based on the chart I'm seeing, the thought of picking up a few shares might not be a bad one considering that there has been a recent breakout and it was confirmed with the move above $5.00 as I type.  I also like that the increase has come on increasing volume.  A very conservative trade could call for a stop to be placed at $4.75 and an upside target of $5.70.

 

 

DRYS CHART

USD INDEX – http://www.bloomberg.com/apps/quote?ticker=DXY:IND

The USD index continues its assault on lower levels despite 2 days in a row now of being up.  Since the May/June peak around $88, we've seen an almost uninterrupted dive to $76.  Imagine that, a 13% drop in the value of the dollar and a move up in the overall markets of around 16%!  Clearly the move higher in the markets is not due to improving economic fundamentals and a healthier environment.  The unsustainable recovery in index asset levels is purely a move derived from US dollar debasement.

The FED's announcement last week of the use of $600 Billion of newly minted QEII to "stabilize" our economy has essentially created an environment where everything simply goes up.  As the dollar goes down, asset prices in stocks, commodities, and everything else have simply risen to keep value somewhat constant.   And if you didn't believe that Bernanke and the FED were serious, there is the overt threat that there is even more liquidity behind the $600 Billion in case it is needed. 

While there is no proof that any of the QE will actually provide sustainable jobs or expansion in the economy, that doesn't mean that we won't have the facade of growth by way of ever increasing valuations of stocks.  Of course when you value those stocks in terms of foreign currencies or in hard assets you find that we are getting nowhere.

The area we are in is pretty critical and the $76.00 level must hold or else we will see a real fall in the USD and a tremendous surge (even greater than we've seen) in gold and silver and other anti-US currencies.  As stated previously, the gold and silver trades are now more than just commodities, they are trading as their own safe haven currencies and have taken on a life of their own.  Yesterday the dollar was actually up and we saw silver go nuts.  It is on days like these that I wish there was an easy and quick way to sell my physical silver as we've seen an almost 20% move in silver in two or three days.  I've heard several stories as to what is going on with these moves from a massive short squeeze to the filing of inquiries and court actions against JPM for silver market manipulation.  No matter what the cause, it is almost enough for me to want to exit.  I simply haven't due to the trouble associated with packing it up and sending it out for sale.  (Anyone want to buy some silver?)

 

NOVEMBER TRADING UPDATE

As much as the broader economy's recovery is still in doubt for me, there is little doubt that the FED is acting to not only buoy this market but to attach a rocket pack to its back and propel it to the loftiest levels.  The policies that are being executed are making it impossible for one to remain in less risky assets like money markets and also makes one very cautious to hold on to other fixed income type holdings as the specter of run away pricing erosion becomes more real.  What I mean here is that despite the notion that I still believe that we do not have inflation, there is rampant asset speculation in all the old standbys.  Oil, copper, wheat and grains, sugar, coffee, cotton, and more all are going parabolic.  I will say it again that this doesn't mean we have inflation, but it does mean that we have speculation like we did in June/July of 2008 where oil reached $147 a barrel.  No one can suggest that that price in oil was caused by actual demand, but it was caused by loose monetary policies that brought our economy to its knees.  It blows me away that we can have a FED that will sit idly by and allow it to happen again.  What kind of recovery will we have if my $100 a barrel target for oil is hit?

Despite my protests, the FED has promised QEII and will promise more of QEIII as the second version fails.  As a result our old trades are extremely profitable and are still ones that I highlight as winners.  We need to remain in commodities or their representative ETFs like DBA, DBC, JJG, SLV, GLD, and more.  We need to continue to trust in emerging markets for the reason that they are ACTUALLY growing at a pace well beyond the US's 2% AND are investments that are outside of the USD.  Countries like Chile,  Singapore, Malaysia, and Brazil have been my favorites.  They have been winners for me for sometime and that trend has not been stopped.  While there is every temptation to harvest gains, the real question needs to be….."And go where?" 

As we have discussed, the potential canary in the coal mine here is the stress in the European countries as measured by Euribor and also by the sovereign debt CDS that I pictured above.  If these continue to blow out this could derail the heroin induced rally the Fed has us on, just like what happened in April of this year.  I don't want to get too excited about any drop in the market though because we have rallied so much in such a little time with NO pullback.  We must expect some drop simply to digest the recent gains.  WATCH THESE CDS AND WATCH THE EURIBOR RATES THEY WILL BE THE INDICATION THAT SANITY IS RETURNING TO THE MARKETS!

Given the tsunami of liquidity and threats of more liquidity we will continue to see more of the same for the next month as the FED continues to debase and devalue our currency in an attempt to make us all feel richer.   Man, do I feel richer, don't you?

Something to Think About (Springheel Jack)

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OK, consider this: 
 
– We made the first peak in this area five days ago when we hit major resistance. 
– We've been chopping around since in a narrow range.
– We broke that range with a spike down yesterday which has been quickly recovered. 
– USD may well be in a significant wave up.
 
What does that say to you? 
 
If we had a rising wedge (and no QE2) we'd be shorting the hell out of this. Sadly no wedge, just the Fed.  
 
Something to think about though. Here are two very thought-provoking USD charts: 

USD Current Declining Channel:

101020-I USD 1Yr Declining Channel

USD 20Yr long term view with current triangle

101020-I USD 20Yr Triangle

I've been charting the DX futures rather than $USD in recent weeks but on $USD we just hit both the bottom of the declining channel and major triangle support. If we're going to see a big reversal on USD, that was the place to see it and so far it has bounced. 

The Looming Something

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I read a lot of market and economic commentary from various sites, and the smart ones all seem to agree on a few general things:

(1) All the trillions being dumped into the system will probably eventually result in Something bad happening; what that "something" is remains unknown, although a worldwide currency crisis seems to be a favored choice;

(2) The jobs market remains dead, except for lame-o service jobs, and without the artificial manipulations of the Fed, we'd be looking at a 12% unemployment rate right now;

(3) The stock "market" is a stock market in name only; at this point, it's a bizarre confabulation of the Fed, the big banks, POMO, and HFT computers.

(4) There will come an event that will – probably very quickly – bring forth the unintended consequences of all this unprecedented action, and the Something will be reviled instead of embraced.

But all the important stuff – like when the crisis will happen and what form it will take – is utterly unknown. This makes trying to make money in a market like this both confounding and difficult.

What I've noticed, as a technical analyst, is that the only time this year the market behaved in a sensible fashion is during the few months that Goldman Sachs was under the gun of the government. The moment GS bought themselves out of their troubles, things got weird again, and they've stayed weird ever since.

What scares me is that things were likewise weird in 1999, and they just kept getting weirder. The "shock event" that finally woke people up was Microsoft's earnings warning early in April 2000.

What brought all this to mind for me was my examination of charts last night. There are many, many charts that are simply acting in ways that seem abnormal. It's as if you have spend the past twenty years watching people run headlong into a brick wall. Every time they reach the wall, they smack against it and fall to the ground. And this time, as you're watching people rush toward that wall…..they pass through it and emerge on the other side.

That isn't what you are accustomed to seeing; it doesn't make sense; and yet, those are the facts before your very eyes.

I still am basing my own trading on individual stock charts. I thank my lucky stars that I stopped trading /ES, Forex, and – with only a single exception this entire year – options. That kind of leverage and volatility, particularly with a plunging VIX in the background, smells of disaster.

I again took a close look at my 1937-1942 analog this morning, and I remain convinced it is firmly intact. If there's going to be a drop this month – – and I think there is – – it isn't going to be anything dramatic, if the analog holds. I don't think we'll get anywhere close to the lows of even August, and I certainly don't think we're going to have a hard fall, unless some leading companies start announcing some surprising earnings.

I think a dip this month would line up nicely with:

+ A (very temporary) strengthening of the US dollar

+ A (again, temporary) diminishment in precious metals prices

Were we to get such a move, I would be strongly inclined to exit most of my short positions and, at the right price, get heavily long in the area of precious metals and specific equities (I am presently long 10 positions). Bernanke seems hell-bent on wrecking the dollar, and I would like to align myself with the Fed's insanity.

Here's what concerns me even more (I never said this essay would be heartening): if we do get a dip, and then a subsequent surge in equities, metals, and the Euro – – the analog predicts that the markets would go into an Ungodly Boring state for months until the Shock Event takes place. The shock event in 1940 was Germany's aggression; the shock event in 2011 would be……Something. Again, nobody knows what it is and nobody knows when it will happen.

But it seems that the Something is out there, and until then, the market is going to remain a pretty big pain in the rear.

One final thought – – one of the many Something Doesn't Look Right Here data points before me is all the hoo-haw about suspending foreclosures. I don't have a sympathetic bone in my body for banks, but this nationwide suspension of foreclosures – – based on technical errors in execution by the banks – – seems ridiculous to me. My heart doesn't bleed for people who:

(a) bought a house way beyond their means;

(b) signed a document promising to pay a certain amount of money each month;

(c) blew off their obligations to pay;

(d) are hanging out in the aforementioned house, rent-free, payment-free, and scruples-free

I've said it before, and I'll say it again – – the biggest suckers in the entire country are hard-working people who pay all their bills on time, keep their commitments, and wouldn't dream of not making payments simply because they could get away with it.

People like – say – me.

Because I really do wonder how stupid I can possibly be to be sending in my payment every month when millions have apparently been given free license to steal houses – – or at least live in them for free for God knows how long. People who are honest and do as they pledge appear to be the Fools of the Nation.

Hi. My name is Tim Knight.

So there we have it. Things are really wrong right now, and they'll continue to be wrong for the foreseeable future. I don't like it, and I hope it ends sooner than I fear.