The Coming Double Dip

This blog is published by Andy Waldock. Andy Waldock is a commodity futures trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

This morning’s (10/29/09) GDP headline on MSNBC reads, “GDP Grows at Best Pace in Two Years.” Bloomberg says, “Economy Expands for First Time in a Year.” Lastly, CNN said, “Economy Finally back in gear.

Statistically, speaking, this morning’s GDP numbers showed growth of 3.5% for the third quarter. This breaks a four quarter string of steadily shrinking numbers. By definition, this uptick brings us out of, “recession.”  This morning’s report looks great in the headlines, sounds good on the evening news and provides warm fuzzy water cooler conversation. However, I believe this is exactly the setup for the Double Dip Recession we’ve been talking about for quite some time.

Let me paraphrase the economic definition of “recession. “ A recession occurs when an economy has two consecutive quarters of declining GDP. We had experienced four straight quarters of declining GDP prior to this morning’s report.  In a free market economy, I would join the water cooler conversation and breathe a collective sigh of relief. However, our economy over the last year, can hardly be called a, “free market economy,” and therefore, I will continue to hold my breath and face the realities of what I believe will be a SIGNIFICANT downturn in our country’s economic stability.

Over the last quarter, the economic effect of the government’s cash for clunkers and housing stimulus packages has been substantial. Unfortunately, the temporary stimulus has done nothing to fix the underpinnings of our country’s global ability to compete into the future. These programs were far more akin to giving a man a fish, rather than teaching a man to fish. Had we allowed the markets to work themselves out, we would have saved billions of taxpayer money that went to bail out worthless financial corporations. Had some of this money been spent on our country’s infrastructure instead, we would have created new jobs by updating the electrical grid and allowing new green energy to be transferred from where it’s created to where it’s needed. The highway system, bridges and railways haven’t been significantly updated since their creation in the 1950’s and are in dire need of repair. As I write this, I see that the Golden Gate Bridge is closed because a cable snapped! Finally, high speed internet needs to be rolled out to everyone, just like the phone companies did so many years ago. These INVESTMENTS in our country’s future would do far more to ensure long term growth than the corporate BAILOUTS we are paying for to make us feel good now.

Due to the programs that have been implemented, we have ended the recession. Hurray for us – NOT. What we have done is placed whip cream and cherries on a pile of cow dung. Let me blow the froth off and show you how much it smells underneath the rhetoric. Deflation is still our major economic concern. Deflationary economies have no chance of sustaining growth. Many of you will argue that because of the falling Dollar and our government’s position of Quantitative Easing, that inflation should be our primary concern. I don’t think that’s the case.

First of all, we still have rising unemployment. According to the last unemployment report, we are at 9.8% unemployed. There are also another 7% underemployed and another 3-4% who’ve simply quit looking for work. According to John Mauldin, “A few years ago, 1 in 16 Americans were unemployed or underemployed. Today, that number is 1 in 5.” Obviously, this means no wage inflation. This is also why I think national infrastructure retooling would’ve been more beneficial. Secondly, between the housing collapse and the bear market in equities, we have seen significant wealth destruction. People are increasing their rate of savings as their net worth declines. Haven’t we all tightened our collective belts a bit? Again, lack of spending equals deflation not, inflation. Finally, the Federal Reserve Board has dropped interest rates to near 0%. Typically, this would be extremely stimulative and very inflationary. However, the money the Fed is printing is not making it to out to home buyers, entrepreneurs or, small businesses. The money is being used to shore up the balance sheets of the many troubled lending institutions at the corporate and private levels. Therefore, the velocity of money is still very low in spite of the amount of money the Fed has been printing and money velocity is positively correlated with inflation. Low velocity means low inflation.

This morning’s GDP numbers need to be taken in context. The dip was halted but, it’s just a breather before the next section of the slide. Watch the Commitment of Traders Reports for the next selling opportunity.

 

U.S. Mint Gold Coins


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This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk in investing in futures.

I came across this in the Casey Daily Dispatch, this morning. Due to the number of inquiries into taking physical possession of Gold Bullion, I thought I’d post this as a reasonable means of physical acquisition. Please understand that this is neither a recommendation to buy physical gold nor, a solicitation for the resellers listed in the following post.

Generally speaking, Gold is a hedge against U.S. Dollar depreciation. It has been my experience that this hedge is more easily executed via the futures markets than in the physical market. However, in the best interest of our customers, I’ll always try to provide you with the best information I can find. After all, the only bad decision is a poorly informed decision.

Buffaloes Are Back!

By Jeff Clark

You may recall the U.S. Mint stopped producing the American Gold
Buffalo coin late last year when demand for all things gold and silver
skyrocketed and they couldn’t keep up. I was personally disappointed, because I
love that coin.

Well, I’m glad to report it’s back on sale! Beginning this
Thursday, October 22, you can once again buy the 2009 Gold Buffalo. The U.S. Mint
is officially releasing the coin for sale that day, and you can purchase them
from the Mint directly or from any dealer who’s got them available.

What many people don’t know is that the Gold Buffalo is the only
U.S.-minted 24-karat gold coin. Wait, you’re saying, isn’t the American Eagle
24 karats? Nope, it’s a 23-karat coin; it contains one ounce of gold, but it
also contains an alloy, about 10%, presumably to make it sturdier. The Buffalo
contains no alloy and is thus the purest form of gold you can buy.

If you’d like to own a Buffalo, I’d suggest calling Asset
Strategies International (1-800-831-0007). Why? Even though you can’t buy it
today, they’ll take your name and number now and then call you on Thursday to
lock in a price. They’ve also got the best price I’ve seen: they’re currently
asking a 6% premium (or lower for larger orders).

This is a better deal than Kitco, for example, because they’re not
taking orders yet and also said their premium is likely to be at least 8.25%.
Keep in mind, though, that premiums could easily be forced up if the demand,
like last time, is strong. I suspect it will be for this popular coin.

If you think the gold price is going to fall and could thus get it
cheaper, I’ll mention that the U.S. Mint projects they’ll produce enough coins
to keep up with demand. This doesn’t mean your dealer couldn’t run out, but
hopefully the mint’s calculations are correct and there will still be plenty of
coins available at later times. No guarantees, though, and premiums will certainly
fluctuate.

Corporate Perks

This blog is published by =
Andy
Waldock. Andy Waldock is a commodity futures trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, =
his
clients in any market discussed. The blog is meant for educational =
purposes and
to develop a dialogue among those with an interest in the commodity =
markets.
The commodity markets employ a high degree of leverage and may not be =
suitable
for all investors. There is substantial risk in investing in =
futures.

I was going to write an article this morning on =
trading
broken markets. My definition of a, “broken market,” is one in =
which
the fundamentals, like the Commitment of Traders Reports and technicals are at odds with each other. Clearly, we =
are
witnessing this in the equities markets. However, when I read the =
following
article in the Washington Post, I realized just how disjointed the =
equity
markets are from reality. How can top end wages increase at  4+% =
when inflation
is nil and unemployment is pushing 10%?

By Tomoeh Murakami Tse

updated 4:35 a.m. ET, Tues., Oct . 20, =
2009

NEW YORK – Even as the nation’s biggest financial =
firms were
struggling and the federal government was spending hundreds of billions =
of
dollars to save many of them, the companies as a group were boosting the =
perks
and benefits they pay their chief executives.

The firms, accounting for more $350 billion in =
federal
bailout funds, increased these perks and benefits 4 percent on average =
last
year, according to an analysis of corporate disclosures filed in recent =
months.

Some chief executives, such as Kenneth D. Lewis of =
Bank of
America and Jeffrey M. Peek of CIT Group, the major small-business =
lender now
on the brink of bankruptcy, each received about $100,000 more than a =
year
earlier for personal use of corporate jets. Others saw an increase in =
the value
of chauffeured services, parking or personal security.

Story continues below ?advertisement | your ad =
here

Ralph W. Babb Jr., chief executive of Dallas-based =
lender
Comerica, was compensated for a new country club membership, with an =
initiation
fee and dues of more than $200,000. GMAC Financial Services chief =
executive
Alvaro de Molina benefited from a $2.5 million payment from his company =
to help
cover his personal tax bill.

“You would have thought that this would be the =
moment
when everyone said, ‘Okay, the perks have got to stop — at least =
while
we’re indebted to the government,’ ” said Paul Hodgson, senior =
research
associate at the Corporate Library. “But that didn’t =
happen.”

This year may turn out to be different. In June, =
the
Treasury Department prohibited companies receiving bailout funds from
reimbursing senior executives for their personal tax =
payments.

In the meantime, Kenneth R. Feinberg, the Obama
administration official assigned to set pay for top executives at seven =
of the
companies receiving the most help, plans to curtail perks such as =
country club
fees when he rules on compensation later this month, according to people
familiar with the matter. Perks worth more than $25,000 are getting =
particular
scrutiny from Feinberg.

On average, the chief executives at 29 of the =
largest public
financial companies that have taken bailout funds received perks and =
benefits
worth more than $380,000 in 2008, according to compensation figures =
included in
annual proxy statements and supplied by Equilar, a compensation data =
services
firm. Individually, about half the banks increased their fringe benefits =
to the
top executives. The figures do not include relocation costs and related =
taxes,
typically one-time fees that can skew year-over-year =
comparisons.

In contrast to the 4 percent average increase in =
perks and
benefits at these companies, the average awarded to top executives at
non-financial companies in the Fortune 100 declined by more than 7 =
percent over
the same period, according to Equilar.

Andy =
Waldock

P =

866-990-0777

F =

419-624-0937

www.commodityandderiva=
tiveadv.com

The contents
of this e-mail communication and any attachments are for informational =
purposes
only and under no circumstances should they be construed as an offer to =
sell or
a solicitation to buy any futures contract, option, security, or =
derivative
including foreign exchange. The information is intended solely for the =
personal
and confidential use of the recipient of this e-mail communication. If =
you are
not the intended recipient, you are hereby notified that any use,
dissemination, distribution or copying of this communication is strictly
prohibited and you are requested to return this message to the sender
immediately and delete all copies from your =
system.

Using Commitment of Traders Data

This blog is published by AndyWaldock. Andy Waldock is a trader, analyst, broker and asset manager.Therefore, Andy Waldock may have positions for himself, his family, or,his clients in any market discussed. The blog is meant for educationalpurposes and to develop a dialogue among those with an interest in thecommodity markets. The commodity markets employ a high degree ofleverage and may not be suitable for all investors. There issubstantial risk in investing in futures.

Do you like buying into retracements and selling into counter trend rallies? Do you get that little antsy, slightly queasy feeling in the pit of your stomach wondering if it really was just a counter trend move and not a major turning point? Do you watch the markets intensely waiting for confirmation of a turn back in your predicted direction?

I’d like to share something with you that is helping my trading substantially. I’ve been trading for 16 years now and in that time span, I’ve come up with three original ideas that work. Two of them I’ve been using for more than 10 years and the third has been a puzzle I haven’t quite been able to put together for some time.

Some of you who know me, know that I’ve been following the Commitment of Traders  reports for at least 10 years. The foremost expert in this field is Steve Briese, publisher of “Bullish Review.” His weekly publication and explanation of the different groups of traders in the markets and their corresponding tallies of accumulation and distribution are like watching the “Old Boys Network,” on TV. It is a quantifiable report on how the big money moves.

His main methodologies involve the Commitment of Traders Index, which reads like a stochastic and the second is Major & Minor Signals, which are based on a static jump or decline in the aforementioned index.  His work and research are first class and parallel his character as a person. However, for any methodology to work, it has to be something the trader is comfortable with.

There are two main reasons I’ve never been able to implement this strategy as it stands. First, the problem with any stochastic or, index is that it is artificially bound between 0 and 100. There have been many times when the Commitment of Traders Index remains pegged at either extreme for months on end. This can happen in two completely different ways. First, the index can pick up a trend and remain locked onto it for an extended period of time. This is what we saw in many of the ’08 commodity rallies. The problem here is the equity swings. As a trader, I have to manage the equity in my account. Given the volatile nature of many of the markets last summer, account equity fluctuated wildly, even in profitable positions.

The second problem with the index is that when a market retraces, commercial hedgers are quick to lock in their production and delivery prices. Their early action in these instances leads to an index reading that is the exact opposite of market direction. Once they’ve bought all their raw materials and hedged all of their forward production, they’re done trading until the market moves back the other way, again. The second half of this summer saw index readings of 100 in falling markets.

Thanks for bearing with me through the setup for my work. If you’ve read this far, you’re obviously looking for a more tradable solution. What I’ve done is track the momentum of commercial buying and selling. This eliminates the artificial boundaries of the index and allows me to compare the degree of buying and selling to the market’s history of commercial capacity for buying and selling. It also allows me to see, on a relative basis, whether there is more or less urgency in the market as we approach critical support and resistance levels. The advantage is that it helps put me on the right side of every trader’s number one question – “Resistance or, Breakout?”

When I combine the major market participants’ actions with my own proprietary trigger, I can pick off swing highs and lows with a greater winning percentage than I ever thought possible. When the Commercial momentum is negative and my indicator says, “sell,” I use the most recent swing high as my protective stop point. This allows me to know what my dollar risk per contract is and allows me to manage my equity more effectively. The opposite rules hold true for the buy side. When Commercial momentum is positive and the market pulls back, I wait for the trigger to indicate, “buy.” I use the most recent swing low as my protective stop price. Again, quantifying the risk is one of the main keys to any successful strategy.

The last topic to address is, obviously, when to exit. This is a purely subjective task. In my quantifiable testing, trailing a stop one bar back has worked – once the market has moved in our anticipated direction. This is not how I trade it. I have the advantage of proximity on my side. I sit in front of the screens all day and watch the markets. I take profits on an experience basis. Sometimes I’m early. Sometimes, I’m late. That is the nature of trading. There is no free lunch. I am happy to say that the more often I find myself on the right side of the market, the easier it is to be profitable and, after all, isn’t that the end game? I hope this helps put you on the right side of the markets more often and may your future trading problems be profit taking issues.

Sincerely, Andy Waldock.

This methodology is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. This method is meant for educational purposes and to illustrate the correlation between the commercial’s trading and its effect on creating turning points within the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures. The information contained herein comes from sources believed to be reliable, but are not guaranteed as to accuracy or, completeness.

 

Customer’s Question

 

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

I received the following email from one of my more erudite customers. I think, between us, we raised more questions than we answered. You will see my response below. Andy, I sent that same article (Swiss Bank say “goodbye to US”) to a European friend that I frequently have global economic discussions with.  He excused it as the “Swiss being the Swiss”.  He said they have been complaining for years as almost all of the European countries have demanded the same transparency from them. He feels that their historic dependence on secrecy and neutrality has been crumbling as the world gets smaller and hasn’t seen them as “playing ball”.  This is the sound of a “baby crying because its not getting its way”.  They used to command respect in international finance, but are becoming far less significant or impactful.  Excuse it.  Ignore it, he said.  It signals desperation, as to lash out against the US is an old European ploy to garner support from there brothers on “the continent”, in a “we stand together” approach.  He reminded me that their list of complaints about the US government approach to the economy and the private sector is, 1) well know , and, 2) the same complaints that you hear in the US itself.  “Who needs them to remind us of the obvious?  Its just rubbish!  Throw it away.”  Interesting …………… As I constantly try to summarize and update my outlook, her are my latest random thoughts……. Although a double dip recession is theoretically possible, what are the realistic chances when money is being printed around the world and interest rates are so low?? As our major companies have globalized over previous decades, and that pace continues to accelerate, is the statistical relevance of the US economic indicators disconnecting from our own stock market?  So many of our prognosticators and experts base there predictions and interpretations on models built from another era.   The rest of the world’s indicators are showing a bottom in place and a standard upturn based upon overprinting of currency and low interest rates – full steam ahead.  The fact is that we have the same, but our banks are holding onto money to protect themselves from the government changing the rules, and the housing glut is feeding the negative impact on household wealth perceptions.  So, our government policy nightmare could feed domestic fears of deflation, economic slowdown, and continued unemployment, while the rest of the world is full steam ahead.  They may worry about potential inflation, fed by the voices of the gold bugs and their own fears based upon many a small country’s own history.  But as you rightly pointed out, it will not be based upon scarcity of labor, material, or capital.  But those three factors usually only come into play at the end of the cycle.  Inflation is prompted by too much cheap money  funding speculation, which fuels growth, expansion, hyper growth and eventually scarcity of labor or material (usually not capital, as what politician in his/her right mind would shut off the spigot which provides their power?)  And since in a globally developing world with 2/3 of the population at poverty levels, and global companies able to readily locate or relocate production to cheaper labor markets – labor inflation will not be a problem.  This leaves only material, raw or manufactured, as the instrument of limited supply – too much money chasing limited supply. And those with true needs for production, will be punished by speculators crowding into their space. Gold is a monetary option, not an inflation indicator.  It is a currency equalizer.  It has risen in response to the drop in the USD, which is in response to our government’s unclear policies.  Gold should drop when these become clearer (the rules of the game) and the game restarts. Although the floor has risen as all currencies are being devalued. Also, has the education of the US investors expanded sufficiently that global investing differentiation has reached the level whereby their personal wealth could be positively impacted by successful investment returns from emerging or global markets, such that they spark retail here?  Or will they focus on reinvesting to rebuild wealth (having been burned recently) and link consumption directly to job security and taxes? We are seeing the condensed cycles we discussed previously.  Easy money has only been around for a year and already everyone’s worried about inflation. So where does that leave me?  With the intention of getting in early and out on time ….. Short term (start of cycle) opportunities would appear to be:  Emerging market stocks, and US stocks of global companies, or banks, small companies with a global labor supply or consumer market but little exposure to materials with potential price spikes or limited supply (SHIT !!!!!! Just realized I’m in the wrong business !!!!)  Perhaps some real estate. Middle term (mid cycle) opportunities would appear to be:  Global stocks and US stocks of global companies, raw materials with limited supply or long windows of new supply coming on stream Long term (late cycle) opportunities would appear to be: Start looking for tops:  to short all stocks, to sell commodity futures, End of cycle opportunities:   Short everything, buy bonds (as interest rates will need to be lowered in the next recession), hold cash (to start buying at the beginning of the next cycle). What should I do today?   Looks like commodities should have a floor, due to cheap money and economic recovery world wide.  So I should stop shorting against minor pullbacks.  Perhaps the only fear of a double dip is domestically?  Although global growth is recovering, it is no where near levels to spark commodity demand – just speculation due to cheap money, and limited alternatives.  Commodities may stay in a range for some time. (When gold retreats, so will many other commodities) Play USD recovery when policies become clearer. Invest in merging markets. Drink wine…. My response: There’s an awful lot to go on here. PhD’s  are working overtime to generate responses to each of your individual questions and you expect me to digest it, whole? I do have a couple of thoughts on some of your points. I’ve read it three times now, and I think I’m starting to wrap my head around it.     1)    Double dip recession – I think it’s very likely if the tax plans go through. It seems to me that taxes will rise and this will hurt our economy both by slowing new employment and, in turn, undercutting federal estimates of planned tax collection. Furthermore, these taxes will provide no long term benefits whatsoever to our infrastructure, our individuals or, our corporations. As you and I have discussed, profits have come through cost cutting and one time stimulus injections. We’re generating zero domestic demand and our exports are increasing, primarily, through the effect of the declining Dollar and its effect on the agricultural markets. Finally, on the inflation/deflation debate of the double dip, I think I’ve gotten my head around to the following argument for deflation as our primary focus. We’ve already had the excess land and labor argument and I think deleveraging has put a damper on capital demand. Throughout the financial crisis, we have g
lobal deleveraging on an unprecedented scale. In addition, the money that the governments are printing is going into a banking system where it is being used by the to fix their own balance sheets. Therefore, the newly printed money is not being lent out, has no velocity and is generating less inflation than would historically be the case.     2)    I tend to think that models have a finite lifespan. Through my experiences in programming them, I have separated quite a bit of wheat from the chaff. There are technical indicators showing our bottom in place like the major divergences in negative momentum from the March lows. There are fundamental indicators like the explosion in jobless claims two months ago or, so followed by declining claims that tends to serve as a predictive indicator. There are the earnings reports, particularly in the financials, that all would indicate the worst is behind us. Remember when the LIBOR (see U.S. Interest Rate Futures) had its own 24 hour window on CNBC through the crisis? I think that globalization has put the U.S. markets in a basket of “tradeable markets.” It’s no different than U.S. investors placing money overseas. Any investor is simply looking for return on investment. As long there are sectors or, markets as a whole, people will design new trading strategies to increase their risk to reward ratios and, in doing so, become less concerned with a market’s internals as the day’s closing price will be the only meaningful metric. This WILL continue to create bubble after global bubble. We will ALWAYS seek out our own financial best interest. The education of U.S. investors is to ride the wave until it crashes then, look for the next one. Ignorance is bliss the whole way into the beach.     3)    Where do we stand in the cycle? The simple version is to invest anywhere there is a growing middle class  with an historically high savings rate, both in population and demographic. That description does not exist domestically.

Tradeable Data

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst,commodity broker and asset manager. Therefore, Andy Waldock may have positions for himself,his family, or, his clients in any market discussed. The blog is meant for edu-cational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and maynot be suitable for all investors. There is substantial risk in investing in futures.The talking heads on the financial networks are more interested in arguing andhearing their own voices on tv than they are with examining the data that we at our disposal to make rational decisions. Currently, the debate rages between “double diprecession vs. Dow 10,000,” the ever popular “inflation vs. deflation” and finally, “stimulus vs. private growth.” These debates do nothing to help individual traders andinvestors find the facts before them based on data that is readily available.In 30 seconds or less,the data tells us that deflation should be our major concern. 1) there is no inflationary pressure in the three keystones of economics. a) land. pick your place and make an offer. b) labor. the unemployment numbers speak for themselves. c) capital. government stimulus and 0% interest is available to anyone who can wade through the paperwork. 2) The stock market has been overinflated by the surviving financial companies that have been allowed to borrow at 0% from the government and lend at whatever rate they can charge. Earnings are on the tail end of the short term tag team spike that has been provided buy government stimulus and cost cutting. 3) The dollar is likely to put in a bottom near these levels. The metals are set to decline. Copper failed to make new highs on this run up, in spite of the Chinese stock piling. Speculative positions in the metal markets are at their peak leaving little money on the sideline. Now, let’s put this in tradeable language. 1) The Commitment of Trader Reports show that the Dollar has shown a tremendous build up of commercial net long positions – moving from net short over 30,000 contracts last October to currently, net long 12,000 contracts. The lows around 76 should be defended. 2) Copper’s failure to make new highs provides solid resistance $2.85 – $2.95 to sell rallies against. London’s stock piles are high and the Chinese stimulus is petering out. 3) Gold has seen a huge build in speculative long positions above $990. The rally to $1025 hasn’t left a lot of room to take profits. Under $990 could see substantial stop loss selling by weakly financed speculators.