Tag Archives: goldman

What’s Wrong with Equities

The economic black hole between the equity markets and the man on the street has never been greater. Earlier this month the media trumpeted about the all time highs in the Dow Jones Industrial Average. The President commends Congress for creating policies that “put Americans back to work,” and points to unemployment levels that are 25% below their 2009 peak. Meanwhile NBC News publishes the results of a new study, which states that four out of five of us will, “struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives.” Please bear with the following few paragraphs as we discuss the social issues that we all feel and use some correlational analysis to come up with a trading plan.

Anecdotal evidence of the government’s failed economic bailout plans to help the working class and small businesses abounds. Finally, we have some research that quantifies where TARP funds went as well as how much of the stimulus reached its intended target. We suggested five years ago that the major banks who were deemed, “too big to fail” were more likely to sit on the funds they received in order to shore up their own loan to equity ratios than they were to make those same funds that had been ear marked for small business creation and maintenance available to them.

The best summation of these events comes from John Mauldin, a republican economist from Texas. “We are watching the Fed employ a trickle-down monetary policy. They hope that if they pump up the banks and stock market, increased wealth will lead to more investment and higher consumption, which will in turn translate into more jobs and higher incomes as the stimulus trickles down the economic ladder. The kindred policy of trickle-down economics was thoroughly trashed by the same people who now support a trickle-down monetary policy and quantitative easing. It is not working.” Mauldin’s condemnation of trickle down economics is especially telling given his own personal background.

The government bailed out the owners of the large banks and their related business entities. Warren Buffet’s Berkshire Hathaway is a good example. When the financial crisis set in Mr. Buffet, who already owned a considerable position in Goldman Sachs, doubled down as the stock hit the skids. He was betting that the Goldman was, “too big to fail” and that the government would bail them out, which they did. Goldman Sachs received $10 billion in TARP aid. Berkshire Hathaway stock is 10% higher now than before the collapse and is up approximately 30% this year. The point is that those with equity ownership and the resources to increase their equity ownership by using the Federal Reserve as a backstop profited handsomely. Unfortunately, a Gallup poll shows that the percentage of Americans owning individual stocks and securities is at its lowest level since 1999 and has declined by 13% since 2007.

Human nature is a terrible trader. The scarcer something becomes, the more we want it. The more that’s available, the less we want it. When stocks were cheap, we were scared. We as individuals are never, “too big to fail.” Collectively, we rarely succeed. This is evidenced by the recent run up in margin buying, which just hit a new all time high. Margin buying is akin to buying stocks on leverage. Currently, investors are only required to put up 50% of the face value of a stock and the brokerage house, “loans” you the balance. The last recent highs were 2000 and 2007. Ring any bells? This is a significant indication that individual investors are doubling up at the top to catch what’s left of the rally they’ve missed. Conversely, When the Federal Reserve Board announced a possibility of easing back on the stimulus and bonds tanked, these were the same people pulling their money out. This is a clear, ugly and leveraged speculative rotation.

The markets themselves tell a different story. The Fed can’t afford to let off the stimulus gas just yet and the major market players know it. They also see the sucker top forming in the equity markets. The appropriate strategy we see is to tighten up equity risk and look towards the long end of the yield curve to regain some of its losses. Frankly, we think moving from equities to bonds should be the primary move between now and October. Take advantage of the access to information we now have and know that ignorance is a choice.This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources thatCommodity & Derivative Advisors believes are reliable.  We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

Pandora’s Grecian Riddle

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.


Pandora’s Grecian Riddle

Here’s a riddle for you. What could make the U.S. Dollar and Gold rally while keeping short term interest rates exceptionally low, in the face of a bleak domestic economy?

The answer: bigger troubles overseas finally finding their way into the light.

I have said for the last 6 months that there is big trouble brewingin Old Europe and the Mediterranean. Many of you who absorb information fromsources other than CNBC and Fox Business channel are already aware that Greeceis on the verge of catastrophe. Members of the EU met in Brussels yesterday,February 15th for the primary purpose of discussing what to do withGreece’s inability to bring their budget in line with national their nationaldebt expenditures, currently totaling about 300 million Euros. They will alsoneed to secure financing of more than 50 million Euros to maintain operationsthrough the end of this year. Currently, their deficit represents about 12.7%of GDP. Jean- Claude Trichet and the rest of the EU policymakers want thisnumber to be brought down to 4% for 2010. It is my understanding that there isa tacit agreement among members of the EU that deficit financing cannot accountfor more than 3% of GDP for EU members.

To put this in perspective, our debt levels here in the U.S. arerunning at approximately the same percentages as Greece. This would be theequivalent of the U.S. cutting its budget deficit, currently around $1.3trillion by more than $550 billion both this year and next. Can you imagine thecivil unrest this would create or, what it would mean to Medicare, welfare orsocial security? How about schools, police forces and the postal service? Thisis what the approximate proposal by the EU would cause in Greece.

Obviously, the next thought is, “its Greece. So what? How badcould it be?” Remember that we’re talking approximately 300 billion Euros.According to John Mauldin, this represents 2.7% of European GDP. Remember BearStearns? They held less than 2% of U.S. banking assets. The issue here is thatthe other members of the European Union would not have the collectivecoordination to operate swiftly and decisively in the event of contagion.Russia in 1998 had a very clear operating system. Decisions were made anddirectives were carried out. Argentina in 2002 was also able to implement thedefault, restructure, revalue and grow procedure within less than a year.However, according to yesterday’s meeting, as reported in both “The Guardian”and the “Telegraph,” there is virtually no consensus among what should be done.The mandate to cut debt was issued but, what enforcement power is there tocarry it out? How long will the other nations allow the European Union as awhole to be seen as impotent in the world financial markets?

Of course, Greece has choices. Most plausibly, they agree to EU concessions and implement them fractionally – like the teenage child that whose completion of the chore list is underwhelming, to say the least. Secondly, they could default on their debt. This would throw the country into a depression.However, unlike Russia and Argentina, who both had a wealth of natural resources to fall back on, over 75% of Greece’s GDP comes from the service sector and less than 4% comes from natural resources, which consist mainly ofagriculture. Therefore, they will not be able export their way to economic recovery the way the Russia and Argentina have. Finally, they could vote to remove themselves from the European Union. The benefits would include a devaluation of their debt and an instant competitive edge in labor pricing.Unfortunately, any savings – monetary or land (mark-to-market), left in Greece would be devalued immediately and it would leave them unable to securefinancing on the open market for quite some time.

Going back to where we started, I asked the question, “What would make the Dollar and Gold rally while keeping short term U.S. interest rates low?” As of this morning, (2/16/10), European Union leaders have broken offtalks with Greece over what to do. A Grecian default would place a huge strain on Germany, Switzerland and France, the three primary holders of Grecian debt(Mauldin). Great Britain and Spain are stuck dealing with their own problemsand the Swiss won’t get involved. If the EU were to bail out Greece, what wouldIreland say? Here in the U.S. we arbitrarily chose to save some firms and letothers fall by the wayside. Think Bear Stearns versus Goldman. The fallout was substantial. I can’t imagine the political chess game that involves picking which country to save and allowing which one to fail. From a tradingperspective, and this is about trading – not political rhetoric, this eventwill create uncertainty in the financial markets. Holders of Euros will diversify. Whether they buy U.S. Dollars directly or, simply move money out ofthe Euro and into other currencies, this action will devalue the Euro. Furthermore,this uncertainty will attract more money to Gold. Finally, uncertainty in theEuro Currency will reassert the U.S. debt markets as king, thus keeping short term rates low for the foreseeable future.

Any questions, please call.Andy Waldock866-990-0777