Trends I'm Watching

When To Buy – Investing (Trading) in Manipulated Markets

Trend: Over the last few months, the real money has been made in Monday rallies, in options expirations week, and in overnight trading.

Graham Summers identifies three trends that tell where the traders make their money. It's all based on timing the Fed actions. I might look at buying on Friday evenings prior to options expiration week.

Link: The Secret Formula for This Stock Market Rally :: The Market Oracle

The first, most obvious trend is the Manic Mondays trend. Dr. Robert McHugh as done extensive analysis on this trend, showing that for the 43 weeks ended Friday January 8, 2010, stocks have rallied on 30 out of the 43 Mondays.

Even more significantly, these Monday ramp jobs have contributed the bulk of the market rally’s gains since March 2009. McHugh comments that all told, 80% of the gains stocks have posted since March 2009 have come on Mondays.

The significance of this trend cannot be overstated. Someone (or several someones) has been pushing S&P 500 futures up virtually every weekend since this rally began. Since most Wall Street traders take their cues from the overnight futures market, this has resulted in massive gap ups on most Monday mornings.

By the way, the “Monday effect” works even when the market is closed on Monday as yesterday’s action attested. All you need is a weekend and light futures trading to produce a Manic Monday.

The second trend that has dominated this market since the March 2009 bottom is the Bernanke Options Expiration juicing. In simple terms Ben Bernanke has shown a REAL preference for pumping money into the financial system on the exact week when options are expiring. ...the LARGEST Fed moves have ALL occurred on expiration weeks.

Options expiration week historically is a time of GREAT market manipulation as Wall Street traders try to push their positions into the black so they can close them out at a profit. For the Fed to be making its biggest infusions of capital on ALL of these dates is “a bit odd” to say the least. The fact it has occurred like clockwork for months makes this trend almost as regular as the Manic Monday Ramp Job.

The final trend that has dominated this market is the Night Session Ramp Job. The simple fact is that from September 13, 2009 until year-end, ALL of the stock market’s gains occurred in the over-night futures session from 4:00 ET to 9:30 AM ET.

Tyler of ZeroHedge was the first to identify this trend.... the market basically traded sideways during the normal day session (9:30ET to 4PM ET). In contrast, the after hours futures market (4PM ET to 9:30AM ET) accounted for ALL stock gains.

So there you have it, the three most dominant trends of this market rally. None of them are pretty. None of them involve fundamentals. And ALL of them are directly related to the Fed’s liquidity pump.

via David Wilson

India Central Bank Buys 200 tons of Gold for $6.7 Billion

Trend: Central banks with massive foreign reserves are spending dollars on gold, creating more demand for the precious metal.

David Parkinson at Seeking Alpha describes the reason that the price of gold spiked up on November 3, 2009. Excerpts below.

Link: Why the IMF's Indian Gold Sale Matters -- Seeking Alpha.

Bullion surged more than $30 (U.S.) to $1,085 an ounce in New York Tuesday, trouncing is record high set just three weeks ago, after the IMF disclosed that it had sold 200 tons of gold to the Reserve Bank of India - for the low, low price of just $6.7 billion. The sales took place over the past two weeks, and represent almost half of the IMF's previously announced 403.3-ton gold sales program.

The prospect of the IMF and other gold-rich central banks selling off gold reserves to the open market was one of the few factors out there weighing gold prices down. Ever since the IMF decided to start selling gold, market watchers had been bracing for a possible flood of gold supply that would take the wind out of gold's sails.

The fact that the IMF sold fully half of its gold program to a single buyer, off-market, in one fell swoop just six weeks after approving the sales program, caught the gold market by surprise.

Investing in the Shortsightness of Government Officials

Trend: Governments that have focused only on short-term problems are facing some grim realities as neglected long-term problems expand exponentially.

Below are some excerpts from a speech by David Einhorn, President of Greenlight Capital. He describes some of the trends that worry him and the events that got us into this situation. For the first time, he suggests holding gold to protect capital. He is renowned for shorting Lehman Brothers before the financial crisis after uncovering the problems that the ratings agencies ignored.

Link: John Mauldin's Outside the Box - InvestorsInsight.com

Presently, Ben Bernanke and Tim Geithner have become the quintessential short-term decision makers. They explicitly "do whatever it takes" to "solve one problem at a time" and deal with the unintended consequences later. It is too soon for history to evaluate their work, because there hasn't been time for the unintended consequences of the "do whatever it takes" decision-making to materialize.

In the context of the recent economic crisis, a highly motivated and organized banking lobby has demonstrated enormous influence. Bankers advance ideas like, "without banks, we would have no economy." Of course, there was a public interest in protecting the guts of the system, but the ATMs could have continued working, even with forced debt-to-equity conversions that would not have required any public funds. Instead, our leaders responded by handing over hundreds of billions of taxpayer dollars to protect the speculative investments of bank shareholders and creditors. This has been particularly remarkable, considering that most agree that these same banks had an enormous role in creating this mess which has thrown millions out of their homes and jobs.

...Americans understand that the Washington-Wall Street relationship has rewarded the least deserving people and institutions at the expense of the prudent. They don't know the particulars or how to argue against the "without banks, we have no economy" demagogues. So, they fight healthcare reform, where they have enough personal experience to equip them to argue with Congressmen at town hall meetings. As I see it, the revolt over healthcare isn't really about healthcare, but represents a broader upset at Washington. The lack of trust over the inability to deal seriously with the party goers feeds the lack of trust over healthcare.

Can We Survive Unsustainable Budget Deficits for a Decade?

Trend: The budget deficits caused by government overspending are growing larger and more damaging to the US economy, with no solution in sight.

John Mauldin first wrote about the Muddle Through Economy in 2002. In 2007 he wrote that we would indeed get back to a Muddle Through Economy after the end of the coming recession. Last week he expressed concern that the US is taking actions that could indeed "Kill the Goose" of our free-market economy. Now he is questioning how we can muddle through in the face of $1.5 trillion and larger deficits. Excerpts below.

Link: Thoughts from the Frontline - John Mauldin

I am not surprised about the response of the Fed to the current recession and credit crisis, whether it's the large monetization of debt or the low interest rates. Assuming they more or less remove the monetary easing in a reasonable manner, there is nothing that would make me think we do not eventually recover, albeit at a very slow Muddle Through pace, with a jobless recovery that lasts for several years. It will not be pleasant, but we'll survive.

Are Actively Managed ETFs a Good Investment?

Trend: ETFs are taking investors and funds from the mutual fund industry; the mutual fund industry is retaliating with actively managed ETFs.

Teeka Tiwari at The Tycoon Report sees managed ETFs as an attempt by the declining mutual fund industry to create stock-picking ETFs that are managed by their fund managers.

Link: The Tycoon Report - Teeka Tiwari - Sector ETFs: Still the Most-Profitable Way to Invest.

A recent article in The Wall Street Journal sang the praises of "managed" Exchange-Traded Funds (ETFs).

Don't be fooled by these "new" financial products. They are just old-fashioned mutual funds disguised as ETFs.

You see, the mutual fund boys have been hemorrhaging cash, as the ETF market has exploded in popularity. ETFs have just a fraction of the cost of a mutual fund and are infinitely more flexible.You can sell an ETF short, and you can also buy or sell options against it. Additionally, ETFs have immediate liquidity and utter transparency.

Currency Devaluation and Gold

Trend: Currency devaluation – the falling dollar – is a primary reason that gold is attracting smart money.

Alice Schroeder at Bloomberg.com describes why gold is a good investment before financial crises. Excerpts below.

Link: Gold Tells You U.S. Bubble Hasn’t Popped Yet: Alice Schroeder - Bloomberg.com

...the relationship between gold and financial crises goes back centuries. In the aftermath of the credit-bubble bust, we confront a Moby Dick-size pile of leverage and the question of whether this is inflationary or deflationary. So it’s worth considering what the price of gold may be telling us.

Leverage is a broad term that covers the complete history of finance, which all boils down essentially to the same structure: debt secured by assets. You give me a cow, I give you a piece of paper. Later innovations are simply variations of obligations secured by assets.

So a simple explanation of bubbles is that they form whenever someone creates a rationale to increase obligations too far beyond the level justified by the assets, regardless of the form of the asset or obligation.

The Illusion of Dollar Pricing

Trend: The weakening dollar makes the 2009 gains in the S&P 500 look much better.

There are many reasons that the political leaders will let the dollar weaken, even while they say they "favor a strong dollar policy." Many of consequences are subtle and unpublicized.

J.S. Kim at The Underground Investor shows us one of the illusions created by a weaker dollar. Click on the link to see the charts.

Link: A Market Rally in Monopoly Money | The Underground Investor

When priced in US dollars, the US stock market appears to have rallied significantly since the beginning of the year, now up 18.31% since January 1st.

...if we price the behavior of the S&P 500 in terms of gold, the gain in the S&P 500 since the beginning of the year shrivels to a 3.92% rise.

When we price the behavior of the S&P 500 in terms of silver, the gain in the S&P 500 evaporates and becomes a 21.36% loss.

Alternative Weighted ETFs Can Boost Gains

Trend: A S&P 500 index equal weighted ETF (RSP, +29% YTD) has almost doubled the performance of the giant traditional cap-weighted ETF (SPY, +15% YTD) in 2009.

Ron Rowland at Money and Markets provides an excellent overview of the weighting options available to ETF investors. Excerpts below.

Link: Get Creative With Alternative Weighting ETFs | Money and Markets

Weighting is simply the way stocks are distributed in a portfolio. An index is nothing more than a publicly-available list of stocks that are weighted according to some sort of strategy. The S&P 500, for example, consists of 500 large U.S. stocks that are selected by a committee at Standard & Poor’s. Like most indexes, the S&P 500 is “cap-weighted.” Each stock receives an allocation equal to its proportional market capitalization — the total value of all outstanding shares at the latest price.

With hundreds of stocks in the index, it’s obvious that a few large companies dominate the portfolio. The remaining ones get very small allocations — a fraction of a percent in most cases.

This is the drawback to cap-weighted indexing: The bigger companies get an outsize share. That’s great if those companies perform well, but not so great if they run into trouble.

To address this problem — and hopefully attract investors — some ETF sponsors have developed alternative weighting schemes. None are perfect, of course, but they can be very useful at times.

Scarcity Industrialism Gaining Momentum

Trend: China is banning the export of rare earth elements – and they currently produce about 90% of the world’s supply.

John Michael Greer describes what he calls "scarcity industrialism." Companies in countries where scarce resources are available will have a competitive advantage as this trend grows more prevalent (look at Saudi Arabia). Excerpts below.

Link: The Archdruid Report: The Dawn of Scarcity Industrialism.

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...the Chinese government is planning to ban the export of rare earth elements ...these have become crucial to many cutting edge technologies. Lanthanum, for example, is used in high-tech batteries, and neodymium goes into the permanent magnets used in electric motors and wind turbines. The innards of the Prius and other hybrids, to say nothing of the as-yet-imaginary electric cars being hyped by what’s left of the American auto industry, depend on rare earth elements, and China currently produces well over 90% of the world’s supply of most of them. The report thus sparked claims of an imminent shortage in these minerals and, predictably, a flurry of speculative interest in (and hype-ridden articles about) mines outside of China that can produce the same minerals.

Why Are Gold Prices Rising?

Trend: The price of gold is approaching an all-time high, boosted by significant upward moves in the first three days of September.

The explanations for the increase in gold prices vary with the political and economic perspective of the person commenting. While prices "don't lie", there's always the possibility of a push by major players who smell an opportunity for big profits, like the oil price run up in the summer of 2008. Chinese buying gold, Fed policies, a declining dollar, excessive lending and debt, and Wall Street's hold on Washington are all discussed below.