Fed action fails to take into account Japan + China front running

Let me address the elephant in the room, why are interest rates on the rise? Two weeks ago the Fed announced its nuclear option; round 2 of quantitative easing. On paper this plan seems fool proof. However, the Fed forgot to check its math. It failed to take into account how China and Japan have begun pursuing monetary policies to protect their own economies. A possible scenario could see both China and Japan selling bonds in order to cheapen their currencies. This in turn would increase the supply of US treasuries, causing bond prices to drop and interest rates to rise. Check it out; it looks like we just might be at that turning point.

Chinese will act to protect the Yuan and to curb inflation, this will probably affect the intended outcome of QE2

Chinese Yuan vs US 10y treasuries-  http://www.hiddenlevers.com/hl/u?cnH5si

Japan is an export driven economy meaning they would prefer a weaker Yen

Japanese Yen vs US 10y treasuries-  http://www.hiddenlevers.com/hl/u?9mToKM

It seems what’s good for the US economy is no longer good for the global economy.

Kudos to Chevron, Atlas Energy is a nice pick-up

Chevron (CVX) announced its purchase of natural gas producer Atlas Energy (ATLS) in a deal worth $4.3 billion, which includes cash, stock and debt. Natural gas has been in a bear market for some time, and has been abysmal compared to the run-up in other commodities. So I was surprised that Chevron would bother making such a purchase. I thought I’d chart Atlas Energy against Natural Gas. Much to my surprise, since 2009 Atlas has rocked its underlying economics. Although it traded in lock-step with Natural Gas prices on the way down in 2008, it broke that pattern in early 2009, and has just kept going.

I would never even think it was a Natural Gas producer. In fact, it looked more like oil charts I’d seen. It turned out to be an even better trade than oil over the past two years.  The Chevron mergers and acquisitions team definitely saw these charts, and realized this gem trades more with Oil than with Natural Gas.

Most people on Wall Street will think Chevron is scooping up a Nat Gas play while prices are languishing. But the charts tell you why they bought it, because Atlas has done well despite those languishing prices. Can you imagine how well Atlas will do if Nat Gas prices climb? Well played Chevron.

Atlas vs Nat Gas

http://www.hiddenlevers.com/hl/u?bkUx83

Atlas vs Oil

http://www.hiddenlevers.com/hl/u?c8n6C9

Heads of Microsoft heading out of Microsoft

Steve Ballmer and Bill Gates, the heads of Microsoft, confirmed they are selling over a billion dollars each of Microsoft stock. A sale of 75 million shares is not a year-end tax planning strategy. It’s a tacit admission that he doesn’t believe in the dream anymore. I’m not too cynical, but when Steve-o makes statements like this, it makes me throw up a little in my mouth – “I want to be clear about this to avoid any confusion. I am excited about our new products and the potential for our technology to change people’s lives, and I remain fully committed to Microsoft and its success.” His timing is even more questionable with the launch of Kinetic and Windows 7. Well why would you sell now Steve?  I charted MSFT against the PC Sales lever over the past few years, and it made things quite clear:

http://www.hiddenlevers.com/hl/u?aLqwqL

These guys see where PC sales are going, and also see how highly correlated Microsoft’s stock price is to that lever. That downward trajectory is unequivocal, and Ballmer’s advisors probably saw the same chart. So now you have it. Would you go long MSFT when the guys with the most at stake are selling billions of dollars worth of stock? Would you walk into a burning building as the building owners are running out?

Me thinks it’s time to take profits in Gold

Time to take those profits you made in Gold and Silver off the table.  Multiple factors are all pointing in the direction of a correction on metals, including currency movements. (1) We hit new highs today on Gold and Silver, but then didn’t finish at those highs. (2) The dollar is hitting double bottom, which will give it serious short-term support, not giving dollar-denominated assets room to rise. (3) The Euro is losing strength against the US dollar, and Gold has been tracing the Euros movement all summer. (4) My doctor friend, usually buried in an operating room or his bed when he is not on call, rang me today to specifically talk about the urgency of moving a good chunk of his portfolio to Gold and Silver.  This last one is the most telling, and even better than an economic chart. When a guy who isn’t paying attention at all to the markets and doesn’t know much about the investing – when he tells you about getting into Gold and Silver – it’s time to sell Gold and Silver. He’s the clearest signal of the top. Here are some HiddenLevers charts to help you understand the relationships between Gold + US Dollar + Euro:

US Dollar vs Euro: http://www.hiddenlevers.com/hl/u?c5Y4cv

Gold vs Euro: http://www.hiddenlevers.com/hl/u?aiCYT7

Gold vs US Dollar: http://www.hiddenlevers.com/hl/u?aas8QH

Put a fork in Ireland, and the Gold rally

Looks like bankruptcy might be an inevitable conclusion for Ireland. Professor Morgan Kelly, their top economist said as much too today. (http://bit.ly/9svpX7) Is the government really going to step in and do something about the new spate of residential mortgage foreclosures, after frittering away so much money on banks with commercial mortgages losses? There is no money left, and access to the EU coffers is going to carry very burdensome terms. So burdensome that I think Ireland will choose default instead of conforming to the EU’s lending conditions.

Remember two years ago, when our beloved government saved Bear Stearns (explosion #1) but let Lehman (explosion #2) serve as a warning for other banks. The Don’t come running to Uncle Sam model worked our rather well eh? AIG (explosion #3) and Merril Lynch (explosion #4) fell within hours, a mess we are still cleaning up.

I think a PIIGS default is imminent, and IMHO, Ireland will be the domino that triggers contagion. Greece was brought back from the brink (explosion #1) and so that makes Ireland another Lehman. Will the EU make Ireland an example? Or will it learn from the US that a creating a martyr can take down a whole system? With Gold topping 1400 usd today, it does make me think a bounce back in the US dollar is due. (Remember when oil was 147 in July of 2008, and people kept talking about a 200 usd target? ‘Nuff said.) So maybe an Ireland default sets off a panic in other PIIGS credit derivatives, and leads to a run on the Euro.  If that happens, the dollar screams higher and Gold kinda crashes. So you heard it here first – a Eurozone collapse leads to a gold crash, and other commodities should feel the hurt too.

Euro vs Gold: http://www.hiddenlevers.com/hl/u?bAr2NQ

If you want to dig deeper, and find out what effect a European debt default could have on your stocks, try HiddenLevers: http://www.hiddenlevers.com/hl/u?9ICERE

Should I be worried about deflation or inflation right now?

It’s so weird out there right now – it seems deflation is happening in some areas, where inflation is happening in others. So no pundit has got it right.  My house is still losing value, and my NYC-LA non-stop plane ticket for Thanksgiving costs 219 usd. Food is more expensive these days, especially produce, and so is gas, so I’m definitely worried about the dollar.

If the dollar keeps losing value, you have to look for investments that do better from that economic trend.  Some of the staffing companies seem to be good hedges. The ones with the strongest inverse correlation to the US Dollar will fare best for inflation. Here are a few:

Korn/Ferry Intl (KFY = decent) http://www.hiddenlevers.com/hl/u?bLuw9U

TrueBlue Inc (TBI = decent) http://www.hiddenlevers.com/hl/u?9SoVeZ

ExlService Holdings Inc (EXLS = decent) http://www.hiddenlevers.com/hl/u?cOAAKa

Kelly Services (KELYA = awesome) http://www.hiddenlevers.com/hl/u?bauXEQ

51Job (JOBS = awesome) http://www.hiddenlevers.com/hl/u?djn5IW

Asia and quantitative easing

Central bankers in Asia feel double-crossed by the Fed’s plans for quantitative easing. A few weeks after G20 member pledges not to devalue currencies in order to spur growth, the United States is doing just that. Even more worrisome are the fears of surging capital inflows into emerging markets causing bubbles to develop in several sectors. Here is glimpse of what a Real Estate bubble bursting in Beijing would look like.

Chinese Real Estate Crash Scenario- http://www.hiddenlevers.com/hl/u?bUiJCM

A recession in China, would nix the global recovery altogether.

Ford leads as Auto Sales improve

Ford led the way for the US auto industry as it proved there’s still a pulse in Detroit. F should continue to be a performer as US auto sales look to rebound along with the economy as a whole. Check out F and US Auto Sales over the past year, a truly memorable synchronized swimming performance.

Ford vs US Auto Sales- http://www.hiddenlevers.com/hl/u?b3Jrpe

 

Fed’s QE2 gives me the willies

Now that the election is over, let’s see if we can take a step forward. For the last three months, we’ve been living in a Tale of Two Cities. We’re coming off one of the strongest rallies in history, yet struggling with the worst unemployment levels in 25 years.  We’ll see what the Fed has to say, but I’m scared quantitative easing is going to trigger runaway inflation.

Here is what we are up against:

S&P vs Unemployment - http://www.hiddenlevers.com/hl/u?8XpAUi

Economic impact of quantitative easing- http://www.hiddenlevers.com/hl/u?aOUL7k

 

Pfizer 70% profit drop = blip

Pfizer announced that its profits fell 70% due to Wyeth acquisition costs from last year, and some asbestos blah blah blah.

That 70% profit drop will definitely sell a lot of newspapers, but know this – Pfizer’s hiccups over the past year are an anomaly due to the Wyeth acquisition. If you want to see what makes Pfizer tick in the long term, you needn’t look any further than Healthcare

Inflation data: http://www.hiddenlevers.com/hl/u?ajNPqp

So wherever you think Healthcare Inflation is going, that gives you a much better idea of long-term prospects for Pfizer than an earnings report.