A Rotting Market Stinks from the Head 12 comments
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[Excerpted from Bill Cara's Week-in-Review]
In this Week In Review, I’ll look at the strength of the $USD and Treasury market and how the COMEX gold market seems to be setting up for a moon-shot. But more than anything, I want to re-address the fact that since the demise of Lehman Brothers in mid-September, the capital markets (ie, equities, fixed income, currencies and commodities) have become a crap-shoot.
As you know, after the close of the market on Wednesday November 19, I gave you the “Trade of the Generation" (TOG). I recommended selling bonds, and buying gold/goldminers. Amid the most extreme day to day volatility the capital markets have ever seen, that was a tough call, but one I believe in.
As one of the CTAB pro traders reported to me at the end of the week, consistent with my beliefs and trading instructions by the way, “If you put a gun to my head and said you only have one trade to make for the next year, I would short U.S. bonds. I have shorted them for CTAB, for my trading account, my retirement account, and my parent’s portfolio. That said, manias always go further and last longer than any sane person would imagine (can we say madness of crowds), so initial positions must be small.”
The 20-year US Treasury ETF (TLT) soared +4.5% this week, despite losing -1.6% on Friday. It was a tough week to be short bonds, but the crucial point I want to make is that pro traders study all aspects of the market, make clear-cut decisions expecting to be right maybe 75% of the time, and when wrong - will quickly cut their losses, while letting their profits run.
These principles are no different to what all traders should be doing. Unfortunately, emotions often get in the way, which separates the average person from a pro trader. Trading is very much like war where you want to be well-trained to go it alone as a guerrilla fighter or else go into combat with troops under the command and control of experts. If the outcome were understood 100% in advance, there would be few if any wars. In any war, there are casualties and lost battles. The objective is to win by managing the downside.
[From my March 29, 2006 blog]:
If I can make say a +5-pct gain in say two or three weeks, that's better than the typical risk-adjusted return that 98-pct of professional traders earn, and if I do that with frequency, then I'm going to stay in the top 5-pct of all pro traders. That's my goal.
Why am I writing this? Well, this was a pivotal week in capital markets. If you follow Point & Figure charts, there were a series of double and triple-bottom break-downs. Despite the fact that the $USD made no advance from Monday through Thursday, commodities were given the “royal flush”. Crude Oil ($WTIC) plunged -25.0% this week. $GOLD, $SILVER, +PLATINUM, $PALLADIUM and $COPPER plunged between -7.8% and -11.8%. The forex markets were in absolute turmoil with the Pound and Loonie plunging -4.6% and -2.7% while the Yen soared +3.1%. However, the Euro lifted +0.20% (can anybody explain that?) and the $USD did gain +0.47% W/W, of which +0.46% was the Friday move, which happened after most of the drop in commodity prices had happened.
Look through all these charts, including the bond market charts, since September 15, after the failure of Lehman Brothers, and ask yourself if capital markets are working. I’m not referring just to the drop in prices; look at the volatility. How can a large cap stock in a supposedly blue-chip company of say $20 billion go up in value +$5 billion in the space of a couple hours and then sink -$5 billion the following session?
The market is now a casino and this week, if you were long commodities when the week started, the dealer dealt himself a royal flush. As the $CRB commodities index plunged -13.9%, you are wiped out. If you were using 50% margin, your loss was close to -30% this week. Even if you had an un-margined position in the widely-held, big cap Energy sector (an ETF broadly based on the world’s largest oil companies), you are down -12.2% this week, and that’s after you took a gain of +2.1% on Friday.
You have every reason to be angry, not at the prices – you could have been short – but at the volatility, and the reasons for it. Wall Street and Washington are out of control. Close to US$700 billion is being injected into banks by the Federal Reserve Bank, and the head of the New York division of that bank – the one that deals with Wall Street – has just been appointed by President-elect Obama as the next Treasury Secretary. Given that no Senator, Congressman or newspaper reporter can get an answer as to their who, how, and why queries, the US Treasury is now in the hands of a Henry Paulson (ex-CEO and Chairman of Goldman Sachs) and his appointees, a specialist team from Goldman Sachs (GS).
Even in Canada, the Parliament was arbitrarily closed this week by the Prime Minister for an emergency period of seven weeks, leaving the nation’s business in the hands of the Bank of Canada, which is also now run by a Goldman Sachs Canada head, recently appointed.
Is it any wonder that the public is being whipped into a firestorm over a potential hoax called the Amero – something CNN news anchor Lou Dobbs believes will come to be – while Washington has now shifted their crosshairs on the Big 3 Detroit automakers?
Like you, I feel like some people in Washington and Wall Street are pulling my chain. I feel somewhat like a Platinum chart – priced today at 787.20; 50-Day Moving Average price at 888.38; and 200-Day MA at 1614.63. Tomorrow’s price? Who knows? Could be 700 or lower, or could be 1500 or higher.
How can anybody deal with that? CEOs can’t, as Michael Panzner wrote in his December 5 blog item, “Bad Moon Rising”.
In helping bail out their friends on Wall Street, I have to ask the question, is Washington trying to make this situation as bad as it can be?
In any case, it is what it is -- whatever that is. I’ll work through the numbers although at this point I really don’t know why. Aren’t we all just waiting for a break-out, and when it happens do any of us really believe there will be a forewarning?
If your name isn’t Paulson or Dimon, you are, as I say, out of the room; out of the deal. This is their casino, and like it or not they are doing everything they can to regain control.
A popular video on Wall Street this week was Win Smith (grandson of the co-founder) and former Chairman ripping into former Merrill Lynch CEO Stan O’Neal (who apparently had a quarter billion dollar buyout clause in his contract in the event of a control change). Smith lays the blame for the storied firm’s demise right at the feet of O’Neal and the Board of Directors he surrounded himself with.
O’Neal, Fuld, Paulson, Dimon, and gang; I think they all ought to be charged with treason, but then, as an observer, I have been known to get a little exercised when I see the public getting screwed. As a pro trader, however, I can’t get caught up in that stuff. I have to stick to my training, my experience, my self-control, and, like it or not, I have to make decisions, right or wrong.
I believe that every bone in my body is saying that long gold/goldminers and short bonds is the Trade of the Generation. I know what this means to Paulson, Dimon and the rest of the inside players in Washington and Wall Street, and I know their power, but I am not about to back off. I believe in myself too much to throw them the towel.
The most important point that Win Smith made, however, is management. Over the past couple years, some of you have been curious as to why I hammered away at selective management, and this is the reason.
In the wrap-up today, I get into the comments made by the CEO of Greycourt and by Seymour Schulich. These people know how a domineering individual can quickly change the entire culture of a major corporation. Just like you cannot blame the junior officers and non-commissioned officers for losing wars, the same can be said about any major company.
It is so true the saying that a rotting fish stinks from the head.
Getting back to this week; it was a tough one, but there are patches of blue sky that popped up on Friday amid the darkest economic and central bank reports in many generations. We all can hope. That’s what life’s about. Without it, we have none.
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This article has 12 comments:
jimrogers-investments....
Thanks for sharing this powerful explanation. I am also long gold/miners and short Treasuries, and for the exact reasons you describe.
Now I've got to find someone who can build a rational and supported case for the exact opposite. I'm still desperate to avoid "confirmation bias", but I understand and share the conviction with which you make your case. While my investment position is based on conviction, I remain open. I just haven't seen anything yet that comes close to convincing me to change.
Banks deleveraging process necessarily creates demand for Treasuries. How far are we through that ballgame? Also, the fed is going to buy long term treasuries to push down yield curve. Finally, we are going to lose another million jobs in the next four months.
That doesn't sound like Treasuries tanking to me. Good luck with your trade.
On Dec 08 06:13 AM usslbcgn9@earthlink.ne... wrote:
> Life would be great if there were no central banks,just a good old
> U.S. Bank that issued Money to Americans ,backed by Gold & Silver!
> But I can dream,cant I! I wish you would comment more on Comex &
> your feelings of the games they play!?
Welcome to deflation, which is a general erosion of prices across all asset classes, including precious metals. If the gold trade worked in this kind of environment, you would have seen it long before now.
How else do you explain the parabolic rally, while the 10-yr stayed flat?