Rather than taking a novelistic approach to this article, I will make my bullish case for coal investments through the use of visual aids. In addition to all of these data series, my view as a monetarist is that commodities are generally a very sound investment and a proven inflation hedge. Just today, the Fed announced another round of quantitative easing, which further supports the overarching

Since the QE3 announcement, equity markets have struggled as we approach the deadline for resolution of the tax cut and benefit extensions decided by Congress (the fiscal cliff). Fiscally, a sudden move toward balancing the budget would almost necessarily be a drag on GDP. The view of optimists is that some sort of compromise can be reached, where the effects of policies to reduce outlays and increase tax revenues can be achieved in a balanced and gradual way to avoid jolting the economy into recession.

From a trader's perspective, I would grow increasingly concerned as the deadline approaches if a deal still appears out of reach. A failure to compromise could result in a very similar scene to the debt ceiling circus of August 2011 -- causing dramatic movements lower in stocks. Either way, we know this:

1. The outcome will have an impact on markets.
2. It is an event, and

On September 13, at the FOMC meeting, the Fed announced another round of quantitative easing. Quantitative easing is the process where the FOMC purchases bonds on the open market in an attempt to stimulate the economy. Below are excerpts from the announcement:

On September 13, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to begin purchasing additional agency mortgage-backed securities (MBS) at a pace of $40 billion per month. The FOMC also directed the Desk to continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities as announced in June and to maintain its existing policy of reinvesting principal payments from the Federal Reserve's holdings of agency debt and agency MBS in agency MBS.

The FOMC noted that these actions, which together will increase the

Volatility can be a portfolio manager's best friend when understood and used correctly. A grasp of historical and implied volatility enables traders and portfolio managers to take calculated risks on their underlying investments. Based on a number of observations, I think being long volatility would be wise at the moment. Additionally the second derivative of volatility also looks inexpensive, and could serve as perhaps the cheapest broad-market hedge today.

First a brief background on historic vs. implied volatility. Historic volatility is a path-dependent measure of a stock's daily variance. The more returns deviate from 0 on a daily basis, the higher your measure of historic volatility will be. Typically volatility will be calculated based on these daily returns and then scaled by the square root number of days for the X-day volatility (shown to be somewhat inefficient, but I digress).

Implied volatility is based on prices in the options market.

A very commonly cited valuation metric is the stock market's P/E ratio. It describes the price of stocks relative to their earnings. A recent article by economist John Huston brings attention to a different way of measuring the price of stocks. It compares the P/E with the yield one can receive on a 10-year Treasury note. The ratio proposed is i*(p/e), where i is the yield on the 10-year bond. This ratio adds yield to measure the relative attractiveness of bonds vs. equities. As a matter of behavioral indifference, this ratio is proposed to signal equilibrium when it is at its mean which should be constant throughout time. Other than our own irrational behavior, are there fundamental forces that could cause this metric to drift?

Before examining the possibilities, a fundamental illustration of the relationship and the theory behind it:

It is supposed that equilibrium in this metric is

Financial attention remains on the EZ, and understandably so, as debt runs have caused turmoil in sovereign paper from the much of the continent. However, a fundamental distinction should be made clear to those following the crisis. The crisis's original cause was trade imbalances within a fixed-rated currency regime, not total debt.

A very simple observation is that debt becomes an issue only if you fear the counterparty will not be able to pay you back eventually. High debt-to-GDP ratios, persistently negative trade balances, and a uniform rate currency regime have put deficit EU countries under scrutiny. The fear is that trade deficits may be irreversible when debtor nations are not allowed to unilaterally issue (devalue) their own currency.

Is all austerity self-defeating and hopeless? Can these countries reverse their trade balances while remaining on the euro? We can analyze trade data from the WTO to see if there are

With all of the media attention focused on the European debt saga over the past weeks (substitute: months, years), it is easy to lose perspective of the big picture. As the domestic stock market has thrived relative to those globally over the past 18 months, I continue to question the merits of the outperformance. One of the most fundamental relationships of the modern economy is the tie between the amount of energy a country consumes and their GDP.

(click to enlarge)

Shown above is a linear regression of PPP-adjusted GDP against the number of barrels of oil consumed daily. For the regression I used countries that ranked in the top 20 for both statistics. As illustrated by the ~.93 R-squared figure, the amount of oil consumed by a country is an excellent way to predict their economic productivity. The relationship is intuitive and could also be illustrated by time-series

Often within the context of investing, I find it is appropriate to ask the question, "Are you sure?"

The market seems sure of the investment implications of China's downwardly revised GDP estimate for 2012 of +7.5% (from 8.0%). Well I am not. The action has been long anticipated, so too have its effects - commodity prices have been under pressure for months. While this market impact is likely warranted to a degree, it seems other possible outcomes of slowing Chinese GDP growth have been ignored.

An alternate view of the downgrade is that China sees its exports to Europe and America taking a large hit in 2012. In this article, I will analyze the strength of this argument and offer investment considerations to those who share this view.

As recently as 2010 exports have comprised roughly 30% of Chinese GDP according to the World Bank. By outspoken, China bear,

Markets shot higher on the heels of a couple of very significant news items today - China's decision to decrease reserve requirements and the coordinated action taken by the Fed, ECB, BoJ, BoE, Bank of Canada and Bank of Switzerland to lower dollar swap lines from 1% to .5%.

I will focus this post on the lowering of dollar swap lines.

Here is the a blurb from the Fed press release:

The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal

Markets rise and fall based on money flow. If money is coming into an asset class at a faster pace than it is leaving, over a long period of time, returns for that asset are going to positive relative to others. While GDP is the most frequently cited economic measure in predicting the net money flow of the market, there are some data series that would suggest a much bleaker picture of projected money flows into equities in the upcoming months and years. (Click charts to enlarge.)

First, M1 money supply. As you can see from the chart above, there has been a recent upward spike in this measure. M1 is, for lack of a better phrasing, the amount of liquid cash available to consumers. The significance of this recent rise could be explained effectively mainly by any combination of three factors. Either banks started lending more aggressively,

Typically, as the market rises the VIX drops and visa versa. A more ambiguious relationship is the relationship between the volatility of volatility and the market.

Here are some observations I stumbled across (as of roughly 1:30 9/15/11).

Implied volatility from the cost of VIX options is now more than double historic volatility based on the past 30 days. Because the implied volatility of the VIX is still relatively high, the observed gap is probably mostly based on how unprecedented the types of moves in volatility we saw in August. For calculated volatility to continue to stay at this level, the broad market would need to make an even less precedented move than the one we saw in August. The head-scratchingly cheap volatility observed leading into the measured period - in July, the VIX closed below 20 on 13/20 trading days - set the stage for this explosion in calculated

On August 8, 2011, I posted this StockTalk:

Panic if both Treasuries and Markets sell, and sell hard. Not the case right now, would seem a buying opportunity.

The correlation between Treasuries and the broad market has been pretty well documented. When people sell stocks, much of the money is often reallocated into Treasuries, sending their rates lower. This is commonly referred to as the "risk-off trade". I decided to take a closer look at this concept, and how well it is holding up in the recent sell-off to determine if I needed to revise my stance.

First, I calculated the beta of the SPY with respect to the Inverse of the iShares 20 Year Treasury Trust ETF (TLT). To do this I looked at YTD daily returns of the SPY, and YTD inverse daily returns of the the TLT. To get the best beta number possible, I decided

One of the more interesting single-stock stories in the market today is the situation involving the transfer of control of Yahoo's (YHOO) private investment in Chinese payment processing company Alipay. Investors were blindsided a couple weeks ago by this announcement, and Yahoo shares sold off accordingly. Even people close to the situation will tell you it's confusing, as Chinese government regulation and the ownership right of the private investment seem to be clashing in a toe-to-toe battle.

This week it was announced that the situation had been resolved behind closed doors. We are only left to speculate on the terms of the resolution, but with an announcement clarifying the situation seemingly imminent, we should expect the options market to be pricing in a market reaction to the circumstances.

As you can see from the chart, historic and implied volatility have actually converged recently. I believe the low

The unusally cold winter in the southeastern United States has been well documented. I see two possible effects if this unusally bad weather is to continue: a rise in orange juice prices and higher heating costs.

I have a way to profit on the latter - AGL Resources (AGL). AGL is an Atlanta-based energy company that provides natural gas to people in that area. If these low temperatures persist, they stand to benefit from the increased energy consumption in this area of the country.

Aside from being a speculative proxy for weather in the southeast, there are several other reasons to be excited about the prospects for this stock in 2011. First, capture the upside of a move higher in natural gas. If there is (ever) a move higher in natural gas the company should be able to increase their own service costs and help their margins. I know, natural

Green Mountain Coffee faces more significant headwinds than rising coffee prices. In a past article, http://seekingalpha.com/article/224931-why-it-s-a-great-time-to-short-starbucks, I made the case for rising commodity prices and weakness of the domestic consumer being good reasons to short Starbucks. I am willing to admit that I was wrong in that case (or maybe early), but the some of the same arguments can be applied to GMCR, and I stand behind the rationale I was using. In this instance though there are significant catalysts behind a more immediate downward move.

1. A class action securities fraud lawsuit has been filed against the company -

Here is the news headline:

NEW YORK, NY, Nov 08, 2010 (MARKETWIRE via COMTEX) -- A class action lawsuit was filed in the United States District Court for the District of Vermont on behalf of purchasers of Green Mountain Coffee Roasters, Inc. ("Green Mountain" or the "Company")

A fertilizer stock with a excellent growth rates and a P/E multiple of 10? Sign me up. That is exactly why I recent bought calls on China Agritech (CAGC).

Food prices have been a tear lately, but can they continue the momentum? I think they can. The drought in Russia has been quite well documented, but for much of 2010 the perceived strength of the U.S. Harvest has helped offset this weakness. Recent news about the U.S. Rice harvest may exacerbate the rise in food prices, and consequently, fertilizers.

Below is a chart of the DBA which is an ETF which tracks the prices of agricultural commodities. As you can see, on a longer term basis, we are in the midst of a gap reversal. Technically, it should be pretty clear sailing until about $33, which was a stopping point on the way down from the highs off the bubble.

The market performance of 2010 has been dizzying to say the least. The obvious run-away freight train trends of the past three years don't seem to be present in this new decade. With a glancing analysis one can tell that the real economy is equally tumultuous. While the domestic economic recovery has been sluggish by any measure, Asian economies continue to grow at a great pace and drive export growth (see here) and it seems markets are finally beginning to acknowledge this leadership. Notable ETFs have been making 52 week highs recently (IFN, PGJ). Can this continue or will markets go back to moving as pairs?

To answer, we need to analyze the strengths of each bull/bear argument.

First, let's look in the mirror. The biggest black cloud over the markets is unquestionably financial reform, and tepid movements in bank stocks (BAC, C, COF) have reflected this uncertainty. So

Uranium made a high of ~$150/LB in 2007, since then price has collapsed and struggled to gain any sort of positive price momentum. Now there appear to be several catalysts for a major trend reversal.

First and most interesting: Last week, USEC (USU) released a report that they have converted the equivalent of 16,000 nuclear warheads into usable fuel for nuclear plants. Those 16,000 nukes represent about 400 metric tons. They also said the program intends to convert 20,000 by 2013. That means they have already converted 80% of what Russian intends to return to the uranium market. Article attached here.

Even if you can't trust the target of 20,000, there is no denying that 16,000 nuclear warheads being recycled is quite significant. There are some disputes about the totals held by Russia, and they did say "the equivalent of", so some of the recycled uranium may already be

Agriculture prices surging and a weak domestic labor market are two macroeconomic themes that are not going away anytime soon. Being the case, why not kill two birds with one stone?

Yes, that's right. I'm suggesting shorting Starbucks (SBUX).

From the November 2008 low to the June 2010 high SBUX made a 400% move. To me this is a headscratcher. Currently SBUX is trading a a ~21 PE multiple. Most of its competitors in the coffee and fast food industry are around 15. This is all in an enviroment where U.S. consumers are looking for less expensive alternatives.

Was the move in SBUX partially propelled by soft coffee prices? Sure. But you can bet that that is over now. I've learned that trends are very tough to fight in commodities markets, and now coffee prices are surging. Additionally with the massive monetary stimuluses and increasing meat consumption in China and