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Robert first tasted a passion for studying the economy during his participation in the National Fed Challenge, where he studied macro economic analysis and the inner workings of FOMC policy. He attended Clemson University and graduated with a B.S. in Business and Economics. After beginning his... More
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  • Recession or Socialism, Pick a Poison
     It’s becoming clearer by day that there is little sanity left in the realm that had once been hailed a “free market”. Traders suck up the “good news” of more QE from the Federal Reserve in the U.S., like a junky celebrating one more smack filled syringe he hopes will be soon smuggled into the rehab clinic by his big brother. How much longer can the lunacy persist?

    Money Thrown at the Problem

    Let’s review the facts, because it will have been two full years since Lehman in September and I think we all (myself included) need a bit of a reality check:

    U.S. Treasury

    - TARP = $700 billion USD to bail out the U.S. banking system through direct liquidity injections in U.S. banks

    - 2009 Government Stimulus = $787 billion USD; Subsidized government and private sector jobs, subsidized state and local services, 14% invested in infrastructure.

    - Unemployment Benefit Extensions = $120 billion USD; Eight (8) consecutive extensions of pay to unemployed.

    U.S. Federal Reserve

    - Total Long Term Treasury Debt Purchases (08/04/2010) = $753 billion USD; Fed bought 10+ year Treasury notes at auction to support demand for U.S. debt, taking rising pressure off of mortgage rates.

    - Total Fannie & Freddie MBS Purchases (08/04/2010)  = $1.12 trillion USD; GSE Mortgage securitization  groups now state owned, as Fed swallows mortgages unfit to remain on GSE balance sheets.

    - Federal Funds Rate target at 0.13%; historically unprecedented quantitative easing, which has allowed mortgage rates to ease below 5% on 30-yr fixed products.

    When we add up the cash that has been dedicated to the sustainability of our financial market, and thus our economy, we see the following capital commitments:

    Treasury = $1.6 trillion

    The Fed = $1.87 trillion

    America’s Future

    It’s clear that if the Fed continues QE and the Treasury continues backing stimulus, the government will end up owning far more once private industries and the population will become dependent on anticompetitive subsidy rationing for survival. It’s been announced recently that over 4o million U.S. citizens are now on Food Stamps.

    The other route suggests an imminent recession. Should the Fed and Treasury go the “austerity” path, as Europe has chosen with the leadership of Germany’s cost cutting plan, the most likely outcome would be a recession and repricing of all assets to actual market values.

    The recession hurts more in the short term, but guarantees more robust long term growth, while the socialist-esque spending route will land us in an economic environment akin to somewhere in Western Europe.

    Of course the Fed is attempting to eat the cake and have it too, by a little slight of hand trick where they announced a reverse repo of MBS on their balance sheet, once abducted from Fannie and Freddie, where they will take money out of the financial system by reselling MBS contracts into the market. However, we don’t know which MBS packages are being sold and which aren’t. Do you see Benny Boy selling bad debt back onto the market? We can assume that the fed is in essence serving as a purifier of bad debt, where they buy the toxic material sort out the rare gems, and sell the good stuff back to the private banks.

    FOMC Tuesday

    The Street is hesitantly expecting Bernanke to announce some kind of further quantitative easing, which would look something like a resumption to the old MBS purchase program from the GSE’s, which was ended in March. For the Fed to end a QE program in March and resume it in August is more than a bit frightening to this analyst. The Street, of course, is cheering the potential assistance.

    If the FOMC Fed announcement tomorrow (Tuesday) includes specific promises of further QE we’ll see a short term rally. IF the FOMC continues to talk abut the economy’s “worse than anticipated” performance, but fails to outline any specific plan to stimulate through monetary policy, we will see as sell-off. In our view, any rally would be stopped cold at 1150 on the S&P 500, as a massive head and shoulders pattern comes to fruition.

    Happy Hunting

    Disclosure: Disclosure: Long SDS, Long VIX, Long GC (Gold Futures), Short XLF
    Aug 10 4:51 AM | Link | Comment!
  • "Ignorance is POLICITAL Bliss"

    The following is a response to the below linked article in The American Spectator
    , which I was asked to read by a close friend :

    "Ignorance is Liberal Bliss"

    Dear Friend,

    I apologize for taking some time to respond to your email concerning the article in the American Spectator, but I will say I wanted to wait until I had time to read the full article and respond to it in breadth.

    First, I like the title a lot, "ignorance is liberal bliss"... It's definitely witty. I know that you might expect for me to have taken a clear stance defending Barry, but I promise you I am very critical of Obama, Tiny Tim, and Benny Boy on a regular basis in my analysis of the U.S. economy. However, I also don't fit into the camp that lambastes liberals for their ignorant or economically unintelligent platforms.

    I'm the guy that hates the game, not the players. My article title might read, "Ignorance is Political Bliss (Referring to the Ignorance of the Constituents & Representatives if Any Are to Remain in Office)". I think that this is the stance of most young people these days, but unlike most I have reasons for my stance. Perhaps the slogan of the juniors in my demographic, should read "Ignorance, Youth, Unemployment and Engaged to be Married is Bliss"... That seems to be the route many of my peers are championing.

    Before raising my flag and claiming ground here, I'd like to bring up this quote again (I really like it):

    "In relation to social questions, the concept of an interdependent system has two important implications: that things are the way they are for some powerful reason or reasons, which have to be understood if effective social solutions are to be devised; and that any social solutions so devised and applied will have repercussions elsewhere, which will have to be faced and which ought to be taken into account."

    Basically, my takeaway from this is that (a) things are the way they are for a reason, and (b) when we screw around with those things, we're likely to change stuff we didn't want to in the process of reaching our goal. Furthermore, that other stuff (externalities) can be really frustrating and many times cause equal or greater damage than intended good. Now I realize the past +/- 15 months have been choppy, and that we are likely to re-enter a global recession. I think that the basic laws of physics are equally inherent in financial markets and global economies than any other field. The truth of our current global predicament is very simple and even more scary... THERE'S NO QUICK FIX! This is something that isn't even proposed behind closed door meetings with cabinets, administrations, and capital hill interns... It's the death sentence to any politician.

    I will concede that on average liberals can come off looking economically dumber than conservatives because they try to manipulate their spending plans mixed with smoke and mirror tax raising schemes. Nancy Pelosi aught to be shot between you and me... I'm fine with Mrs. Clinton jet setting around the world and doing photo ops, but I would sigh in relief if she were absent from the U.S. political spectrum. Barny Frank is clinically retarded... I've watched the tapes of Frank proposing all of the regulations that were enacted at Fannie and Freddie where they adopted higher caps on the percentage of Sub Prime ARM mortgages, which led to their decline. Then I also watched as he criticized the leaders of Fan and Fred for their devious management practices and poor risk awareness. So YES there are liberals who are more than guilty of Economic Retardation who still serve in office and probably will for years to come.

    Still there's a boatload of Republicans, mainly Congressmen, whose political platforms could also use a bit of waterboarding. The Republican strategy has worked very well so far, despite failing to block healthcare, which basically aims to block anything proposed by Obama or the Left and stay as far out of the spotlight as possible while doing so. Republicans come out to play whenever there's a batch of CEO's in industries uncommon among their constituents and give 'em a good lickin, but otherwise they are keeping their heads down and voting "no" to every bill. We'll see if it works in the midterm elections...

    Okay, now I hate to live in the past, but this quote SCREAMS President Bush...

    "Another important reason for the left's disregard for economic understanding is their almost exclusive focus on intentions rather than results."

    Coming from the guy who started a war in Iraq using incomplete evidence and leveraging the emotional fear of his country to band behind the effort. We've spent nearly a trillion bucks on Iraq, and during that period Bush lowered taxes. First time in modern history that's happened I believe. Now Bush was a feisty one, always liking to add hybrid minorities to his cabinet with conservative souls (i.e. Condy), but he did appoint Bernanke (The Jew From South Carolina). And his Treasury Secretary started this spending fiasco with 600 Billion USD TARP Fund.

    I understand WHY an economist with a conservative agenda would publish an article like this, because it's an easy target. Obama's in office and the National Debt is around 60% of GDP in the U.S., looking to reach 80% by 2035, and should we keep the Bush tax cuts we would reach 185% GDP by 2035 according to the Financial Times (

    Furthermore, U.S. States are all on the brink of bankruptcy. California, which is indeed a very liberal state, but has been managed by the Governator for the applicable past years, and is still in a state of disrepair.

    So my response is, "Yes for liberals [and conservatives] economic ignorance is bliss [in Washington]." I like what maybe 5% of politicians have to say and the rest is just noise. I really like a lot of what representatives from both of our states, Graham and McConnell, stand for, but am ashamed that they refuse to step outside party lines to pass effective legislature. The entire system is so damn ineffective.

    The moral of the story, which transcends the article in question, is that in economic recessions "career" politicians spend money. Conservatives spent money on TARP and liberals finished up with a stimulus. But I can guarantee that McCain would have enacted a stimulus plan. Sure tax cuts proposed by Mccain are by definition more efficient, but they're equally unsustainable, because we DO have deficit issues and the Bush tax cuts are IMPOSSIBLE to be made permanent, unless we pull out of the middle east and stop spending so much on Defense. Thus the same end game... the same results...

    It's not just W though, it's Clinton, Big Bush, the whole damn modern era that became founded on money made out of nothing and calling it the free market. We as a country have refused to believe that the charade will end. It's been going on for so long that we forgot what an honest wage felt like. Greed and Excess are the name of the game, and until we shut up and take our medicine to start fresh, we'll continue in the boom bust cycle.

    We would be right smack dab where we are at this moment under either political party, because the damage was already done when liberals took the reigns. I agree with the underlying argument of the article, that we should not mess with the free market economy. But we did. And this time it was Hank Paulson that started the merry go round that liberals now ride. No one is innocent and the potential devastation that waits around the bend will be merciless and unrelenting, because the global economy is refusing to concede defeat.

    The market is fair, most people are ignorant, and politicians are snakes.

    I hope this satisfies your query,


    Disclosure: Disclosure: No positiions
    Tags: Opinion
    Jul 02 11:54 PM | Link | Comment!
  • Trade Flash: Short S&P 500, Short Crude Oil, Long the VIX
    There are several positions we had been waiting for and on Friday the limits were hit and trades were placed. We are exceedingly confident about these three trades, and we feel that it's worth our readers' time to take a peak at where we're putting our cash. This "trade flash" will target those three trades.

    Trade: Long the VIX

    Time Horizon: 5-10 Trading Sessions

    We went long the VIX (CBOE Volatility Index) on Friday ahead of the Memorial Day weekend. Using a short term VIX tracking ETN from iPath, VXX, we bought shares at $28.50/shr and capitalized on a large pullback from the highs 3-5 sessions earlier.


    VXX (iPath S&P 500 VIX Short-Term Futures ETN), 1-yr chart on 05-28-10


    Trade: Short the S&P 500

    Time Horizon: 5-20 Trading Sessions

    For the first time in a LONG time it's becoming safe to bring on short positions relative to the S&P 500 equity index. The S&P 500 p/e ratio adjusted for inflation remains above 20 @ 21.13 as of Friday's S&P 500 close @ 1089, which suggests that the recent correction on the S&P has further to decline before it reaches fair value.


    SDS (ProShares Ultra-Short ETF), 6-mo Chart on 05-28-10


    While we don't feel comfortable going long the S&P 500 at any p/e level above 15, given the trend of rising interest rates, we understand that risk takers will re-enter the market at higher current p/e valuations. So we're recommending this play as a short term position (i.e. 1-4 weeks or until reaching our profit target). Using the ProShares Ultra Short S&P 500 ETF (NYSEARCA:SDS) we can get relatively liquid 2x inverse exposure to the S&P 500 (recently +50 million shares/day). While we're looking to capitalize on instability and unresolved risks in the EU, trading the SDS will give traders short exposure to a basket of U.S. equities and avoid short term fluctuations  in similar vehicles tied directly to the EU.

    Trade: Short Crude Oil

    Time Horizon: 5-15 Trading Sessions

    We made a call to short Crude at $79.69, calling a price target of $70 /brl for the WTI continuous spot price and we cashed out when the WTI price hit that level. After closing that position at a profit, our hunch was confirmed. The uptrend in inventories had fought the rumors of accelerating demand for gasoline and mediocre distillate consumption, and instead that macro-economic and geopolitical forces are now leading prices.


    WTI Continuous Crude Spot, 1-Yr Chart on 05-28-10


    You may notice that the MACD histogram would disagree with our position, however the flight from risk trade is back on and we are going against our technical instincts to put an opening stake into DTO at 75 bucks. We also have a buy trigger set at $80/shr which will give us short exposure when the WTI near month contract prices near the 50 day sma at $77.

    The European Confidence report and the Chinese Industrial Purchase Managers survey have added to uninspiring anecdotes concerning bond market weakness in the U.S., Europe, and China, to reassure us of our bearish positions here.

    Some readers will like none of these strategies, while others will find them all interesting at these levels. Remember to do your own research and by all means tell us why we are RIGHT or WRONG in the comment box below! 

    Disclosure: Disclosure: Long SDS, Long DTO, Long VXX
    Jun 02 11:34 AM | Link | Comment!
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