For the fifth week in a row, M2 has shown growth. And the rate of growth continues to accelerate.
The preliminary December 20th measure stood at $8.834 trillion. Annualized M2 growth over the past 13 weeks was 6.9% vs. annualized growth of 5.9% and 3.2% for the past 26 and 52 weeks.
These numbers are precisely what one would expect of an economy on the rebound. Treasury bonds rebounded slightly from their recent, sharp sell-off, but they continue to offer little value at current levels given the prospects for corporate earnings growth and, unfortunately, future inflation.
Friday, December 31, 2010
Thursday, December 23, 2010
Tonight's Money Supply Report
Yet another bullish money supply report has been released by the Fed this evening.
The preliminary December 13th measure stood at $8.829 trillion. Annualized M2 growth over the past 13 weeks was 6.8% vs. annualized growth of 5.7% and 3.2% for the past 26 and 52 weeks. All figures are pointing to an acceleration of M2.
The easy money has already been made shorting Treasuries, although downside risk remains. These numbers also bolster my believe that GDP growth for 2011 will accelerate, taking corporate profitability along with it. With the S&P up 37% over the past six months, investors may give pause to driving that index to new heights. But the S&P remains fundamentally undervalued, given the prospects for year-ahead earnings growth.
The preliminary December 13th measure stood at $8.829 trillion. Annualized M2 growth over the past 13 weeks was 6.8% vs. annualized growth of 5.7% and 3.2% for the past 26 and 52 weeks. All figures are pointing to an acceleration of M2.
The easy money has already been made shorting Treasuries, although downside risk remains. These numbers also bolster my believe that GDP growth for 2011 will accelerate, taking corporate profitability along with it. With the S&P up 37% over the past six months, investors may give pause to driving that index to new heights. But the S&P remains fundamentally undervalued, given the prospects for year-ahead earnings growth.
S&P Raises Forward Earnings Estimates Again
As of December 21st, Standard and Poor's current operating earnings estimates for the S&P 500 across the next four quarters (4th quarter 2010 through 3rd quarter 2011) are now 91.42. This compares to their previous estimate for the same period, released November 23rd, of 90.99.
As the prospects for more vigorous economic growth in the year ahead improve, I expect to see additional improvements to their earnings estimates.
Despite trading at multi-year highs now, the S&P still remains relatively cheap, at least compared to bonds. (13.8x forward earnings for an earnings yield of 7 1/4% vs. the 10 Year T-Note yield of 3.35%) And yet we are beginning to see certain segments of the market where valuations have become unrealistic. Companies like Netflix and Salesforce.com trade at multiples that are wholly unsupported by their fundamentals. The "momentum" crowd seems intent upon pushing them to even higher, unsustainable prices. Still, as an asset class, stocks as a whole should deliver superior risk-adjusted returns for the next year or two.
As the prospects for more vigorous economic growth in the year ahead improve, I expect to see additional improvements to their earnings estimates.
Despite trading at multi-year highs now, the S&P still remains relatively cheap, at least compared to bonds. (13.8x forward earnings for an earnings yield of 7 1/4% vs. the 10 Year T-Note yield of 3.35%) And yet we are beginning to see certain segments of the market where valuations have become unrealistic. Companies like Netflix and Salesforce.com trade at multiples that are wholly unsupported by their fundamentals. The "momentum" crowd seems intent upon pushing them to even higher, unsustainable prices. Still, as an asset class, stocks as a whole should deliver superior risk-adjusted returns for the next year or two.
Thursday, December 16, 2010
Tonight's Money Supply Report
No surprises here. For another week, M2 showed incremental gains week over week.
The preliminary December 6th measure stood at $8.813 trillion. Annualized M2 growth over the past 13 weeks was 6.7% vs. annualized growth of 5.56% and 3.1% for the past 26 and 52 weeks.
The sell-off in bonds this week has been fairly spectacular. Therefore, I would not recommend anyone take new, short positions against the 30-Year Treasury Bond. I've closed out most of my own short positions against this security and would urge anyone else who's been short the past several months to consider locking in profits.
However, even at these prices, I would still recommend that investors avoid longer maturity Treasuries at this time.
The preliminary December 6th measure stood at $8.813 trillion. Annualized M2 growth over the past 13 weeks was 6.7% vs. annualized growth of 5.56% and 3.1% for the past 26 and 52 weeks.
The sell-off in bonds this week has been fairly spectacular. Therefore, I would not recommend anyone take new, short positions against the 30-Year Treasury Bond. I've closed out most of my own short positions against this security and would urge anyone else who's been short the past several months to consider locking in profits.
However, even at these prices, I would still recommend that investors avoid longer maturity Treasuries at this time.
Tuesday, December 14, 2010
Treasury Bonds In Deep Decline Today
With today's action in the Treasury bond market pits, where the March 30-Year Treasury futures are now under 120, anyone who is short might want to consider covering at least a portion of their position.
There is still no compelling reason to buy long-term Treasury bonds at these levels, but it's possible we'll see a bounce back into the low 120's that could be shorted before bonds resume their course to lower levels.
There is still no compelling reason to buy long-term Treasury bonds at these levels, but it's possible we'll see a bounce back into the low 120's that could be shorted before bonds resume their course to lower levels.
Monday, December 13, 2010
Is It Time to Short China?
If there's a common theme to the way I approach short selling, it's that I'm attracted to potential bubbles. We can debate whether or not gold is really in a bubble state. And I get that there is an argument to be made for being on the long side of the gold trade. But my attraction to shorting gold is a perception of a potential bubble there.
Similarly, I am getting this sense that China is in a bubble. What's more, their decision over the weekend not to raise their rates will only contribute to the formation of a bubble in their economy. Their real estate market is red hot, reminiscent in some ways of the real estate bubble we experienced here before the 2007/2008 bust. Their inflation is accelerating, though it may be unfair to focus on recent numbers as their always volatile food segment has been running around 10% recently. Still, their broader based inflation index continues to rise. Eventually, inflation in China must be addressed.
When it does get addressed, prices of Chinese financial assets are likely to decline as well.
There aren't many ways to take a short position against China, but one that's available to most investors in the United States is the iShares FTSE/Xinhau China 25 ETF (Symbol: FXI). Option contracts trade on this security, so if you're uncomfortable shorting the ETF's outright, put options are available to take a position against this index.
Similarly, I am getting this sense that China is in a bubble. What's more, their decision over the weekend not to raise their rates will only contribute to the formation of a bubble in their economy. Their real estate market is red hot, reminiscent in some ways of the real estate bubble we experienced here before the 2007/2008 bust. Their inflation is accelerating, though it may be unfair to focus on recent numbers as their always volatile food segment has been running around 10% recently. Still, their broader based inflation index continues to rise. Eventually, inflation in China must be addressed.
When it does get addressed, prices of Chinese financial assets are likely to decline as well.
There aren't many ways to take a short position against China, but one that's available to most investors in the United States is the iShares FTSE/Xinhau China 25 ETF (Symbol: FXI). Option contracts trade on this security, so if you're uncomfortable shorting the ETF's outright, put options are available to take a position against this index.
Thursday, December 9, 2010
Tonight's Money Supply Report
M2 continues to accelerate in the most recent money supply report released by the Federal Reserve tonight.
The preliminary November 29th measure stood at $8.812 trillion. Annualized M2 growth over the past 13 weeks was 6.6% vs. annualized growth of 5.5% and 3.1% for the past 26 and 52 weeks. This numbers shows a slight acceleration against last week's money supply report, but weekly fluctuations are typical.
However, the numbers do seem to suggest that the Fed's efforts to reflate are succeeding. Hopefully the current round of quantitative easing efforts will be reconsidered or abandoned altogether.
The preliminary November 29th measure stood at $8.812 trillion. Annualized M2 growth over the past 13 weeks was 6.6% vs. annualized growth of 5.5% and 3.1% for the past 26 and 52 weeks. This numbers shows a slight acceleration against last week's money supply report, but weekly fluctuations are typical.
However, the numbers do seem to suggest that the Fed's efforts to reflate are succeeding. Hopefully the current round of quantitative easing efforts will be reconsidered or abandoned altogether.
Wednesday, December 8, 2010
Why Bonds Are Tanking
Yesterday's sell-off on the long-end of the Treasury yield-curve continues, with the 30-Year off nearly another point today.
Unfortunately, this sell-off has been accompanied by headlines pinning the blame on the tax cut deal that was negotiated between the President and Republicans in Congress. Specifically, the stories behind these headlines tend to state that this tax cut deal will increase the Federal budget deficit, therefore making Treasury Bonds less attractive.
It won't.
Just as the 2003 Tax Cuts resulted in a sharp increase in Federal receipts from personal income taxes, especially from the wealthy, this current tax cut deal is going to pave the way for a new recovery in Form 1040 receipts as well. Unfortunately, we won't see the data for 2011 and 2012 Federal tax receipts for another five years. That is the downside to tax policy analysis; it can take years to see the cumulative effect of taxation on people's behavior.
The real reason that bonds are tanking now has to do with the prospects for economic growth and corporate profitability going forward. With the uncertainty of tax policy behind us, and an abandonment of a really bad, anti-growth agenda in the form of letting those 2003 Tax Cuts expire, businesses and entrepreneurs will focus more on being productive. The effects of this phenomenon should start showing up in the GDP numbers by the 2nd half of 2011.
How does that affect bonds? Bonds, as a financial investment, must compete with every other asset category. When economic growth and corporate profitability is anemic, bonds become more attractive. However, with the prospect of renewed economic growth over the next two years, common stocks become more attractive as an asset category. That relative attractiveness draws capital away from the bond market.
For most of three years now, the 30-year Treasury Bond has traded with yields in the low 4s%. This is great if you're a new homebuyer with decent credit, as it's afforded home owners the ability to finance, and refinance, fixed rate mortgages at the lowest rates seen in generations. But this is not good news if you need the economy to grow at a faster pace. And collectively, we need that growth if we're to ever address the coming demographic nightmare known as Social Security and Medicare.
SPGlobal currently estimates that corporate profitability will grow by 15% over the coming year. I now suspect that actual growth will exceed their estimate. It'll be great news for stocks.
But it's not going to be a fun ride for bonds.
Unfortunately, this sell-off has been accompanied by headlines pinning the blame on the tax cut deal that was negotiated between the President and Republicans in Congress. Specifically, the stories behind these headlines tend to state that this tax cut deal will increase the Federal budget deficit, therefore making Treasury Bonds less attractive.
It won't.
Just as the 2003 Tax Cuts resulted in a sharp increase in Federal receipts from personal income taxes, especially from the wealthy, this current tax cut deal is going to pave the way for a new recovery in Form 1040 receipts as well. Unfortunately, we won't see the data for 2011 and 2012 Federal tax receipts for another five years. That is the downside to tax policy analysis; it can take years to see the cumulative effect of taxation on people's behavior.
The real reason that bonds are tanking now has to do with the prospects for economic growth and corporate profitability going forward. With the uncertainty of tax policy behind us, and an abandonment of a really bad, anti-growth agenda in the form of letting those 2003 Tax Cuts expire, businesses and entrepreneurs will focus more on being productive. The effects of this phenomenon should start showing up in the GDP numbers by the 2nd half of 2011.
How does that affect bonds? Bonds, as a financial investment, must compete with every other asset category. When economic growth and corporate profitability is anemic, bonds become more attractive. However, with the prospect of renewed economic growth over the next two years, common stocks become more attractive as an asset category. That relative attractiveness draws capital away from the bond market.
For most of three years now, the 30-year Treasury Bond has traded with yields in the low 4s%. This is great if you're a new homebuyer with decent credit, as it's afforded home owners the ability to finance, and refinance, fixed rate mortgages at the lowest rates seen in generations. But this is not good news if you need the economy to grow at a faster pace. And collectively, we need that growth if we're to ever address the coming demographic nightmare known as Social Security and Medicare.
SPGlobal currently estimates that corporate profitability will grow by 15% over the coming year. I now suspect that actual growth will exceed their estimate. It'll be great news for stocks.
But it's not going to be a fun ride for bonds.
Tuesday, December 7, 2010
Horrible Day for Bonds
This is pretty brutal. It's nearly two years since I've seen a day like this.
And I fear there is worse to come.
And I fear there is worse to come.
Sunday, December 5, 2010
Is It Time to Short Gold?
The case for gold is compelling. The Federal Reserve is in the midst of a reflation cycle which, by the signs of life in M2 growth, appear to be gaining traction. The Euro zone is in free-fall. The Chinese are hoarding the stuff. And the North Koreans are threatening to blow up the world.
Unfortunately, from a purely objective angle, there is no way to come up with a "fundamental" value for gold. It has some utility in a number of industrial and consumer applications, but for the most part it is used as a "store" of value. That value, of course, being dependent solely upon what someone else in the future might be willing to pay later for that store of value.
There are some interesting historical ratios that merit watching. By virtue of their being global commodities which otherwise tend to move in tandem, the gold-to-oil ratio has some utility in deciding whether gold might be overvalued relative to crude. At Friday's prices, that ratio is just under 16, which is not extreme by historic norms. The flaw in the gold-oil ratio is that nearly every barrel of oil ever extracted from the earth was consumed, whereas nearly every ounce of gold ever mined during the history of mankind remains in our global inventory.
But the real case against gold is the fervor amongst gold investors and the outlets that have appeared to tap into investors who've become disillusioned with stocks and bonds. Gold is now the "can't-miss" investment, with a current year-to-date return of 19.4%, a one-year return of 29.4%, and a three-year return of 76.4%. That kind of historic performance tends to attract new investors to an asset.
Unfortunately, that type of investor tends to be a "late to the party" type of investor. And as we saw with past "can't-miss" investments, like tech stocks in the late '90's and real estate in 2007, those "late to the party" investors are the ones who get hammered the worst when markets ultimately corrected.
So how much higher can gold? Unknown. Gold trades purely on psychology and there's no reasonable way to estimate how much higher it'll go before it corrects. $2000/oz would be a surprise, but hardly shocking. Nor is there any way to forecast how low it'll go once the enthusiasm for the metal wanes. As for an historic perspective, in 1980, after trading at $850/oz in January, gold would trade at $484/oz less than two months later, a 43% drop.
While most of the new instruments used to trade gold are intended to give investors the ability to take long positions, they've also opened up some opportunities for investors with the willingness and ability to take a position against gold. The SPDR Gold Shares ETF, symbol GLD, has been around since late 2004, and options trade on these shares. As of Friday, the December 2011, $100 put on GLD was offered at $2. A 40% correction would send the GLD shares below $83. Chances are those $100 puts will expire worthless, but their potential to generate huge gains in the face of a sharp sell-off in gold is intriguing.
Investors with a stomach for volatility might want to consider shorting a deep in-the-money call option against GLD. This could be a rough ride and there is bound to be some more price volatility in the days, weeks, and months ahead, but barring some cataclysmic geopolitical disaster, gold prices will probably cool off, rewarding those investors who had the guts to bet against the crowd.
Unfortunately, from a purely objective angle, there is no way to come up with a "fundamental" value for gold. It has some utility in a number of industrial and consumer applications, but for the most part it is used as a "store" of value. That value, of course, being dependent solely upon what someone else in the future might be willing to pay later for that store of value.
There are some interesting historical ratios that merit watching. By virtue of their being global commodities which otherwise tend to move in tandem, the gold-to-oil ratio has some utility in deciding whether gold might be overvalued relative to crude. At Friday's prices, that ratio is just under 16, which is not extreme by historic norms. The flaw in the gold-oil ratio is that nearly every barrel of oil ever extracted from the earth was consumed, whereas nearly every ounce of gold ever mined during the history of mankind remains in our global inventory.
But the real case against gold is the fervor amongst gold investors and the outlets that have appeared to tap into investors who've become disillusioned with stocks and bonds. Gold is now the "can't-miss" investment, with a current year-to-date return of 19.4%, a one-year return of 29.4%, and a three-year return of 76.4%. That kind of historic performance tends to attract new investors to an asset.
Unfortunately, that type of investor tends to be a "late to the party" type of investor. And as we saw with past "can't-miss" investments, like tech stocks in the late '90's and real estate in 2007, those "late to the party" investors are the ones who get hammered the worst when markets ultimately corrected.
So how much higher can gold? Unknown. Gold trades purely on psychology and there's no reasonable way to estimate how much higher it'll go before it corrects. $2000/oz would be a surprise, but hardly shocking. Nor is there any way to forecast how low it'll go once the enthusiasm for the metal wanes. As for an historic perspective, in 1980, after trading at $850/oz in January, gold would trade at $484/oz less than two months later, a 43% drop.
While most of the new instruments used to trade gold are intended to give investors the ability to take long positions, they've also opened up some opportunities for investors with the willingness and ability to take a position against gold. The SPDR Gold Shares ETF, symbol GLD, has been around since late 2004, and options trade on these shares. As of Friday, the December 2011, $100 put on GLD was offered at $2. A 40% correction would send the GLD shares below $83. Chances are those $100 puts will expire worthless, but their potential to generate huge gains in the face of a sharp sell-off in gold is intriguing.
Investors with a stomach for volatility might want to consider shorting a deep in-the-money call option against GLD. This could be a rough ride and there is bound to be some more price volatility in the days, weeks, and months ahead, but barring some cataclysmic geopolitical disaster, gold prices will probably cool off, rewarding those investors who had the guts to bet against the crowd.
Thursday, December 2, 2010
Tonight's Money Supply Report
M2 continues to accelerate in the most recent money supply report released by the Federal Reserve tonight.
The preliminary November 22nd measure stood at $8.809 trillion. Annualized M2 growth over the past 13 weeks was 6.4% vs. annualized growth of 5.3% and 3.1% for the past 26 and 52 weeks.
As a leading economic indicator, these numbers bode well for GDP growth (and corporate profitability growth) into the near-term future. However, these numbers are not good news for bond investors. The 30-year Treasury Bond has already fallen 6% from its October highs. Worse losses await if this trend in money supply growth continues.
At this time, most investors should avoid Treasury bond purchases and speculative investors may want to consider a short position in these securities.
The preliminary November 22nd measure stood at $8.809 trillion. Annualized M2 growth over the past 13 weeks was 6.4% vs. annualized growth of 5.3% and 3.1% for the past 26 and 52 weeks.
As a leading economic indicator, these numbers bode well for GDP growth (and corporate profitability growth) into the near-term future. However, these numbers are not good news for bond investors. The 30-year Treasury Bond has already fallen 6% from its October highs. Worse losses await if this trend in money supply growth continues.
At this time, most investors should avoid Treasury bond purchases and speculative investors may want to consider a short position in these securities.
Current Year-Ahead Earnings Estimates from S&P
As of November 23rd, Standard and Poor's current operating earnings estimates for the S&P 500 across the next four quarters (4th quarter 2010 through 3rd quarter 2011) are 90.99.
For the four quarters, 4th quarter 2009 through 3rd quarter 2010 (with 99% of earnings reported for the last quarter), operating earnings were 78.87.
Expected year-ahead earnings growth: 15.4%
The current operating earnings report showed an increase of 99% from the previous year's operating earnings, but that included the fourth quarter of 2008, where operating earnings were a horrendous -0.09.
For the four quarters, 4th quarter 2009 through 3rd quarter 2010 (with 99% of earnings reported for the last quarter), operating earnings were 78.87.
Expected year-ahead earnings growth: 15.4%
The current operating earnings report showed an increase of 99% from the previous year's operating earnings, but that included the fourth quarter of 2008, where operating earnings were a horrendous -0.09.
Subscribe to:
Posts (Atom)