Open Thread

This market tracks the US economy, the USA as a nation. Be prepared for one step up and one and one half steps back. We are a large economy and a large country…things do not change quickly (think erosion along an ocean or a leaky faucet in the kitchen sink or pollution of our lakes, streams and air.) Our ineffectual and selfish leadership in Washington, the corporate board rooms and on Wall Street makes one think that the punch bowl is deep and unlimited. Beware of excess hubris.

BRK/B UP in DOWN MARKET…PAAS down but on real lite volume lately…

kaiser, I don’t like silver as much as gold. I’m worried about it’s price’s dependence on industrial usage (which isn’t good with a global slowdown).

Its time for the market to head downnnnnnnnn………………………………… What happens if crazy n. Korea launches that missle ?

For me the most interesting aspect of this action is what’s going on in energy. Crude oil was supposed to be all pumped up with speculative fever and yet it’s still pushing $70.

Energy stocks on the other hand have intriguing if not compelling valuations at this point–aren’t a lot of these companies still being rated on $40 oil?–and yet XLE continues to get hammered. What’s up with that? Does everyone still think oil will be cut in half any minute now?

Also surprised at how thoroughly emerging markets got whacked. Maybe Roach is right in that while emerging market economies have been stuffing cash under the mattress to fight the last war (asian contagion), the new boogeyman that is about to whack them is the demise of the American consumer.

Another question is what the hell happened to hedge funds. I mean we know these guys are volatile as a group but the hedgies really turned out to have a glass jaw. All this VAR selling makes them look like a bunch of crybaby pansies. Or maybe they are doing the smart thing—John Hussman this week said that an S&P valuation of 700-800 in the next few years would be “reasonable.”

Overall I am impressed with how stupid and childish this market feels. For a while I had the impression that investors on the whole were getting more savvy. That goes right out the window; things are as kneejerk and goofball as ever. If Jesse Livermore were to walk into this market he’d probably say SSDD.

Of course, that’s just my opinion. I could be wrong. (Whatever happened to that guy anyway?)

I am very puzzled/confused with the inflation/deflation debate. Is the whole idea behind buying gold that it is a hedge against inflation? The key argument for deflation appears to be that due to globalization, there will be no wage-price upward spiral — what are the arguments against that?
Secondly, the folks at ECRI have said that current inflation numbers are a lagging indicator and do not tell us anything about where we are headed. Their future inflation gauge indicates that inflation has started to turn down and their long leading index of global economies indicates a slowing of the global economy in the second half which will reduce inflationary pressures (there is an interview on the Capital Spectator). So, is inflation really a problem in the coming months or is the Fed aware of this and is just talking tough to appease the markets?

Open – great.

Can anyone believe what Richard Fisher has to say about housing after that crazy “ninth inning” comment last year? I saw him on the screen with the mute button on and told my market-novice-wife the joke. She said, “must be extra innings, huh?”

I’m avoiding the metals for now. I can’t tell if they’ve bottomed. I have a small position in CAM and AMR that I’ll hold until they reach a 61.8- 78.6% Fib retracement of old highs.
I might go long an oil driller like TS, or refiner like VLO tomorrow. I also will add to my QQQQ position.

Emerging markets still look like a short to me – after a bounce. I shorted Russia, China, South Africa during that micro-bounce a couple of weeks ago. A rally could come at any time, but take a look at Japan’s monetary base – now down 15% yoy. Liquidity being withdrawn. Lots of (dumb?) money flowed into EM’s in Jan – April. Need more pain for this thing to be truely unwound. I am torn as to whether Barry is right on a signifigant rally b4 ultimate bottom. Maybe. But my massive reading of the blogosphere makes me believe this may be a consensus – maybe we wash out here.

Maybe maybe maybe – isn’t trading fun?

There’s a difference between getting angry at the market–and rationalizing unfavorable activity with epithets–vs recognizing the primary drivers of a situation.

Some say the market is always right. I prefer Soros’ notion that the market is always wrong. Though ideally one should have the flexibility to recognize that sometimes the market is right and sometimes it is wrong.

All that “one and done” chatter of a few weeks / months back, for example, was a clear example of the market being wrong. The collective euphoria associated with the dow’s early May breakout to highs was a case of the market being wrong.

Many who argue that the market is always right have emptied the phrase of meaning–if everything the market does is “right,” then the term becomes meaningless. Better to recognize that the collective view interprets things sometimes rightly… sometimes wrongly… and sometimes stupidly. The market is not the Dalai Lhama. The collective crowd consciousness can be downright moronic at times.

Agree, though, that information must be interrpeted strategically rather than emotionally to be useful.

I keep thinking about the bear market of 1973-1974. I think Barry’s referenced the 1973 collapse as his preference relative to the 1929 scenario …

There was a crazy bear market rally in the summer of 1973 … late August to late October … Every time I think its over-the-falls time, I take another look at that chart.

FWIW, I’m long DIA, BLS calls, 401(k) in cash

I believe he died in the mensroom of a bar in Detroit circa 1940. Supposedly his last words were, “What a wasted life’.

Had to mention something that has amazed me over the last month or so. We get a moderate market decline, just like all the many other moderate market declines that have happened in history, but the noise that seemed to go with it just seemed absolutely mad. It was as if it had never happened before or that next week we would be all lining up outside the poor house to get some kind of watery potato gruel and a hunk of stale bread. I am still shaking my head over some of the rabid analysis that was going on. We didnt even get to the down 10% mark for either the Dow or S&P and only just grabbed it for the Nas. It got me thinking about what kind of world we live in today. A world where s**t doesnt happen and if it does its always someone elses fault. Does anyone truly own their own decisions anymore. I great case in piont is how the market is obsessed………..obsessed with every word that comes out of any fed chairmans mouth. I think there was even a piont a few years ago that because Greenspan was basically saying the same things over and over that people began to analyse HOW he said those very same things. GET A LIFE.
As far as I know I live in a Universe that runs in cycles, everything goes up and down, everything. The sooner people realise this the better because the longer we try and keep this fairytale going the bigger the cliff we are going to fall off when market decides to correct itself in a real mans way.
Ahhh rant over, ulcers feeling better already. Now who can I offload those three houses I bought on to, I mean in any kind of normal world they should go up at least 20% a year, if the Fed would stop raising interest rates when they clearly dont have to.

mark-

good talk.

long DIA at 3:40 pm

People had a cow this correction because it was hard and fast. Forget about the indices. The indices you read about in the paper are likely going to be the bear market leaders. ie, The ones which hold up the best if we hit a protracted downside. Instead, look at some commodities, emerging markets and many of the mojo leaders in the US. People were overweight small caps, industrial metals, emerging markets and the China plays. They all hit about a 25-40% skid in a month. That is some serious pain and someone took an ass whoopin.

The indices have hidden much of the underlying blood bath for the mojo players.

BTW I AM A OIL TURD KINDA GUY. Patience. Oil is in a different place than the industrial metals. That fantasy is based on China growing at 5000% a year ad infinitum. Oil is also based on that argument but as well there are alot of peak oilers. (Although I’m not sure $10-20 oil is a reality for a long time if ever.) So, this sell off hit the Asian story the hardest. Oil is the new “pet” investment of traders. You will need more to shake them out. Oil markets globally have started to take it rather hard. They led the decline in oil stocks in the US. And stocks many times lead the prices of commodities. So, this might be a normal correction and buying opportunity or it might be the start of something bigger. IMO the traders will need to see the white of the eyes of a significant global slow down in progress before it tanks. ie, They will drive it until they crater the global economy with it. We are already at ten year highs in supply for both oil and gasoline. So, there is a large premium based on “risk” ie, traders speculating.

Don’t be fooled into thinking these oil stocks will hold up in a slow down just because oil is elevated and they have a PE of 10. The market is telling you something by giving them a PE of 10. It is telling you that their profits are NOT SUSTAINABLE and HIGHLY CYCLICAL. XOM lost 50% of its value in 74 even though oil stayed elevated. If China overheats, blows up, gives up the ghost or whatever, you’ll be bathing in oil. And wouldn’t that be nice to hear the Iranian kook shut the f*ck up because his oil balls are shriveling up. Although there is a part of me that wishes oil would stay high to spur long term innovation. I fear weak oil will reduce consumer enthusiasm for alternative energy over time as it has every cycle before. Remember, the DOE was created in 1977 to make sure we were never dependent on foreign oil again. 30 years later oil imparts are double what they were then.

I suspect that a lot of the consternation and confusion that many express and the rather odd behavior of global markets is because stagflation has already set in. I also suspect that many here are not old enough to understand what that really is in day to day terms rather than as a glossary entry in an econ book.

At heart, stagflation is concurrent inflation and deflation which I would say is worse than either component by itself simply because it is so difficult to figure out how to stop. The setup for stagflation is a budget deficit that is absurd, severe trade imbalances, an endless and expensive war, and a loss of faith in govt leadership- does this sound at all familiar if I throw in oil price escalation?

Once stagflation is in play, it brings with it general malaise. In a Corporate State, nothing will escape which is something of a twist on the last time that we walked into this when there was a nominal division between business and govt.

Re stagflation I thought Caroline Baum had a good observation the other day–one way in which the current environment is NOT like the 70s is that wage earners have a lot less pricing power these days.

With the pressure of global labor competition, it’s not like Joe Sixpack can demand a raise just because his cost of living is going up, and the unions that could do it for him in the old days have been gutted.

If the US consumer taps out and commodities stay crushed, where is inflation going to come from. Continued support of commodities via the China connection seems to depend on continued resilience of the western buyer. So maybe when Joe Sixpack goes down for the count, so does everything else, including inflationary pressures.

And then the liquidity desert puts a bunch of marginal hedgies out of business, and their unwinding depresses the market even further, and then we get the deflationary death spiral threat that gives Ben a primo excuse to put that old printing press speech to use.

But if that’s the scenario it’s more of a slowdown to deflation to hail mary super-stimulus kinda theme, rather than a 70s replay.

anyone read martin pring’s piece on the s&p today on “the street”? rather exceptional conditions being violated. pretty compelling chart. anyone see any holes in the research?

http://www.thestreet.com/p/rmoney/technicalanalysis/10292480.html

per Trader75:

“Re stagflation I thought Caroline Baum had a good observation the other day–one way in which the current environment is NOT like the 70s is that wage earners have a lot less pricing power these days.”

True enough, “wage earners” now are mere coolies. But she necessarily subsumes that stagflation in the 70s was primarily brought on by wage escalation when the underlying cause was years of unfunded govt spending together with the oil embargo. So it is not the same and I would say it is worse since we no longer have a robust middle class and can no longer expect anyone to line up with us out of self interest when push comes to shove.

What’s going to happen when the Chinese say they are going to take back Taiwan and we say no? And then they say fine, no exports until you change your mind. Where are all of those WalMartians going to go to buy anything after the 45 day JIT supply chain is empty? What about all of the other retailers who have sold themselves out to the Chinese?

One of my favorite blogs.

Since todays action was blamed on the builders sentiment numbers it brings to mind bubbles.

I have said it here before. I have been an active participant in several bubbles and a few ass kickings. I decided that I not only wanted to be able to avoid the next one but make some money off of it. To somehow rise above the irrational behaviors.

I have been a believer for over a year that residential housing is a bubble market. That at some point prices will have to not only peak but decline. Most likely a regression to the mean will occur.

I know that now I have incurred the wrath of dozens of staunch advocates of real estate. The issue does get confusing. Is the recent slowdown due to the Feds actions in tightening. Is it simply an issue of some markets rose too fast and are experiencing a brief pause. There are some areas that are still seeing price increases doesn’t that mean that all is okay. The dozens of investment advisors that are calling a buy on home builders because their P/E’s are ridiculously low. I have seen all the charts and graphs. Housing as a percent of GDP or of real wages etc.

I am not an economist or anyone with any special educational background. However, if this is a bubble.

All of the charts and graphs and data will end up being wrong. (usually because they end up being based on false assumptions)

P/E’s of 6 will turn out to have been perfectly normal. As in the P/E will be 6 in two years from now but the E will be way smaller than today and so therefore will the stock price.

I don’t know that it is really very easy to predict when a bubble will end. I just know from the last few that I followed that when they do, there is a price to pay. The event will have to have an affect on the economy and probably a substantial one.

I have had some puts on the industry for several months now and have had some nice returns of course. I think the bigger issue is that I am going to make sure that all my investment choices from here on out, keep this issue in mind as well. That I will be somehow hedged against a general shift in housing sentiment and the downward force that would put on most of the markets.

VL? WTF??

4. Democratic landslide in November

6. Bird flu pandemic or terrorist dirty bomb in the US

Hmmm…decisions, decisions…..

Great commentary, guys. Barry: thanks for letting us have another open session. How about setting up a real forum, where we can start subjects, comment, do polls, etc ?

I called this downturn. I’ve been calling it since January. I was heavy in gold. When it hit $720 I cashed out. And of everything else shortly thereafter. Yep, I’m sitting on 100% cash. For some reason I don’t have a margin account setup so I have not been trading options or shorts. I think I’ll change that shortly.

Oil: I keep looking at the inventory data and we have tons. But the supply is weak and demand isn’t falling much even at $70. I don’t think it is going to fall much below $50 and even then oil companies are profitable.

I think oil companies will be my first buy when the market turns. Investors are throwing the baby out with the bathwater with them.

Copper and other commodities: copper was all speculation. Everyone thought the market was tight enough that it could be cornered. And actually, it was, for a few weeks anyway. My guess is we see copper in the $2 range within a month. A couple more big sell offs and we will be there.

Cause of the decline is two fold: a) HOUSING. b) liquidity.

Today for the first day the market acknowledge that housing probably isn’t going to have a soft landing and yes, it is going to hurt. Very badly. No way around it at this point. I think by now everyone realizes that the homebuilders have declined by about 50%. What they don’t realize is that the homeowners are now going to get whacked. When people say the economy is slowing, what they really mean is that RE is going to bust.

Liquidity: this caught me off guard. I know there was a lot of carry trade and figured that at some point it would unwind, but the speed of it caught me off guard.

Hedges: I heard a rumor today that we are going to see some hedge fund sell off shortly. Some of them are indeed in trouble.

Inflation: yes it is out there. And I am happy that Bernanke is fighting it the way he is. If the economy was healthy, 6% wouldn’t hurt us. The problem is the economy isn’t healthy. Housing floated us for the last few years and now its done.

Fed Rates: My call is 6%+ before the end of the year and one or more 50 basis point hikes.

Stock picks: I can’t see buying stocks long until this has all blown over and I don’t think we are there yet. There might be a trade from time to time like last week, but I only see bad news for a while, mainly from housing. I agree the market shouldn’t flip over the Fed rate, but they have. Maybe its a liquidity thing. The funny thing is that I don’t think corporate bonds have gone up a lot, so the Fed rate isn’t going to hurt corporate debt that much, at least not yet. Caveat: I haven’t watched the bond market that close.

Something I don’t understand: the trend is your friend when it is going up. It is your enemy when it is going down. Why do people (retail investors) stay invested and try to make money in a down market ?

Turning Point: I don’t know what it will be. The Fed can stop raising rates, but that isn’t going to inject liquidity into the market and it isn’t going to stop the housing market from crashing. We might get a bounce on it, but I doubt it will hold.

Corporate profit: Yes it is high. We are at the top of the cycle. Profit is always high then. The market sees that slower times are right around the corner and thus the sell off.

We’ve been living like drunken sailors for the last decade (?). The party is over. Now it is time to clean up.

I am very puzzled/confused with the inflation/deflation debate. Is the whole idea behind buying gold that it is a hedge against inflation? The key argument for deflation appears to be that due to globalization, there will be no wage-price upward spiral — what are the arguments against that?

Lola,
Here are a number of counterarguments.
1) There has been no wage-price spiral because of the downward pressure on wages due to production shifting to China. But what if that process has gone about as far as it can go? The counter-inflationary force might subside.
2) Oil is sky-high and ultimately that affects everything. Even if oil dropped as low as $40, that would still be substantially higher than it has been for a while. The counter-inflationary force from China has been balancing this out, but that force ebbs, then the inflationary impact of high-priced energy will start to be felt.
3) There is already substantial inflation but the numbers are cooked (by the manner in which housing costs are handled) and then sliced and diced by focusing on “core inflation”, with the core defined to excluse those areas that have inflation. This is what I understand Barry to be saying.
4) There are many people across the political spectrum who feel that the current administration in Washington is not always reliably competent. (Do I get a prize for understatement?) A tussle with Iran handled even half as poorly as the invasion of Iraq could send oil prices to unfathomable heights.
5) Reverse argument 2. What if there is some calming down with Iran and North Korea and oil prices do fall, but the deflationary impact from China accelerates? The Chinese have massive over-capacity and much of it is in the hands of local and provincial governments who are more motivated to keep on producing at any price rather than cut back to maximize profits. If something went wrong in China, they might export a tidal wave of deflation. What does the Fed do then? When confronted (in this hypothetical scenario) by the prospects of a depression as bad as the 30s? Do they shovel money out of helicopters and ask questions later ? Maybe bring in the cargo planes that are used for dumping water on forest fires?
6) Many people feel that the huge US deficits will require a large devaluation of the US dollar. That would be quite inflationary within the US (although deflationary elsewhere).
These arguments may all turn out to be wrong, but they are reasonable ones.
Also, the people whom I personally know who have been big on gold for a long time all are deeply suspicious of “fiat money”. This is not all investors at all, but there are definitely some gold supporters for whom support for gold is a deeply held belief, in some cases almost religious.

Can the US stock market do well if the dollar continues to be weak?

Does anyone have a pie chart that shows who owns equity in the world? Something like 40% mutual funds, 30% hedge funds, 10% individuals, 10% pension funds, 10% private equity funds. With some drill down this would be even more helpful.

“I am very puzzled/confused with the inflation/deflation debate.”

OK. My OPINION to follow.

“Is the whole idea behind buying gold that it is a hedge against inflation?”

Yes, but only if you think it is going to be significant. The key thing for me in the Bernanke speeches is that he isn’t going to allow inflation to run. As far as I am concerned, that is what caused gold to fall off and maybe the start of the whole sell off.

“The key argument for deflation appears to be that due to globalization, there will be no wage-price upward spiral — what are the arguments against that?”

The argument against that is that there is enough global demand that prices stay high.

However, I argue that in the long run deflation ala Japan is a much bigger likelyhood than inflation. The reports out of China are that they have massive over capacity and will flood the market with cheap goods. This will be especially prevalent if the US goes into recession because demand will drop. In the short term we have massive commodity inflation. I could write more but it is late.

erik-

You called out someone’s comment and pointed to it directly as “wrong thinking”(“try never to have that reaction that you are wiser then the market”.) as if you are the Dali Lama of Trading. When called on it you retreat behind the “constructive commentary” canard and the “fair play” posture, then claim rights to be the victim. Are you like a sophomore in college or something?

Sorry all to clutter up the thread with this. I’ll try to hold my tongue next time.

You’re forgiven. And no I would not.

Good luck to you also.

Again, apologies to all who have posted on this thread. Some really good comments out there.

According to John Hussman, gold actually does best in times of deflation, when interests rates and the dollar are falling. I think that explains why gold has gotten hammered over the past month even though fears of inflation have picked up. I figured inflation would be good for gold, but rising interest rates and a rising dollar outweigh inflation fears.

I am widely diversified among asset classes as I have been since the last bear market. I was fortunate to have overweighted REITs and international stocks since 2001 until I lowered my allocations to them in the past year, so I made back what I lost and then some from the last bear market. And, I’m not about to take that kind of a beating again.

David-

Here’s the link.

http://www.hussman.net/html/gold.htm

The Dali Lama? Big hitter, the Lama……………

I bought some oil stocks this morning. Too cheap to pass up. COP at 6x earnings !

I’m down 1% already though. But seriously, it looks like oil company fundamentals are sound, actually very sound. And 6x earnings ! A man only has so much strength to resist something like that. Watch me lose my shirt…

Whammer: you must have total consciousness! LOL. Too funny.