In our last post “Democrats and Republicans Don’t Care About You And The Bond Market Doesn’t Care About Them” we discussed how many pundits show their stupidity by sticking to their opinions without making sure that their view is grounded in reality.  In that post we showed how politicians and media hype be damned the bond market doesn’t care much about the potential “technical default”, instead it seems to think that US debts will continue to be paid.  So despite all the hullabaloo about how interest rates will skyrocket pushing up the cost of our debt the truth is that bonds are higher/yields are lower over the past five months or so which is coincidentally the same amount of time that the debt ceiling debate has been raging on.

Now it is time to look at the US Dollar.  If you ask the average 24 hour news watcher, and it doesn’t matter if it is MSNBC, FOX, or CNN, what the US Dollar has done over the past three years they will usually say it is down.  If you ask how much they all guess 10-30%.  Luckily for us there is a place called reality and reality doesn’t care what people think, it just is.  In this land called reality the US Dollar despite some large gyrations is actually up over the last three years.  Don’t believe us?  Well take a look at the following chart. (Click on chart to enlarge)

US Dollar Index

As you can see over the past few years it has effectively gone nowhere.  Why has this happened?  If the US has huge debt and the Fed is mismanaging the monetary base shouldn’t the USD be lower?  In a vacuum yes but since currencies do not trade in a vacuum the USD is holding its own.  As opposed to equities, fixed income, or commodities the currency market always trades against other currencies.  For instance while you could have every stock in the SP500 climb higher the same is not possible in currencies.  If the USD goes up then what did it go up against?  If the Swiss Franc is down then what did it go down against?  This is why currency quotes are always quoted EUR/USD or JPY/USD.  For one currency to go up at least one other currency has to go down.  So anytime you hear someone on the news say that the (name your currency) is going higher you need to ask against what.

When all currencies trade against each other the resilience of the US Dollar makes more sense.  After all the US may have a ton of debt but how are its competitors doing?  The Euro Zone is crumbling before our eyes, Japan has an even higher Debt to GDP ratio then the US, and the UK economy is in horrible shape.  So while the United States has a lot of issues our largest free floating trading partners do too and this goes a long ways towards leveling the playing field. So until the United States is the only major economy with a debt crisis we will not go into a free fall.  Remember to look at reality before you make trading and investment decisions.  Do not trade based upon what you want to happen but instead trade off what is actually happening.  Distancing yourself from empty opinions will improve your bottom line year in and year out.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

Disclaimer-In our model portfolio we are currently short the USD/CHF and short the EUR/USD.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

During the crisis you may remember that everyone started following the TED spread.  Where one year earlier only investment professionals even knew what it was during 2008 it seemed as though everyone and their dog were experts on all types of credit market indicators.  Well now that we haven’t seen anything in the news talking about the TED or other money market spreads for months, in a contrarion way it is probably a good time to pay attention to them.

In the chart below we have the TED, LIBOR-OIS, and Commercial Paper-T-Bills spreads overlaid.  As you can see they started to trend up a while back and that trend is still in force.  So is it the end?  Is the United States defaulting tomorrow?  No, nothing like that.  Instead it is a sign that investors are starting to acknowledge that all is not rainbows and butterflies and that there are some risks out there.  At current levels none of these spreads are saying anything other then that liquidity has tightened up a bit, but only a bit.

Money Market Spreads

So what to make of this?  Only that we need to start getting more cautious.  The Fed liquidity bull is slowing down ever so slightly as QE2 nears its end and that may bring with it rising volatility in the markets.  For now however the trend is up and new liquidity is being injected every few days, consequently we are long and medium term bullish on the risk trade.

Happy Trading,

Dave@TheMacroTrader.com

P.S.-We have obviously not posted to the site in some time and aim to correct this.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

First a bit of a disclaimer.  Most of the time when you see port data you are looking at Long Beach and/or Los Angeles as no other port in United States releases their data on a monthly basis.  That being said LA and LB account for almost 50% of all port traffic in the United States.  Finally this port traffic is comprised almost entirely of trade with Asia whether it be China, India, Thailand, Mongolia, etc.  If it ships from Asia it usually finds its way to one of these ports.

So what is port date showing?  Well at first glace the chart below shows that over the past few months trade has fallen off a cliff.  On further review however you will notice that there are very pronounced seasonal tendencies in port data.  From November through February each year port traffic slows down considerably.  That being said you can still see that even with the seasonality factored in, that trade is nowhere near where it was pre-crash.

Combined LA and Long Beach Port Data

The green line represents all trade both imports and exports.  It has yet to make a new high and is currently in a free-fall.  The blue line represents imports and it looks even weaker as it has yet to make a high since 8/1/06.  This tends to show that not only are we as consumers not consuming quite like we were but companies are not ordering like they were.  The much vaunted inventory rebuild of the past year was barely enough to take import levels back above the high in 2008.  Finally we have the red line which is exports.  In a way this number is actually looking the best as it is steadily climbing.   Still it is a long ways away from its peak formed in 8/1/08.

Port data is giving signals for a variety of things.  How does this impact China, India, and the rest of Asia?  How does this affect consumer discretionary stocks?  We know that Apple has almost all of these containers filled with I-Pads, I-Pods, and I-Phones   so who is not importing anything anymore?  How does this affect shipping stocks?  Why has the seasonality been so pronounced for so long?  Don’t corporate purchasers look at the data and try to game shipping costs by ordering a few months earlier?  And finally how is global trade going?  As we can see it has improved but have the markets gotten ahead of themselves?

These are all questions where port data can be used to arrive at a conclusion.  We are constantly surprised how few investors use these and other obvious, to us anyways, data points that can help you make an informed decision.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-We are long some stuff and short some stuff but none of it is directly related to port data.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

We are sick of talking about QE2.  Instead lets look at the EU.   European Credit Default Swaps are blowing out, and really it is the consistently weak countries known as the PIIGS.  Italy is actually doing alright although it too is ticking higher but Ireland, Portugal, Greece, and Spain are once again on the races to see who can suck the worst…again.  If this continues, and it probably will, we will have to revisit  shorting the Euro.  For now we will just sit back and watch.

Ireland 5-Yr CDS

Portugal 5-Yr CDS

Greece 5-Yr CDS

Spain 5-Yr CDS

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-Right now we are riding out Ben “The Bubble” Bernanke’s bubble (long a slug of “risky” assets) but are looking to short the Euro soon.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

Ever since the David Tepper interview last week on CNBC we have heard a lot about how money supply is finally expanding.  Yes, M2 has been rising the last several weeks, but before the hyper inflation crowd gets out of control we thought it would be a good idea to look at the actual numbers.

Looking at a plain chart of M2 you can see that yes it has broken to new highs but it really only declined for about six weeks back in March and April of 2010.  During this time and since then we have seen bond yields drop lower and lower indicating that inflation is essentially non-existent.  So this rising M2 is really nothing new.

M2

To get a better picture of the money supply we can look at M3 data.  In the chart below we have M3 with the 12-month ROC overlaid.  As you can see not only has M3 been headed slowly but continually lower but the 12-month ROC has not exactly rocketed higher.  Yes, it has improved but marginally at best.

M3 and M3 Annual ROC

Finally lets look at a chart that we showed a few months back when we discussed money supply being quite tight.  If we look at real M3 adjusted for inflation minus industrial production we get a good view of how loose or tight money supply is relative to growth in the economy.  As you can see in the chart below things have improved a bit but they are still extremely low from a historical perspective.

Real Money Supply (M3) minus Industrial Production (Year-to-Year Changes)

So while M2 has been improving a bit and overall money supply is a bit improved we are not exactly awash in liquidity.  No, despite the best if a bit misguided efforts by the Fed to flood the planet with US Dollars, the massive deleveraging has managed to cancel most of it out.  So before you run out and short the hell out of the bond market, load the boat with stocks, and go all in on commodities stop and think about the likely scenario.  Do you really think that hyper inflation is right around the corner?  We obviously don’t.  We continue to be of the thought that the Fed will do what it thinks it should and while it will help financial assets go higher it will not really go into the real economy and consequently we will see little real inflation for the next year or two or maybe even longer.  Yes, we are long stocks but we are not long in size and we continue to trade commodities cautiously.  So while the Fed put might be, the  minor up-tick in M2 is not , at least for now, a major game changer.

Happy Trading,

Dave@TheMacroTrader.com

P.S.-Since M3 has been discontinued by the Fed we are now using the M3 data from NowandFutureswhich has reproduced it with a correlation of .99999 to the old M3 data.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

As of late we have heard a lot about how sentiment was too bearish and that this justified the market rally.  While we no doubt got a rally, we have to question the idea that sentiment is overdone to the downside.  In the world of sentiment indicators there are more then a few ways to look at things.  You can look at polls like Investors Intelligence or the AAII numbers, you can look at anecdotal indicators like covers at the magazine rack or listening to your shoeshine boy, and finally you can look at market derived indicators.

Looking at poll data alone would have you thinking that either the world is coming to an end or that we are due for a large counter sentiment trade.  The first chart here is of the Investors Intelligence Bulls to Bears ratio popularized by Marty Zweig.  As you can see in the chart it is hitting lows not seen since 2008.

Investors Intelligence Bulls Bears Ratio

If you want an equally extreme way to look at it below is a chart of the Investors Intelligence percent bears.  As you can see we are spiking to new highs not seen since the dark days of 2008.

Investors Intelligence Percent Bears

Looking at just these two charts makes the trend followers short and happy, and the contrarian leveraged long.  Of course we have a lot more tools at our disposal then just the Investors Intelligence poll data.  We like to check the poll based data against the market based data to see if it is inline with what investors are actually doing.  Usually it is, but sometimes it gets out of line.  As you can probably guess now is one of those times.  In the chart below we have taken the VIX and overlaid the percent bears.  As you can see both indicators usually move roughly to the same beat but lately the poll data has been getting more and more negative while the market derived data, data that actually shows where people are putting their money, has been getting more positive.

VIX and Investors Intelligence % Bears

Because of this disconnect we think that sentiment is not overdone to the bear side and that there is still some room to the downside.  In fact one of our short term sentiment indicators is showing exactly that as the 5-day equity only put call ratio hit .55 yesterday.  This level is significant as it has done an excellent job of showing when things are in fact too optimistic and has a good record calling tops in the equity market.  So while we aren’t calling for some Dow 1,000 crash, our analysis which includes sentiment data, does show room for more downside.

5-Day Equity Only Put Call Ratio

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In our model portfolio we are long some SPY puts.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

With the steepest global yield curve in history it appeared in mid 2009 as though we were going to go on the credit binge to end all credit binges.  We were going to see inflation of eight gazillion percent and gold was headed to $50,000 as we went back to the gold standard.  As we now know that is not what happened. Instead banks bought Treasuries and there has been a massive contraction in lending as borrowing.  Instead of massive amounts of real growth the record steep yield curve instead brought with it a credit contraction that appears to be slowly but steadily sapping the energy from this so-called recovery.

Looking at the global GDP weighted yield curve right now you can see that since April of 2010 long term government rates have been steadily coming down as the short term rates are close to zero percent in many developed nations, which of course make up the bulk of a GDP weighted yield curve.

Global GDP Weighted Yield Curve

What is obvious to us when looking at this chart is that we are in a slow to negative growth environment for the foreseeable future.  We see this in both the economic data as well as in the markets themselves with stocks showing increased volatility and bond yields of all maturities hitting new lows or close to near lows. Until we start to see signs of real growth we expect the curve to continue to flatten, primarily on the long end.   One potential trade to take advantage of declining long bond yields is to either buy the long bond or buy TLT the 20+ year Treasury ETF. While we expect pullbacks and corrections, we expect long term Treasuries to continue to do well as an investment over the coming several months and maybe even the next few years.  Yes, yields are low but they can go lower.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-In our model portfolio we are long TLT

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

While we have been long various risk assets over the past several months we have been very cautious and have had some short positions the entire time.  We have been very defensive due to the plethora of indicators pointing to an economy that at best was going nowhere for the majority of 2010.  The reality is that as time has gone on we have seen more and more indicators deteriorate showing that money for the real economy is tight, employment is worsening, risk assets are overpriced, demand is not there, etc.   This basic outlook has served us well as our newsletter model portfolio has generated positive returns with very low drawdowns so far this year.

Here are two indicators that show that their is a very high likelihood that we are headed for not just a slowdown but a recession.  The two indicators are the PMI and the ECRI WLI growth rate.  As much as the ECRI has been trying to say that they aren’t calling for a recession we and several other analysts find a lot of use in looking at it.  We think that the main reason for some of this controversy is that the folks at ECRI think that Hussman and Rosenberg are using it as a mechanical model and that if it does X then Y will happen.  Instead we are confident that most analysts look at it as another tool in the toolbox, albeit a very good one.  Like inflation, interest rates, industrial production, etc.  it is but a piece in the puzzle. At least that is how we use it.

Looking at the ECRI WLI growth rate and the PMI on the same chart you can see that the WLI tends to lead the PMI by roughly three months.  Not only does it tend to lead but with a few exceptions it does a pretty good job of showing the magnitude of the future move of the PMI.  Looking at the chart right now it appears as though the PMI is headed to a level below 50 and we would not be surprised to see it down to 40.  These levels tend to be not just slowdowns but recessionary.

ECRI WLI Growth and PMI

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

One of the many reasons why markets have been falling is due to the fact that the money supply has not kept up with the economy.  After stoking the fire in a big way during the crisis with bailout money, stimulus, and QE the economy finally started to take off.  At first the different forms of stimuli were doing enough but over the past few months it appears as though they have stopped keeping up with demand.  Now instead of enough, and arguable too much money in the streets the situation has reversed and now there is not nearly enough money out there to make up for the surge in economic output let alone to find its way into the markets.

In the chart below we have an indicator that measures the real money supply growth against economic output to determine if there is adequate money to sustain current economic growth and for the markets (This indicator came from a NDR chart we saw somewhere several years ago).  What we have done is take the year to year change in industrial production and subtract it from the year to year change of the real money supply using M3* data.  As you can see in the chart, money supply relative to industrial production has taken a huge dive indicating that we either need more QE, more government spending, or we will likely see a dip in output.

Real Money Supply (M3) minus Industrial Production (Year-to-Year Changes)

Happy Trading,

Dave@TheMacroTrader.com

P.S.-Since M3 has been discontinued by the Fed we are now using the M3 data from NowandFutures which has reproduced it with a correlation of .99999 to the old M3 data.

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks

What historically is one of the major drivers of construction and the housing market?  If you answered interest rates you are correct.  So lets look at housing rates right now.  Here is a chart of the 30-Year fixed rate.

30-Year Fixed Rate

What about real yields?  After all a few months back we showed how real rates were at multi year highs.  Well that time has passed as rates are once again close to 30 year lows.

Real 30-Year Fixed Rate

With interest rates this low you would think that we would at least be seeing decent sales growth if not record breaking.  And yet as the numbers showed today the sales are not coming.  Look at the chart below.  The red line is the all time low which happens to be from the most recent release.  Fewer homes were sold in April then in any other time in at least the last 50 years.

New Home Sales

Right now it seems as though our long held deflationary beliefs are correct and that the economy still has too large of a gap to be expecting any real inflation.  We will of course see how this all turns out but anytime you have near record low interest rates and new record lows in housing sales it definitely does not bode well for the economy.  Double dip here we come.

Happy Trading,

Dave@TheMacroTrader.com

Take a $1 trial of The Macro Trader to receive unbiased actionable research.

Bookmarks