Sunday, September 1, 2013

Signs of a top

Just a quick word of warning friends.  Leverage is great when stocks are soaring higher but it's a bitch when things turn around.  Dougie Short posted a great chart of how much leverage there is in the system right now:

The Bottom Line:

We are nearing a tipping point.  The Fed's "tapering" is a serious threat to the stock market and more importantly the bond market.  

I have dramatically reduced my positions in bonds. Interest rates are rising and I don't see how this can be prevented. I still hold some bonds to be diversified but if you learn one thing from this post it's to understand that bonds are not "safe".  In fact, they are much more risky than the stock market right now and you risk getting killed if rates move higher.

The reason I see rates moving higher is two fold:  Either the economy improves and the Fed tapers in order to control inflation or we pull a "Greece" where the economy implodes and the risk of servicing our debt scares away buyers of our bonds.

We may see a temporary rally in bonds if the market pulls back but longer term I expect the 10 year bond to hit 5%.  If and when this happens it will be painful for fixed income investments including junk bonds, REIT's, treasuries and any other interest rate sensitive stocks.

My long positions remain focused on energy and tech.  MSFT, OKE, CSCO, ETE, CHK, and a few others.  I also hold some gold and silver as a hedge.

Be careful out there folks!

Sunday, June 30, 2013

It's time to be afraid.....

Hello friends!

I post only one chart today because the 10 year bond is all that matters.  I haven't posted much because things have become rather calm, but I am afraid things regarding the stock and bond markets are about to heat up again.

So everyone is talking about the Fed's tapering so let me give you my take...

The Fed has basically backed themselves into a corner via QE.  The Bernanke is basically screwed either way,  Zero Hedge had a great piece explaining why he is being tortured:

 OK, I'll add a second chart:

Here is the Fed's dilemma.  If they continue to buy bonds at the rate they have been buying they risk owning nearly all of the bond market within 6 years.  The reason for this is because the deficit has been shrinking and fewer MBS have been created following the housing crash in 2007/2008.  This means there are fewer and fewer bonds that the Fed can buy. 

As a result, the Fed has no choice but to taper.  I say this because if they don't taper they risk owning the whole bond market(or close to it).

If this happens then the risk for volatility dramatically increases because there will be fewer and fewer bonds that are traded as the Fed continues to buy.  For example:  If they owned 90% of the market then the 10% that was left  would be spooked and would likely flee or perhaps during tough times in the stock market they would come back.  Either way it creates a situation where volatility would surge and the markets would eventually panic because the float would be so small. 

The Bottom Line:

I think the Fed is hell bent on tapering even though they don't want to because they know Wall St. will hate them for it.  The problem they have is if they continue on their QE path they eventually risk owning all of the bond market.

By doing so they would essentially be monetizing our debt which Bernanke has promised he would never do.  We all know Ben is leaving next year so I believe he is concerned about his legacy. He doesn't want to be the guy that printed money until he crashed the dollar.

In the long run I believe the person that replaces him will do exactly that.  In the meantime, I think it's smart to play the taper trade.  Get out of the bond market, short treasuries, and go long the dollar.  I have personally bailed on most of my bond positions and have gone to cash and the USD.  I remain invested in blue chip stocks and gold because I see nowhere else to hide. Be careful out there folks.  The Fed's antics have created an environment where owning bonds are more risky than owning stocks IMO.

If rates continue to rise as I expect it's going to get really ugly in both the stock and bond markets. 

Stay tuned...

Friday, February 15, 2013

And The Fraud Rolls on 1 Year Later

Hello Friends!

I am not sure who is still following me since I haven't posted in about a year, but I felt compelled to share my thoughts around the markets. 

It's quite amazing to me to see where stocks are 4 years from the lows that were set in 2009.  The amount of corruption/money printing that it took for us to get here is something I never could have expected.  My hope and expectations as I wrote this blog back in 2008/2009 was that we would take our medicine and write down the losses from the housing boom.  This turned out to be a silly mistake considering the astounding amounts of Wall St money that flowed into Washington DC following the crisis.

So where are we now after a 4 year boom in stocks?  That's a great question.  History is always a great barometer of what's to come and it's told us in the past that most bull markets last around 4 years.  I suspect we are nearing the euphoria stage of this current run up in stocks.

However, thanks to the Fed, the game has changed.  Bonds IMO are no longer a "safe haven" anymore thanks to the Fed buying 80% of the longer end of the bond market..  I mean let's get real here:  Does a 2% yield on the 10 year represent real RISK from an inflationary standpoint?  I think not.

So what have here are investors that are desperate for yield done in response to this new dynamic.  They have taken on much greater risk in order to maintain their 5% yields by buying high yield junk bonds and high dividend stocks.  Savers are getting screwed with a capital S thanks to the Fed's 0% interest policy.

I can honestly can say that I don't blame them for chasing yield.  I mean you gotta pay the bills right?.  However, do I think this is a good long term strategy?  Of course not.  IMO the sheep are being led to slaughter.  Risky assets have been bid up to ridiculous prices.  Historically junk bonds do not pay 5%.  These are treasury type yields  .  Investors need to realize that junk bonds are called JUNK for a reason.  They are highly risky and could very well blow up in your face.  I would suggest that high yield investors take a good hard look at their portfolios and perhaps pare down these holdings.

That being said, I have different feelings around strong dividend stocks that have strong balance sheets.  I think the next crisis will be around solvency, and I am curious to see how this dynamic plays out between stocks with strong balance shets and bonds.

The key question for me is this:  Would you prefer to own treasuries that are essentially bankrupt as we continue to run up our deficits or own stocks like Microsoft, Intel , and Cisco and others that have $30-$60 billion in cash on their balance sheets and continue to pay strong dividends..

This IMO is the million dollar question moving forward.