Reflation Trade Analysis. Recent Action in Gold, USD, OIL, FXC, AUD/JPY, US Treasuries and Jim Rogers Wisdom

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I want to start off the year revisiting the reflation trade. I posted about the carry trade/reflation not too long ago (1,2). Today on December 31, 2008 the ETFs $GLD (Gold), $SLV (Silver), $TBT (UltraShort 30 Yr Treasuries), $USO (Oil), $DRYS (dry bulk shipper) and the U.S markets are rallying big time. Also the AUD/JPY (carry trade) broke out of a range, the $VIX dipped below 40 and the $UUP (US Dollar Bullish ETF) is unchanged after a recent correction. At the bottom I decorated charts revealing some potential setups. Must be careful with this directional trade though because it could just be a bear market rally. Stay protected!

Here's some wisdom from legendary investor Jim Rogers who had a long interview on Bloomberg recently and was bullish (as always) on commodities.

Wingsuit base jumping, as crazy as the stock market this year.

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wingsuit base jumping from Ali on Vimeo.

2008: The Year of Anxiety, How About This Distressed & Volatile Year?

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How about this distressed and volatile year? I learned something new every day. Investors need some Zoloft after experiencing a 49% ytd loss in the S&P in November. Right now (Dec 30, 2008) we're down 39% ytd. Hopefully your mutual fund managers beat that #. As you know the U.S Government is throwing hundreds of billions of dollars at the U.S economy to try to spark growth and save jobs¹²³. China is engineering a $585 billion stimulus package and they recently lowered the one year lending rate¹. Japan is also trying to stimulate their economy and intervene in the forex market to halt the rise of the yen which has been killing Japanese exports. It also looks like Europe might need a big stimulus as well. So central banks and their printing presses are throwing as much money as they can at this global growth/deflation problem. Investors are positioning themselves for this deflationary period by sacrificing yield to protect principal. Treasuries are like the new savings account. Hopefully 2009 will be a better year. Happy New Year, PEACE!


Interview with Yahoo Founder Jerry Yang at Web 2.0 Summit 11/5/08

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"What happened with the Microsoft deal? Why didn't you take the $33 a share Jerry?!"

I always wanted to put up this interview with Yahoo's Founder (CEO/Chief Yahoo/Whatever) Jerry Yang at the Web2.0 Summit on 11/05/2008. John Battelle's interview with Jerry Yang touches on the Microsoft deal as well as the 10 year search monetization deal with Google that fell apart. It was a crazy year for Yahoo. Remember Icahn, with help from John Paulson and T. Boone Pickens, led a proxy fight and nominated a slate of directors including Mark Cuban?
"June 3 (Bloomberg) -- Yahoo! Inc. Chief Executive Officer Jerry Yang is facing increasing shareholder pressure to sell the Internet company he helped found or step aside. Billionaire investor Carl Icahn told the Wall Street Journal that if he wins control of the board, he will seek to oust Yang, who rejected a $47.5 billion takeover bid from Microsoft Corp. last month. Yahoo said today that it will hold the shareholder vote on the board on Aug. 1.

Icahn has amassed support for his proxy fight from hedge- fund manager John Paulson and BP Capital LLC Chairman T. Boone Pickens since Yang, 39, spurned the offer. Yahoo shares closed at $26.15 today, or 21 percent less than the last bid."

Icahn Pressures Yang as Yahoo Investors Urge Sale (Bloomberg)

I guess Microsoft was smart to walk away after Yahoo turned it down. The global recession was coming and Yahoo lost over a 1/3 of it's value in the next 6 months. It closed at $8.94 in November. Here's the video with a 1 year chart. Also Yahoo should carve out Tech Ticker and take it public. It is revolutionizing financial business news on the internet.

Adami & Macke Pretty Much Sum Up 2008 (Tech Ticker). Also Peter Schiff on Fast Money (11/20/2008)

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The Fast Money traders pretty much sum up 2008, lol.

Also here's an interesting clip from CNBC's Fast Money on Nov 20, 2008 featuring Peter Schiff.

Plus I'm watching long term Treasuries, US Dollar, CRB Index, base metals, Aussie/Yen and precious metals. By the way it's interesting that the moves in base metals have been lagging the Aussie/Yen which has been lagging the precious metals. There continues to be monetary stimuli across the world, Australia has commodities, there could be Japanese currency intervention and there's still a global recession.... So it will be interesting to see what happens with that disconnect.

GLD, SLV, USO and Options Active, Probably Due to 0% Rates, Mideast/Asia Tensions. Inflation Risk?

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Today was a very interesting day for gold, silver and oil and I was monitoring their ETF equivalents $GLD (Gold), $SLV (Silver) and $USO (Oil).. There's been geopolitical tension around the world recently between India/Pakistan, Israel/Palestine and Russia/Ukraine and it could be that these commodity traders are either anticipating an ugly event, pricing in the 0% interest rates or covering their short positions for a reversal/bear market rally. Either way $GLD rallied on volume spikes right before 1:00p and had active front month call activity. It's interesting because I saw $UNG and it's options get bid up a few days ago on the Russia/Ukraine debt conflict (blog post). It's tough to tell what exactly is driving all of this activity because we're in a recession with disinflationary forces. But billions of dollars are set to multiply through the economy once banks start lending again.

Anyway check out the intraday volume spike in GLD today in the chart below. GLD Options were also active. The JAN 90 strike traded close to 6,000 contracts, the JAN 100 strike traded close to 14,000 and the JAN 110 strike traded 5,000 contracts on cheap premium. Calls outnumbered puts. Looking at the technicals on the 9 month chart it broke the 200 day moving avg which probably brought a herd of buyers but it's knocking right up against the downtrend line which could act as resistance. Also GLD moved higher on low volume and all of the option activity occurred in JAN so it's a short term time horizon.

$GLD (Gold ETF) Intraday Volume Spike (Yahoo Finance)

$GLD 9 Month Chart (Yahoo Finance)

$GLD Option Activity, Call Volume Active (Yahoo Finance)

Below I provided the USO (Oil ETF) and SLV (Silver ETF) charts. Both were being bid up today. All of this activity could bring a short squeeze in commodity prices or a bear market rally on the charts. But this slowdown is serious and there definitely needs to be more conviction. If the USD can't sustain a downtrend and rates remain at 0%, a commodity rally will probably be unsustainable. But I'm watching for a reflaciones trade folks! There are a bunch of moving parts in a global reflation trade so I'll blog about it in pieces and maybe I'll come up with something interesting.

$USO (Oil ETF) - (Yahoo Finance)

$SLV (Silver ETF) - (Yahoo Finance)

Natural Gas ETF $UNG Sees Activity On Gazprom/Naftogaz Debt Issues

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I've been seeing conflicting indicators in the market regarding a potential reflation trade linked to commodities, currencies, interest rates, and the BDI shipping indices. It's been a tug of war between deflationary and inflationary forces and with oil plummeting, the US Dollar and gold bouncing in a channel, and 3 month T-bills yielding 0% I need more conviction before even thinking about price stabilization and risk appetite.

But market indicators aside, political risk is showing itself in the natural gas market. I saw some interesting movement in the natural gas ETF this morning primarily related to the Gazprom/Naftogaz debt conflict and gas meetings in Moscow. Russia's Gazprom is ordering Ukraine's Naftogaz to pay back billions in debt by the end of the year and warned Western Europe of potential gas disruptions if they aren't paid.
"The Russian gas-export monopoly, Gazprom, and the Russian government have warned European consumers of possible disruptions in supplies pumped through Ukrainian territory at the start of 2009. Gazprom is threatening cuts to Kiev over a $2.4 billion (1.8 billion euro) debt Russia says Ukraine's state gas company Naftogaz owes Gazprom." Deutsche Welle

Putin also said today the "Era of Cheap Natural Gas is Ending".
"Speaking in Moscow at a meeting of the Gas Exporting Countries Forum, or GECF, Prime Minister Putin said liquefied natural gas has become an expanding global business that requires construction of more liquefaction facilities and special terminals to transfer supplies. He says existing gas fields are being depleted and promising new ones are farther away from leading consumption centers. As a result, says Mr. Putin, expenses for exploration, extraction, and transport of gas are rising." Voice of America

2008, The Year of Anxiety, Will Monetary Stimulus Save The Global Economy?

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How about this distressed and volatile year? I Learned something new every day. Investors need some Zoloft after experiencing a 49% ytd loss in the S&P in November. Right now (Dec 30, 2008) we're down 39% ytd. Hopefully your mutual fund managers beat that #. As you know the U.S Government is throwing hundreds of billions of dollars at the U.S economy to try to spark growth and save jobs¹²³. China is engineering a $585 billion stimulus package and they recently lowered the one year lending rate¹. Japan is also trying to stimulate their economy and intervene in the forex market to halt the rise of the yen which has been killing Japanese exports. It also looks like Europe might need a big stimulus as well. So central banks and their printing presses are throwing as much money as they can at this global growth/deflation problem. Investors are positioning themselves for this deflationary period by sacrificing yield to protect principal. Treasuries are like the new savings account. Hopefully 2009 will be a better year. Happy New Year, PEACE!


Bernie Madoff: 2007 Roundtable Discussion Talking About Regulation! (Video)

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I had to put up this video of Bernie Madoff at a roundtable discussion in October, 2007. As you already know this guy had a $50 Billion ponzi scheme going on that screwed over many charities and investors. At the discussion he said "in today's regulatory environment it's virtually impossible to violate rules and that's what the public doesn't understand" (5:49). Is this the biggest fraud case in US history? Better blog posts coming in the next week.

Madoff Roundtable Discussion (10/2007)

Diane Garnick's 2009 Investment Outlook (Investment Strategist at Invesco)

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Diane Garnick has some interesting thoughts about the market. She was recently featured on Yahoo's Tech Ticker and at the 2009 Reuters Investment Summit.

Alt-A, Option Arm Mortgage Bubble About to Burst, Whitney Tilson Bullish on Stock Market and Distressed Debt.

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I just came across this 60 Minutes clip (12/14/08) about the next big wave of mortgage defaults: Alt-A and Option ARMs. It featured well known value investor Whitney Tilson and other professionals in the industry. The clip also provided a Credit Suisse chart comparing the $1 trillion subprime resets in 2008 and the estimated $1.8 trillion Alt-As and Option ARMs set to reset in the next few years. So there's more delevering to come in the housing The interesting part is at the very end. Tilson is actually BULLISH on the stock market. He believes the market is forward looking and is "finally pricing in how bad things are going to be".

Auto Rescue Fails in Senate, White House the White Knight?

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Of course this is in New York, not Detroit.. Either way these companies need to restructure in or out of bankruptcy which means jobs will still be lost. Hopefully it happens out of bankruptcy with a collateralized bridge loan to stave off a forced liquidation which would be disastrous. Read more for videos.

0% T-Bill Yield, "Super Contango" Oil Arbitrage, $DJI 50 Day Moving Avg

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Since we're in the middle of a recession investors and institutions have been loading up on 0% 3 Month Treasury Bills as a safe haven. These bills are yielding a negative return after inflation which is crazy. I guess it's the modern day equivalent of stashing money under your mattress. I can understand these moves with job losses compounding and a possible GM, Ford and Chrysler bankruptcy. But watch out for the big bond dump when inflation starts creeping into the system, that's if the last trillion dollar difibrillation attempt finally wakes up the economy. The $DJI is at a critical moment trying to break above it's 50 day moving average. The auto bailout and economic data will be the catalysts either way. G'luck.

Source: Yahoo Finance


While T-Bills were being bought commodities like oil were being sold. While the crude oil spot price was being liquidated I noticed that the futures curve was very steep going out to 2017. On December 10, 2008 the crude oil spot price was at 42.52 while the December 2009 future was at 55.60, a 30% increase in just one year. The December 2015 contract closed at 74.80, a 76% increase!! There's actually a term for this phenomenon called "Super Contango" which I learned from the oil and economic blog where you can find better information. But something has to give here, either the front months rally hard or the long dated futures get dumped because the spread is at a decade high. Oil companies with cash on hand are taking advantage of this arbitrage opportunity by storing oil now and selling the Dec '09 contracts to make a riskless 30% profit! Below is the futures curve, comparison chart and a Bloomberg video. Click the video to be directed to



Investors See Bigger Profits in Crude Oil Contango (click for video)

Bloomberg article w/ video: Contango Pays Most in Decade as Shell Stores Crude (Update 4)

VIX Puts Active, Broke 50 Day Moving Average, Looks Double Toppy

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Last week I was looking at the chart of the Volatility Index (VIX) and saw two things. It was flirting with the 50 day moving average and it looked double toppy.. So I decided to head over to Option Monster to see what was going on and checked out their Volatility Sonar report on 12/3 and 12/4. Surprisingly they saw thousands of May and April '09 $30 puts trading which is a bet on lower volatility in the future. Add on to that a futures curve trending lower and you have a bullish scenario for the market since VIX:S&P are inversely related.

Fast forward to Friday's close and the VIX actually broke below the 50 day moving average when the market rallied at the end of the day. Also the index futures are up big tonight. The Dow is +190 and the S&P +22 as of 1:32am est. If the break below the critical 50 day ma can be sustained it would bring a lower VIX and a nice profitable trade (less the premium paid). Awesome.

Watch the videos and also provided are VIX charts and a snapshot of the futures curve with data via the CBOE Futures Exchange as of Fridays close (12/5/08).

Long Term S&P Technicals Including Charts, Technical Analysis, CBS News

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(updated the video sizes) 

I want to revisit the long term technicals of the S&P 500 which will feed into my next post about the VIX which will include videos, charts, futures curve and options activity. On 9/13/2008 I posted a long term chart of the S&P but I forgot to add a trend line from the '87 crash lows. The updated chart is provided below.

I was able to gather some historical charts from Yahoo Finance and The S&P 500 just bounced off the 26 year trend line and what's interesting is the trend does not include the tech bubble lows of 2002. I'm not exactly sure why, maybe the recession wasn't fully realized because it was artificially propped up by monetary policy. Like what Peter Schiff's been saying on cnbc for years. But it's interesting that we're hitting the long term trend today. At the same time the S&P is also testing the tech bubble lows which could also act as support. So if, I said if, the S&P shows sustained strength above these levels it could technically prove a bottom. Again I wouldn't be surprised if we retested the Nov 21 lows of 741 in the near term so monitor the S&P for up moves on strong volume and higher lows. It's interesting that the market charged higher today on horrible news (videos). Hopefully the Obama administration can renew confidence in our economy and be a positive catalyst for the market.

Baltic Dry Index, Dryships (DRYS), Excel Maritime (EXM), Charts, News, Reports...

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Check out the Baltic Dry Index which measures commodity shipping costs on various carriers. It tanked due to the lack of demand for commodities and the inability to get letters of credit due to bank counterparty risk. Plus the lack of demand and excess tonnage capacity drove prices lower.

I remember analyzing the Baltic Dry Index in 2005 when it took a hit and EXC (Excel Maritime) was around $11/share in the beginning of 2006. In 2005 there was a tightening bias¹, hurricanes, a steel price correction that slowed down the movement of iron ore and coking coal, China was in an inventory correction and vessel rates declined. But the global growth story for China and India was still in tact. Plus there was congestion at Chinese and Australian seaports at the end of '05 when China was loading up on iron ore (olympics). The positive fundamentals allowed the Baltic Dry Index and EXM to increase 8 fold within a year.

Now the fundamentals have clearly changed. Lower rates are squeezing cash flows and vessel values have fallen so dramatically that they could breach NAV ratios on credit lines secured by vessels. Hopefully tonnage capacity, commodity demand and vessel values bounce back sooner or later. A story below did say many vessels get scrapped during a recession creating "vessel supply destruction". There's even some chatter that some public shippers might go private. But some analysts think there is more pain ahead for the industry. Plus if one of the Big 3 went under it would put more strain on the global economy. It's interesting that a bunch of DRYS out of the money calls traded today on a 13% up day when the market was down 2-3%. I'm not making any recommendations but if I went long for a trade here I'd buy some puts for protection. Very risky!

I provided the charts of the Baltic Dry Index, EXM, DRYS and the Commodity Index/Australian Dollar which have both taken a hit (Australia is a big commodity exporter so importers need the AUD). Also I found a few research reports posted on about the Baltic Dry Index.

Baltic Dry Index (Source:

Excel Maritime (EXM)

DryShips (DRYS)

Commodity Index/Australian Dollar (Source:

Recent News:Dry bulk rates to rise as China starts restocking of iron ore 12/5/08 (Steel Guru)

"It is reported that Dry bulk rates are likely to recover when China replenishes its dwindling iron ore inventory and demand for thermal coal starts to pick up."

Charting Mutual Fund Performance Vs. S&P 500 (4 year period)

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What have mutual funds done for investors during the past 4 years? Not much. I found some well known value funds that significantly underperformed the S&P. I googled "mutual funds" and found this recent blog post: Eighth Annual Mutual Fund Turkey Awards by which gave me some interesting ideas.

Some of the value funds the blog mentioned were down 50%+ ytd. Hopefully they have a nice dividend to reinvest so people can average down for the next bull run. For the people that hoarded cash in late 2007; once the recession/credit crisis fades out (could take a while) these funds will be great buying opportunities for the long haul, but so will the SPY (S&P 500) exchange traded fund. By the way I'm not making any recommendations here.

So I screened for large reputable value funds with more than $3 billion under management and charted them against the S&P 500 since 12/3/2004 (4 year spread). I think it's fair because it gives a 3:1 bull/bear time period. It turns out many of the funds underperformed the S&P by 15%+. I should note that the Dodge Cox and Third Avenue fund did significantly outperform the S&P during 2005 and 2006. Below I provided the mutual fund, symbol and chart vs. S&P. Also check out this article: What went wrong with value funds (Money Magazine).

Legg Mason Value Trust: LMVTX
Dodge Cox Stock Fund: DODGX
Third Avenue Value Fund: TAVFX
Vanguard Windsor: VWNDX
Fidelity Equity-Income: FEQIX

S&P vs. Value Funds Over 4 Years (Source:

Click to enlarge

Ben Bernanke Speaks Financial Zen at Austin Chamber of Commerce. Policy/Economic Outlook (Video Link/Script)

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Bernanke Says Fed May Buy Treasuries to Aid Economy

Bloomberg Video Link (45 minutes)

Chairman Ben S. Bernanke
At the Greater Austin Chamber of Commerce
Austin, Texas December 1, 2008
Federal Reserve Policies in the Financial Crisis

"Economic Outlook

Despite the efforts of the Federal Reserve and other policymakers, the U.S. economy remains under considerable stress. Economic activity was weakening even before the intensification of the financial crisis this fall. The sharp falloff in consumer spending during the summer was particularly striking. According to the latest estimates, real gross domestic product (GDP) declined at an annual rate of 0.5 percent in the third quarter, with personal consumption falling at an annual rate of 3.7 percent.

However, economic activity appears to have downshifted further in the wake of the deterioration in financial conditions in September. Employment losses, which had been averaging about 100,000 per month for much of the year, accelerated to more than 250,000 per month, on average, in September and October, and the unemployment rate jumped to 6.5 percent in October. Moreover, recent increases in the number of new claims for unemployment insurance suggest that labor market conditions worsened further in November. Housing markets remain weak, with low demand and the increased number of distressed properties on the market contributing to further declines in house prices and ongoing reductions in new construction. In reaction to worse economic prospects and tightening credit conditions, households have continued to retrench, putting consumer spending on a pace to post another sharp decline in the fourth quarter. In particular, sales of light motor vehicles fell to an annual rate of 10-1/2 million units in October, the lowest level since 1983, and November sales reports are downbeat.

Business activity also slowed in recent months. Excluding the effects of the hurricanes and the Boeing strike on production, manufacturing output fell 2 percent over the months of September and October, orders and shipments of nondefense capital goods fell markedly in October, and most survey measures of business conditions are at or close to record lows.

Amid the bad news, there have been some positives. The pronounced declines in the prices for crude oil and other commodities have helped to reverse what had been a significant drag on household purchasing power through much of the year. And there have been a few tentative signs of stabilization in financial markets. For instance, short-term funding costs for banks and commercial paper issuers have come down recently, and issuance of investment-grade bonds by nonfinancial corporations appears to have held up well. Banks have recently issued bonds backed by the FDIC guarantee. That said, investor concerns about credit quality have increased further, and risk aversion remains intense. As a result, in almost all credit markets, spreads remain wider, maturities shorter, and availability more constrained than was the case before the intensification of the crisis this fall.

The likely duration of the financial turmoil is difficult to judge, and thus the uncertainty surrounding the economic outlook is unusually large. But even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time. In particular, household spending likely will continue to be depressed by the declines to date in household wealth, cumulating job losses, weak consumer confidence, and a lack of credit availability.

The global economy has also slowed. Many industrial countries were affected by the financial crisis from the beginning, but the latest economic data point to a more noticeable weakening of conditions. And emerging market economies, which were little affected at first, are slowing now as well. One implication of these developments is that exports are not likely to be as great a source of strength for U.S. economic activity in coming quarters as they had been earlier this year.

At the same time, the increase in economic slack and the declines in commodity prices and import prices have alleviated upward pressures on consumer prices. Moreover, inflation expectations appear to have eased slightly. These developments should bring inflation down to levels consistent with price stability.

Although the near-term outlook for the economy is weak, a number of factors are likely over time to promote the return of solid gains in economic activity and employment in the context of low and stable inflation. Among those factors are the stimulus provided by monetary policy and possible fiscal actions, the eventual stabilization in housing markets as the correction runs its course, and the underlying strengths and recuperative powers of our economy. The time needed for economic recovery, however, will depend greatly on the pace at which financial and credit markets return to more-normal functioning.

The Outlook for Policy

Include Tesla Motors In Auto Loan Package!!! (Tesla Roadster Video)

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I saw a video on Tech Ticker today talking about Tesla Motors who builds an electric car for 109k. There was a NYT article saying they shouldn't get low interest funding of $400 million included in the auto funding package. What the ffff, why not? If the taxpayer is going to keep the Big 3 from going out of business why not provide funding to a company with a cooler product that could lower prices in the future? I wanted to post about this because I saw an interesting interview with the founder Elon Musk at the most recent Web 2.0 conference which is embedded at the bottom.