Black Swan Insights

Don't Believe the Hype: Apple is Not a Cheap Value Stock

2013-04-24T11:49:00.001-07:00

A quick blurb about Apple's earnings.

Apple reported earnings last night which beat already lowered expectations. Little surprise. Under-promise over deliver as usual. However, guidance was very poor. That has not stopped the usual Apple groupies from proclaiming that Apple has become a value stock with a growing dividend and share buybacks. This is completely false.

On the surface Apple appears to the layman cheap. Compared to 2013 earnings expectations, Apple trades at a 9 P/E and a forward P/E of 8.3. What more could a value investor want? The reason that Apple is trading at a low valuation because everyone expects earnings to decline in the future. This is a key aspect which most investors fail to realize. When a non-cyclical stock trades at a P/E of lower than 10, the market is expecting declining earnings--analysts just have not realized this yet. In fact the market is expecting a sharp decline of at least 20% compared to analyst's 49.00 in earnings expected for FY 2014. The concept that Apple is cheap is noting more than a stock market mirage created to suck in low-informed investors into a massive value trap. If anything, Apple is a short not a buy at $414 a share. Expect it to steadily decline over the next year as more and more investors realize that the growth will disappoint to the downside.

And remember--those stock buybacks are nothing more than a waste of shareholder money. Buying back stock at inflated prices when earnings are declining is a recipe for disaster. I pity anyone owning Apple (e.g Greenlight Cap and about a billion other hedge funds). The Apple Titanic is sinking, better abandon ship before the whole thing sinks and there wont be enough lifeboats for everyone.

Black Swan Insights.

AP's Fake Terror Tweet: The Beginning of For-Profit Terrorism?

2013-04-23T14:59:00.001-07:00

Historically, most terrorism was committed for ideological reasons, but now a new form of terrorism may be emerging: for-profit terrorism.

On April 23 2013 AP's widely followed Twitter account was hacked and falsely reported that an explosion had occurred at the White House injuring President Obama. Normally such a report would have little impact, but with 2 million followers, AP's tweet translated into real world consequences for US financial markets. Before the false tweet, US markets were enjoying a rally of about 130 points on the Dow and 14 points for the S&P 500. Within 3 minutes of the fake AP tweet, the S&P 500 had crashed 13 points with large gaps seen in many stocks. Zerohedge reports that during that time 260,000 S&P contracts traded with a notional value of $20.4 billion. A large amount of money was made and lost during this time, all because of a fake news report on a twitter account. While this instance was isolated and minuscule in the general course of the stock market, it may mark the beginning of a disturbing new trend where terror is used for financial gain.

The rapid dissemination of information through mobile and social media is a double-edge sword. People are more connected to their friends, families, and employers despite living 1000's of miles apart in some cases. Information is no longer controlled by a top-down mainstream media hierarchy which was vetted by editors and producers before dissemination to the masses. Instead information can now be transmitted almost instantaneously be anyone with an Internet connection, bypassing traditional forms of media such as TV or radio which had controls to prevent false or unsubstantiated stories from breaking. This new form of unedited information has the same power to change the course of events as traditional mainstream media information. Malicious actors (whether state-sponsored or independent) could use this new technology to make money.

Consider the following example. A man in Times Square starts shouting that the President has been shot and is dead. He runs around telling everyone that he has a source at the White House that told him this was true. What would be the effect of this false statement? Most likely nothing. Some by passers may get upset and call the police to report the deranged man for making threats against the president. The point being that no real world impact occurred. Most likely, the event will be considered a non-event and not covered by the media.

Now consider another example. Hedge fund Alpha wants to make a quick buck in the stock market. Hedge Fund Alpha purchases the services of an accomplished hacker to break into the twitter account of AP and post a false report that "Terror in DC--the president shot and killed at public reception--- foreign terrorists thought responsible--Washington on lock down--more news coming". Knowing that this headline would cause the market to drop precipitously, Hedge Fund Alpha shorts a large amount of S&P 500 futures or buys puts. Within minutes, Hedge Fund Alpha has made millions of dollars and promptly closes its positions. After 10 minutes, information comes out that this was a false report and that AP's twitter account was hacked. The White House Press Secretary tweets that the president is fine and all is well in the West Wing. AP asks Twitter to suspend its twitter account in order to prevent further misinformation from occurring. The problem is that the damage has already occurred. Investors lost money as stocks plummeted, while Hedge Fund Alpha collected large profits. Keep in mind that this whole event happened in less than 10 minutes. What was the cost of this illegal hack operation for Hedge Fund Alpha? The answer is not much compared to the millions in potential profits. All the hedge fund had to do was to hire a hacker and not tell them what the hack attack was designed for. You could probably hire a computer hacker for a trivial amount (lets just say $50,000), provided they did not understand the goal of the operation.

The above example illustrates how simple and cost-effective this fake terror story could be generated and disseminated to the world. While the story was quickly debunked as a false news item, it succeeded in its objective by creating a temporary panic in the stock market, allowing nefarious operators to make some fast money. While this fake terror scenario was relatively benign (e.g. no one was physically hurt or injured), the incident raises an important point regarding terrorism: it can be very profitable.

Now suppose Hedge Fund Alpha wants to go a step further and actually influence events by committing a low-scale attack against a specific company in order to profit from the events. In this scenario, the attack could be a cyberattack against a company which primarily relied on its website to make money (e.g. Amazon.com, Google, etc). This is not without precedent. Many companies over the last few years have reported denial of service attacks against their websites. However, for the most part these attacks are done by disgruntled low level hackers who take down the site for a few hours at most. Sometimes they post explicit or incorrect images on the website, like seeing a naked woman when you go to bankofamerica.com. Sure its embarrassing for the company, but does little to impact corporate profitability or stock price. Now imagine that a well financed organization with millions of dollars in capital engaged in a well coordinated and persistent attack which shut down Amazon.com. Just when Amazon thinks it has restored the website, the hackers slip a malicious virus into Amazon's network which artificially lowers the price on every item to $1. These kind of well planned attacks continue for 6 days until Amazon finally regains full website functionality. A few days later Amazon announces that the hack attack also resulted in credit card information on millions of customers to be stolen. This attack would have cost Amazon 10's of millions of dollars of profit and hundreds of millions in revenue, along with a serious breach of public trust in the company. There is no question that the stock could decline during the whole incident, a positive for anyone betting against the company through short-selling or puts.

While the above scenario is unlikely considering how large Amazon is and the thousands of computer technicians it undoubtedly employs, this is not the case for smaller companies who could not defend themselves against such an organized and persistent cyberattack. For smaller or weaker companies this attack could very well force them into bankruptcy. We have entered a new world where this type of scenario is possible.

Black Swan Insights

MACRO UPDATE: Buy, Sell or Hold?

2013-03-18T18:27:00.000-07:00

Well. I am finally back to the blog after a very long and pleasurable hiatus.

I am going to begin publishing a weekly survey of the current macro environment with my various trading positions and predictions.

1. S&P 500 Position: Neutral/with downside bias (e.g.would wait for a correction before buying stock).

If somebody put a gun to my head and forced me to by a stock I would chose a consumer staple stock over cyclical. The best stocks on earth are the tobacco stocks like Altria (MO) and Lorillard (LO). They pay 5% dividends which increase over time. They have a captive customer who is physically and mentally compelled to purchase their product. Buy. Hold. Reinvest Dividends. Retire Rich.

Furthermore, sentiment is too high as indicated by the NAAIM Manager Survey sentiment which currently stands at 85%. Anything over 80 indicates a top for the market.

2. Gold & Silver Position: Buy/Accumulate

Gold has corrected over the last few months and represents a good entry point. With the Fed promising to print money forever, why not own gold? I am happy that I get to buy gold on sale around $1580-1600. Furthermore, the large commercials have dramatically cut their short positions, indicating that they expect higher prices. HSBC noted that gold fundamentals remain positive because of "rising global liquidity as the likes of the Bank of Japan ramp up quantitative easing, rising inflation expectations, currency depreciation and geopolitical tensions."

Furthermore, the Cyprus crisis is likely to keep a bid under gold writes UBS:

"For now, the risk of immediate contagion to otherperipheral countries remains limited, but the Cyprus precedent certainly cannotbe shrugged off particularly if things deteriorate elsewhere...As people start to worry about the safety of their deposits, gold would become an attractive alternative and an escalation of these worries would prompt a return of fear-related physical buying."

3. Oil Position: Sell/Short

Too much oil and not enough places to put it sums up the oil market. The chart below shows the surplus amount of oil slushing around the US. US oil consumption is declining and production is growing. Not a good combination for Crude oil. Furthermore, speculators are long crude, which means it is likely to go down. Always fade the crowd my friends. It is not a guaranteed win, but puts the odds in your favor.

And this trend of massive over-supply is expected to worsen: "According to early estimates from four analysts surveyed by Dow Jones Newswires, U.S. crude oil inventories rose by 1.1 million barrels in the week ended Friday"

4. Treasuries Position: Neutral

No reason to buy treasuries. The Fed is manipulating the market with its "QE till we all die" policy. Rates will remain low despite the improvement in the economy and higher inflation expectations. There is no bond bubble and it will not burst. The Fed will not allow this. If you are dumb enough to own Treasuries beware. The government is printing money to debase the dollar. You will always get your principal back with interest, but will likely lose substantial purchasing power due to inflation in the future.

5. Residential Real Estate Position: BULLISH BULLISH BULLISH.

If you can qualify for a 4% or less mortgage, this is the best time to buy a home. The Federal Reserve led by kamikaze Ben Bernanke has lowered mortgage rates to near all-time lows. If you buy a house, you are in essence betting on inflation which is exactly what the Fed is trying to engineer. This bet is going to pay off for you in a huge way in the future. You would have locked in a super low interest rate of 4% when historical inflation is 3%. This means that in real inflation adjusted terms, you are borrowing money for 1%. Great deal for consumers. Furthermore, with the illegally printing money, homes prices should increase over the next 1-5 years substantially (10-20%). If you put 10% down, a 10% increase doubles your investment.

6. Trade for the Week Position:

Buy Imperial Tobacco (ITYBY.pk) This is the ADR for Imperial Tobacco company which is a large multinational tobacco company with steady profits and addicted customers. Not a bad combination. The stock has strong support at $70.40. I expect a bounce to $73.50.

Happy Trading Everyone!

Black Swan Insights

Buying GLD: A Golden Opportunity For Contrarian Investors

2012-05-08T16:00:00.000-07:00

Back from hiatus. As frequent readers will remember, gold remains a core part of my portfolio (since the beginning of QE madness from the FED). However, from time to time I will take a trading position in the yellow metal when opportunities present themselves. Well, that time is now upon us. I am buying GLD.

Why?

Gold has been in a downtrend since reaching its high back in 2011 around $1913. Recent selling has been initiated on the (I believe) false assumption that QE 3 is off the table. Wrong! Another month of weak unemployment numbers will almost certainly force the Fed into more QE (maybe sterilized in some form) to force long term interest rates even more. QE=Money Printing=Dollar Debasement=Higher Nominal Asset Prices. No rocket science here.

However, the market has failed to realize that QE is back on the table. This case is especially true in Europe where the ECB will be forced into doing more to stop the bleeding. The European public does not want more austerity (outside of Germany). They want more government spending financed by money printing. ECB will initiate more QE or expand its current refinancing operations.

Sentiment on gold is extremely negative which from a contrarian perspective is positive. According to the Hulbert gold newsletter sentiment index (a collection of market timers) the crowd is now short gold-- Here is an excerpt, "Today, in contrast, it is at minus 14.8%, which means that the average gold timer is now allocating about a seventh of his gold-oriented portfolio to shorting the market."

As usual these professional market timers are almost always wrong. They are bullish at the top of the market and bearish at the bottom. So I will be happy to buy when they are shorting.

Obviously, gold could go lower, but the odds favor that we are approaching a major bottom in gold.

Black Swan Insights

Head and Shoulders Top on Silver Wheaton (SLW)

2011-10-02T15:54:00.000-07:00

My silver bug friends are going to hate me for this, but it looks like Silver Wheaton (SLW) is completing a massive 11 month head and shoulders top formation. If this pans out, the price target is around $15, which would suggest a steep 50% decline for the stock. See weekly chart below

Along with a strong bearish technical pattern, SLW has weak fundamentals. The price of silver is falling with the whole commodity complex as the world starts to price in a collapse of the euro and a hard landing in China. Silver is now below its 200 day moving average and officially in a bear market (20% off its high). From a macro outlook, general market conditions do not favor a higher stock price for SLW. About the only positive you can say about SLW is that it is short-term oversold.

FD: I am going to short SLW on Monday at the open. To hedge any possible loss on this trade, I am going to purchase the Oct 29 call option. I prefer this to a simple stop loss. Why? HFT manipulation has made stop losses very risky (alla May 6 flash crash).

Update: Postion filled at 30.14 at the open.

Black Swan Insights

Scared Shitless: Investment Manager Sentiment Plummets to March 2009 Levels

2011-09-29T12:16:00.000-07:00

Considering that the market has done nothing for the last few weeks, except bounce up and down in a very tight range, one would think that sentiment has cooled off from August's market crash. You would be wrong. The NAAIM sentiment survey released today shows that investment managers are practically on the ledge and ready to jump to their own deaths to escape this vicious market turmoil. Apparently, they just realized that their end of year bonus is not going to be filled with gold or jewels, but instead with a lump of coal thanks to their poor performance. NAAIM sentiment came in at 4.18, a level not seen since the March 2009 lows. This also means that investment managers are so depressed that they are almost completely net short (with leverage). It should be remembered that this is a contrary indicator. You generally make money by doing the exact opposite of these pigeons. Right now it is saying that we may be nearing an important low in the market. This is quite interesting because other sentiment indicators like the AAIII poll are not confirming excessive bearishness.

One thing to keep in mind when trying to use this indicator for market timing. Back in March 2009 when the market was bottoming, the NAAIM survey held below 10 for three weeks. So it is not a perfect timing indicator, but certainly one worth following.

3/4/2009 2.15
3/11/2009 4.23
3/18/2009 9.97

Black Swan Insights

Quick Update: Closing Sugar Short

2011-09-27T11:11:00.000-07:00

All good trades must come to and end as they say. The time has come for my Sugar short. I caught a nice 14% downside move that was pretty much straight down. It would be piggish of me to press the short any further. When you trade on leverage, you cannot risk a large oversold bounce (you never know if it is the beginning of a large move higher or just a technical bounce).

So why did this trade work so well? Luck. When I shorted sugar the fundamentals were beginning to sour along with a negative technical backdrop. Furthermore, all soft commodities were weak during this period, which pressured sugar lower. In short, the general conditions favored lower sugar prices.

I might consider shorting sugar again on a possible bounce higher.

Related Articles

Shorting Sugar
Update on the Sugar Short

Black Swan Insights

Will the EU Bailout Save the Market? Be Careful What You Wish For

2011-09-26T13:47:00.000-07:00

The endless and increasingly desperate rumors of an EU bailout was enough to juice the stock market higher today. The Dow closed up over 270 points. To me, this has ominous parallels to the October 2008 Tarp bailout of the banks. If you remember the market initially dropped when the US House of ~~Criminals~~ Representatives failed to surrender complete sovereignty to the major banks. A few days later, the big banks made the right payments to the right people to get the TARP bailout approved despite public opposition to the plan. Anyway, the key takeaway was that the stock market immediately began to crash after the passing of the TARP bill. Instead of restoring confidence, the bailout bill spooked the market. People started to freak out that the US financial system must be in deep trouble if it needed $700 billion in additional capital. After all, every Government official and Fed member had assured the market that "the fundamentals remain sound" and other lies.

Below is a chart of the S&P 500 between October 3, 2008 (when the TARP bill was approved) and October 17,2008. The market crashed 22% despite the bailout. The lesson from 2008 was that bailouts don't prevent markets from crashing. Are we repeating history?

Black Swan Insights

Update on the Sugar Short

2011-09-21T13:42:00.000-07:00

A few days ago I mentioned that Sugar was a good short from both a fundamental and technical view. So far the trade has done well. The longs are currently in liquidation mode as market sentiment has changed dramatically. A few weeks ago the bulls were focusing on Brazil's weak crop estimates. Now, everyone is worried about the expected global sugar surplus of between 4-7 million tons for the 2011/2012 season. Furthermore, the risk on market sentiment has been turned off courtesy of Europe's financial implosion.

This situation represents trouble for the sugar bulls as the market is heavily long sugar. The sugar market is also at a key technical level. See chart below

March Sugar is currently trading at 25.84, which is just above the early August low of 25.38. If sugar fails to hold this level than it exposes 24 as the next downside target. If 24 is breached then we could see sugar fall to 22.

Volume, as you can see from the chart is starting to pick up as spec longs sell their losing positions. Adding to the bulls' woes, the CME's margin hike made it a little more expensive to hold sugar.

I remain short Sugar.

Black Swan Insights

Shorting Sugar

2011-09-16T11:22:00.000-07:00

With the market gyrating back and forth with no real conviction either way, I have been looking for uncorrelated trades, which can protect me from the non-stop risk on/risk off algo controlled market. Well I think I have found an interesting short opportunity: Sugar.

Below is a chart of SGG, the ETF which tracks Sugar.

You can see from the technical setup that Sugar is looking very heavy, with a possible double top pattern. Along with a weak technical picture, Sugar also faces poor fundamentals. The market is expected to be in surplus of at least 5 million tons for the 2011/2012 season. The only news that supports the market is a lower than expected harvest out of #1 exporter Brazil. However, this decline in output will be easily offset by record crops in Thailand, Europe, and India, along with strong harvests out of Russia and Ukraine. So we have a situation where the price of sugar has been bid higher on Brazilian crop concerns, but this should be short lived as market participants realize that the market will be well supplied.

Another reason I like this trade is because sugar has a very low correlation with the stock market (around 0.1), which provides at least some diversification.

Finally, the sugar market is dominated by long speculators right now. Non-commercial traders are currently long 155,000 contracts, meaning that they will be quick to sell on any decline. Another bearish indicator is the fall in open interest, signaling a lack of conviction in this latest up move.

The trade is pretty simply. Short SGG with a stop at 105.

UPDATE 9/16/2011---Well obviously I got really lucky on my timing on this trade. At the time of this writing 11:18 am pst, Sugar is down over 5% on a Canplan report, which suggests the Brazilian sugar crop will be stronger than expected. I am still short. There will much more long liquidation in the days to come.

Black Swan Insights

Disclosure: I am short SGG at 100.40

Merger Arbitrage Opportunities---Free Money....But

2011-09-09T11:21:00.000-07:00

With the recent chaos in global markets, merger arbitrage spreads have widened considerably. This has made the risk/reward more favorable, allowing enterprising investors to take advantage. Below are some of the best opportunities in the merger arbitrage area:

From Dow Jones

Varian Semiconductor Equipment Associates Inc. (VSEA), Applied Materials Inc.(AMAT) 
 
Premium offered: $1.03 or 1.66% 
Acquirer: AMAT 
Target: VSEA 
Offer per share: $63.00 cash 
Value of outstanding common equity: $4,752,090,000 
Target share price: $61.97 
Acquirer share price: $11.05 
Expected closing: End Of 2011 9/25/2011 (might be October at the latest) 
Annualized gain: 37.92%

Motorola Mobility Holdings, Inc. (MMI), Google Inc. (GOOG) 
 
Premium offered: $2.40 or 6.37% 
Acquirer: GOOG 
Target: MMI 
Offer per share: $40.00 cash 
Value of outstanding common equity: $11,772,000,000 
Target share price: $37.61 
Acquirer share price: $533.51 
Expected closing: End 2011-Early 2012 1/1/2012 
Annualized gain: 20.39%

I don't normally like merger arbitrage because the risk is generally too high and the reward is too low. However, with these kind of annualized returns and ZIRP by Banana Ben and his merry traitors at the Fed, these look like good opportunities, without having to bet on the direction of the stock market. After all, anything is better than 0% at your bank.

Warning: Merger Arbitrage often seems likes a sure thing...and it is until one of the deals falls through and you watch the stock drop 20-30%. The deals listed above are both all cash deals and have a very high likelihood of going through. But no guarantees.

Black Swan Insights

Marc Faber's September Outlook: The Calm Before the Storm

2011-08-30T21:00:00.000-07:00

Marc Faber is out with the latest issue of his famous Gloom, Boom, and Doom Report which is always a must read for serious investors. Unlike most of the other talking heads, Faber has an excellent track record. He correctly predicted the top in the equity markets in Nov 2007 and caught the bottom in March 2009, making his subscribers a lot of money. Here is a summary of his September 2011 report:

1. Stocks---Faber says stocks face two potential outcomes: a brief rally to between 1250-1300 on the SP 500 before another leg down (and breaching the 1101 low) or a prolonged trading range with 1100 being the low and 1300 as resistance. Faber thinks the first outcome is more likely, but this could change depending on Fed policy (aka: money printing). Another reason for Faber's bearish posture is the unfavorable seasonality of September (worst month for stocks historically). Investors who have exposure to stocks should use any bounce to sell. If you feel compelled to own stocks, Faber recommends blue-chip stocks like Pepsi and Johnson and Johnson.

2. Gold--Extremely overbought at this level. Could fall to $1500-1600 range during the correction. Faber noted the bizarre relationship between US treasuries and gold. Concludes that the people buying gold were not worried about inflation but a collapse of the entire financial system. Gold should be viewed as more of an insurance policy rather than an inflation hedge. Long-term gold is going significantly higher. Gold stocks may be the better bet than the physical metal in the short-term as they play catch up.

3. US Treasuries--After a huge, fear-inspired rally, US treasuries are extremely vulnerable to a correction. Faber notes that the Daily Sentiment Index is around 98%, indicating a possible top. Furthermore, the "dumb money," a.k.a. the retail crowd, is very bullish judging by their positioning in the Rydex inverse government bond fund. If you own Treasuries, now is time to take profits.

4. Indian Equities (Sensex)--While generally bearish on equities, Faber would advise the gradual accumulation of Indian shares, noting that they are relatively cheap and represent good value. Over a longer time frame (10 years), Faber thinks Indian stocks could appreciate 7%, which is pretty good compared to other investment options.

5. Macro--"This system has become completely corrupted and is being run for the benefit of the billionaires and banking CEO's who have control of the politicians." Faber has harsh words for Warren Buffett, noting that the investment guru profits not because of his genius, but at the expense of the American taxpayer. Buffett represents the very worst when it comes to crony capitalism. His BAC investment will likely prove very profitable, courtesy of the taxpaying middle-class and Buffett's straw man President whom he controls.

Happy trading!

Black Swan Insights

Nasdaq Sentiment Index Hits All-Time Low---A Contrary Buy Signal?

2011-08-23T11:36:00.000-07:00

The last time this indicator fell by so much was back on June 13 2011 when the NASDAQ sentiment index hit -194. We mentioned (see Negative Sentiment Suggests A Near-Term Bottom) that from a contrary perspective, this was a short term buy signal with the markets likely to rally. SPY was at 127 on June 13th. By July 7, SPY had risen all the way to 135.

Well it is that time again. The NSI has hit a new all time low of -342, showing just how much fear is currently priced into the market. This is a bullish signal for contrary investors who buy fear and sell euphoria as Jim Rogers would say.

I expect the market to trade sideways for a while before the new leg higher. Similar to what happened in late June of 2011. It would be hard to imagine a significant fall from these levels barring some kind of European Lehman event.

click chart for larger image.

Black Swan Insights

Investment Ideas from the Barron's Roundtable

2011-08-14T15:19:00.000-07:00

Find out what the word's top investors are doing with their money during these tumultuous times.

Bill Gross of PIMCO-- "Our best idea therefore is a 10-year Australian or Canadian bond. A 10-year Canadian government bond yields 2.5%. A10-year Aussie bond yields 4.5%. "

Marc Faber--In the near term the stock market is oversold, and a bounce to between 1240 and 1280 on the S&P 500 is possible. New highs above the May 2 high at 1370 are most unlikely for next six to 12 months.

I'm not buying anything right now. But if stocks dropped another 10% to 20%, I might add to the positions I mentioned in the Midyear Roundtable. I also maintain my recommendation to short Salesforce.com [CRM]

Gold is likely to correct, possibly by $100 or $150, but I continue to recommend gradual accumulation.

Archie MacAllaster-- I like some of the insurance companies more than the banks. Hartford Financial Services [HIG] has a book value of $43 a share, and the stock trades around 19. It yields more than 2%. Hartford raised its dividend this year to 40 cents a share from 20 cents, although it was a lot higher before the financial crisis in 2008. Hartford could earn $3 a share this year, so on a price/earnings basis it is very cheap.

Fred Hickey--- I stay with my secular bull-market play in gold. I own bullion and gold exchange-traded funds. The better opportunity right now is in gold-mining stocks. They have underperformed for a while. They are going to get a huge boost on price alone. I like Agnico-Eagle Mines [AEM], Newmont Mining [NEM] and Yamana Gold [AUY] for the second half of the year.

We were short since May a dozen semiconductor stocks, but I have covered them. I wouldn't be short anything now, because I don't know when the Fed is going to pull the trigger on QE.

Felix Zulauf ---I predicted in the Midyear Roundtable ("Buy Low, Stay Nimble," June 13) that
the stock market would go to a low in the fall. The next few weeks will be extremely volatile. I expect the market to go below the latest lows in September.

The central bank will come in to provide liquidity, but timidly at first because the Fed was bashed for QE2. After the fall low, equities will recover part of what they lost into the turn of the year and then fall again. Economies around the world most likely will be in recession next year.
Confidence in our currencies, policy makers and central banks is going down the drain. That will be reflected in a rising gold price. I have long said this isn't an environment for investing in stocks. Hold cash in the form of short- to medium-term Treasuries. Own a lot of gold, and don't have debt.

Mario Gabelli --The volatility we saw in the markets in May 2010 -- hedge funds trying to protect themselves using ETFs [exchange-traded funds] -- has returned, with the result that good and bad stocks are getting crushed. It is hard to figure out where to allocate and reallocate capital. On the other hand, we are getting pretty decent cash flows in certain products such as utilities, where we have taken advantage of the decline in stocks like NextEra Energy [NEE]. One position to which we have added is National Fuel Gas [NFG]. Shares of the company, which is partly a utility and partly a shale-gas play, fell to 55 from
75.
-------------------

I have failed to include Abbey Joesph Cohen's view because she is a certifiable lunatic who only gets paid to pump stocks to retail investors. As such, her opinion is worth less than rat excrement and would only serve to harm readers.

Black Swan Insights

Did We See the Plunge Protection Team Last Night?

2011-08-09T10:24:00.000-07:00

Last night was a strange trading session. The Asian markets followed the US down. The Nikkei was off 4.5%, Kospi down 8%, and the ASX 200 was down 5%. As a result SP 500 futures plummeted another 28.50 points to around 1080. Then the unexpected happened--within a 20 minute period some massive buyer came in and starting lifting all bids in the market. The SP 500 futures almost immediately gained 14 points and went on to recoup all overnight losses. Then futures turned 1% higher. This is a stunning move considering the market was in free fall at the time.

I don't have any proof, but we may have just seen the plunge protection team in action. Just when everything in the world is going to hell, there always seems to be a mystery buyer come in to save the market. The huge move in the SP futures was not in response to any news, which makes the situation very suspicious. I doubt the SEC will ever investigate this considering how busy they are watching tranny porn (see ABC news article).

Oh well, back to your regularly scheduled market manipulation courtesy of the Fed.

Black Swan Insights

Charting the Stock Market Crash of 2011

2011-08-08T17:01:00.000-07:00

Amazing charts show the massive carnage.

Here is a chart of the % of S&P 500 stocks above their 50 day moving average. We are at the same crash levels back in October of 2008.

S&P 500 stocks above 200 day average--its low, but has been lower.

The CBOE Equity put/call ratio--generally a contrarian indicator. We are near the highs reached back in 2008. Everybody wants to buy puts near the bottom.

The VIX--otherwise known as the fear index shows the real fear in this market. We either get a Lehman event or we are near capitulation.

SP 500 Bullish sentiment--not near the lows seen during October 2008 or March 2009, but getting very close.

Baltic Dry Index--used to be a good leading indicator. It is hovering just above 2008 lows.

Based purely on technicals, the market has only been this oversold twice: 5/21/40 & 10/19/87. The SPX was +9.4% and +8.1% a month later according to Sentimentrader.com

While the AAII investor sentiment will be released on Thursday--we can imagine that it is somewhere around 5% bullish and 95% bearish.

Comment: Don't listen to the fools on CNBC saying it is time to be defensive--the time for that was 2 weeks ago before the crash. Now is the time to buy safe stocks for a tradable bounce in the markets. I like tobacco stocks and MLPs (with no commodity risk).

Black Swan Insights

Economy on the Brink--The Fed's Next Move

2011-08-08T13:15:00.000-07:00

With the Fed meeting tomorrow, everyone wants to know what the Fed's next move after this dramatic crash. This is a re post of a previous article which explains the Fed's options during a liquidity trap.

1. Dramatically Change Price Expectations---Recent Fed announcements indicate that they want a 2-3% inflation rate compared to the current 1% rate. One idea is for the Fed to increase its inflation target upward to between 4-6%. To support this new policy the Fed could openly announce that they are monetizing debt rather than calling their money printing--credit easing. The Fed could also buy new kinds of assets such as stocks, corporate bonds, land, etc. This could have the effect of stimulating spending as consumers and businesses fear the loss of purchasing power. It would make it clear that the Fed is serious and will do everything in its power to create inflation.

2. Cap Treasury Rates (Aka. Operation Twist)--Under this policy option the Fed would agree to cap treasury rates at unreasonably low rates (e.g 10 year at 2.0% and 30 year at 3.5%). They would openly announce the target to the market and state that they will print as much money as necessary to achieve the goal. This would have the effect of lowering the real inflation adjusted yield of the 10 year to below zero. It would reduce the incentive for financial institutions to hold Treasuries and force them to do something with their money.

3. Taxing Currency---- Under this option the government would tax the currency, meaning that the dollar would automatically lose value over a period of time (say 3% every 6 months). This would create a cost to holding currency, giving people and institutions an incentive to spend it quickly, which would increase the velocity of money throughout the financial system. An extreme example of this policy would be the introduction of a new currency, which would lose a certain amount of value over a fixed period of time. The Japanese government considered this option in 1999, but never implemented it.

4. Negative Interest Rates--Like taxing currency, this option imposes a cost to hold money and theoretically forces people and corporations to spend money, which would increase aggregate demand. However, this is a hard policy to implement from a political perspective. It could lead to a flight of capital from the US as savers abandon the dollar for foreign assets. Under this policy option you may have to implement capital controls. What could work is for the Fed to impose negative interest rates on bank deposits held at the Federal Reserve. They could also prevent banks from passing along negative interest rates to consumers. Banks would be forced to do something with all of the money they are hoarding. This policy option would give banks an incentive to lend to the economy.

5. Reduce the Interest Paid on Excess Reserves---One reason QE failed was because banks simply held onto all of the excess reserves created by the Fed. All of this money is simply sitting around doing nothing for the economy. The Fed could reduce the rate it pays on these excess reserves, thereby creating an incentive for the banks to lend the money. While this appears to be a logical policy option, it is not practical because the major banks are largely insolvent. They need the capital to cushion themselves from future credit losses. Even if the Fed was to reduce the rate paid on reserves to 0%, it would not be enough to encourage the banks to lend out the money.

6.Extend Duration of Balance Sheet--Under this option, the Fed would start to move its bond holdings into longer dated Treasuries. The idea would be that the Fed would indicate to the market that it is going to maintain easy monetary policy forever. However, this action would be a de facto admission that QE 1, QE 2 was debt monetization. The last bit of confidence left in the dollar would collapse . The whole goal of QE was to con Americans and foreigners into believing QE was temporary and would be reversed at a later time (readers know better than that). If the Fed starts buying 30 year treasuries, it collapses the illusion forever.

7. Helicopter Drop Money--The easiest way to stimulate aggregate demand is to print money and hand it out to the general population. Imagine everyone in the US getting a check for $25,000. This would automatically create inflation and increase spending. It would also increase inflation expectations, which the Fed considers important. The major drawback is that nobody knows how much inflation this would cause and it might lead to hyperinflation.

As you can see the Fed is not out of bullets. Zimbabwe Ben and his fellow counterfeiters will stop at nothing to create inflation and destroy the value of the dollar, all in the name of saving the economy.

Black Swan Insights

Buying Into a Stock Market Crash

2011-08-08T12:20:00.000-07:00

No, I am not insane. The markets are in free-fall, crash mode, whatever term you want to use. Fear reigns supreme as everyone is talking about another recession, depression, etc. Hedge funds are collapsing as we speak. So what is the trade? It is quite simple: buy. That's right you want to be a buyer of top quality tobacco stocks and MLPs which do not have any commodity price risk. I have also decided to sell volatility (through a call spread) at around 40. Placing a trade like this makes me want to vomit, but historically this is a high probability trade.

During a market crash--which we are experiencing, everything falls regardless of fundamentals. This represents an opportunity for the few smart investors.

Stocks I am buying:

Nustar Energy--stable toll like revenue with a 7% plus yield. So if this is such a great stock, why is it falling so much? Because this is a favorite of hedge funds who like the postive carry. They borrow from their prime broker at 50 bps (if that) and buy Nustar and other MLPS which yield 6-8%. When there is a market crash, these hedge funds are forced to liquidate to meet margin calls.

Altria(MO)--this company sells an addictive product. People have to have their nicotine fix, regardless of economics. Even if you think we are entering a depression, this is still a good stock. They have complete pricing power and control 50% of the market. Current yield 6%.

Gold (GLD)--Over 50% of my portfolio remains in gold (see here). I will not be selling despite the huge move in gold.

Good luck.

Black Swan Insights

S&P 500 Priced in Gold---The Economic Recovery Illusion

2011-08-06T10:53:00.000-07:00

Back in Jan of 2011 Black Swan Insights predicted that the S&P 500 when priced in gold would decline. So far in 2011 this has been the case. The following chart shows just how poorly the S&P 500 has performed this year when priced in real money. The result is shocking. We are now back to the March 2009 lows--and no fiat money printing from Zimbabwe Ben will change this situation.

click chart for larger image

With the ECB officially entering the monetization phase, you can expect gold to continue its upward trajectory.

This issue of money printing and the performance of equity markets is very important. The SP 500 may only be down 4.4% year to date in nominal terms, but in real (gold) terms it has fallen almost 20%. And when you consider the performance of the S&P 500 since March 2009 you can see that it does not exist in real terms. This whole fiat money rally from 2009-2011 has been an illusion to fool the masses into thinking they were wealthier, when in reality they are no better off then at the bottom of the Great ~~Depression~~ Recession.

Below is an embedded YouTube video about visual illusions. As humans we are sometimes not capable of seeing reality when it right in front of us. In my opinion the greatest illusion is between nominal values and real values. Enjoy.

It is a long video (17 mins). If you want to jump to the visual illusions go the 2 minute mark.

Black Swan Insights

Obama's Failure: S&P Downgrades US Debt Rating

2011-08-05T21:49:00.000-07:00

Well it happened--after markets closed, S&P officially downgraded the credit rating of the US. This is a truly historic occurrence which will have far reaching impact on the economy and financial markets. The real question is: What will the stock market do? Will we swoon limit down or shrug off the news and dismiss S&P as a totally irrelevant entity?

A few facts to consider:

The US should have been downgraded years ago. Specifically, when the Federal Reserve decided to monetize US debt in late 2008-early 2009. This action should have been considered an unofficial default by all three major ratings agencies. Countries that print money to pay their debts do not deserve an AAA rating.

The US has defaulted on its debt before. In 1933, war criminal and traitor Franklin Roosevelt took the US off the gold standard and devalued the dollar by over 60%. Why on earth the US was not downgraded for this goes to show just how worthless the ratings agencies are.

A debt downgrade is not the end of the world. Japan lost its coveted AAA rating in 2001. At first, pundits declared that bond yields would surge as investors flee. What happened? Take a look at the "fear and panic" in the JGB market. Oh--that's right nothing happened. People continued to buy JGBs and today Japan enjoys the lowest bond yields on the planet.

The real question is: What happens to the market? I believe this to be a very negative psychological event which comes at the worst possible time for an already fragile stock market. Numerous hedge funds have blown up this week leading to margin calls and liquidations. Investors are scared about the EU debt crisis, and we need a US debt downgrade like we need a bullet in the head. This downgrade could be the tipping point which leads to more selling.

Gold--If you are like me and own gold, you are in nirvana. The gold bugs have been proved correct. The dollar and US debt are no longer safe havens anymore. It is hard to say gold does not continue to surge as investors rush to the ultimate safe haven of gold.

The dollar and Treasuries may rally. I know it sounds absurd, even illogical to suggest the dollar and Treasuries could increase on news of the downgrade, but consider the following: The US is the world's reserve currency with the largest, most liquid debt market. There is simply no alternative for global investors to flee to. What, are they going to buy the euro when it is on the verge of collapse? I think not. As much as I like gold, there is not enough gold to handle trillions of dollar denominated assets. Furthermore, most Asian central banks (including China) will continue to buy US dollars and US debt to keep their currencies from appreciating against the dollar.

By the way, if you look at the chart below, you will see that quite a few bond investors knew in advance of the S&P downgrade (e.g. Bill Gross, etc). Someone wanted out of US bonds before the end of the day.

Obama will go down in history as an unmitigated failure, just like George W Bush. Obama will be the first President to preside over a US downgrade. I don't blame him for his incompetence and lack of leadership. I blame the dumbed down piece of filth Americans who voted this supercilious jackass into the White House. Everyone one of you who voted for him should be stripped of your constitutional rights immediately. You voted for a low-life community organizer from Chicago with no experience into the highest and most powerful job in the world. I remember watching the cheering fools, celebrating Obama's victory. People were running around claiming that the US would be saved and that they would not have to worry about their mortgage or gas bill anymore thanks to Obama. LMAO! Well, now you are stuck with a mental midget in the White House whose only concern is playing basketball with the secret service and vacationing at Martha's Vineyard. He does not give a damn that Rome is burning; he is too busy holding fundraisers and selling out the country.

America you got what you deserved! I hope you can live with the fall-out. I bet you will re-elect Obama in 2012 just to prove how stupid you really are.

Don't blame me, I voted for Ron Paul in 2008 (and will again in 2012).

Black Swan Insights

Market Massacre--- What Happens Next?

2011-08-04T14:21:00.000-07:00

That little EU debt crisis we have been warning about for over a year is finally hitting the fan. The market has fallen over 10% percent in the last 9 trading days, which is similar to a mini-crash. Today the Dow was down 512 points with European bourses performing much worse. Why the dramatic decline?

The realization that the EU is on the verge of collapse is finally starting to dawn on investors. About fucking time in my opinion. More importantly the EURO finally got smacked hard after ECB president Trichet finally acknowledged that future rate increases will not happen. Furthermore, the ECB started to buy Italian and Spanish bonds in a desperate action to restore confidence (did not work). This action caused massive panic in Europe and dumping of the EURO in favor of gold--which was bid all the way up to $1680. The Europeans see the writing on the wall. Either the ECB monetizes all PIIG debt (inflationary) or the EU collapses into oblivion. Natural response is to buy gold.

But, a funny thing happened in the middle of New York trading--gold was deliberately taken down from $1680 to $1650. The rumor on the trading desks was that COMEX was going to increase margin requirements (didn't happen). It is days like today where you really know gold is manipulated by the US government and central banks. Why would gold suddenly go into a flash crash in the middle of trading on no news? I could see if gold fell in Europe along with the market. This would make some sense, but today's move was unjustifiable and clear evidence of market manipulation. The gold cartel did not want to see gold surge to new all-time highs during a market meltdown. Good news is that gold held its own.

Why was gold relatively strong today? Because QE 3 is guaranteed! It may not be called QE 3, but Bernanke and Co. will almost certainly start to print more money or begin Operation Twist 2.0 (manipulating Treasury yields). The market will continue to fall until the Fed injects more liquidity.

That being said the market is getting pretty oversold and could get a token bounce tomorrow with the NFP. The number may not be as bad as expected and that will give a reason for a short-term move higher.

As for how to protect yourself from further market losses? There is little you can do at this point when the vix is over 31 up 50% over the last three days. The time to protect your portfolio is when the vix is below 18 not at panic highs above 30.

From a trading perspective the easiest trade is to short volatility if it jumps to around 35-36. This would likely constitute a short term market bottom. The way to play is through VXX which is mathematically guaranteed to decline over time because of the term structure of volatility. About they only way this instrument could rise longer-term is if volatility became an appreciable asset (impossible). In the intermediate time frame it should be noted that super-investor Marc Faber thinks the SP 500 could fall to around 1100 before a QE 3 bounce.

Today I picked up NS--Nustar Energy MLP an oil storage company with steady earnings and a stable 7% yield. A lot of hedge funds have been flushed out of the name and it looks like a good opportunity.

Have a good day.

Black Swan Insights

Profit From the EU Debt Crisis--Short EUR/CAD

2011-08-02T12:50:00.000-07:00

With Spain having crossed the thin red line into bankruptcy, with its 5 YR CDS surging above 400 bps and Italian 10 year yields rising over 6%, the next chapter in the EU debt crisis is rapidly playing out. I have been thinking of ways investors can profit from this almost certain EU calamity. While on the face of it, shorting EUR/USD looks like a no-brainer, but anyone who has put on this trade has been royally screwed over the last few months. The problem is that the US government along with the Fed is feverishly devaluing the dollar, which has led to a flat EUR/USD trading range between 1.40-1.45. Competitive devaluation at its finest.

I think the better trade is to short EUR/CAD at around 1.3630. The Canadian government is not actively devaluing its currency by printing money, which makes the Canadian loonie stand tall in a world of debased fiat currencies.

If you look at the chart below of EUR/CAD you can see the trend is definitely down (e.g Canadian strength). In addition to strong technicals, you have a favorable macro back drop as more and more market participants realize that the EU is doomed to collapse. I am looking for a EUR/CAD downside target of around 1.32-1.3250.

click chart for larger image

Black Swan Insights

How I Cut $672 Billion From the Federal Budget

2011-07-31T13:07:00.000-07:00

It always sickens me when corrupt politicians say we can't cut the federal budget. They say we have to keep spending our way into bankruptcy to save the economy. Here are 8 simple way to cut $672 billion from the federal budget:

1. End the Wars in Afghanistan and Iraq--Cost savings $160 billion

2. Reduce Defense Department budget by $100 billion. In 2010 we spent $530 billion on Defense. And before people say I am weak on defense let me remind you that the majority of the US defense spending goes to private contractors, bureaucratic expenses, and soldier salaries (+medical, educational programs, day care,etc). I am all for purchasing next generation weapons and keeping the military strong. I just don't like squandering money on a giant bureaucracy, corrupt military contractors (Halliburton, etc), and maintaining a global military empire.

3. Close the Department of Housing and Urban Development--savings $48 billion. It is a complete waste of taxpayer money and completely unconstitutional. More importantly, it has failed in its mission of restoring urban cities. In fact it has made urban cities worse. You can thank the communist liberals for this department.

4. Close Department of Education--savings $47 billion. Federal government has no right to meddle in education or provide student loans. Since the Federalization of education the quality of education has consistently fallen. Our children have been reduced to the level of brain dead zombies who simply repeat government propaganda.

5. Close Department of Commerce--savings $14 billion. Talk about a complete waste of money. The only good this department does is assemble some useful statistics about the economy. I would transfer the statistics people to the Treasury department.

6. Close Department of Labor--savings of $13.3 billion. Another useless government agency.

7. Eliminate Corporate Welfare-- According to the CATO Institute, the US government hands out over $90 billion dollars a year to corporations through direct subsides, tax credits, and other schemes. This is egregious considering corporations never had it so good. They are making record profits while the American economy is trapped in a depression. These companies do not need any more taxpayer funded giveaways.

8. Reduce Government Fraud and Redundancy--The Government Accountability Office has identified approx $200 billion in government waste, fraud, and incorrect payments. If we simply implemented the GAO's recommendations we could save at least $200 billion. This should be easily accepted by both sides of the political spectrum because the GAO is independent and non-partisan. See here for more info. And here

Total Savings: $672 Billion

While $672 billion is a significant amount of money, it is only a portion of what we need to cut in order to balance the budget and restore America's dire financial outlook.

Black Swan Insights

Why You Should Want A US Debt Default

2011-07-26T20:37:00.000-07:00

With all the talk about what a disaster it would be if the US defaults, lets take a look at the benefits. I for one pray that the US defaults because it would force a government shutdown. Here's why:

No More IRS--The most nefarious and feared government agency would no longer be able to harass, extort, and steal your money. No more audits. The income tax is oppressive to the middle class, preventing them from accumulating wealth, while at the same time multinational corporations like GE and Google don't even pay taxes. Would ordinary citizen really miss the IRS and its threats?

No More Foreign Wars--Without money the troops would have to come home. This would save the US trillions of dollars over the next few years. Our troops would no longer have to fight and die for pointless wars in far away lands. The only losers would be the military industrial complex, which would lose hundreds of billions in military contracts---poor them.

No More Government Waste and Fraud---We hear the outrageous stories--how the government spent hundreds of thousands of dollars of taxpayer money researching shrimp on treadmills, jello wrestling in Antarctica, and other egregious frauds. If the US government was forced to shutdown, funding for such fraud and waste would end, saving taxpayers billions. Furthermore, the government would be unable to squander another $100-200 billion identified by the Government Accountability Office as wasteful and redundant (e.g. 15 federal agencies regulate food safety when only 1 is necessary). See here for full article

No More Illegal Government Gun Smuggling Operations--The ATF, through its Fast and Furious Operation has been caught selling guns to Mexican drug cartels and other members of organized crime units. Lets be very clear here--your government has sold weapons to criminals who killed US border patrol agent Brian Terry and thousands others along the US/Mexico border. Do we really want to give the ATF the funds necessary to continue these illegal operations? A government shutdown would stop it. This is just one example of what illegal acts your government is conducting. Does anyone remember Iran Contra? It never ends. I am not even going to mention ATF operations such as WACO and Ruby Ridge (e.g. you government executing American citizens with impunity).

No More Cruel Government Funded Health Experiments--From 1946-1948 the US government funded a health experiment which purposely infected 700 Guatemalans with the venereal disease syphilis. During the 1950s and into the 1960s the CIA through an operation codenamed MK Ultra went around forcibly drugging Americans with LSD and other narcotics in a failed effort to produce a mind control substance. At least one person died as a result of this operation. These are just a few examples of what your government is up to.

No More Government Luxuries For Obama--With the American economy in a perpetual depression, sky-high unemployment, and rising inflation it is unbelievable that Barry Obama gets to jet around like an imperial dictator. The President gets to fly around in Air Force One (which costs billions per year in maintenance and repairs) , dine in luxury (with the very best china), and travel around the world with an entourage ranging from 200-400 bodyguards--all at taxpayer expense. Even his dopey wife Michele gets to bleed the taxpayer to fund her vacations to Spain and the African continent when she has not even been elected to an official office. And to top it all off-Obama gets paid a salary to live like a King. Such actions when millions of Americans go hungry is evil plain and simple. Perhaps if the government shutdown, Barry ~~Sotero~~ Obama would be forced to cut back on his extravagant lifestyle and lower himself to live like the average American for a while.

I don't know about you, but I welcome a US default and a complete government shutdown. And guess what--life would still go on. True the dollar would fall, but most readers of this blog already own gold so who cares. The main point being that there would be no Armageddon scenario, just a little more economic and political freedom for the average American. Does this sound all that bad?

Black Swan Insights

$1700 Gold By Year End Says MF Global

2011-07-11T22:36:00.000-07:00

With the Euro in full-blown collapse, money market funds in trouble and a feeble dollar--the only asset people can trust is gold. MF Global in a research note predicts $1700 dollar gold by December 2011 Dow Jones reports:

Gold is likely to reach a new record high and trade up to $1,700 a troy ounce in 2H, MF Global says in a report. The house expects the yellow metal to trade between $1,650/oz and $1,700/oz in the remainder of the year, and forecasts a 2011 average of $1,551/oz. Gold's current high is $1,576.52/oz, reached on May 2; spot gold is at $1,552.90/oz, down $1.50 from its close in New York. Gold will likely push higher later this year on stronger physical demand from China and India, the house says, while concerns over inflation will boost its safe-haven appeal. "Expectations of more People's Bank Of China purchases to increase China's gold holdings as a means to diversify reserves is another bullish argument supportive of fundamentals," it says, noting that a 1.0%-2.0% increase in mine supply will be offset by better physical demand.

Notice how gold was up during today's sell-off--along with the dollar. As the meltdown in Europe continues, gold will be the primary beneficiary.

ps.

And if you think MF Global is too bullish on gold try this on for size. Standard Chartered in a research report said gold could reach $4,869 by 2020 during a super-bull market scenario. This will likely prove a conservative target if the Bernank has it his way.
Black Swan Insights