Nasdaq's Low Volatility Index

With earnings season over it's laying down for a nap. Would someone pull down the shades and turn off the lights, please?

Government Fiction # 14708: The Savings Rate

The news is replete with government supplied "data" on the economy. Frank Shostak at Mises.org isn't fooled by it. Are you?

Now, since it is not possible to quantitatively establish the status of the total of real goods and services, obviously various data like real income, real personal consumption expenditure, or real GDP that government statisticians generate shouldn't be taken too seriously. The data that are generated by means of mathematical methods is just a fiction.

Yet this fiction passes as the facts of reality, which allows economists to make comments with a straight face regarding the likely future direction of the real economy. The debate is often confined to the decimal point of the rate of growth. Thus it is debated whether the economy will grow by 3.1% or by 3.5%.

The fictitious data are served as a benchmark against which various economic theories are validated. Also, once it is accepted that it is "possible" to quantify the state of the real economy then one can also establish another fiction — the price level. This in turn provides the rationale for the importance of keeping the price level stable. And this in turn provides the justification that the central bank ought to navigate the economy towards the path of stable price level and stable real economic growth.

Red Help Lowers Rates

An article on Bloomberg.com by William Pesek Jr. gives us a good idea about why our long term treasury yields are so low, and it has little to do with domestic "inflationary expectations" or "investors expecting a slowdown in the economy" or any of that other gibberish the experts blabber on about.

Foreign central banks buy a huge amount of these things; the Chinese are one of the biggest holders.

About $250 billion of China's reserves are in U.S. Treasuries. China's purchases ``put Pimco's Bill Gross to shame and contribute to low yields'' in the world's biggest economy, said Nouriel Roubini...

The press tends to hyperventilate over Gross's frequent comments about U.S. debt yields. The reason: He manages Newport Beach, California-based Pacific Investment Management Co.'s $90.6 billion Total Return Fund. Investors might be wise to pay more attention to where the really big money is: in Beijing.

Why do they hold foreign currency reserves, of which Treasury Bonds are a big part? According to Pesek:

Asia's currency-reserve arms race reflects two things. First, a desire to keep currencies from rising so that exports aren't hurt. Second, a determination to avoid a replay of 1997, when the region lacked ample reserves to fight speculators attacking currencies.

You should thank the commies for that low rate mortgage of yours. Their central bank is working hard for you.

It's Getting Warmer

Bloomberg news gives us the latest on the inflation front:

Costs of intermediate goods, those used in earlier stages of production, rose 1.2 percent last month and are up 9.3 percent in the 12 months ended in January. Prices of raw materials, or so- called crude goods, fell 0.5 percent and were up 23.6 percent in the last 12 months.

Crude goods prices are up 23.6% in twelve months! These are the goods that are furthest away from the consumer in the structure of production, the higher order goods. They are used primarily to make the capital goods which, themselves are needed to make and move lower order goods, consumption goods, to there final destinations.

Among other characteristics they are very sensitive to the business cycle. You might even say that they are the clearest evidence of it.

When the boom begins they rise to the sky and everyone is feeling groovy. When the inevitable bust appears, they get crushed the worst and no one will touch them. But you don't buy crude goods so why should you care, right?

Faced with rising raw-material costs, manufacturers are raising prices. Caterpillar Inc., the world's largest maker of earthmoving equipment, said last month that fourth-quarter profit surged 54 percent, helped in part by higher prices. The company raised its earnings forecast for this year and announced a price increase of as much as 5 percent, effective Jan. 1.

...and on down the chain of production they are passed, higher prices. But they would not be sustainable without the artificial expansion of money and credit by the central banks, the Fed in the United States. A price increase here would be offset by a price decrease there; no general rise in prices would be seen.

With all the talk about the Fed focusing in on the fixing of the Fed Funds rate very few people these days keep track of the changes in the money supply. Doug Noland from the Credit Bubble Bulletin gives us the latest Fed data:

Broad money supply (M3) rose $9.3 billion to a record $10.280 Trillion (week of Feb. 6). During the past 38 weeks, M3 has inflated $654 billion, or 9.3% annualized. Over 52 weeks, M3 has expanded 8.2%, with M3-less Money Funds up 8.3%. For the week, Currency added $0.4 billion. Demand & Checkable Deposits fell $26.4 billion. Savings Deposits jumped $24.2 billion, and Small Denominated Deposits increased $2.6 billion. Retail Money Fund deposits slipped $0.6 billion, while Institutional Money Fund deposits rose $11.0 billion. Large Denominated Deposits declined $11.0 billion. Over the past 52 weeks, Large Deposits were up $264 billion, or 23.3% annualized. For the week, Repurchase Agreements jumped $12.6 billion. Eurodollar deposits declined $3.5 billion.

Bank Credit gained $2.8 billion last week (5-wk gain of $103bn) to a record $7.591 Trillion. Over the past 52 weeks, Bank Credit has inflated $676 billion, or 9.8%. For the week, Securities Credit declined $6.1 billion. Loans & Leases were up 12.0% over the past 52 weeks, with Commercial & Industrial (C&I) Loans up 15.3%. For the week, C&I loans declined $3.6 billion, while Real Estate loans expanded $8.9 billion. Real Estate loans have expanded at a 10.9% pace over the past 20 weeks and 14.5% during the past 52 weeks. For the week, Consumer loans were about unchanged, and Securities loans increased $7.6 billion. Other loans declined $4.3 billion.

Total Commercial Paper dropped $14.5 billion last week to $1.675 Trillion. Total CP is up $25.4 billion y-t-d (7wks), while having expanded $241 billion over the past 52 weeks, or 16.8%. Last week, Financial Sector CP borrowings declined $13.5 billion to $1.537 Trillion, with a 52-week gain of $247 billion, or 19.2%. Non-financial CP declined $1.0 billion to $137.7 billion, with a 52-week decline of 4.0%.

Now I ask you, do those annual numbers leave you with the impression that we are living in a restrictive monetary environment?

Take monetary expansion down to zero and let rates go where they will, then we'll call it neutral.

Until then the business cycles will continue.

Big Cap Twenty

This weeks IBD big cap twenty list is out, you can see the first ten here and the second ten here.

Looking it over, there are a few things that one might notice. First, some of the biggest leaders have fallen off since the earnings season began. As IBD points out, Apple, Google, Ebay and Yahoo are gone. Mainly taken out by huge price corrections, and from here on out long stock holders will probably be using rallies in these stocks to unload more of their holdings because they know the short term party is over.

Second, the list is dominated by oil and commodity related names: SLB, HAL, PCZ, OXY, BHI, TLM,WFT, NEM. Also up are transports and big capital builders: NSC, CAT, BNI, CNI; and the big money houses of: LM, MER, LEH, and GS.

Techs are barely represented with BRCM and ADBE.

What's the point, you ask?

It's looking more and more like the beginnings of the Mises-Hayek Austrian business cycle. Money and credit is created out of thin air by the central bank providing "liquidity" to the economy and lowering the complex of interest rates below what would have existed without their intervention.

These false signals induce capital investments that otherwise would not have occurred, the boom phase, and lead to malinvestments which will eventually have to be corrected by business failures and unemployment, the bust phase. There are no free lunches, as Uncle Miltie has said.

But the desire in them to maintain political power is overwhelming. So the beat goes on...

Intro to Polycentric Law

I know you've been looking around for brief explanation of Polycentric law. Tom W. Bell offers one up here.

Economists since Adam Smith have argued that competition in production serves consumers' interests, while monopolies tend toward sloth and waste. Gustave de Molinari, editor of the Journal des economistes, was probably the first legal theorist who dared to ask why this should not be as true of the law as it is of apples, cotton, and iron. He argued that under the state's monopoly of law " Justice becomes slow and costly, the police vexatious, individual liberty is no longer respected, [and] the price of security is abusively inflated and inequitably apportioned. . . ." He therefore advocated a non- monopolistic legal system and projected that once " all artificial obstacles to the free action of the natural laws that govern the economic world have disappeared, the situation of the various members of society will become the best possible."

Thanks to Stefan Karlsson for the pointer.

The Trade Deficit Story

Frank Shostak at mises.org explains why the trade deficit is not a threat to the economy but the central bank is.

Our analysis doesn't imply that the US economy is in healthy shape - far from it. However, what we maintain is that the key factor behind the erosion of US fundamentals is not the widening in the trade account as such, but rather the policies of the Fed. During the reign of Alan Greenspan between August 1987 and December 2005, money AMS has increased by 173%. Greenspan's strong monetary pumping was accompanied by a massive artificial lowering of interest rates. The federal funds rate was lowered from 6.5% in 2000 to 1% in 2003. Obviously then such reckless policies must have severely undermined the process of real wealth formation. However, focusing on the trade account statements only diverts the focus of attention from the true culprit behind the erosion of US economic fundamentals.

The fear of a growing trade deficit is used to bully protectionist legislation through Congress, the threat of which could easily disrupt the economy and send the market into a freefall.

Then again, if you happened to be long puts, that would be a good thing.

VXN: Nasdaq Volatility Index

On the rise through January. What it means is that prices for both calls and puts on the nasdaq 100 stocks have been on the rise.

A number of worries for the market are out there including earnings season, the FOMC meeting, oil and other commodity prices continuing to go higher, and Iranian sanity problem, to name a few.

CBOE Plans New Exchange Index

The CBOE follows the lead of The Moon and the Sixpence and announces plans for an index of one of the fastest growing new industries in the country: trading exchanges.

The index "will provide an essential composite look at this new market, and will provide the benchmark that investors and analysts will use as the indicator for this emerging business sector," said CBOE Chairman and CEO William Brodsky in a statement. He expects options and futures to be listed on the index soon.

The Index symbol wil be "EXQ".

Trading and Innovation

Trading is a boom industry. Here are the graphs of some of the more interesting publicly traded trading related companies in the United States.

Look at the Chicago Mercantile Exchange, CME. After forming an eight week base on top of a long run up, it still has the strength to break out to new highs above $400.

The Chicago Board of Trade, BOT, an IPO from last year is also doing well. The quick money is gone. It may now be in stronger hands and under accumulation. Yahoo Finance shows that The Vanguard group is the only significant holder but a few other big funds have started to take positions at the end of last year.



Both the Arca Exchange, AX, and the Nasdaq, NDAQ, have shown big volume rallies off of their moving average supports with similar chart patterns.


AX of course owns the Pacific Exchange and is merging with the NYSE.



Do you want a link to most of the exchanges around the world? I found a pretty good one here.

This stodgy old industry is becoming more dynamic as new technology forces its way in, and those who refuse to innovate, get bought out or die.

Competition from abroad forces regulatory changes in the United States and elsewhere that never would have occured without it. Those who benefited from the lack of competition in the past would have watched their order flow dwindle down to a trickle.

The Self Regulated Organization, SRO, model is a failure. A P&L is crucial in decision making. It forces institutions to serve real people, and rewards the best for doing so efficiently.

This is an industry that is slowly being released from its bureaucratic bondage, into a world where it has more to gain from tech innovation than any other. These firms will come to realize that they are nothing more than networks.

An exchange used to be defined by its location. But no longer. The concept of an exchange is being released from its earthly location. If the Pacific exchange abandons it's trading floor in San Francisco and goes virtual with all of its market makers participating electronically, is it still the PCX? The customer may not even notice a change.

...and you are holding IBM in your IRA?

Genius.

Time's Up

According to the Stock Trader's Almanac, the end of January signals the end of the best three months of the year for stocks. The average gain for the Nasdaq since January, 1971 is 3.7%.

For the S&P 500, the probability of an up day today is about 67%, but tomorrow is historically one of the best trading days of the year with the probability of an up day at 81%.

It also happens to be the day of the FOMC meeting.

Bernanke's coming, look busy.

Half-Point Rate Increase from the Bernanke Fed?

Jim Otis over at Prudentbear.com speculates on one rate manipulation strategy for new Fed Czar Bernanke.

As an exercise for the students, compare and contrast the results from raising a boring quarter point now and another quarter point at the next meeting, versus a bold half point increase now and no increase at the next meeting. The following Fed meetings will show the timing value of a sharp increase in rates now. By then, the media will talk about little more than the dreaded deflation toward which our economy is surely falling, and the Fed will be able to cut rates by a half point at each of the next few meetings to protect us from the dastardly deflation fate which would otherwise crush our economy (despite the contrary evidence offered by energy and metals prices which will be setting new record highs). Those sharp rate cuts over the spring and summer, combined with the ever increasing M3 money supply which will no longer be published, will have our economy running at full speed again by late fall, and will push stock prices to record highs. Coincidentally, that will put voters in a good mood by November.

If you were the new head of the Fed how would you play it?

GM, Kerkorian Outed by Matias

In my last post I noted that GM showed unusual strength on that big down day on Friday. Evidently much of that strength was due to Kirk Kerkorian's stealthy accumulation of More GM shares on the cheap, raising his stake to 10% of the company.

Kerkorian, rumored to be a dedicated reader of this blog, The Moon and the Sixpence, realized he'd been outed and decided to go public with his activities.


Note the last three bars (elongated) are the Monday, Tuesday and Wednesday just past. Friday, which on most other stock charts is a big red slash, is an almost nonexistent dot on GM's chart.

Why is he buying again?

His latest move may indicate he believes GM is listening to his ideas for improving the company. In a speech to Wall Street analysts this month, Kerkorian's top aide Jerome York called on GM to cut its annual dividend in half and set profitability goals and a timetable for achieving them.

York said Kerkorian was interested in buying more GM shares and was optimistic about its recovery efforts, but he said it was time for GM to get into a "crisis mode."

GM just broke it's intermediate term downtrend. The company will report quarterly and full year results today.

Dow Check

Here are the graphs for most of the Dow stocks.

Of the bunch, McDonalds is the only one that had a strong up day on Friday, when most of the market got whacked.

T, Pfizer and Merck showed mild relative strength. And surprise surprise, GM may be forming a bottom while no one else is paying attention.

Nasdaq Check

With the QQQQ as a proxy, on a 3-year chart showing strong support at $40. Let it come in, then if the market action starts to look better, get long.

INGR Closing

We are short the Jan 45-50 put spread which means we are short the 50 puts and long the 45 puts. On expiration both will go to parity at the end of the trading day. Since the stock is around $49.50, parity for the 50 puts is 50 cents, and for the 45 puts zero.

All we really need to do is buy back the short 50s before the close.

Assuming that the market will be neutral, the stock should be drawn to $50 a share intraday and when it is, those 50 puts will have little value--their price will drop. So when the stock makes a run up through fifty, we should buy them back. Going into the morning let's keep a 20 cent bid in mind. But unless the stock runs up big, we will buy them back by the close.

To remind you, the opening trade was selling this put spread for $1.90. Let's see how well we do closing it.

AAPL legging Out

Apple, we'll be an $.85 bid on our Jan 80 puts to close. If it trades, we'll still be long the Jan 75 puts from the spread we sold on Monday.

Quick Charts; Oil and Exchanges

Here are a few good oil related stocks and exchange and trading related stocks. We'll need them in the future.

CMED Out

Just as I thought, the stock tried to punch through the $40 mark, as you can see on this intraday chart, but failed and closed down.

Fortunately we had a $5.80 offer out on the Jan 35 calls which got taken out on the stock's run up, and we then closed out the other part of our vertical, the short Jan 40 calls, to close.

Bought for $1.50, sold for $3.60.

$210 profit per spread on the initial $150 investment.

CMED, Legging out

We paid $1.50 for the CMED Jan 35-40 call spread--buying the Jan 35 calls and selling the Jan 40 calls--and since the stock has met our expectations we are looking to get out as the stock hits a ceiling at $40.

But CMED presents a problem common to stocks with illiquid options markets; the bid-ask spread is wide and we don't want to give that much money away.

On tuesday the stock closed at $39.41, and the Jan 35 calls, the part of our spread that we are long, was $4.60 bid, at $5.40--$.80 wide. Too wide.

We'll put out an offer to sell this Jan 35 call at $5.80 and see what happens. Why?

If the rest of the market is neutral we can bet that CMED will make another attempt at crossing above $40, even if it does not close above it. When it does make the run, those Jan 35 calls, which are deep in the money, will move up almost as much as the stock itself.

So if the stock moves up the required $.60 to hit the $40 mark, the calls should move up, let's say $.50. The $5.40 offer on the exchanges will rise to $5.90 uncovering our offer at $5.80--and we will become the best one; the next to sell to those momentum call buyers.

Even if the professionals keep lowering their offer to remain the best one, the stock may continue to rise and they will be forced to fade and maybe buy our call themselves in order to get us out of their hair.

Once we sell the 35 call we can pay the offer on the Jan 40 call or work out of it, and we will be out of the spread.

In the real world you can react to the market in real time, but it is always good to go into the trading day with a plan. As old Gomp used to say "ya've gotta have a plan". Of course that always included a sixer of King Cobra...

STJ Missed

Do you like apples?

Well I turned around and wasn't paying attention to STJ for a few days while it came back in to $50 and support at its 50-day moving average and so I missed my chance to sell the Feb 50-55 put spread for fat cash how do you like them apples?

AAPL Trade

AAPL Jan 75-80 put spread let's hypothetically sell it at a $3.20 limit. If the stock comes in closer to $75 during the day (mon.) it might get taken. The stock should find support @ $75 after it broke through and closed above resistance there.

As we've noted before, vertical spreads have a limited profit and a limited loss. To sell a Jan 75-80 put spread, you have to sell a Jan 80 put and buy a Jan 75 put. The difference between the two prices is what the spread trades for, if we sell it, someone else buys it.

Then net amount of money goes into our trading account and sits there until we close out the trade by buying the same spread back. Hopefully for a lot less than we sell it for if our offer gets taken.

Stay tuned...

China Shifting Away from the Dollar?

If so, the dollar gets weak and long term bond yields rise.

Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves - currently accumulating at about $15bn (EU12.4bn) a month - it could put heavy downward pressure on the greenback.

Goods imported to the U.S. will themselves become more expensive, and will no longer have as much of a dampening effect on domestic prices here, paving the way for a "surprising" uptick in future CPI numbers, including the phony "core" rate of inflation.

However, according to Stephen Green, economist for Standard Chartered in Shanghai, although the language was "vague", Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets.

"It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities," he said.

And their appetite for commodities from around the world will continue to grow. Thanks to prudentbear.com for the pointer.

Under the Skin, All Central Banks are Alike

On the Prudence of China's central bank, again from Bloomberg.com:

"The People's Bank of China plans to restrict growth in M2, the broadest measure of money supply, to 16 percent this year, the central bank said on its Web site, citing an annual working conference held yesterday."

And Citigroup's best chimes in...

``The M2 target is in line with the aim of having a healthy and stable policy,'' said Huang Yiping, Citigroup Inc.'s Hong Kong-based chief Asia economist.

He makes it sound so easy...

``The M2 target is in line with the aim of having a healthy and stable policy,'' said Huang Yiping, Citigroup Inc.'s Hong Kong-based chief Asia economist. ``We aren't expecting any big tightening moves until inflation picks up and becomes a risk.''

China's consumer prices rose 1.3 percent from a year earlier in November, compared with a 1.2 percent gain in October. Inflation has eased from a high of 5.3 percent in July and August 2004 after the government clamped down on bank lending to industries such as steel and real estate.

It will be fun to watch all of this unfold.

No Inflation Here

"Inflation? What inflation? Didn't we tell you the core CPI was low--nothin' you needed to worry about?"

Yeah, sure.

Another piece by Bloomberg (Commodities rise to Record...) in the growing body of evidence, that in spite of the 13 headline-capturing rate hikes by the Fed, it has actually been a prolonged period of easy money.

The core rate of inflation is only two percent, you say? Man, you are well trained!

From a story over at the Financial Times (FT.com), metals prices continue to surge.

More to follow...

AAPL, Bite It?

While it's better to wait until a stock is trading near it's 50 day MA and basing for six to eight weeks, watch AAPL if it closes above $75 on strong volume. You may get paid off for taking a bite.

Go East Young Man

Think the U.S. is the leading growth market for retail equity derivatives? Think again. Think kimchi and...well, read on at FT.com.

Is the Alleged Tight-Money policy Over?

From Bloomberg:

The number of rate increases needed to control inflation ``probably would not be large,'' yesterday's minutes from the Fed's December policy meeting showed. The ``measured'' phrasing was retained to avoid any suggestion of bigger rate increases, the central bank said.

No wonder they want to get rid of M3, managing 'inflationary expectations' is half the fun of it.

Market in the Rear View: Looking Forward

Using the qqqq as a proxy for the stock market, here is a two-year weekly chart showing the nasty fall the market took at the beginning of last year; dropping about 1/8th of its value in the first three months of the year and then using the Spring and the Fall to recover.

$40 has been the key level during this period for the q's, providing resistance to the upside, and will also provide support, when the stock starts to break lower.

This last end-of-the-year rally has been low on volume, and looks to be running out of steam. The return to the $40 level for a test will not be far off.

Short rates have risen and may continue to do so as the Fed attempts to fight the very real threat of rising prices, i.e. "domestic dollar devaluation"; a problem which was created, of course, by the Fed itself.

The yield curve has inverted, increasing the odds of a recession next year. An inverted yield curve simply means that it no longer pays banks and other financial institutions to do what they do: borrow short term money to lend it long term. It's selling something for less than you buy it for, over and over again.

When lending is unprofitable, the boss hits you over the head and tells you to knock it off. So all sorts of productive activity doesn't get financed and that means it doesn't happen. Business slows. Bubbles burst. people feel poorer.

What could prevent a recession from happening next year?

The always easiest answer is that the Fed could return to her old ways and start pumping it out again like the drunken prom queen she is. Stop kidding us honey, you know you love it!

Another very real possibility is that some kind of tax reduction legislation gets pushed through sparking another growth cycle with an unexpectedly big market upside.

The establishment fears deflation like a liberal fears virginity; odds are, they'll do whatever it takes...

Greenspan: The Trailer...

Stefan M.I. Karlsson, like Murray Rothbard before him, isn't pulling any punches when it comes to Alan Greenspan and his legacy.

"...apart from inflation and economic imbalances, the defining characteristic of the Greenspan Fed has been its dishonesty. We have already seen how Greenspan claimed to have mimicked gold standard conditions. Moreover, instead of admitting how he was responsible for the tech stock bubble through the creation of moral hazard and suppression of interest rates, he blamed the bubble on "irrational exuberance." And instead of admitting his role in creating the housing bubble, he denied that there was such a bubble. Later, when he admitted that the housing bubble was real, he spoke out against it as if he had nothing to do with having created it in the first place."