Tuesday, June 03, 2014

Good Morning America, How Are You?

I woke up just at dawn this morning (and in the far north that is early early early).  Even though it rained off and on all day yesterday, the river is going down.  It will soon be time to go fishing for rainbow trout and brown trout.  Oh the joy of considering what might be pleasurable today and tomorrow. 

It is still cloudy and cool this morning, but the birds are singing, the hummingbirds are dive bombing me, and my pet crow is squawking.  My lilacs are over, but the peonies will burst into bloom starting today.  

Yesterday I cut nearly a pound of side shoots from my broccoli plants.  My wife and I discussed how many broccoli plants it takes to satisfy just two old people, and we came to no conclusion.  We've ate everything so far, and have not put away any broccoli for the winter. 

Summary:  JUNE 5 - The EURO Show

1.   Remember, June 5 is the Super Mario show at the ECB in Europe.  Expectations are high, and speculation on what will happen is all over the map; except there seems to be a consensus that whatever happens will be good for the equity markets.  Personally, I think the expectation are too high, and investors and traders will find it a oh-hum moment. 

2.   In early going yesterday, a nice trend was set up to the downside.  This may have been due to the ISM data and construction spending miss.  After the first hour, price in all USA stock indexes remained in the 1 hour range.  ISM's key numbers are going in the wrong direction; new orders and employment are slowing, while the cost of raw materials are accelerating.  Fact is the number was too low; so the government immediately revised it to higher than its been all year.  This morning, the government revised again to 55.4, and destroyed any credibility the government had.  Basically, dear reader, there is rot on vine of the US economy.

3.   Overall, Volatility (as measured by VIX) is nowhere.  I've looked under every stone, in every cave, and in the witches brew, and volatility is hiding. Complacency rules the equity markets as institutions (banks, mutual funds, and hedge-funds) add more risk.  They are now using leverage and increasingly exotic vehicles to maintain returns. 

4.   According to Reuters, we have "leverage and complexity amnesia".  I read that to mean human beings easily forget the liquidity crises we went through in 2007-2008, and that now we are relying on the central banks to maintain liquidity. 

5.   Leveraged ETFs have grown immensely in the last few years, as yields everywhere are hard to come by.  Leveraged ETFs use derivatives (or other means) to amplify gains.  The other side of gains, of course is losses.  According to Reuters: "

a.    While the dangers of leverage are easy and instinctual to understand, perhaps the real enemy of the average investor is complexity, another thing which is making a roaring comeback.

b.    Complexity is expensive for at least two reasons. Every bit of fancy footwork, be it a derivative bet or a complex hedging technique, costs money, money which is a sure thing while the supposed benefits are only speculative. Complexity is also the great friend of the intermediary, making it easier to load up unsuspecting investors with costs.

6.   With increased leverage and the rise in complex hedging strategies the risk increases.  The equity markets will rise until it does not rise anymore.  Leverage compounds losses, and then the supposed experts at the Central Banks will likely declare (as the despicable Timmy Geithner did in his new book) that no one could see it coming. 

7.   All I can say is, timing is important.  The market can continue to go up much longer than any rational person can anticipate.  The market can continue to go down when the bear takes over.  When is the question in both cases?  No one; absolutely no one can predict when accurately. 

8.   Complexity is not your friend in investing if you are a small investor, and it is not your friend in the banks et al if you are a taxpayer.

9.   Chinese Renminbi was sold overnight.  Of course, the only control over the Renminbi is the Chinese Central Bank.  The official off-shore currency is CNH.  That is the code for the Yaun.  I'm not here today to give a lesson in Renminbi and Yuan other than to say the Yuan is a basic unit of the Renminbi.  CNH is becoming the currency of Hong Kong, and the value of CNH is driven by private demand and supply, but CNH is still Yaun.  The interesting thing is CNH is being used as hedge against the USA dollar.