Posts in Category: Economics

Buy bonds, short Boehner

Bill Gross, CEO of the world’s largest bond fund, Pacific Investment Management, has made the rounds of financial news saying that PIMCO has bought several billion dollars’ worth of short-term Treasury bonds. He also told Bloomberg that the government was not going to default, period. He said what most have come to believe and what the market has almost certainly already priced in.

House Speaker Boehner looks ever more likely to suffer the same fate as his predecessor, Newt Gingrich, who lost the support of both Main Street and Wall Street and was seen as putting politics first. Sadly, Boehner was still in the game even as people were furloughed, poor elderly people lost their daily Meals on Wheels, and perhaps most sadly, 30 children with cancer were turned away from an experimental new treatment by an unfunded National Institutes of Health. Despite all that, the House GOP gets respect in some quarters for standing up for principle.

Official portrait of United States House Speak...

Official portrait of United States House Speaker (R-Ohio). (Photo credit: Wikipedia)

Until some started asking, what principle? That lost the voters (who might still matter despite Citizens v United and the legalized bribery it has created). But now, as Gross pointed out, the shutdown is already having a ripple effect that will harm U.S. exports, freeze up credit, and lower fourth-quarter earnings. Now it’s about money, and the people are beginning to see the shutdown the way markets already do: as an expensive nuisance. If John Boehner were a stock, people wouldn’t just stop buying shares, they would be selling him short.

Bonds are part of a web

In the interview above with Bloomberg’s Trish Regan, he explained in detail how the markets are a web and equities can be affected, the strength of alternative “safe havens” like the German Bund can be affected, and so on. His complicated replay may have seemed to most investors like they were getting caught in a web of information overload.

Right now it’s hard to distinguish fact from opinion, especially when someone as authoritative as Gross has his game face on and is talking up his multi-billion-dollar bond purchase. Hard to distinguish fact from opinion, certainty from prediction, calculation from guessing, or wishing, or hoping. It’s hard to know what the truth is.

As a result, it’s very hard to trade. The relatively small volumes and range-bound price action reinforce what floor traders in Chicago and New York have been saying, that a lot of the smart money is simply taking a break and not in the markets.

[pullquote]We fall back on the truth, of course. And the only truth is price.[/pullquote]Don’t believe for a second this is because of disgust at Congress or the president or Washington in general. Disgust has been priced in. The Republicans’ willingness to play games with the economy to get their way is priced in. President Obama’s refusal to negotiate on denying Obamacare to uninsured people for an extra year or two — already priced in.

The market has already decided where it will go and the orders are sitting in the plans of the collective, waiting to be executed. All the smart money that has left didn’t just leave. If this is like every shutdown before, they put in their buy and sell stops (mostly buy, the chart suggests) and they are sitting there waiting for the market to come to them. This is true of stocks and bonds.

So what’s a dumb, old-fashioned technical trader like me supposed to do when even the explanation of the web of interconnected market forces is information overload? We fall back on the truth, of course. And the only truth is price.

ZB 12-13 (60 Min)  10_7_2013

So what do the price charts of the Treasury bonds (ZBZ13) tell us? Let’s start by zooming out a little to a 60-minute chart. We have a double bottom with a clear break above the high between the two bottom points. That signals the start of a real uptrend.

How far up will that trend go? We see that it reached a 50% retracement of the previous drop that began in June. Then it stopped and has moved sideways, with slightly higher highs, for nine trading days. In the nine days prior to Sept. 25, bonds jumped from below 130 to this range.

Even if you didn’t follow the news, you’d have to know there was some unusual circumstance stalling the uptrend at this level instead of letting the market continue up to the Fibonacci 61.8% level at 134’20. This is an artificial hesitation. A fictional reason to stop here and enjoy the view for this long.

Of course there is the chance of bonds dropping, especially if a default becomes real. But even then, traders know that Treasury Secretary Jack Lew can simply continue paying the bills and make it a default in name only.

ZB 12-13 (15 Min)  10_7_2013

Let’s zoom in to the 15 minute chart and see if PIMCO did its investors a service in buying so many bond futures. Don’t make the simple needlessly complicated. If you were looking at this afresh, without any thought of what the government or other investors and traders are doing or what the TV people are saying — heck, if you didn’t even know what market you were looking at and believed as I and most successful traders do, that a chart is a chart — would you say the trend is up or down?

Up, obviously. Would you say there’s a clear sign that the market has topped here and then remained in a sideways channel at the top?

That’s rather unusual. What we most likely have—and let’s remind ourselves we are always dealing in probabilities — is a market waiting to go up further, at least to 134’20 and probably well beyond. You have an uptrend marked by higher highs and higher lows since Sept. 7, with little correction waves in between.

And now you have a sideways channel that isn’t precisely sideways but keeps finding slightly higher highs.

You really don’t need to know much else. Do what you do to manage emotion and enter into trades with confidence, have your checklist handy, write down your entry and exit plans and how you will set stop losses and control risk, then do what price is telling you to do.

Price is the only truth. Listen to the markets when they tell you the truth. Give up the need to tell the market what it should do or what you need it to do. The market isn’t listening. It’s talking to you. Tune out the noise and propaganda from Washington and everywhere else, including your own mind, and listen to the market. It will tell you how to trade it.

So did PIMCO’s Bill Gross make a good decision buying all those bond futures? It looks that way. Whatever impressive and complex analysis he gave Bloomberg and CNBC, in the end he decided that the trend was his friend.

Stocks up, poverty too: The things that matter

Amid the obsession with the Fed announcement, another report got less coverage: the US Census Report on Income, Poverty, and Health Insurance Coverage. It says 1 in 7 Americans live in the government’s definition of poverty. Which means that effectively more like one-fifth of us live in what anyone would call poverty.

English: A peanut butter and jelly sandwich, m...

This is dinner for 1/5 of us.

This doesn’t mean no toys at Christmas, wearing worn-out shoes, or the typical television notions of poverty. This is going to school hungry, having a peanut butter sandwich for dinner, mothers skipping meals so the kids can eat.

The census numbers are more likely to be relevant to the lives of the 99% of us who earn our primary income from jobs rather than investments. Even if you don’t live in poverty, your employees or contractors might. Even some of your neighbors in the suburbs are having trouble meeting their monthly food costs.

Housing going up, health sector stocks going up, for-profit education becoming a booming sector while public education is hit by fluctuations in interest rates—all these things have enriched portfolios. But they mean less or no disposable income for many in the middle class.

Which means in America, you can now be considered middle class because you make $60,000 a year. But if you have two kids and a mortgage or live where the rent is high, you have no disposable income and certainly nothing left over to put into stocks or to trade futures with. And if you make $25,000 or less, your kid may be going to school hungry. In America.

The stock market rally this year has been the kind of bull run that makes even idiots able to market themselves as Wall Street rock stars. Woe unto the people who stick with them when they continue to hold after the rally is over. They’ll get the usual “stay the course, we’re going through a correction, this is a long-term investment” letters and watch their portfolios go back down because they wouldn’t do what traders do: get out.

And they’ll feel poor. It’s understandable. Some people now have hope of paying for their kids to go to college. Or retiring when they planned to and how they planned to. Most people in the stock market are almost as far from the 1-percent world as the poor are.

That “almost” is the one politicians like to exploit. But for most of us, the news about how the poor are doing is much closer to home than the news about the new post-bailout batch of overpaid CEOs breaking the same laws of the U.S. and common sense and decency as the previous batch did.

But at 5:30 AM Central on Thursday, September 19, there was nothing about American poverty on the front page of There was an article about 41-megapixel cameras.

At 5:45 megapixels were replaced by this important article about how the biggest gain in employment is among women waiting tables. That’s pretty close to an article on poverty. Many waitresses have college degrees (and debts) and are as qualified as you or I. And they live in poverty. Sometimes, the person bringing you food is herself hungry.

Mitt Romney

Mitt Romney

Having waited tables myself, I see a microcosm of our economy in the life of a wait-person. When I taught MBA students, I always asked how many of them automatically tip 20% pretty much no matter what. After the show of hands, I ask, “How many of you have ever waited tables?” Same hands. I’m an easy-going person, but when I see someone yelling at a waitress, humiliating her in public, I get angry.

They clearly don’t know what real work is, the kind where you come home and have to wash off the smell of cleaner or cooking grease. Maybe they see the world through Mitt Romney’s 47% filter. And they probably think their fund manager, who bought in a bull market, is a genius and because they picked him, so are they. That’s why some people deserve to be in menial jobs getting yelled at and some people have a right to yell at them, because they are stock market geniuses, makers not takers.

The divide in the news, about stock rallies for some and near- or actual poverty for too many, reflects a wealth divide that will damage the American republic. Our democracy and the strength of the U.S. dollar depend on our ability to trust each other. And right now, we don’t.

That’s the news you won’t see very much of in the financial press. But surprisingly, you see more of it this time than in 2006. Maybe our skepticism is making us think differently about what an economy is for. Some still think an economy’s main purpose is to enrich those who are already rich, the corporate imperative to meet shareholder expectations at the end of the quarter.

But some of us, I call us New Capitalists, think the reason for even having an economy is something more noble and far-sighted. Happiness. The happiness of having work that is real rewarded by a chance at a decent life relatively free from needless financial worries. A life where money isn’t the constant looming fear and the only goal.

A lot of people made small fortunes this week, millions of dollars. I wonder how they get along with their kids. As our friend and mentor, Marty “Pit Bull” Schwartz, said at the end of his remarkable talk at Amherst (a MrTopStep exclusive and free here): Money is a lubricant. It doesn’t bring happiness, but it makes some things easier. “Because once you have children, you never stop worrying about them.”

If you’re one of the 46 million Americans receiving government help to feed your families—you know, welfare, food stamps, the thing that makes people love being poor so much they never want to stop—the stock market rally won’t affect you directly, but it will affect you, both in the likelihood of getting help feeding your kids and in the cost of the food needed to feed your kids. But the larger context of this is that rich or poor, you might have kids. How are they doing?

That’s it in the end, isn’t it? We want to be happy and we want our children to be OK and to love us. Isn’t that it?

I was honored a few years back to be inducted into the Golden Key honor society and give a keynote to college students on success. I struggled for weeks to find a good, impressive, Golden Key definition of success. Finally I came up with this: If somewhere, somebody is thanking God for you and it’s not just because you put money in her wallet, you are a success.

Icahn tweet makes Apple stock jump 3%. Meaning what, exactly?

Apple stock jumps after Carl Icahn's tweet

courtesy The Huffington Post

Carl Icahn got a Twitter account a little over two weeks ago. Where most of us would still be wondering what to do with our 140 characters, Icahn decided to boost the value of his Apple sharesby an estimated several hundred millions of dollars. Who says you can’t make money on the Internet?

The power of the tweet clearly reflects the belief that if such a successful investor believes in Apple, it must be a good investment. So the herd piles on. It’s like an endorsement of a political candidate or public figure. Warren Buffett’s public endorsement of Pres. Obama helped win him support from business. Ed Sullivan’s endorsement of Elvis Presley made it okay for suburban white parents to let their kids buy his records.

But should one man’s opinion have such outsized influence on a stock that so many people have in their pensions and college funds? What if he had shorted the stock and then tweeted that he loved Android?

The tweet raises another, deeper question as well: do stock prices reflect the actual value of a company to society? Is the free market functioning to provide capital to companies that create value and deny capital to companies that make lousy or obsolete products, fail to serve customers, or are simply incompetently managed?

That is what markets are supposed to do, right? We don’t have publicly traded crystal meth manufacturers, or makers of cigarettes for kids (Li’l Smokies!). Still, we can buy shares of alcohol makers when alcohol kills thousands each year, arms manufacturers, oil companies that suppress the development of other energy sources.

And shares of the banks who caused the credit crisis are doing fine, as they pursue new ventures like inflating the price of basic food grains, causing a famine; predatory lending by so-called for-profit universities; and more recently, artificially inflating aluminum prices.

Icahn-Apple-tweet.pngIcahn’s tweet is sort of like the Twitter crash, in which a hacker sent out a false report on the AP’s twitter feed about the White House being bombed. It just worked in the opposite direction as far as investors were concerned.

But both events show how disconnected the market is from people’s real lives. Is Icahn to be praised or congratulated? If he uses the profits to eradicate a disease, as Bill and Melinda Gates are doing to polio and malaria, will that make the money mean something different than if he used it to buy a presidential election, as Sheldon Adelson tried with Mitt Romney? It might, but right now it doesn’t mean anything, really.

People talk about bubbles in various markets; we’re seeing the bursting of a real estate bubble in China now. But there’s another bubble that is much more dangerous. When markets exist inside a bubble that has nothing to do with creating value in the world, when stock prices soar after a company lays off workers, only some of that is “creative destruction.” The rest is just plain destruction.

If I walk out of MrTopStep’s building and turn left, I’m at the CME. If I turn right and walk the same distance, I’m at the Federal Prison. A block and a world apart. It makes me think just exactly how much an iPhone really is worth, not just to shareholders and owners, but society. It’s a thing of beauty, yes, but is it 3% more beautiful today than two weeks ago, when Carl Icahn joined the Twitterverse?

But what do I know? I’m editing this on my new HTC One, which, quite frankly, makes your iPhone 5 look like a glorified cigarette lighter. I think I’ll tweet about it.