Diamond Slice

More Gloom, Boom and Doom, Compliments of Marc Faber

Marc Faber, U.S. economy "bear" and author of the recently infamous "Gloom, Boom and Doom Report", speaks his mind about the prospects for growth, debt and war in the world over the next 10 years. In the interview he actually endorses stocks as a reasonable investment in the near term, due to obsessive spending by the U.S. government to prop up the U.S. economy. He makes an interesting comparison between businesses and households which over spend and which save, as a metaphor for the consuming U.S. and developing China.

We have seen a rational retrenchment by U.S. consumers over the past twelve months and credit to consumers continues to decline. While the government has spent an enormous amount of capital to aid the citizen's hand into his back pocket, this bubble of government endorsed spending may be the last before true reconciliation. 

Enjoy these speaking points and more in the simplistically wise words of one of the grizzliest "perma-bears" out there, Mark Faber...

Marc Faber, Indian TV Interview Part 1/3

Marc Faber, Indian TV Interview Part2/3

Marc Faber, Indian TV Interview Part 3/3

Housing and Consumer in Focus, Christmas Week

Monday

Three and six month treasury bonds will be auctioned at 11:30 am Monday and will kick off the monthly test of the demand for short term investment security. The dollar is becoming stronger and rumors, spawned from the announcement of Bond King Bill Gross's "Lehman high" cash levels, are beginning to spur renewed debate over the steepness of the yield curve. The yield on the 10-year has been following the dollar higher, and traders can look to capitalize on further dollar gains by shorting the debt with an ETF or ETN like (TYO).

Tuesday

Redbook (8:55 am) and Goldman's ICSC (7:45 am) store sales comps will be scoured for details as the market looks to zero in estimates of the amount of spending going into holiday shopping when compared to the previous year and may show signs of hope to rally stocks through the Thursday close if numbers surprise to the upside. The GDP number will get revised slightly, expected to drop 0.1% to 2.7% for the 2009 Q3, but will not have any effect on prices unless a larger revision pops out. We'll get existing Home Sales at 10:00 am and FHFA House Price index at the same time, both of which are expected to show further strength in housing. Any disappointment in housing will be a hard pill to swallow as bulls are basing more of their equity rally extension theory on the industry.

Wednesday

Housing news from the MBA Mortgage numbers will cross tickers at 7:00 am and will set a negative tone for the remaining data, should the results further the anemic results of the past week. Personal Consumption Expenditures (PCE) data, out of the Income and Outlays report at 8:30 am, is expected to show a 0.6% jump in consumption along side price increases of only 0.1%. At 9:55 am the second and final leg of forward looking Consumer Sentiment will prove or disprove the solid improvement to 73.4 earlier in the December. Traders will take this report and run with it into the Christmas weekend and positions should be closely watched if sentiment surges or dives from the 73 mark. The July peak at 430k annual U.S. homes sold has been hard to breach after a sharp drop in September, but Bloomberg economists think the November report will be the one to show builder's confidence ahead of the 2010 Spring buying season. The consensus for the new homes report is 10k higher than October at 440k, and is expected to show confidence in the disgraced industry moving towards the new year. CME traders keeping a sharp eye on the EIA Report at 10:30 will be trigger happy with January delivery futures contracts nearing expiration and crude supply leveling off at the absurdly high 330 million barrel mark. 

Thursday

Durable Goods orders out of the gate early at 8:30 am are expected to make up for a -0.6% drop in November by increasing the amount of machinery on order by 0.5%. Last month the metric disregarding automotive orders fell a larger -1.3% as manufacturing seems to have seen most of the benefit from inventory rebuilding and big ticket purchases are pared back. Jobless claims jumped 7,000 to 480k last week, but are expected to fall 10,000 as layoffs subside. However, many employers save job slashing until after the holidays, begging that January's numbers will tell the full employment story. Money Supply and the Fed Balance sheet will be closely watched for changes this week as the story of the strengthening U.S. Dollar is criticized and supported by traders on both sides.

Disclosure: Long DTO, Long TYO, Long SDS, Long SCC

Market Response to Fed Policy

Few expect the U.S. Federal Reserve's FOMC to announce any change to the current monetary policy. The Fed Funds rate target is expected to stay at 0.25%, despite effective rates closer to 0.1%, while language will promise that purchase programs of private debt and Fannie/Freddie mortgage products are soon to wind down. Conditions of the "dual mandate" of low inflation and job growth, set by Bernanke earlier this year for the Fed, look to be nearing levels that would spur preemptive withdrawal of quantitative easing. The Producer Price Index (PPI) in November showed a 1.2% jump from the same month in 2008 and the household survey of employment showed improvement in the jobless rate from 10.2% to 10.0% in November. 

We have maintained the position that over time sustained dollar weakness, due to low short term borrowing costs, will raise the prices of all goods and services changing hands in the U.S. We also suspect that the printing of money will dilute the value of the dollar and that that inflation will bring a second wage of hardship to consumers struggling to make payments.

The FOMC has had a couple weeks to mull over the November Jobs report, but the PPI came out during the board's Tuesday deliberation and the Consumer Price Index will be crossing tickers as the governors are finalizing rhetoric for the Wednesday announcement. We see little chance of a nominal policy change but suspect the language will have some recognition of the stronger jobs situation and inflation risk moving forward. This is all that will be needed for the dollar to rally much higher and for stocks to see a sell-off after a few days of mixed reaction to the implications of a rising Fed Funds in the next three months. 

We encourage readers to exit long gold positions ahead of the announcement, especially BVN (Buenaventura Mining Corp) which we have recently endorsed. We also endorse adding dollars to short oil positions, by simply shorting the USO or adding to DTO positions (Powershares Double Short Oil ETF). 

Sell BVN

 

Buy DTO

 
 

Before Bernanke, Review the Charts

 
 
 

Price Indexes, Fed Meeting, Quad Witching

The last five days before the shortened Christmas week may bring tidings of inflation, Bernanke rhetoric, and volatile Friday trading as investors unwrap both producer price (PPI) and consumer price indexes (CPI), foreshadowing Bernanke language, and a "quad witching" day on friday. We will get a taste testing of government debt as the 4 week, 3 month, 6 month, and 52 week Treasury bills are digested, following the weakness in long-term 10 and 30 year notes last week. Capping the week we will see manufacturing data and a summary of froward indicators for the most recent month, as traders search for guidance heading into 2010.

Monday

Monday's have been something of an equity market spectacle over the past month, garnering their share of shop talk amongst the small fish looking to the sharks for notes. The word on the street is that the big boys have been playing the SPY futures over the weekend, causing for an early spike on monday morning, followed by the pullback when the same bullies pull out profits into Friday's session. We'll see if there's still the chutzpah to put down bets as the dollar weakens and the Fed meets this week. The 3-month and 6-month Treasury bill auctions at 11:30 am will weigh the lower end of the yield curve, after last week's weakness in the 10 and 30 year notes, but shouldn't effect stocks unless yields really start popping ahead of the Fed's FOMC announcement.

Tuesday

ICSC Goldman and Redbook retail sales, at 7:45 am and 8:55 am respectively, will set the tone as the Christmas sales sample begins to hold more water. The Producer Price Index (PPI) hitting the ticker at 8:30 am may muffle recovery hawks if the expectation for a 1.0% increase in November is met on top of the October 0.3% gain. Still the core statistic is projected to barely break even at 0.3% higher than October. At 8:30 am the Empire State Manufacturing survey will measure the forward strength of industry in New York, off of it's October high and expected to stabilize near the 23.5 November reading at 25.0 for December. Positive numbers for the index gage growth, yet a weakening progression suggests a decline in the rate of increase from record low output levels. November industrial Production numbers at 9:15 am are expected to increase from the anemic 0.1% increase in October, and will send markets lower if the 0.6% forecast defied by a weak or negative monthly change. The 4-week and 52-week Treasury sale at 11:30 am may shock markets if yields drift higher prior to the Wednesday FOMC meeting. Capping the day, the 1:00 pm Housing Market Index (HMI) could leave a sour taste on traders' economic palettes if the report sites weakness for the badly hurt sector.

Wednesday

It's all about Bernanke baby... The December FOMC announcement at 2:15 pm will be hotly anticipated by watchful traders around the globe, as the economic outlook for the world's largest economy could change the trajectory of the U.S. dollar. The benchmark Fed Funds overnight rate is expected to remain at the 0.25% level, but the language of the release could turn have a violent effect on the USD value. Last week, Bernanke found himself between the dollar and a hard place as he gave a more dreary outlook of the U.S. economy, as if in a last ditch effort to talk down the value of the Green Back. The cheap money has allowed institutional traders to keep stock prices high in an effort to extend the recovery, so far only felt in the price of U.S. corporate shares; a plus for Bernanke as he navigates the potentiallyunraveling economy. At 8:30 am the Consumer Price Index (CPI) is expected to show a virtually unchanged 0.4% growth rate for headline inflation, while the core number should be effectively 0.1%. Simultaneously, November housing starts are forecast to climb from a yearly .529 million rate to .575, yet a similarly increasing outlook in October was fuddled by builders decreasing the number of starts. 10:30 am will capture commodity desks, as an EIA Petroleum report of higher crude oil inventories will take the price of the WTI January contract further below $70/barrel.

Thursday

Jobless claims at 8:30 should snap the attention of analysts from the FOMC announcement and are expected to fall by 9000 jobs from last weeks increase to 474,000. The sum of leading economic indicators was said to have increased over the November period by 0.7% from the October gain of 0.3%, to be confirmed or dis-confirmed at 10:00 am. The Philadelphia Fed will release it's assessment of business conditions in November alongside the leading indicators. The Philly branch expects growth to maintain it's trajectory at a level of 16.5 compared to 16.7 in October, in a report which is often compared to the industrial production numbers out on Tuesday.

Friday

While completely void of economic indicators, the "Quad Witching" Friday should end anything but calmly as U.S. finacial markets antiquate the time value of derivative contracts leading into expiration. Quad Witching is a term used to describe the expiration of Stock Index Futures, Stock Index Options, Individual Stock Futures, and Individual Stock Options. Triple and Quadruple Witching days are increasingly volatile, as derivatives contracts expire on this day and the obligations of contract holders are called upon to be honored. Many derivatives hold certain values based on expectations concerning the value of the underlying security and the length of time until expiration. This causes many losing positions to be covered in a hurry when the strategy goes bust and large numbers of shares to trade hands as prices swing through wide ranges. 

The December 14-19 week will hold plenty of answers to questions concerning U.S. inflation, monetary policy, and implied price volatility. Watch for sustained moves higher by the U.S. dollar, which could send gold prices sharply lower and crude oil to mid $60-$70/barrel prices. Stocks will also suffer from U.S. dollar strength at these levels, while a legitimate sentiment shift could see a sell off leading into 2010.

Caution: Long Term Treasury Debt Weakness

The 10 Year Treasury Note is the benchmark debt product of the Treasury and as the benchmark it's meant to represent the strength of the U.S. Treasury's balance sheet. If this holds true, the current fiscal strength of the U.S. Treasury is hampered at best. Debt markets are generally much less exciting than equity markets, as bond yields tend to stay fixed within the 10% range, while we all hear stories of individuals reaping fortunes off of stocks. But the debt markets are crucial to business and should be watched more closely by investors amidst such volatile credit scenarios in the private and public sectors.

Just this week we have seen increasingly bearish signals for U.S. Treasury debt as a whole, especially long term obligations, as the 10 and 30 year note auctions have extended a short term pullback from record demand levels in the past months. Wednesday we saw the bid-to-cover ratio of the 10 Year Note auction fall sharply from the October high of 3.01 to 2.62, citing a decrease in demand for U.S. debt. On Thursday there were further red flags raised as the effective "high yield" during the 30-Year Treasury auction jumped to 4.52% despite the same coupon rate as the lower yielding November auction.

   
 
There will soon come a time where equities and government bonds perform inversely to one another, because in moderately frightening times U.S. debt is seen as a better alternative to cash. However the 10-year note has peaked and begun to fall as investors realize the hazards to investing in the long term credit of the United States. U.S. debt default is not a part of the question, yet the rating of the debt has been threatened by credit rating agencies Moody's and S&P, suggesting that holding the interest bearing notes for an extended period will cause one to lose money, as higher rates are assuredly ahead for a 0.01% Fed Funds targeting U.S. Central Bank.

Judge for yourself and take a look at the possibilities for the 10 Year treasury to fall further as the yield continues to rise. Nearly one month ago we endorsed this position as a medium term play on low interest rates and a hedge against U.S. equity shorts in our "Shorting the 10-Year Treasury" article. Below is a chart of the 10 Year Treasury yield which moves in tandem with such Treasury short funds as the TYO (Direxion 10-Year Treasury 3x Bear ETN).

While you may not have opened a Short 10-Year Treasury position when we first endorsed it on November 13, you have a new opportunity to see the yield rising with momentum, and have the luxury of waiting for the yield to pull back before making a short play. Remember, the yield goes up when the bond price drops, thus raking in gains for Treasury bear positions. Diamond Slice currently holds a minor position in the TYO ETN and plans to add to the position on pullbacks due to the bullish momentum and MACD averages showing bullish trends above zero.

Disclosure: Long TYO 

The New Direction of Crude Oil

Last week you could have thrown a dart onto the floor of the CME and almost assuredly poked the eye out of a commodity bull. This week there's no telling who you'd maim. Blood and gore aside, the sideways pattern of the past three weeks is over as far as crude oil is concerned. The WTI contracts for January delivery dove from $80+ to touch the $70/barrel mark on Wednesday before popping back into $71 territory, concluding the six day sell-off was nothing to shrug at.

First, we're going to look at the WTI continuous spot chart and identify some selling momentum that we haven't seen since the bottom in crude in December.

The sideways action of crude is deceptive in the chart because the price staggers horizontally for nearly all of November, yet the value of the dollar continued to fall through the period. Therefore the actual value of the WTI contracts in foreign currencies began falling before the price destruction of the past six days, where the strengthening dollar allowed prices to fall nominally. 

Turning to the technicals, the MACD technical signal has broken below zero after a long and progressive move lower, the Slow Stochastics are at the low end of their range, and the Relative Strength Index (RSI) is far below zero. These technicals suggest an oversold condition for the WTI crude spot, but also show a very bearish sentiment which was unleashed simultaneous to released pressure on the dollar observed below.

The dollar rose last week on rumors that the Federal Reserve would raise the benchmark Fed Funds rate from the current 0.01% level, despite remarks from Ben Bernanke which suggested that the economy has strong headwinds against it. It seems that the window between now and summer 2010, during which traders had expected record low rates, is growing too small for comfort and unwinding carry trades. It was only a matter of time before Bernanke had nothing good to say, and perhaps it was the speech to the Washington Economic club which ruined the party. He claimed that the economy had further "headwinds" to face, as if specifically guaranteeing a low Fed Funds. Unfortunately, those headwinds might just be enough to snap investors out of the risky assets (stocks, bonds, commodities)  and back into cash.

If the large moves we've seen in crude over the past six days are any sort of warning to the future of the asset, how can you make a short oil play to capitalize from consumer weakness and decreased global demand? The sheer magnitude of selling involved in the move suggests that the Oil bulls may indeed be on the run and we suggest taking a look at the DTO Exchange Traded Note (ETN) as a possible vehicle, charted below.

Diamond Slice has a position in the Powershares DB Crude Oil Double Short ETN (DTO), which we are taking profits from at these levels due to the technical data mentioned above, anticipating a short term bounce in the price of crude. Investors should also understand that an ETN is different from an ETF and should be investigated carefully. Also always remember to keep an eye on the clock as the January contract nears expiration (December 24, 2009), when the price will gravitate towards the February delivery price as positions are closed and orders filled. 

We will however be buying on bounces in WTI and forecast crude falling to sub $70 levels as supply remains high and demand continues to stumble amidst a short-term U.S. Dollar plateau. The dollar doesn't have to recover for production intensive commodities such as oil, copper, and steel to fall extensively, it only has to stabilize.  

DS Disclosure: Long DTO

Japan Economy Trips Hard

Japan's revised 2009 third quarter growth fell to a third of the economy's previously reported GDP, as corporations slashed spending and prices fell. The initial estimate of 2009 Q3 growth reported the pace of expansion at 4.8% annually compared to the most current revision to 1.3%.

Prime Minister Hatoyama announced a 7.2 trillion Yen ($81 billion) stimulus package to aid the distressed economy, as the rate of deflation was shown to be accelerating over the three months ending in September at -0.5%. In nominal terms economic growth for the period actually declined -0.9% highlighting the true effects of the deflationary environment.

The incoming Democratic Party of Japan (DPJ) has inherited a legacy of big stimulus spending from the Liberal Deomocratic Party (LDP), including $6.3 trillion worth of infrastructure outlays since 1991, and a indebted fiscal balance sheet to the tune of 190% x GDP. Thus it's not surprising that PM Hatoyama hasn't changed much as he plans to tack on the additional $81 billion in the form of a Japanese Cash for Clunkers equivalent, subsidies for "green" housing & consumer products, cheaper mortgage rate home buying incentives and more subsidized private sector salaries. Yet, the habitually borrowing stimulus crutched state won't feel stimulated, simply further drained and taxed moving forward as depicted through the visual below from the FT.

What is truly crippling the country and the fiscal policy moving forward is the inability of firms to compete as the prices of goods consumed in the country falls and prices of Japanese goods sold outside of the country rise.  The following chart will shed further light on the equally important imbalances among Japanese products sold domestically, imported from abroad, and exported to foreign consumers. Wages are falling, the government subsidizes the cost of employees salaries and firms are struggling to compete abroad.

The future for Japan looks dim as deflation takes a tighter grip, growth wanes and debt soars. Keep a close eye on the world's second largest economy as global financial markets respond to the ensuing course of events. 

Could The Dollar Be Stronger?

As Bank of America (BAC) recently announced plans to repay it's $45 billion borrowed under the TARP program, simultaneously news broke covering the request for deferral of nearly $60 billion of borrowed funds by the Dubai World sovereign fund. One could deem the global financial arena murky at best, as anticipated economic data will cover a short list for this December 7-12, 2009 trading week. Gold retreated over the weekend further from the 1200 level to 1145 as speculation over the Fed's interest rate policy caused the U.S. Dollar to strengthen, by default weakening all commodities and stocks as traders crack knuckles into the opening bell. This could be the start of a dead cat bounce for the dollar...

Monday

Monday will see a 3-month and 6-month Treasury bill auction at 11:30 AM; two breeds of security which have been attracting bid-to-cover ratios of 3.9 and 3.5 respectively. At 3:00 PM the most watched data of the day may change the tides in markets, with the announcement of revolving and non-revolving U.S. Consumer Credit. The street expects an 8.8% decline in the October headline figure, slightly less severe than the -14.8% deterioration in September, but what would be another sign of tighter consumer budgets in the long list of declines.

Tuesday

Watch ICSC Goldman Store Sales and the Redbook year-over-year sales numbers for more guidance into the 2009 Holiday sales trend following the high traffic on Black Friday. Reports of holiday spending and consumer polls have sent mixed signals thus far. A November 2009 Gallop poll showed that average spending for the Thanksgiving holiday week was roughly flat when compared to 2008, but that the week after thanksgiving spending averages were lower

Wednesday

MBA Purchase applications will be closely watched on Wednesday as recent reports are showing spurts of strength in housing as the government tax refund stimulus has been extended until June of 2010. The EIA petroleum status report will be significant as Crude Oil Futures bob for traction amidst the hesitating fall in the dollar. While less publicized, the 10-year Treasury Note auction at 1:00 PM will be closely watched for real change in demand for the benchmark Treasury security as rumors abound of a shift in monetary policy. A stronger dollar may yield weak demand for the Note as investors are less apt to gobble up the debt amidst rising rates.

Thursday

The October International Trade balance will come first at 8:30 AM Thursday morning, and is expected to show marginal change from the -36.5% trade deficit in September. Jobless Claims at 8:30 AM will come scrutinized this week, following last Friday's drop in the home survey of unemployed persons from 10.2% to 10%, and regarding the applied effects on consumer spending for the 2009 year end. 

Friday

We may get a little Santa sneak peak on Friday at 8:30 AM as the Retail Sales report for November comes in above or below the 0.9% growth from 1.4% in October, where a negative number or near even result would paint retail traders truly bearish. Perhaps the best gauge of weekly consumer faith will come at 9:55 AM as the first leg of the December Consumer Sentiment report, which is expected to show a minor up-tick from November's 67.4 to 68.2, yet forward looking monthly averages have been falling since the end of September. The inventory report at 10:00 AM is expected to show a minor -0.2% drop in inventories to level out the Inventory to Sales (I/S) ratio at 1.32 for October. 

The week will see some meaningful data, but weekend news suggests the trading focus may be aimed more at news from the Fed, financial firms (BAC & C), and foreign financial situations (Dubai World). Any further rumors concerning an accelerated time table for Fed Funds rate hikes or meaningful rhetoric from regulators promoting the same perception will undoubtedly send the dollar higher and all else lower.

***Close BVN: Diamond Slice Closes Position In Beunaventura Mines***

On October 23, 2009 we endorsed a position in the Peruvian gold mining firm Beunaventura Mines (BVN) in the article titled Profiting From Volatile Crude Oil Prices and Safe Guarding Your Dollars. 

Since October 23, BVN has moved from $36.97 to the Friday December 4, 2009 closing price of $39.84, capturing a 7.8% gain. Continuous spot prices for gold are near 1145 this morning, while S&P 500 futures are also down 5 points at 1102, suggesting that BVN will open lower as the December 7, 2009 trading day begins. 

We like the company for a long term investment strategy of 5 or more years at these prices, given their promising new La Zanja and Tantahuatay mines. La Zanja is set to come on line in early 2010 and is projected to put out 100,000 ounces of gold per year, while Tantahuatay will come on line in 2011 and should also tack on an additional 100,000 ounces of production. BVN does not hedge their gold prices, so any changes in the price of gold directly effect the bottom line of the firm. The firm is located in Peru, where labor is cheap and the currency is highly tied to the price of precious metals, making the firm an attractive company to own in a high U.S. inflationary environment. 

All said we see a shifting sentiment concerning U.S. interest rate policy (markets are beginning to anticipate earlier than expected quantitative tightening by the Fed) and a separately high technical probability that global equities will pull back from current levels. 

 

We suspect there will be a short term pullback of the stock along with the price of gold as the dollar strengthens temporarily, yet we endorse the company as a good investment for medium and long term investors. 

Diamond Slice is acting on these signals and closing BVN positions for a profit. The stock will continue to be followed and any positions regarding the stock on our behalf will be fully disclosed to our readers.