Tuesday April; 12, 2011
Our position is that the stock market as well as commodity markets will make a significant top between now and the middle of June. In that case one would expect both instances of soaring positive mood mixed with divergences suggesting something is amiss. Let's take a look a the last two days of the WSJ. Don't look askance, the author of Megatrends developed his theory by examining the content of newspapers. The more different stories appeared, the more the trend was changing. News items from the WSJ are in italics.
The NYSE has rejected the $11.3 B bid by the NASD for the $9.7 B bid by the Deutsche Borse. Understandably angry phone calls from shareholders are being received. But the socionomic point is that one expect big deals at the big tops of markets, feeling are inclusionary, well towards Germany in this case, and expansionary. What could be more expansionary than globalization of big markets? Ironically the Germans are after the derivative not the stock business. This is a further irony of a stock market top.
China has registered its first quarterly trade deficit in seven years. This is not surprising as world economies have slowed. The problem however for China is how to keep the steam kettle on boil. Entire ghost cities have been built on the pretext of growth. Now real growth is slowing, how to employ 700 million people?
Now as Coleen Rowley famously said about the FBI, let's connect the dots. Hui Xian Real Estate Investment Trust will raise $1.7 billion dollar equivalent but via 11.2 billion yuan in a Hong Kong based offering. Reading right along, we learn that the group believe this could lead to a listing of China properties. But Ms. Fu adds
4% is reasonable for Hui Xian because rental yields of China commercial properties are generally lower than properties in Hong Kong.
This reveals the absurdity of Chinese real estate prices. Hong Kong has sported the most expensive properties in the world for some time, yet yields are lower in China? This means the prices are to high in China, more evidence of the Chinese property bubble. REITs went bust in the US from 1973-74. I vividly remember learning, the hard way, to start buying Barrons in Sunday. Whatever REIT Alan Abelson panned on Sunday was headed south that week. I recall one REIT dropping from oh 13 to 8 by the following Thursday. Oh by the way the offering will be used to pay down debt, of which I am sure there is plenty to pay.
Mass Murder in Mexico, Redux Mel Gibson hit the big screen in the mid 1970s, our parallel period for the present, in Mad Max, This was a futuristic world of horror, as always in the movies, as civilization returned to a tribal survival of the fittest. That seems to describe a good bit of the Mexican border now.
Iceland, for the second time, voted against paying the losses of their big bankers and foreign investors. Iceland is a microcosm of things to come, remember Rick Santelli's question to the traders at the Chicago Board of Trade, they didn't want to pay for failed mortgages either.
Banks inability to move houses through foreclosure could further delay the housing recovery. Yes not to mention thousands of squatters deciding not to pay, after all who is going to remove them?
And finally on page C5 of today's WSJ a full page ad emblazoned in green announcing
The Pentagon plans to produce over 50 million gallons of jet fuel from algae.
Gee what do you suppose the cost of going green will be for that project?
I visited my first drilling rig at age thirteen. I was learning to drive at the wheel of Dad's Gulf Oil 1961 Chevy Biscayne Company Car. I have been observing and writing about oil since then. Every time we get high oil prices 'far out' ideas like ethanol, shale oil, wind power and such surface. None of then have ever solved the crisis, they all require massive subsidies to even look reasonable, notice you are paying $3.50 for gasoline now. Despite bio diesel and other revelations as we noted trucks are now switching to variations of natural gas.
Softer demand is pushing steel prices down. Like copper this is a basic industrial indicator, and with auto production curtailed now world wide, no wonder.
Wal Mart is back to basics, again, yet another up market move has failed, to the good fortune of the Dollar Stores. The demand is for low priced goods, hello deflation.
As the stock market recovered in 2005, Macy's merged with may Department Stores, sales have fallen since. Now sales associates are actually being trained rather than watch videos, so much for visual learning, a recent fad in education circles. Oh you can't read and comprehend, no problem watch a You Tube Video! The problem is just that one is a bystander not a participant in the problem solving process.
None of these items may seem like much in and of themselves but taken together represent false hope amid a slowing economy world wide. IN particular an REIT touting Chinese real estate which it admits is fetching below Hong Kong returns is absurdly false hope. Where does this group think prices are going? The idea of buying stock and derivative exchanges at new fresh recovery highs, matching previous recovery highs is equally foolish. But it takes that kind of social mood to generate such false confidence.
Our recommendation is to benchmark the same strategy that has been so successful in past market meltdowns, buy government bonds. Here is an example of what can happen with just a ten point drop in the S & P. This past weekend we showed numerous examples, 1987, 2000, 2008, where bonds retreated against stocks, in every instance, like the railroad train versus the car, the bonds won. Here is a snapshot of what to expect after June, 2011, stocks fall, bonds advance. And appreciate that bonds have had every nugget of bad publicity one could imagine
- The Dollar is routinely trashed, news reports are that rallies only occur amid world wide crisis , yeah, no kidding, guess what is coming
- Bill Gross has sold all T bonds in his funds and is short bonds, Bill Gross at PIMCO now holds the same status that Peter Lynch did in the 1970s. Lynch was smart enough to exit at the top, this does not look to be the case for Gross. Gross should have been short when TLT was 106, not now as we are in the area of support
- Numerous articles trumpet inflation despite the move by WMT to return to its discount roots, the triumph of Dollar Stores, the continued inability of housing to recover, the call for a $10,000 college degree, etc.
- Massive over building of real estate world wide and the recovery of markets has brought the same false optimism that took down Bear, Lehman, Merrill. Now that same over confidence is on display in the new leading World Stock Exchange, Hong Kong.
THe US will sell thirty year bonds on Thursday. The idea of being short bonds against all the principal dealers in US Securities has never worked to my knowledge during an auction week. Oh well, like Gross I cut my teeth on bond trading, we will see who is the better judge of that market.
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