Look At the chart for SPXS

[portart]

This chart reminded me of GDX this  Jan. It was down for years, at the bottom, beaten and bloody. I like bets with little downside and a great reward if I am right. I loaded up on Jan 1st with GDX and GDXJ in my VP. Luck and timing was on my side. I made a nice 25% profit and sold it today when on Marketwatch.com some reporter started touting it, a sure sign a selloff is in the offing. I might buy it back if we get a healthy drop in it because I think the lows have been seen.

Check out the chart for SPXS for the last three years. It looks strangely like the gold mining ETF. it's the triple bet against the market and it's straight down 82% from 2011. Ok, so I ask myself, what are the odds of it going a whole lot lower. I decided at the close today to make this ETF my new VP. It's something in the air in this market that looks very shaky with not a whole lot of upside left.  Do you believe this remarkable market recovery some 6,000 Dow points had anything to do with Feb manipulation or do you think it was economics correcting itself over time? I think we all know the answer to this question. In any case, risk vs reward, I think the time is right. Time will tell. I am feeling lucky this year. Making two calls right in a row might be too much to ask.

[Mod comment: I fixed the typo in the ETF name in the title.  It was bugging me. ]

[Kshartle]

Are you going strictly off technicals here portart?

There is one critical thing you must keep in mind when buying and selling. The dollar is on the opposite side of your trade.

That is what every non-bond market has in common for us. Every purchase or sale is a bet that something will rise or fall against straight dollars.

Yes I think the economy is weak. I think the US economy is a complete house of cards. The entire rally has just been a dead cat bounce combined with a bunch of borrowing and inflation.

I don't think the S&P has any hope of generating a real return at these prices. I think we will not make a new high until we get more money printing.

That being said.......why do you think they will let the stock market fall? Yellen can make an announcement next week saying the Fed will ensure asset prices don't fall and the S&P will blast every short out of the water and it will surge past $1,900. They can incinerate the dollar.

If you want to short the stock market......the only safe way to do that is by going long gold and cash imo. They can push the market higher and have every incentive to do so.

That being said good luck man. The fundamentals to me are screaming that the gold miners are still way way undervalued.

[D1984]

Feb manipulation? Unless you were saying that the market was manipulated more so far this month (February) than in the preceding 11 months, then maybe you meant "Fed manipulation"?

As far as the market being manipulated and that causing it to rise more than it would otherwise, who knows? The economy is doing better than it did in 2009-2011 but it's still nowhere near full employment or operating anywhere close to full capacity....but a slack labor market has been great for corporate profits over the past few years and those increasing profits have helped move stocks up....but that does mean they are looking kinda pricey by PE/10 standards...

As far as trying to buy an ETF at the bottom to market time for a fast profit: If I thought the market had been manipulated up and wanted to bet on the it correcting downwards sharply and suddenly and only planned to hold the investment for a short time and a quick potential profit, I might go with VIX futures ETFs like VXX or even TVIX instead of SPXS...note that said ETFs are not long-term holds (contango will kill you if the market doesn't fall) and should never be thought of as such, but when the market goes down these things typically shoot up even more than 3X bear ETFs do.

[Kshartle]

As far as the market being manipulated and that causing it to rise more than it would otherwise, who knows? The economy is doing better than it did in 2009-2011 but it's still nowhere near full employment or operating anywhere close to full capacity....but a slack labor market has been great for corporate profits over the past few years and those increasing profits have helped move stocks up....but that does mean they are looking kinda pricey by PE/10 standards...

How does a "slack" labor market help corporate profits?

Nowhere near full employment? Well...that's an understatement. Labor participation is at a 35 year low.

Do you think the S&P would be near it's current price if the Fed had not printed 4-5 trillion and bought bonds with it for the past five years?

[D1984]

As far as the market being manipulated and that causing it to rise more than it would otherwise, who knows? The economy is doing better than it did in 2009-2011 but it's still nowhere near full employment or operating anywhere close to full capacity....but a slack labor market has been great for corporate profits over the past few years and those increasing profits have helped move stocks up....but that does mean they are looking kinda pricey by PE/10 standards...

How does a "slack" labor market help corporate profits?

Nowhere near full employment? Well...that's an understatement. Labor participation is at a 35 year low.

Do you think the S&P would be near it's current price if the Fed had not printed 4-5 trillion and bought bonds with it for the past five years?

In a labor market with full employment wages would be bid up higher than in a labor market with roughly 3 workers for every potential job opening.

Look at average compensation increases YOY over the past five years or so for production and non-supervisory workers.

Then look at the share of GDP going to labor income vs that going to corporate profits.

Are you saying there is no relationship whatsoever between them, and that high unemployment doesn't lead to a moderation in demands for wage increases?

Now, obviously,  all of the currently high profit levels are not purely due to less money being paid out as wages; however, wages are a direct cost (just like land, fuel, commdities, electricty, any other input really) and them being lower than they would be (and not rising nearly so fast as they would) in a full employment economy probably does contribute to more money showing up as profits than it otherwise would (because they are presumably getting same amount of labor per worker for less than they would had there been full employment).

Jsut curious, what do you think are the main drivers of the record profit levels? All a Fed induced bubble?


As far as the S&P price level goes, maybe, maybe not...how does the transmission mechanism from Fed money to the higher stock market price levels you are suggesting work? Are you saying that people bid up stocks because bond yields are so low due to Fed bond buying?

[Kshartle]

In a labor market with full employment wages would be bid up higher than in a labor market with roughly 3 workers for every potential job opening.

Look at average compensation increases YOY over the past five years or so for production and non-supervisory workers.

Then look at the share of GDP going to labor income vs that going to corporate profits.

Are you saying there is no relationship whatsoever between them, and that high unemployment doesn't lead to a moderation in demands for wage increases?

Now, obviously,  all of the currently high profit levels are not purely due to less money being paid out as wages; however, wages are a direct cost (just like land, fuel, commdities, electricty, any other input really) and them being lower than they would be (and not rising nearly so fast as they would) in a full employment economy probably does contribute to more money showing up as profits than it otherwise would (because they are presumably getting same amount of labor per worker for less than they would had there been full employment).

Jsut curious, what do you think are the main drivers of the record profit levels? All a Fed induced bubble?


As far as the S&P price level goes, maybe, maybe not...how does the transmission mechanism from Fed money to the higher stock market price levels you are suggesting work? Are you saying that people bid up stocks because bond yields are so low due to Fed bond buying?

Where do I begin.........

Investment decisions are made by weighing one investment against another. If the Fed is printing money (inflation) and driving up bond prices to 300 year highs it will make the stock market a more attractive investment and for some the only appranent choice to avoid certain loss in bonds (real terms). Do we need to cover this or is that obvious?

A "slack" labor market as you describe seems to be one that is subject to falling wages in real terms. Companies are required to increase pay nominally less in this environment over time vs. what they can increase in charges....resulting in higher profits. Well.....ok....ask yourself why that's the case. Why is the money supply increasing faster than wages and what has this meant for corporate profits. Employment is falling for various reasons. The min wage is almost a non factor since it hasn't risen in years despite significant inflation.

You must also look at debt to equity ratios. This BS about corporate profits being high has already been slammed by this quarters earnings announcements. Look at Wal-Mart, group on, CONN, countless other companies. The corporate profits might be at nominal highs....but it's doubtful they are anywhere close to inflation adjusted highs. Additionally, it's EPS growth that pushes stocks to higher multiples and that is a direct correlation to interest rates. Low rates mean more debt financing which means fewer shares issued, more stock buy-backs etc.

Higher rates will slaughter the markets. People will have alternate investments that are attractive, companies will have to stop borrowing to buy back shares, they will have to pay interest, their customers won't be able to buy stuff on credit, etc. etc.

This is a stimulus and QE rally through and through.

[D1984]

Where do I begin.........

Investment decisions are made by weighing one investment against another. If the Fed is printing money (inflation) and driving up bond prices to 300 year highs it will make the stock market a more attractive investment and for some the only appanent choice to avoid certain loss in bonds (real terms). Do we need to cover this or is that obvious?

Kshartle,

Sigh....I was actually about to basically agree with you on that (about stock prices being influenced by people choosing to hold equities instead of bonds...that's Econ 101; the oppportunity cost of holding stocks is holding bonds and vice versa or more broadly the opportunity cost of holding one investment is that one cannot use the same money to hold another)...that's why I asked about the transmission mechanism (and postulated the potential one I did about bonds and stocks and asked if you agreed with it...I apologize if it seemed I was adopting a "challenging" tone when asking this rather than a confirmatory one).

A "slack" labor market as you describe seems to be one that is subject to falling wages in real terms. Companies are required to increase pay nominally less in this environment over time vs. what they can increase in charges....resulting in higher profits. Well.....ok....ask yourself why that's the case. Why is the money supply increasing faster than wages and what has this meant for corporate profits. Employment is falling for various reasons. The min wage is almost a non factor since it hasn't risen in years despite significant inflation.

You must also look at debt to equity ratios. This BS about corporate profits being high has already been slammed by this quarter's earnings announcements. Look at Wal-Mart, group on, CONN, countless other companies. The corporate profits might be at nominal highs....but it's doubtful they are anywhere close to inflation adjusted highs. Additionally, it's EPS growth that pushes stocks to higher multiples and that is a direct correlation to interest rates. Low rates mean more debt financing which means fewer shares issued, more stock buy-backs etc.

Higher rates will slaughter the markets. People will have alternate investments that are attractive, companies will have to stop borrowing to buy back shares, they will have to pay interest, their customers won't be able to buy stuff on credit, etc. etc.

This is a stimulus and QE rally through and through

.


Kshartle,

I honestly thought you (as an anti-statist) would be more concerned about corporate profits being supported by government spending (i.e. by food stamps, stimulus spending, deficit spending, etc; just look at how Wal-Mart's profits--or for that matter US GDP growth a a whole--for instance, were affected by food stamp cuts, the end of Federally paid extended unemployment benefits, and by the expiration of the payroll tax holiday, etc) than about the relation of the money supply to them. Anyway, looking at the MZM charts from the St Louis Fed money supply seems to always be on an upward slope regardless of profits as a share of national income vs labor compensation.

As regards inflation adjusted profits (or at least as regards them not being at highs in real terms): This looks like a high in real terms to me:

http://economix.blogs.nytimes.com/2012/ ... e-profits/

http://www.ritholtz.com/blog/2013/10/co ... after-tax/

The second one isn't inflation-adjusted but you can use the Minneapolis Fed's calculator to adjust the numbers from their pre-recession highs (2007...looks to be at around 1400 on the chart) and see that in late 2013 the equivalent number in inflation adjusted terms would be around 1620 or so...and since it's at 1800 and 1800 is more than 1620.....)

Regarding employment - You don't think it's still so low due to slack demand and the economy not operating at full capacity (Correct me if I'm wrong but I'm guessing you don't--based on what you said in your previous post--think the economy is operating anywhere near full capacity)?

As regards leverage and debt to equity and EPS - I am just curious, how leveraged are US corporations as a whole now? How leveraged is the US economy now, counting all forms of net debt vs GDP; net debt being debt minus assets.

Also, if this (the real economy including corporate earnings, not just the stock market) is all indeed a Fed-propped up, on a sugar-high, QE supported house of cards, then why is it not true that as soon as it presumably collapses (and the economy presumably ends up in a recession again and aggregate demand, spending, and monetary velocity fall or slow down) that rates will be higher and not lower? Economic recessions don't typically lead to higher rates (having said that, if the economy does improve, I do expect rates will head higher).

EDIT: Just to be clear, I'm NOT saying that rate increases wouldn't both adversely effect equity prices and hurt companies that had borrowed heavily (assuming floating rate debt was how they'd borrowed), just that huge rate increases don't (barring premature tightening by the Fed) seem too likely any time soon with so much slack still in the economy....now, if for instance, the Fed blundered and for some reason decided to do something like raise short-term rates to 5 or 6% immediately tomorrow (not that I think the Yellen Fed will take them that high for a long while), then yeah, I think the market would nosedive; the question is why they would choose to raise short-tem rates that high with long-term unemployment (and just unemployment in general) still so elevated and inflation still (relatively) low.

Finally, I know you hold a lot of gold (percentage wise as a percent of your portfolio) and had earlier mentioned gold as a way to quasi-short the market; however, if you are right and rates spike higher than inflation and stay there for a while you don't worry that that will be a negative for your portfolio (considering gold's performance correlation to negative real rates and its not typically doing so hot when real rates are rising and positive)? If you truly expect higher rates (and fairly soon), then why do you still hold mostly gold in your portfolio? Is it because you think rates will be higher but inflation will be higher still (so even if nominal rates were to rise to, say, 7 or 8%, they would still be negative in real terms)?

[portart]

You guys are far, far more astute and informed about the technicalities of economic forces which you so eloquently have stated. Because I am not a member of the Fed and not on the board of a Fortune 500 company so, as a result of that and my age of 65,  I am a tried and true PP player with 95% of my money and have been for ten years. Don't want to give it back trying to be greedy.

I have long since left the momentum playing field of the 1990's where I made fabulous money (could have be more fabulous if I hadn't bailed on Apple so soon. I had lots of at 14.00 a share. So I sold too early but someone said you never go broke taking profit,...you never get really rich either not playing something out to some really insane level. I have other stories but is digress.) Amazingly enough, between my investing (luck, timing or intuition however you want to put it) I have become monetarily wealthy enough to enjoy a retirement equal to my working standards for a lifetime if and when I can find the "off" button.

It's interesting to note. I have a person I know who at my Country Club, out of fear and what others told him, sold all his stocks at Dow 11,000 for fear it would drop again to 7,000. To my knowledge he never got back in and had little interest in learning about PP where he could hedge his bets on the downside and stay around for some well documented gains in any economic environment without fear of major loss. Works for me..

Now I can understand this fellow's fear being retired and having watched his portfolio ravaged and recouped some of the losses, being talked into selling all his stocks by a doomsday expert with a convincing storyline. If there is one thing I have learned from investing, its that you can always find some treatise or article to support your viewpoint to keep  the mental support you need to make a decision, right or wrong.

The interesting part to me is if you sell at 11,000 and we now sit at 16,000 as a result of an amazing run and recovery by the markets due a lot of what has been discussed here, at what point as a matter of sheer odds, what makes the most sense to make a bet in a different direction. Trees do not grow to the sky and this market at some point will become so top heavy that a correction will be in order. The longer and the more vertical the climb with the smallest amount of corrections along the way, pave the way for a sharper and more pronounced drop ensues.

I used this thinking to make a bet on the miners on Jan 1st of this year. Their chart was eerily similar to the dow in reverse. Straight down hard for years and priced well below the price of gold. Being a sheer novice that I am, I concluded the odds of losing more where far less then a nice gain....risk vs reward, plain and simple. Who, at the first of the year, was touting buying GDX then?? Now you are reading about it and, yes, I sold, perhaps too early again as has been my pattern but sticking a sweet 25k in my pocket thank you. I also believe the highs have more to come but being a VP, I get my speculation fun from making nice gains and moving to what looks like the next either run up or disaster waiting to happen. After the miners moving so high so fast, I believe the velocity will take a break at this point. Too much press for my liking and buying what everyone is talking about makes me uncomfortable.

So, back to the triple bet down. Well I am up $160 bucks on buying it at 2:00 PM on Friday... and getting a sharp little drop at the close. So I will be watching it closely to see if I am lucky again or just plain stupid. However, looking at where we are, how far we have climbed, last years YTD gains, the Fed controlled measures that can only work for so long before economics becomes economics and not a shell game, I don't fear a meteoric rise, strictly from an odds standpoint.

It's a VP with some gains to play with. Like they say, don't bet with money you can't afford to lose. If I get to that point, I will wimp out and take my medicine...if... 

[Kshartle]

Holy Moses guys there's a lot in those posts.

D sorry if I sounded confrontational. It was late and I had too many martinis at a house party earlier. I think we agree on most of the situation as it currently is, just disagree about where it's headed. I'll see if I can break up some parts of your post and address separately.

Portart....going 3x negative here on the S&P is not a bad trade here imo from a reward/risk standpoint. I think 1,850 is going to be very difficult to get through until mama Yellen tapers the taper. I just think she'll be doing that and once it happens the shorts that are selling at 1,850 will be covering and pushing this to 1,900. That's just a guess of course, I just wouldn't want to see you get gapped for a 6% loss some morning after a couple days of losses prior. Do you have a stop-loss or an event that would cause you sell out of the position?

I don't think the Fed would allow the market to drop more than 10% which limits the upside on your trade. If they fully backed off the manipulation though I can see the S&P dropping 50% as everything falls apart. You'd be a brazillionare.

[Kshartle]

that's why I asked about the transmission mechanism (and postulated the potential one I did about bonds and stocks and asked if you agreed with it...I apologize if it seemed I was adopting a "challenging" tone when asking this rather than a confirmatory one).

I think that's absolutely correct. Stocks are more attractive when the central bank bids up the bond prices.

Low interest rates also make debt financing cheaper which permits stock buybacks through debt financing. This pushes up prices by reducing shares outstanding and increasing EPS. All that is predicated on rates not rising though. Once they rise the company will either face increasing interst payments, reducing EPS or they need to pay off the bonds (requiring issuance of shares or asset sales or reducing EPS).

Also I've heard, but not confirmed, that margin usage is at an all time high. So investors are borrowing money to buy stocks. Higher rates will decrease the attractivness of using margin and result in selling.

So all this being said there is zero doubt to me that the rally is completely phony and based on historically low interest rates.

Higher rates will kill the rally dead as a doornail, at least in real terms. That being said, I don't think we're going to higher rates anytime soon and definately not higher in real terms. We could get higher rates but I think they'll stay below the real inflation rate and probably fall increasingly behind.

I consider the increase in the money the inflation rate. Other's disagree of course. I prefer the objective measure of the expansion of the money supply to tell me what inflation is rather than try to factor in weather, buying habits, changes in production, a billion other factors etc.

*Disclaimer - I could be completely wrong about everything I say

[Kshartle]

I honestly thought you (as an anti-statist) would be more concerned about corporate profits being supported by government spending (i.e. by food stamps, stimulus spending, deficit spending, etc; just look at how Wal-Mart's profits--or for that matter US GDP growth a a whole--for instance, were affected by food stamp cuts, the end of Federally paid extended unemployment benefits, and by the expiration of the payroll tax holiday, etc) than about the relation of the money supply to them. Anyway, looking at the MZM charts from the St Louis Fed money supply seems to always be on an upward slope regardless of profits as a share of national income vs labor compensation.

I completely agree that violent intervention into the economy by the humans we call the government cause some people to get rich at the expense of others. The distortions you mentioned are only a handful of them. There are plenty more.

I don't beleive that government intervention can make the overall market more valuable though, only select pieces. All the things you mention are theft and transfer of wealth. That would mean the outsized profits going to a company like walmart because of the government would have just gone somewhere else. The government didn't invent increased value or wealth, it just redistributed it and kept a bunch for itself. That's what it does.

So I don't worry that government activities are making stocks overvalued apart from the low rates and money printing.

That being said.......if the government stopped it's activities or when it stops we will go into recession as the economy tries to shift to something sustainable. If the government doesn't resist it the result will be much more wealth and value within a few years. I don't care about the temporary drop in stocks that would result from the government pulling back on all it's manipulations. we'll be far far better off in the long run.



Or I could be wrong

[Kshartle]

Regarding employment - You don't think it's still so low due to slack demand and the economy not operating at full capacity (Correct me if I'm wrong but I'm guessing you don't--based on what you said in your previous post--think the economy is operating anywhere near full capacity)?

Employment is well below capacity because entrepreneurs and business can't make additional profits by hiring. Taxes are too high, regulations are too costly, government dissencentives to hiring americans....these are the three biggest job/production killers imo.

The idea that businesses aren't hiring because demand is low and the government needs to stimulate demand is Keynseian. When I hear someone say this it seems to me that they don't understand economics and repeat what they hear on TV rather than thinking about it.

Everything of value that's produced gets demanded. Nothing is demanded until it's produced, before then it's just a desire. We don't need to stimiulate demand (no doubt with government deficits and inflation). We need stimulation of production.

How do you stimultation production? You just get out of the way. Smart people will figure out how to increase it because they will seek profit. Stop taxing them, stop saddling them with regulation and stop dissencentivizing them to hire Americans with all the labor guarantees.

[portart]

I dumped half of SPSX on the premarket yesterday and the rest later as I saw the market charging up. Going to buy it back today and try again. Difficult to time a change in sentiment. I would think this market wants to keep running but thats the kind of thinking that keeps you in it. The strong run could signal something changing soon. I was hoping to buy a little GDX back but it also refuses to rest. Such it the variabilities of timing a VP. Nice to see my account, overall, keep going up. I am at all time highs with PP. Also am continuing to buy TLT on the rebalance as it goes down. If we have a market shift, I expect that to do pretty well.

[Kshartle]

I dumped half of SPSX on the premarket yesterday and the rest later as I saw the market charging up. Going to buy it back today and try again. Difficult to time a change in sentiment. I would think this market wants to keep running but thats the kind of thinking that keeps you in it. The strong run could signal something changing soon. I was hoping to buy a little GDX back but it also refuses to rest. Such it the variabilities of timing a VP. Nice to see my account, overall, keep going up. I am at all time highs with PP. Also am continuing to buy TLT on the rebalance as it goes down. If we have a market shift, I expect that to do pretty well.

Yesterday looks like a failed breakout to me. The job of the market is create as many losers as possible. I wonder if it didn't just go back up to suck in the breakout traders. Someone buying at a new high yesterday probably has a tight stop.

We'll see. A move up for one day does invalidate your short. A sell day today will really go a long way towards confirming yesterday as a failed breakout and retest of the lows from a few weeks ago I think.

Good luck!

[Kshartle]

SPXS looks like a great buy here at $32.77with a tight stop below $31.50. If it breaks there just stay out and take the tiny loss but I think there's a strong possibility it runs to $38-$39.

Risk $1.27 to make $5.23 or more. that's better than 4 to 1 so anything better than a 20% chance and you've got a nice bet here.

I would give it at least 20% that we go back down without hitting new highs.

Damn I'm nearly talking myself into it.

[Reub]

I like the trade also. However I believe it is too early. The Fed will keep the phony economy afloat at least until we get close to the November election. So possibly in October would be my guess on the optimum time for it or for TZA. After the election,  Obama won't care so look out below.

[portart]

I like the way you think! The only danger is an overnight run up in stocks and missing the stop. Seems unlikely here but one never knows