7 Looming Financial Bubbles

Recently, Forbes published an article that pointed to seven different areas where there may be financial bubbles. The interesting article does highlight some areas with which we concur but the article completely misses out on some important structural changes that are driving the financial markets in the recent past. The slide show in the artcile points out to seven areas  (reproduced as in their order) where bubbles may be forming including:

1. Gold

2. China

3. Emerging Markets

4. US Treasuries

5. College Tution

6. Exchange Traded Funds (ETFs)

7. Copper

We would probably agree that there is a possibility of a bubble in Gold and maybe even in the US Treasuries while completely agreeing about the likelihood of a bubble in China and Emerging Makets.

One area where we think there will be little scope for a bubble is in the area of Exchange traded funds (ETFs). We believe that the rise of the exchange traded funds is a unique structural change that is taking place in the world of finance. It is likely that these funds will over the next few years replace mutual funds as the preferred investment destintation for a class of investors who willing to take more risks for the sake of higher returns. This is not to suggest that mutual funds will disappear. Instead mutual funds are likely to cater to a different set of investors whose risk profile is completely different from those who invest/speculate in Exchange Traded Funds.

We believe that the rise of ETFs is part of the process of financialisation that has accompanied the growing monetisation which in turn has been accompanied by the increased influence and spread of the financial markets. An important reason why the ETFs are likely to stay is that they not only enable even the most sophisticated speculators who oversee billions of dollars but also enable small time investors/speculators/traders to take directional bets on a particular market or or a particular segment of the market or asset, something that was not possible even five years ago. More importantly, the scope for financial speculation is now truly global. It is now possible for investors in any part of the globe to open trading accounts and buy/sell these funds.

The special appeal of the ETFs is that they have financialised any type of commodity/currency  or their derivatives. These new financialised products are now available to even to an individual investor with limited surplus and little or no leverage. The minimum number of units that an investor has to purchase is one (though it would be uneconomic to purchase such small quantities due to high transaction costs). Investors can now bet on the direction of even something like nuclear power through ETFs (traded under their symbols: PKN, NUCL and NLR), most of the major currencies, most of the commodities and even countries. Since they are avaialble even to investors who can only invest in small amounts they have become popular. It is likely that investors (especially the larger ones) will increasingly consider ETFs as being central to their trading/investing strategies and one should not be surprised if over the next one decade they overtake the Assets Under management of the Mutual funds. Such indications are clearly visible in the exponential growth of some of these funds. Take the case of the SPDR Gold Trust (Symbol: GLD). Over the years (it was originally listed in 2004), it has emerged as the sixth largest holder of gold (1132.71 tonnes as on 22 December 2009) exceeding most of the countries of the world.

There are also growing concerns about the economic impact on the real (actual economy and not the financial markets) that these financialised funds  are having. It has also led to record trading in those commodity futures. The case of the United States Natural Gas Fund (Symbol: UNG) and the recent debate about the size of the fund because it owned nearly 20 percent of the outstanding natural gas contracts in the USA and its subsequnet problems with the US Regulator, CFTC. It led to a change in rules.

The ETFs have drawn widespread interest due to their ability to facilitate financial speculation  by reducing costs (since they are traded like any other securities,) liquidity, as well as their abiliity  to attract even people with limited resources. This is a far cry from the past when speculating in some of the important markets in the sphere of commodity and currencies were limited to institutional players. Unlike in the past, one need not (though it is still preferable) to be close to the metropolis to speculate in the financial markets. ETFs combined with technology means that one could reside in any part of the world and still specluate (successfully).

It is pertinent to note that a number of these funds have been unable to meet the demand and have frequently had to approach the regulators in order to increase the shares that they would like to issue. The most recent is the currency ETF (symbol: UUP).

Another important innovation in the world of global finance is the possiblity of betting on the possibility of a country going bankrupt through the purchase of a Credit Default Swap (CDS). This is supposed to work as an insurance policy on a country. It rises when investors perceive there to be trouble in the economy of a country. This is precisely the problem in the world of present day modern day finance. There need not be actual economic trouble at that juncture,  but if a set of influential institutional investors think that there is trouble then the CDS may start rising and that would in turn lead to more capital fleeing the country, thereby accentuating the decline, which may have started with a speculative attack (more on this later as it is beyond the scope of this post).

Welcome to the world of highly speculative agile world of capital.

Read this interesting article on money managers who are now activing as "risk Vigilantes"

Speculators have never had it so good: Zero percent interest rates, sovereign guarantee for banks means that our money is safe (at least as long as the government is solvent) and amazing choice of financial products to speculate on.

COMMODITY CORNER
Long/Short Position of Traders

As on 15 December 2009
Source: CFTC

Net Change over previous reporting period (8th December 2009) in Brackets
Silver Contract 5000 Troy Ounces
Gold Contract in 100 Troy Ounces
Copper contract in 25,000 pounds
Palladium Contract in 100 Troy Ounces
Platinum contract in 50 Troy ounces

SILVER	All Open interest	Long Positions	Short Positions
Producer	152,183(-5,126)	9,689 (-930)	69,461(-2,082)
Managed Money	152,183(-5,126)	28,966(-5,516)	1,454(890)
Swap Dealers	152,183(-5,126)	18,018 (+1,252)	17,845(-1,573)

GOLD	All Open interest	Long Positions	Short Positions
Producer	692,120 (-2,530)	55,461(+233)	258,031(+3,938)
Managed Money	692,120 (-2,530)	215,204 (-1,557)	3,891 (-217)
Swap Dealers	692,120 (-2,530)	33,827(-1,508)	149,731(-1,610)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	148,040(-138)	4,156(+68)	73,926(-1,563)
Managed Money	148,040(-138)	39,995 (-2,490)	29,589(+1,220)
Swap Dealers	148,040(-138)	64,468 (+272)	6,508 (-550)

PALLADIUM	All Open interest	Long Positions	Short Positions
Producer	22,380(-524)	548(-817)	16,155(-1,178)
Managed Money	22,380(-524)	12,526(+375)	869(+23)
Swap Dealers	22,380(-524)	2,985 (-48)	3,565(+773)

PLATINUM	All Open interest	Long Positions	Short Positions
Producer	32,909(-1,211)	342(-57)	17,979(-1,096)
Managed Money	32,909(-1,211)	18,295(-185)	719 (+3)
Swap Dealers	32,909(-1,211)	5,106(-33)	11,573(-278)

COMMODITY CORNER
Long/Short Position of Traders

As on 8 December 2009
Source: CFTC

Net Change over previous reporting period (5th December 2009) in Brackets
Silver Contract 5000 Troy Ounces
Gold Contract in 100 Troy Ounces
Copper contract in 25,000 pounds
Palladium Contract in 100 Troy Ounces
Platinum contract in 50 Troy ounces

SILVER	All Open interest	Long Positions	Short Positions
Producer	157,310(-9,413)	10,619 (-225)	71,543(-3,102)
Managed Money	157,310(-9,413))	34,482(-3,014)	564(-241)
Swap Dealers	157,310(-9,413)	16,766 (-1,632)	19,418(-825)

GOLD	All Open interest	Long Positions	Short Positions
Producer	694,650 (-22,775)	55,227(-4,064)	254,094 (-4,473)
Managed Money	694,650 (-22,775)	216,761 (-15,337)	4,108 (-3,057)
Swap Dealers	694,650 (-22,775)	35,335 (-4,553)	148,122(-15,437)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	148,178(-904)	4,088(-703)	75,489(+1,485)
Managed Money	148,178(-904)	64,196 (+1620)	28,369 (+464)
Swap Dealers	148,178(-904)	64,196 (-573)	7,058 (-256)

PALLADIUM	All Open interest	Long Positions	Short Positions
Producer	22,904(-367)	1,365 (-98)	17,333 (-179)
Managed Money	22,904(-367)	12,151 (+111)	846(+119)
Swap Dealers	22,904(-367)	3,033 (-213)	2,792(-326)

PLATINUM	All Open interest	Long Positions	Short Positions
Producer	34,120(-1,735)	399(+39)	19,075(-809)
Managed Money	34,120(-1,735)	18,477(-1,480)	716 (+17)
Swap Dealers	34,120(-1,735)	5,139(+26)	11,851(-817)

COMMODITY CORNER
Long/Short Position of Traders

As on 1 December 2009
Source: CFTC

Net Change over previous reporting period (24 Nov 2009) in Brackets
Silver Contract 5000 Troy Ounces
Gold Contract in 100 Troy Ounces
Copper contract in 25,000 pounds
Palladium Contract in 100 Troy Ounces
Platinum contract in 50 Troy ounces

SILVER	All Open interest	Long Positions	Short Positions
Producer	166,722(-1,742)	10,845 (-636)	74,645(-1,783)
Managed Money	166,722(-1,742))	37,496(-73)	805(+171)
Swap Dealers	166,722(-1,742)	18,398 (+8)	20,242(+690)

GOLD	All Open interest	Long Positions	Short Positions
Producer	717,426 (+23,765)	59,291(+4,292)	258,657 (-6,258)
Managed Money	717,426 (+23,765)	233,099 (-941)	7,164(+3,081)
Swap Dealers	717,426 (+23,765)	39,888 (-1,420)	163,559(+13,273)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	149,082(-3,110)	4,791 (+519)	74,004(-524)
Managed Money	149,082(-3,110)	40,865 (+457)	27,905 (+348)
Swap Dealers	149,082(-3,110)	64,769 (+712)	7,314 (-564)

PALLADIUM	All Open interest	Long Positions	Short Positions
Producer	23,271 (0)	1,463(0)	17,512 (0)
Managed Money	23,271(0)	12,040 (0))	727(0)
Swap Dealers	23,271(0)	3,246 (0)	3,118(0)

PLATINUM	All Open interest	Long Positions	Short Positions
Producer	35,855 (0)	360(0)	19,884(0)
Managed Money	35,855 (0)	19,957(0)	699 (0)
Swap Dealers	35,855 (0)	5,113(0)	12,668(0)

COMMODITY CORNER
Long/Short Position of Traders

As on 24 November 2009
Source: CFTC

Net Change in Brackets

SILVER	All Open interest	Long Positions	Short Positions
Producer	168,465(-23,594)	11,481 (+1,146)	76,429(+2,251)
Managed Money	168,465(-23,594)	37,569 (-824)	634(-135)
Swap Dealers	168,465(-23,594)	18,390 (+377)	19,552(-207)

GOLD	All Open interest	Long Positions	Short Positions
Producer	693,661 (-80,020)	54,999(-8,986)	264,824 (+2,109)
Managed Money	693,661 (-80,020)	233,039 (-465)	4,083(+249)
Swap Dealers	693,661 (-80,020)	41,308 (+2,799)	150,286 (-1,265)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	152,192 (+464)	5,310 (-610)	74,528(+995)
Managed Money	152,192 (+464)	40,408 (+1,544)	27,558 (+244)
Swap Dealers	152,192 (+464)	64,057 (-505)	7,878 (-532)

The Bears are Back, and more ferocious

(Please consider this more as a preliminary post and the usual research notes with stats, references and charts will be posted over the weekend).

The events surrounding Dubai have led to a renewed round of panic in the markets. It has brought back fears of the financial crisis. The crisis owes its origin to those who are in a perpetual state of intellectual deficiency and were convinced that building those castles in the sand and the sea were good business propositions (and all those morons who actually bought them). The Dubai problem is not per se very large - "only" about 60 billion dollars. But that has upset the "sentiment" which could be rebuilt only after all the government's pumped in about US$12.9 trillion over the past year. This default( though not yet in a technical sense) is likely to lead to exactly all those changes that took place after Lehman, only a more grand scale with all emerging markets likely to be hit by risk aversion, which will lead to a shooting up of the cost of debt and increase their spreads. Imagine this is the position of a government that has liquid assets in the form of oil, which is anyway rising because of speculators. What will it be like if others are hit?

The best case scenario is this: Fed and all the other governments' step in and go back to pumping in another 2 or 5 trillion dollars. That will lead to exactly the type of situation that we saw since march. I think we are likely to have that. Then after the fall, we will have commodities shoot up. It is likely that we will have a dip in the markets and a rise after that (a false dawn) which should probably be used to get out of the markets. The commodity market is likely to witness a 20 percent correction (in the worst case another 35% correction). If you have the stomach for it, short oil below 74. In the intraday hourly chart, it looks like it is likely to break the 75.35 level, which is the head and shoulder break. That should be stop loss. It is getting short-term support at 74.50 level. if that holds then good or else the next major support is 74. If there is a rise in the market over the next week (major trading will take place in the US only on Monday) then use the rally to take up short positions - if one is an aggressive trader. For the next one week there are only two good places, USD and US Treasury bonds. (i know both are bad

In the worst case: Dow will go back to 5000. I think that sums up the worst case in a sentence.

There is one very interesting development that we have been talking about: bond funds drawing a lot of funds over the past two months. Looks like the bond market has got the whole thing right, as usual Equity market it turns out is the dumb money. Currency guys are the thundering hordes who are jumping all over the place, and well commodity markets are somewhere in the middle.

One should not be surprised if the UST10 year note heads back to 127 or even 131.

The Dollar index is most important and interesting. 75.16 is a critical level but the important level to really look out for is the 76.30 level. if it is not able to move above that then expect a new low (well below 70) for the Dollar Index. (my personal level is that it could probably test that and may take out the 76.30 level over the next one month. if it takes out that level by Monday then expect a big rally in USD. Any close above 75.85 on a weekly basis will mean that we have hit a bottom in the dollar index.

Gold market is the next important market to watch out for. Normally in times of crisis (like the one that we are likely to have now with the start of the sovereign defaults) Gold should do well - but, "THIS TIME IT IS DIFFERENT". (pls dont get me wrong when i say that). I think gold is due for a very sharp big (good) correction. This are for a number of reasons:

1. Gold is anyway due for a sharp correction. It has returned 34 pc this year.
2. It may well turn out to be a "buy on rumour, sell on fact case".
3. There are huge long positions in gold in various commodity markets. They are likely to be liquidated.
4. The most important reason is that gold is likely to be sold because, all those who face margin calls are likely to sell gold positions and pay the margin call (i would do that if i were in their position - rather than part with cash, so likely that everybody would do that).
5. Fundamentally, this actually long-term good news for gold. I think governments will keep pumping in more money (now they have a good excuse) and that should lead to gold shooting up in the long term (after this correction). so utilise this correction to buy gold and as a second best alternative, its poorer cousin gold.

For all those who are still comfortable with only buying (long only) buy Exchange traded funds like VXX and FAZ. Then... sit back and enjoy the ride. Nobody in their senses would have actually been comfortable when the VIX touched 20.

I must confess that i was not able to sleep well since it touched 35, but that is the problem, i get on to the train even before they have refueled it for their journey, and i get off just as it has reached its first stop, leave alone the actual destination, but that could be the reason why I have lived to fight another day in the markets.

Happy trading.

10 Year U.S. TREASURY BONDS - CHICAGO BOARD OF TRADE
Commitments of Traders (Delta-adjusted Options & Futures Combined)
November 17, 2009

Category	Quantity of Positions
Total Open Interest	1,720,039(+159,633)
Non-Commercial Long	172,398 (+30,882)
Non-Commercial Short	243,210 (+42,468
Commercial Long	1,008,638(+31,407)
Commercial Short	923,703(-1,560)
Total Long	1,417,825(+120,029)
Total Short	1,403,703 (+199,926)

Source: CFTC

NYMEX Light Sweet Crude
Disaggregated Commitments of Traders(Options & Futures Combined),
November 17, 2009

Category	Quantity of Positions
Total Open Interest	2,491,200 (-417,670)
Producer Long	293,262 (-25,770)
Producer Short	512,711
Managed Money Long	189,923 (-9,212)
Managed Money Short	40,787 (-1,560)
Managed Money Spreading	269,425 (-70,354)
Swap Dealers Long	214,673 (+48,907)
Swap Dealers Short	176,813 (+9,054)
Swap Dealers Spreading	829,158 (-235,640)

Source: CFTC

Deciphering the Rising Baltic Dry Index

The past two months has seen a rise in most of the asset classes. One index that has outperformed all other indices is the Baltic Dry Index, the index that is considered to be a barometer of the world's shipping freight charges. Over the past two months the index has nearly doubled from about 2163 to about 4668. This has led to renewed optimism that the global economy is on the path to a recovery. This is because, shipping (along with other transportation indices) were some of the few advance indicators that signalled the present recession.

The Baltic Dry Index is an index that is computed from the average of twenty two bulk cargoes on a futures basis including iron ore, coal, cement, steel and food grains. It is quoted every working day at 1300 GMT. The index does not include wet goods such as crude oil. The index is a daily average of shipping freight rates. The important feature of the index (and its relevance) may be due to the fact that it is not a tradable contract and is exclusively the preserve of actual users of shipping services. It does not directly include short-term speculative inflows (or ‘hot money’) directly. There are however, derivative products (futures) introduced by other exchanges (the International Maritime Exchange, MAREX) that trade on Baltic Dry Index. There are a number of other ways to trade shipping freight including exchange traded funds like Claymore/Delta Shipping Index exchange traded fund. This exchange traded fund (ETF) trades under the symbol SEA. The ETF does not replicate the BDI and instead invests in shipping companies.

Bubbleomania’s Note of Caution: Be more circumspect on the BDI

The fact that the index was one of the earliest indicators that warned of an impending crisis, has led the investing public to become enamoured with the movement of the index over the past couple of months. While in the past it rare to come across a price quote of the index, it has now become common for the financial media to give this index great prominence, probably a contrarian indicator that should warn investors that it is time to move on to another indicator. Investors as well as observers may be well advised to be more watchful that giving primacy to the index. Circumspection may be in order because it is imperative for investors to keep in mind the fundamental of economics – Demand and Supply – before overemphasising the importance to any one indicator. The global economy is far too complex, sophisticated and dynamic for investors to depend solely on only one indicator. To place the BDI in perspective, it rose from about 5600 in early 2008 to a record of 11,793 in mid-2008 and in the aftermath of the Lehman Brothers’ bankruptcy it collapsed to a low of 666 in December 2008-in about six months.

Baltic Dry Index

                   

If we were to over emphasise the indicator with all the irrationality of a financial herd, then we would have to believe that the world trade would double (as the index more than doubled in 2008) and then expect the world trade to collapse by 98 percent by the end of 2008. WTO indicated that world trade would decline by about ten percent. In May 2009, the New York Times quoted a report that indicated that nearly 735 ships were anchored in ports, due to lack uneconomical freight charges. This seems to have turned around as the present rates would make freight profitable on all routes for the companies. This is not to claim that the BDI as an indicator is redundant.

Questions Galore, Answers limited:

Among the many questions that investors and observers would now have to grapple would be:

-What is the likely consequence of the near doubling of the BDI?

-Does it merely reflect the bubbles that are likely to be being built in the other asset classes of the nearly 150% increase in the monetary base in the US economy?

-Is it the harbinger of a new era of economic prosperity that all of us so desperately yearn for after more than a year of financial turmoil that has not been witnessed since the end of the Second World War?

-Does it indicate that the commodity bull market has just been renewed with great vigour?

-What would be the impact of the rising cost of shipping on the weak recovery?

The simplest answer would: Nobody knows accurately. But nevertheless we hope to provide some valuable insights, which hopefully should enable investors to come to their own informed opinion.

Why is the BDI rising?

The simple answer would be that there is a large, rising demand for commodities in the emerging markets, especially China. Undoubtedly, there is some truth in that assertion, though it would be difficult to quantify the exact quantum of that impact on movement of the index on the movement of the index. There are a number of important factors that have to be kept in mind. The crisis of 2008 has dramatically altered the landscape of the shipping industry (as with most of the other industries).

It should be kept in mind that the recent boom led to an exponential large increase in world trade, due to globalisation, which necessitated the need for more number of ships. This shipbuilding activity increased with the boom, and ship orders increased, especially in 2007. Considering the fact that it takes nearly two years for ordered ships to be delivered, these will increase in 2009 and 2010. It has been pointed out that capacity addition to the present fleet will be to the tune of about 60 percent of existing fleet capacity.

A critical element in the future of shipping would be the state of the economy as a natural corollary, the demand for goods. This unfortunately is likely to be the Achilles heel for the shipping industry. Recent statements by some of the shipping companies is instructive of what we can expect from the sector. A.P Moeller-Maersk, the owner of the largest container shipping line has announced that volumes are likely to grow by 3 percent to 8 percent in 2010. That would indicate that the world economy is unlikely to grow at a pace that the optimists think as it essentially means that the growth is likely to come after a 10 percent drop in container traffic in 2009. The third largest container shipping company CMA is reported to have stated that the while the Europe-Asia route has seen some recovery, the US-Asia route is yet to see demand pick up. Some analysts have pointed out that the proportion of the container fleet that was idel was likely to rise to 15 percent or een 20 percent over the next year.

What is causing the BDI to rise?

The quick answer would be imports by China of Iron Ore, Coal and oil. The Chinese continue to increase their import of most of the commodities, including copper, lead, iron ore, coal as well as oil. This demand is likely to increase as China has announced that it would like to establish a coal reserve that would store at least about 10 percent of the annual consumption in the reserve. The recent rising food prices has only increased the demand.

It is pertinent to note that companies tend to start building stocks for the forthcoming Christmas shopping season, we are likely to see this happening. The fact that business inventories are at their lowest levels in recent years only seems to be aiding the movement of goods.

Two important developments seem to be causing the BDI to rise. The first is the consequence of the financial crisis, where shipping companies were forced to close due to the non-availability of credit. This is to be seen in the context of the fact that shipping a capital intensive business. It has been pointed out that the collapse in the credit markets led to an estimated US$350 billion of orders for new ships unfinanced. To this may be added the cost consequnces of partly funded orders/loans which were cancelled as the banks continue to pull back. This is not likely to improve over the next year.

A second important factor that is positive for the shipping sector and a predominant factor that is supportive of the shipping prices are ironically the activities of speculators in the oil market.

Another important cause for the rise in the Baltic Dry Index seem to be the rise in short positions in the futures segment of the BDI futures. The October 2009 futures indicate that there seem indicte that the rally may have more to do with futures market issue (again a consequence of financialisation) rather than those based on demand and supply of actual goods.

Source: IMAREX

The following chart provides a snapshot of the rising trading in the futures and derivatives segments of the BDI futures.

Source: IMAREX

The charts below provide an overview of the problem of rising inventories in China. This should be a cause for concern as the recent boom in the commodity sector as well as rise in the Baltic Dry Index was largely to import of commodities by China. The Chart below indicate the problem of rising inventories in Shanghai (Copper Inventories)

Source: Bloomberg

Zinc inventories in China too are at their highest level since 2007.

                            

Source: Bloomberg.

A counter weight to the above problem would be that the BDI may find support from the import of Coal and food grains. The world will continue to remain short of food grains and since countries like Philippines and India have announced large import of food grains, this likely to remain supportive of prices in mid 2010, if not a bullish factor.

Interestingly, the number of ships that are waiting for coal load has not increased as one may have expected, considering the Euphoria that we have seen. It has remained more or less constant within the range that we had seen in between 2008-09 as can be discerned from the chart of New Castle Mining port authorities:

Source: Bloomberg

Reasons to be Cautious:
-Shipping freight derivatives for 2010 and beyond imply lower freight rates.
-New ship deliveries are estimated to approach 34 million DWT of capacity in 2009, there is a possibility of another 26 million DWT being added to the capacity, though shipping companies can delay the deliveries.
-What is more worrisome is the fact that we have been witnessing a continuous rise in inventories of various base metals, including copper and lead, among others. If demand were not to return in 2010 due to a faltering global economy, it is likely to lead to yet another round of collapse in the shipping sector as the sector is likely to be hit by increasing capacity which will be aggravated to high commodity inventories.
-According to Paris-based AXS-Alphaliner, 10.7 per cent of the world’s container ship capacity is now laid up out of use, with most of the idle ships belonging to independent owners

Hence, investors may be well advised not to over-emphasise the importance of the Baltic Dry index, while at the same time, we should not be hasty to dismiss the index as redundant.

COMMODITY CORNER
Long/Short Position of Traders

As on 17 November 2009
Source: CFTC

Net Change in Brackets

SILVER	All Open interest	Long Positions	Short Positions
Producer	192,059(+5,499)	10,335 (-1,707)	74,177(-1,774)
Managed Money	192,059(+5,499)	38,393 (+5,045)	768 (-523)
Swap Dealers	192,059(+5,499)	18,013 (+553)	19,759 (+1,070)

GOLD	All Open interest	Long Positions	Short Positions
Producer	773,681 (+36,290)	563,986(+4,650)	262,716 (+1,275)
Managed Money	773,681 (+36,290)	233,540 (-1,676)	3,834(+407)
Swap Dealers	773,681 (+36,290)	38,508 (+1,167)	151,550 (-2,740)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	151,727 (+7,778)	5,920 (+1,221)	69,466(+11,873)
Managed Money	151,727 (+7,778)	38,864 (+6,259)	27,314 (+3,826)
Swap Dealers	151,727 (+7,778)	64,562 (+2,481)	8,410 (+277)

Investor Sentiment Survey



Short Term (3 month) Sentiment
Bulls = 68.1% {55.3%}
Bears = 12.8% {26.3%}
Neutral = 19.1% {18.4%}
Average Prediction = 3.9% {1.1%}

Long Term (12 month) Sentiment
Bulls = 64.4% {57.9%}
Bears = 24.4% {26.3%}
Neutral = 11.1% {15.8%}
Average Prediction = 5.7% {3.8%}

Note: Values in Brackets are those from 4 weeks ago

COMMODITY CORNER
Long/Short Position of Traders

As on 9 November 2009
Source: CFTC

Net Change in Brackets

SILVER	All Open interest	Long Positions	Short Positions
Producer	186,560(+14,654)	12,042 (+1,364)	75,951(+2,540)
Managed Money	186,560(+14,654)	33,348 (-1,201)	1,291 (-82)
Swap Dealers	186,560(+14,654)	17,461 (-428)	18,690 (-1,231)

GOLD	All Open interest	Long Positions	Short Positions
Producer	737,391 (+50,108)	59,336(+59)	261,441 (+21,22)
Managed Money	737,391 (+50,108)	235,180 (-1,787)	3,427(-840)
Swap Dealers	737,391 (+50,108)	37,341 (+4,545)	154,291 (+5,807)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	143,949 (+3,030)	4,699 (+614)	69,466(+11,873)
Managed Money	143,949 (+3,030)	32,605 (-1)	23,488 (+2,950)
Swap Dealers	143,949 (+3,030)	62,081 (+465)	8,133 (-10,846)

Survey of Investor Sentiment

The results of the latest survey of investor sentiment published by Dogs of the Dow:

Note: Values in brackets {} are from 4 weeks ago.

Short Term (3 month) Sentiment
Bulls = 55.8% {64.5%}
Bears = 18.6% {16.1%}
Neutral = 25.6% {19.4%}
Average Prediction = 2.8% {4.0%}

Long Term (12 month) Sentiment
Bulls = 65.9% {80.6%}
Bears = 14.6% {9.7%}
Neutral = 19.5% {9.7%}
Average Prediction = 5.4% {12.7%}

A probable answer to the market rise riddle

Came across this interesting statistic on the web.

Some estimates (not sure about the source) claim that the wealthiest 1% of U.S. society holds 55% of all stocks. More importantly, it has been pointed out that Wall Street controls as much as 70% or more of all equity trading.

Probably a conspiracy theory but worth keeping in Mind.

COMMODITY CORNER
Long/Short Position of Traders

As on3 November 2009
Source: CFTC

Net Change in Brackets

SILVER	All Open interest	Long Positions	Short Positions
Producer	171,906(-37)	10,679 (+1108)	73,412(-1974)
Managed Money	171,906(-37)	34,549 (-4,000)	1,373 (+434)
Swap Dealers	171,906(-37)	17,889 (+562)	19,921 (-1,126)

GOLD	All Open interest	Long Positions	Short Positions
Producer	687,283 (+35,649)	59,276(+5,290)	259,318 (+9,360)
Managed Money	687,283 (+35,649)	236,967 (+15,057)	4,267(+2,269)
Swap Dealers	687,283 (+35,649)	32,796 (+879)	148,484 (+3,506)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	140,919 (+2,244)	4,085 (-267)	57,593(+1,745)
Managed Money	140,919 (+2,244)	32,606 (+861)	20,538 (+2,196)
Swap Dealers	140,919 (+2,244)	61,616 (-167)	18,979 (-747)

COMMODITIES - LONG/SHORT POSITION OF TRADERS

As on 27 October 2009
Source: CFTC

Net Change in Brackets

SILVER	All Open interest	Long Positions	Short Positions
Producer	171,943 (-7,389)	9,571 (+57)	75,386 (-280)
Managed Money	171,943 (-7,389)	38,548 (-4542)	940 (-20)
Swap Dealers	171,943 (-7,389)	17,326 (+655)	21,047 (-1,560)

GOLD	All Open interest	Long Positions	Short Positions
Producer	651,634 (-25,222)	53,986(-1747)	249,958 (14,543)
Managed Money	651,634 (-25,222)	221,910 (-18,882)	1,998 (-655)
Swap Dealers	651,634 (-25,222)	31,917 (+1,368)	144,977 (-5,149)

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	138,675 (+5,215)	4,352 (+512)	55,849 (+6,475)
Managed Money	138,675 (+5,215)	31,745 (+4,546)	18,342 (-3482)
Swap Dealers	138,675 (+5,215)	61,783 (+1,108)	19,726 (+628)

Historical Statistics

Shareholders in India - 1981

The Stock Exchange Division of the Union Finance Ministry announced in 1981:

• The total number of shareholders in the country (in 1975) was two million (20 Lakhs). 
• This increased to 3.5 million as a result of FERA share issue. 
• In 1981 this figure remained constant. 
• The face value of FERA shares (including premium) was Rs. 58.39 Crores (or about Rs.5.839 billion), while the premium amounted to Rs.12.89 crores. 
• About 35-40 percent of the total shareholding was held by Public financial institutions. Among the Public financial institutions LIC held 10 percent (or Rs.375 crores), GIC Rs.70 Crores
• Until 1980, Hindustan Lever had the highest number of shareholders - 90,000 - followed by TISCO (70,000).
• In 1980 Ambalal Sarabhai Industries crossed Hindustan Lever when they issued shares to the public (which was oversubscribed by 3.5 times) and raised Rs.24 crores. The number of shareholders in the company reached 3.5 lakhs (a record in those days).
  

Source: The Financial Express, 8 July 1981.

A Peek Into History: 

Evolution of Indian Stock Markets

I came across some interesting articles on the evolution of the Indian stock markets. I complied the various interesting statistics and events. The compilation is mostly from old newspaper articles (sources provided as far as possible).

What is interesting to note is that in the recent years, the government seems to believe that the Indian stock markets are "safe" (As a disclaimer, we personally hold the view that speculation can never be safe). This seems to be the thinking after the introduction of dematerialisation of shares and "compulsory rolling settlement". The predominant concern during the period 1060-2002 seems to have been to bring about better compliance and make the system "safe".

On July 6, 1981, the Government of India announced that they they were introducing new norms for the stock exchanges.  These guidelines were aimed at checking irregularities in the functioning of the stock exchanges. They included:

• Tightening the present system of check on benami share transfers
• Computerise the operation of the stock exchanges
• Authorities should move quickly to impound the increase in share prices to curb speculation. 
• Fix a minimum scale of brokerage in order to further curb speculation.
• Prohibit the directors and senior officials of a company from handling the share books of a company once these books are closed. 
• The company management should pass on the information of issue of bonus shares immediately to the stock exchanges. 

The Government thought that they could broad base the equity markets by reducing the face value of shares from the existing Rs.100 per share to Rs.10 per share by 1983. Most of the companies were stated to be opposed to that measure and they were reported to be pressurising the government on that count.

It is pertinent to note that nowhere is there any mention to undertake measures to improve price discovery as well as to increase settle investor grievances.

Source: The Financial Express, 8 July 1981

Interesting Quote

It is a painful thing to look at your own trouble and know that you yourself and no one else has made it.

~Sophocles, BC 496-406, Greek dramatist

Important Development about US Dollar: Gulf States may stop Using Dollar

The Indepedent (which was subsequently carried by Bloomberg and Others) reported that the Gulf states may stop denominating their oil exports in the US Dollar. Interestingly, one of the unstated reasons for the US invasion of Iraq by George Bush was supposed intention and attempt by Iraq (under Saddam Hussein) to start using the Euro as the denomination for its oil exports. Rest apart, if the development actually does materialise then we may be about to see a paradigm shift which would structurally alter the global economy for the rest of our lives. It could also start the inauguration of the gradual decline of the US dominance in every sphere of our lives. In other words, it could mean the end of the US Empire.

But on a pure contrarain basis, it could also (only in hindsight can we actually be sure) be the medium term bottom. Look at it this way, people are selling USD as if there will be no tomorrow.

And, remember, major turning points occur at such turbulent times. So, we could just be near, at least a short-term bottom simply because I believe that it cannot get worse than this in the immediate future.

More on this later.

Short-Term Caution on Commodities

While we continue to remain bullish about commodities over the long-term, we believe that in the short-term caution may be well advised in the commodity space (as a whole). We continue to hold that while Gold is a good buy on substantial declines, the rest of the space, especially base metals seem ripe for a sharp correction.

Commodities have a tendency to witness very sharp corrections, so dont be unduly worried. If you are the one who incessantly worries about such sharp corrections then the commodity space is best avoided.

The chart below provides a graphic representation of the US Commodity Open Interest (as published by Bloomberg).

(Click on the Image to Enlarge)

While we would like to avoid particular recommendations, we decided that we would like to make an exception

It is imperative to note that at the present juncture, on a purely technical basis, we believe that commodities like copper may witness selling pressure once it falls below US$260. The first sign of trouble will be hinted once it falls below 264 and 262.

In case of short-term gold speculators, it is prudent to note that our post about Gold a couple of weeks back is still valid. In the very short-term, speculative long-positions in gold could be contemplated once it cross 1007 and 1011. On the downside, very short-term speculative short positions could be contemplated once gold falls below US$1000. But, keep in mind that the interesting development that gold is not closing below US$1000. Below 1000 major supports are at 997, 990, 987 and 982.

Please note that our bullish long-term stance in the commodities being in a secular structural bull-market with cyclical bear-market corrections remains intact.

Margin Debt on NYSE in 2008

The following table provides details about Margin Debt on NYSE on a monthly basis in 2008. The Debt is in US$ millions.

Click on the Image to Enlarge

Margin Debt on NYSE in 2007

The following table provides details about Margin debt on NYSE on a monthly basis in 2007. The Debt is in US$ millions.

Click on the Image to Enlarge

Margin Debt on NYSE in 2002

The following table provides us with the overview of margin debt on NYSE in the Year 2002. The Debt is in US$ millions.

Click on the Image to Enlarge

Margin Debt on NYSE in 2001

The following table provides us with the overview of margin debt on NYSE in the Year 2001. The Debt is in US$ millions.

Click on the Image to Enlarge

Margin Debt on NYSE in 2000

The following table provides us with the overview of margin debt on NYSE in the Year 2000. The Debt is in US$ millions.

Click on the Image to Enlarge

Deciphering the Riddle of Liquidity & Rally

Every day we hear that the boom since March 2009 has been driven by 'liquidity'. This shrill has become all the more pervasive with the recent rally in the markets. We keep asking the question what has induced such a strong rally (apart from the usual factors such as government support as well as other technical factors). So I thought the best thing would be to research how far argument is actually backed up by solid statistical evidence. I decided that I would dig out statistics from different sources and try to find out a macro-argument for or against liquidity inducing this rally. I looked into ICI statistics and also the statistics put out by the US Federal Reserve Money Stock Measures (in billions of dollars as on 1 October 2009) and the ECB and tried to analyse (with an open mind) which way the liquidity riddle.

I kept reminding myself that liquidity is a ubiquitous but double edged sword and probably the easiest way to unfathomable market movements. I consider this posting to be part of a longer-term research in progress wherein we would like to track the flow of liquidity into different asset classes and consequently the socio-economic impact of this process.

At the outset, it is pertinent to remember that this rally directly or indirectly has the blessings of the governments the world over for the simple reason that a rally of this magnitude goes a longway in reducing the leverage on the balance sheets as well providing succour through rising assets on the books of the beleagured financial institutions of the developed world. The statistics and charts provided in this post clearly indicate that money supply creation may have slowed (at least in the USA) at best and that itself could be a red flag. Recent reports by Bloomberg claims that the European Central Bank has actually given lesser number of loans than expected.

Another argument that we can put forth is that the rally became possible (apart from the usual conspiracy theories) is not because of liquidity that has been created due to investors becoming risk averse but instead it is largely due to money that originates in the global central bank emergency measures. The results of Goldman Sachs and others clearly indicate that trading has become an important part. So we looked up statistics about margin lending and it gives credence to the view that private pools of capital are warming up to leveraging once again. Margin Debt has been increasing. This is not to claim that they were not interested in borrowing, just that there were no lenders.

It becomes increasingly difficult to argue that the rally in the equity markets worldwide was largely because of growing willingness on the part of various segments to take on more risk, or risk aversion abating. That story may only be partly correct. It becomes increasingly difficult to argue that the rally was driven by money coming out of the US Money Market funds. A small part of it may have come into the markets. The chart below clearly illustrates the fact that money on the sidelines has come down, but it is equally important to note that not all of it would have come into equities.

It has been pointed out that the amount of money shot up in the aftermath of the Lehman Crisis. The chart below show that it increased from about US$3.399 trillion to about US$3.922 trillion. A commonly held view is that a part of that is coming back into the equity markets. The Chart below (from Bloomberg) clearly indicates that even before the crisis began the amount of money in US Money Market Funds in mid 2006 was about US$2.038 trillion and after the problems with Bear Stearns in March 2007 it was about US$2.432 trillion. In early September 2008, just before Lehman collapsed it was US$3.585 trillion. Two days back it was about US$3.425 trillion. This indicates that the jump was approximately about a US$1 trillion after the problems began.

Please Click on image to expand Image

It is important is that we have to note that about US$190 billion moved into commodities, approximately US$220 billion dollars moved into bond funds.

That leads us to the important question: what led to this huge rally? Invariably short-covering played a part. But that is not to be over-emphasised. More important is the money printing as indicated by the US Federal Reserve statistics given in the table below.

We have to assume that a part this money did flow into the various markets as banks are not lending it to consumers (as some of our other posts have shown). A part of the money did go into covering the losses of the banks, while it is likely that a large component is simply being hoarded by the banks due to either uncertainty in the economy or uncertainty over their own capital requirements to cover losses in future.

The rally (in the equity markets) seems to have been fuelled by equity mutul funds putting some of their cash back into the market. The table below (from ICI) shows that the cash position of the US equity funds have largely been reduced thereby creating additional demand.

August 2009	July 2009	August 2008
4%	4.2%	4.5%

The following table provides us with Net New Cash Flow of Money Market Funds (In US$ million)

August 2009	July 2009	YTD 2009	YTD 2008
-53,788	-48,325	-291,1782	339,548

Source: Investment Company Institute

One important source for the equity rally in the US has been the increase in margin debt as shown by the table below. It provides us with the annual average of margin debt for the years preceding 2009, while for the current year monthly statistics have been provided. This indicates that a large part of the rally has been induced by speculators (likely to be hedge funds) borrowing money to buy stocks. Interestingly ICI statistics show that US based equity funds have only seen inflows to the tune of about US$65 billion in 2009. In contrast the Bond funds have seen inflows of nearly US$220 billion, indicating that money moving out of the money market funds is going into bond and commodities and even emerging markets rather than US equities. Emerging market funds have seen inflows only to the tune of about US$9.68 billion on a net basis. Hedge funds on the other hand have seen inflows. Added to that is the leverage that has been built with banks lending only to them and their borrowing on the basis of margin debt. One could also add that in almost all the countries we have seen a large amount of money being pumped into the system, a large part of this invariably has entered the markets (all of them for financial speculation). A number of reports indicate this has largely been the trigger for the rally in countries such as China. The fact that a number of investors (especially mutual funds) putting some part of the cash cannot be overlooked, but should not also be overemphasised.

Year	Average Margin Debt on NYSE
2000	243,448
2001	164,550
2002	141,003
2003	150,190.8
2004	183,287
2005	207,166.7
2006	239,572
2007	331,554.2
2008	285,168
2009 January	177,170
2009 February	173,300
2009 March	182,160
2009 April	184,120
2009 May	189,250
2009 June	188,140
2009 July	199,460
2009 August	206,720

All the above figures in $ Millions
Source: NYSE

The above analysis hopefully provides greater clarity about the the source of the rally. The important question that we need to ask is how long will the liquidity last? The short answer is that is not likely to last long (at least not beyond the next two or three months) unless the US decides that the weakness in the economy needs another round of stimulus of various kinds. That is probably one of the reasons what the commodity market is sniffing.

We would believe that most of the money that would like to enter the equity markets has already entered the equity markets and the role of liquidity is probably being overhyped. There is probably more selling that is likely rather than the other way round. Insiders are selling quite aggressively, while the investment herd seems to be buying.

While our analysis may be full of certain generalisations, we think this could be a good starting point to carry out further research and debate on the issue. Hopefully others will add to the debate.

History of Bubbles: The South Sea Bubble

As a student of history one cannot but marvel about the nature of human mentality and human emotions. Nowhere is this more visible than when it comes to investor behaviour in the financial markets. The history of bubbles goes back hundreds of years (at least). The remarkable similarities of bubbles starts with each generation of people believing that they are living in an era of great technological change that generations before them had never witnessed. These "revolutions" probably first started with the ability of humans to use fire, then the ability to harness the wheel, maps, industrial revolution, the invention of the steam engine, telephone, electricity, railways, (may not be in that order though). In recent years the ostensible reason for elation has been technological change that invariably leaves us spellbound. The list is exhaustive.

These 'revolutions' invariably leave in their legacy of euphoria amongst the investment community and every few years we have a new fad that becomes the rage. There are a number of interesting manifestations of these manias or in investment terminology - bubbles - are the eerie similarity and their amazing simplicity. Often, in retrospect one may be forgiven to wonder how normally rational, intelligent investors could fall for such a simple illogical investment theme.

A common trait of most of the bubbles is the fact that nearly all of them characteristics that are remarkably similar in the way that they have operated through the ages.

I thought there would be no better way than to go back and research about the past bubbles from what contemporary observers (who kept their sanity) had to say. There is no better book to back to than Charles Mackay’s Extraordinary Popular Delusions & the Madness of Crowds, first published in 1841. However, writing about each of the bubbles will be my priority but due to time constraints, I thought it would be best for me to reproduce parts and pieces from different bubbles that he has documented and try to dig up similarities with bubbles that I have been observing since 1993.

Over a period of time, I have found that the best way to observe the formation of bubbles is when people in a different line of activity start taking notice of returns in a particular asset class. We opine that the greater the attention from non-professional investors, the greater the validation that a bubble has started to expand. A classic instance of a bubble was in 2000: It was reported by Marketwatch website (then http://www.cbs.marketwatch.com/ in a story titled “Buffett defends his tech aversion on 29 April 2000) that a ten year California girl demanded an explanation from Warren Buffett (considered to be one of the most successful investors of the present) during their Annual Shareholder meeting as to why he avoids technology sector.

In this post, I will highlight some important quotations about bubbles and Mackay’s observations. The South-Sea Bubble is one such classic bubble.

The South Sea Company was established in the year 1711 by Harley, the Earl of Oxford. The company was formed to restore public credit which had suffered due to the dismissal of the Whig Ministry. A company of merchants decided that they would assume the debt themselves and in return the government agreed to provide them with certain duties in lieu for a certain period of time at an interest rate of six percent per annum. A monopoly of trade was granted by the British Parliament. The amount of debt that this company of unnamed merchants would assume amounted to nearly ten million sterling, a considerable sum in those days. The interest rate was reduced to five percent from six percent in 1717 on the request by the company.

Reports then surfaced that the company was to be granted four ports in South America by Spain so that it could trade in gold, silver and slaves. These rumours held ground despite the Philip V of Spain having no intention to grant free trade concessions to the British. The Company was granted permission to increase its capital. To cut a long story short, during the course of the debate in parliament about extension of benefits to the company, the stock price exploded due to speculation.

A speaker (Walpole, the only one who spoke against the company) had the prescience to warn in parliament that, ‘the dangerous practice of stockjobbing would divert the genius of the nation from trade and industry. It would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labour for the prospect of imaginary wealth….’

The parliamentary debate over the bill took two months and in the meantime the stock was the magnet of speculation. The stock rose from about 100 to about 400 and then settled near 330 by the time the bill was passed by the House of Commons. At its height the stock reached a high of 890. A large part of the speculation was driven by rumours that claimed that the company would grow exponentially. Among others, an interesting rumour was that the Earl had received overtures in France from the Spanish government that they exchange the company Gibraltar and another port for some places on the coast of Peru.

On April 12, five days after the bill was passed the company decided to issue fresh shares to the public. The bids received were nearly two million more than the existing capital. Even the Prince of Wales decided to invest about 40,000 of his own money. This boom led to more companies being formed to trade.

Mackay points out that there were nearly a hundred different projects were formed. This is eerily similar to our present day bubbles. Hundreds of companies decide to raise capital from the public: all to monetise the prevailing investment fad. During that era, it was estimated that nearly three hundred million sterling was raised from the public for dubious ventures (p.68). Among the ventures for which money was raised included:
Establishment of a company to make deal board out of saw-dust
Establishment of a company for encouraging the breed horses in England, and improving glebe and church lands, and repairing and rebuilding parsonage and vicarage houses.
A company for carrying on and undertaking of great advantage, but nobody knows what it is.

Once the bubble burst, the following is the list of some of the companies that were declared to be illegal. Mackay lists nearly 85 different companies that were declared illegal and abolished. Amongst them the interesting ventures were:

1. For the importation of Swedish Iron

2. For supplying London with Sea-coal

3. For building and rebuilding houses throughout all England

4. For effectually settling the island of Blanco and Sal Tartagus.

5. For improvement of lands in Great Britain

6. For Purchasing lands to build on.

7. For Trading in Hair
8. For erecting salt works in Holy Island
9. For carrying on an undertaking of great advantage; but nobody knows what it is.
10. For paving the streets of London
11. For furnishing funerals at any part of Great Britain
12. For insuring of horses
13. For a grand dispensary
14. For improving the art of making soup
15. For a settlement on the island of Santa Cruz
16. For improving of Gardens
17. For drying malt by hot air

Once the stock collapsed, it was pointed out that the wealthy of yesterday became the beggars of today.

Source: Charles Mackay (1841), Extraordinary Popular Delusions & the Madness of Crowds, Three Rivers Press, New York, Reprint 1980.

News Headlines from the Great Depression

1929-1932 Headlines

September 1929“There is no cause to worry. The high tide of prosperity will continue.”- Andrew W. Mellon, Secretary of the Treasury.

October 14, 1929“Secretary Lamont and officials of the Commerce Department today denied rumors that a severe depression in business and industrial activity was impending, which had been based on a mistaken interpretation of a review of industrial and credit conditions issued earlier in the day by the Federal Reserve Board.”– New York Times

October 29 1929
Stock market crash

December 5, 1929“The Government’s business is in sound condition.”– Andrew W. Mellon, Secretary of the Treasury

December 28, 1929“Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.”– Associated Press dispatch.

January 13, 1930“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.”– News item.

January 21, 1930“Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction.”– News dispatch from Washington.

January 24, 1930“Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast.”– New York Herald Tribune.

March 8, 1930“President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days.”– Washington dispatch.

May 1, 1930“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.”– President Hoover

June 29, 1930“The worst is over without a doubt.”– James J. Davis, Secretary of Labor.

August 29, 1930“American labor may now look to the future with confidence.”– James J. Davis, Secretary of Labor.

September 12, 1930“We have hit bottom and are on the upswing.”– James J. Davis, Secretary of Labor.

October 16, 1930“Looking to the future I see in the further acceleration of science continuous jobs for our workers. Science will cure unemployment.”– Charles M. Schwab.

October 20, 1930“President Hoover today designated Robert W. Lamont, Secretary of Commerce, as chairman of the President’s special committee on unemployment.”– Washington dispatch.

October 21, 1930“President Hoover has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work this winter.”– Washington dispatch.

November 1930“I see no reason why 1931 should not be an extremely good year.”– Alfred P. Sloan, Jr., General Motors Co.

January 20, 1931“The country is not in good condition.”– Calvin Coolidge.
June 9, 1931“The depression has ended.”– Dr. Julius Klein, Assistant Secretary of Commerce.
August 12, 1931“Henry Ford has shut down his Detroit automobile factories almost completely. At least 75,000 men have been thrown out of work.”– The Nation.

July 21, 1932“I believe July 8, 1932 was the end of the great bear market.”– Dow Theorist, Robert Rhea.

More Links for Great Depression Era Headlines

http://www.jolietpubliclibrary.org/Digitization%20Projects/The%201930s/Depression.htm

We Never Learn from History - Interesting Quotes

A friend suggested that some interesting quotes should be put on the site. Most of these quotes are those that I have come across or those that friends have sent me. Wherever possible I will acknowledge them

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one - Charles Mackay

Insanity consists of doing the same thing over and over again and expecting the same results

Discovery consists of seeing what everybody has seen and thinking what nobody has thought”
. . . Albert von Nagyrapolt, The Science Speculates

“The main purpose of the stock market is to make fools of as many men as possible.” – Bernard Baruch


Interesting Headlines from the Past:

August 28, 1930:
There’s a large amount of money on the sidelines waiting for investment opportunities; this should be felt in market when “cheerful sentiment is more firmly entrenched.” Economists point out that banks and insurance companies “never before had so much money lying idle.”

September 3, 1930:
Market has now reached resistance level where it ran out of steam on July 18 (240.57) and July 28 (240.81). Breaking through this level would be considered a highly bullish signal. General confidence that this will happen based on recent market action; many leading stocks have already surpassed July highs. Further positive technicals seen in recent volume pattern (higher on rallies and lower on pullbacks), and in continued large short interest.

Some wariness based on recent good rally recovering all of drought-related break; some observers advise taking profits on at least part of long positions, to be in position to rebuy on good pullbacks.

Most economists agree business upturn is close; peak in business was reached July 1929, so depression has lasted about 14 months. “Those who have faith and confidence in the country and its ability to come back will profit by their foresight. This has also been the case over the past half century.”

Harvard Economic Society points to steady rise in bond prices as favorable for stocks. Says there is “every prospect that the [business] recovery … will not long be delayed,” although fall period may not be strong as expected. Notes worldwide decline in business, but 1922 recovery demonstrates U.S. due to “great size, natural advantages, and diversity of conditions … can lift itself out of depression without the stimulus of improved foreign demand.” “We only know now with perfect hindsight what these pundits did not know back then - that there was another 80% of downside left in the bear market.”

Mirage of Recovery

The US Federal Reserve released statistics about the US personal savings rate (and disposable personal incomes) that clearly point to a problem that is far from being solved. The chart below illustrates the magnitude of the collapse in incomes. While there is a recovery from the recent lows, it is amply clear that the incomes are far from what would be healthy for a sustainable recovery. The importance of the fall should be seen in the context that the personal consumption now accounts for nearly 70 percent of the GDP, while manufacturing consists of probably the remainder. It would be erronous to see the present economy with that of the previous times as during the 1980s and 1990s consumption accounted for less than 50 percent.

Click on the Image to enlarge it

A large part of the jump could be due to the jump in incomes of that could be short-term including tax cuts/refunds, rise in minimum wages and also income that accrues to the well to do due to rising asset prices (if it is actually working), which are unlikely to be sustained.

The chart below (in billions of US Dollars) clearly illustrates that the problem there seems to be no rise in personal incomes on a long-term basis. Recovery in incomes seem to far from certain as the US economy is still losing jobs (job losses in September were more than most of the forecasts). Recent reports claim that a large proprtion of people with income of about US$100,000 per annum have little savings. Nearly 70 percent of the households are living on pay-cheque to pay-cheque. More worringly, about 35% of the households that make US$100,000 are living on pay-cheque to pay-cheque. So about half of the US population can go bankrupt if they dont have income for one month.

Click on the image to enlarge it

The charts are as on 1st October 2009.

Crude Oil Fibonnaci Retracement Levels

In the commodity stable, Crude oil charts seem especially interesting. So we thought we would simply leave the chart of crude oil and the Fibonnaci chart in its raw form and let our views take the call.

The following are the Long term Fibonnaci Retracment levels on the Weekly charts

Please note that the levels are rounded off to the nearest higher number

1984- 2009 (Sept 15)
Low: 9.74 (April 1986)
High: 147.27

61.8% Level	50% Level	38.2% Level	23.6% Level
76.20	90.07	103.22	120

As on 22 September 2009
Source: CFTC

SILVER	All Open interest	Long Positions	Short Positions
Producer	171,065	8823	72596
Managed Money	171,065	45427	1109
Swap Dealers	171,065	15077	21480

GOLD	All Open interest	Long Positions	Short Positions
Producer	628,409	52,699	246,474
Managed Money	628,409	215,058	825
Swap Dealers	628,409	29,950	144,117

COPPER GRADE 1	All Open interest	Long Positions	Short Positions
Producer	117,689	3,851	41,492
Managed Money	117,689	19,009	18984
Swap Dealers	117,689	57,188	18,187