Thursday, December 27, 2012

Watch The VIX For Clues

This is a difficult market to analyze because this week’s close gave fuel to both cases in my opinion. The bulls can argue that the way we rebounded off the lows on Friday is bullish, while the bears can say that this is the start of a larger decline. Next week will likely cloud the picture even more with a holiday shortened week and light volume.
The VIX shot out of a giant wedge on Friday and then closed the gap on the 60 minute chart. So far that is normal when you see that it was rejected at it’s first attempt to break through resistance. It will be critical that this finds supports and launches higher if the bears want to see further gains. If we fall back into the base then we’re likely to see a bullish to flat bias next week.

1000x Systemic Leverage: $600 Trillion In Gross Derivatives "Backed" By $600 Billion In Collateral

There is much debate whether when it comes to the total notional size of outstanding derivatives, it is the gross notional that matters (roughly $600 trillion), or the amount which takes out biletaral netting and other offsetting positions (much lower). We explained previously how gross is irrelevant... until it is, i.e. until there is a breach in the counterparty chain and suddenly all net becomes gross (as in the case of the Lehman bankruptcy), such as during a financial crisis, i.e., the only time when gross derivative exposure becomes material. But a bigger question is what is the actual collateral backing this gargantuan market which is about 10 times greater than the world's combined GDP, because as the "derivative" name implies all this exposure is backed on some dedicated, real assets, somewhere. Luckily, the IMF recently released a discussion note titled "Shadow Banking: Economics and Policy" where quietly hidden in one of the appendices it answers precisely this critical question. The bottom line: $600 trillion in gross notional derivatives backed by a tiny $600 billion in real assets: a whopping 0.1% margin requirement! Surely nothing can possibly go wrong with this amount of unprecedented 1000x systemic leverage.  (more)

McAlvany Weekly Commentary

December 26, 2012; The Jewels of 2012, Pt. 1

The Jewels of 2012 part 1
-Steve Forbes demands “Stable Money”
-Forbes warns against the bond market
-Embry: The public hasn’t even started to buy gold
Read | Subscribe@iTunes

Chart of the Day - Kansas City Southern (KSU)

The "Chart of the Day" is Kansas City Southern (KSU), which showed up on Friday's Barchart "All-Time High" list. TrendSpotter has been long since Dec 14 at $81.89. In recent news on the stock, FBR Capital downgraded KSU to Market Perform from Outperform. Barclays initiated coverage on KSU with an Equal Weight and a target of $81. Wells Fargo said on Nov 28 that ONEOK's cancellation of its plan for the Bakken Express Pipeline is a positive for Union Pacific (UNP) and Kansas City Southern (KSU) since those two railroads move crude oil from the Bakken and other shale oil areas. Kansas City Southern, with a market cap of $9 billion, is a transportation holding company. The company's North American rail network comprises approximately 6,000 miles of rail lines that link commercial and industrial markets in the United States and Mexico. KCS also owns 50% of the Panama Canal Railway Company in Panama.


Fiscal Cliff: Let's Call Their Bluff!

The "fiscal cliff" has all the earmarks of a false flag operation, full of sound and fury, intended to extort concessions from opponents.  Neil Irwin of The Washington Post calls it "a self-induced austerity crisis." David Weidner in The Wall Street Journalcalls it simply theater, designed to pressure politicians into a budget deal: "The cliff is really just a trumped-up annual budget discussion... The most likely outcome is a combination of tax increases, spending cuts and  kicking the can down the road."
Yet the media coverage has been "panic-inducing, falling somewhere between that given to an approaching hurricane and an alien invasion."  In the summer of 2011, this sort of media hype succeeded in causing the Dow Jones Industrial Average to plunge nearly 2000 points. But this time the market is generally ignoring the cliff, either confident a deal will be reached or not caring.
The goal of the exercise seems to be to dismantle Social Security and Medicare, something a radical group of conservatives has worked for decades to achieve.  But with the recent Democratic victories, demands for "fiscal responsibility" may just result in higher taxes for the rich, without gutting the entitlements.
The problem is that no deal is going to be satisfactory. If we go over the cliff, taxes will be raised on everyone, and GDP is predicted to drop by 3 percent. If a deal is reached, taxes will be raised on some people, and some services will be cut. But the underlying problems -- high unemployment and a languishing economy -- will remain.  More effective solutions are needed.
Be Careful What You Wish for: Fiscal Hostage-Taking Could Backfire
Taxpayers and governments that are pushed too far have been known to resort to more radical measures, and there are some on the table that could fix the problem at its core. Here are a few that are receiving media attention:
1.  A financial transactions tax.  While children's shoes and lunchboxes are taxed at nearly 10 percent, financial sales have so far gotten off scot-free. The idea of a financial transactions tax, or Tobin tax, has been kicked around for decades; but it is now gaining real teeth. The European Commission has backed plans from 10 countries -- including France, Germany, Italy and Spain -- to launch a financial transactions tax to help raise funds to tackle the debt crisis. Sarah van Gelder ofYES! Magazine observes that the tax would not only help reduce deficits but would hit the highest income earners, and it would cool the speculative fever of Wall Street.
Simon Thorpe, a financial blogger in France, cites figures from the Bank for International Settlements, showing total U.S. financial transactions of nearly $3 quadtrillion in 2011.  Including other sources, he derives a figure of $4.44 quadrillion. Even using the more "conservative" $3 quadrillion figure, a tax of a mere 0.05 percent (1/20th of 1 percent) would be sufficient to raise $1.5 trillion yearly, enough to replace personal income taxes with money to spare.
2.  The trillion dollar coin trick.  If Republicans insist on the letter of the law, Democrats could respond with a law of their own. The Constitution says that Congress shall have the power to "coin money" and "regulate the value thereof," and no limit is put on the value of the coins Congress creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s.
I actually suggested this solution in Web of Debt in 2007, when it was just a "wacky idea." But after the 2008 banking crisis, it started getting the attention of scholars. In a Dec. 7 article in The Washington Post titled "Could Two Platinum Coins Solve the Debt-ceiling Crisis?," Brad Plumer wrote that if Congress doesn't raise the debt ceiling as part of the fiscal cliff negotiations, "then some of these wacky ideas may get more attention."
Ed Harrison summarized the proposal at Credit Writedowns like this:
  • The Treasury mints a1 trillion coin, or whatever amount is desired.
  • The Treasury deposits the coin into the Treasury's account at the Fed.
  • The Treasury buys back bonds.
  • The retirement of bonds is an asset swap, no different from QE2.
  • The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.
  • These operations by the Treasury create no new net financial assets for the non-government sector.
  • The debt ceiling crisis is averted.
Plumer cites Yale Law School Professor Jack Balkin, confirming the ploy is legal. He also cites Joseph Gagnon of the Peterson Institute for International Economics, stating, "I like it. There's nothing that's obviously economically problematic about it."
To the objection that it is a legal trick that makes a mockery of the law, Paul Krugman responded, "These things sound ridiculous -- but so is the behavior of Congressional Republicans. So why not fight back using legal tricks?"
3.  Declare the debt ceiling unconstitutional.  The 14th Amendment to the Constitution mandates that Congress shall pay its debts on time and in full, and Congress does not know how much it will collect in taxes until after the bills have been incurred.  The debt ceiling was imposed by a statute first passed in 1917 and revised multiple times since. The Constitution trumps it and should rule.
4.  Borrow interest-free from the government's own central bank.  If the government refinanced its entire debt through the Federal Reserve, it could save nearly half a trillion dollars annually in interest, since the Fed rebates its profits to the government.  The Fed's newly-announced QE4 adds $45 billion monthly in government securities purchases to the $40 billion for mortgaged-backed securities declared in QE3, and no time limit has been designated for ending the program.  Forty-five billion dollars monthly is over half a trillion yearly.  Added to the federal debt already held by the Fed, the whole $16 trillion federal debt could be bought back in 28 years.
This is not a wild, untested idea. Borrowing interest-free from its central bank was done by Canada from 1939 to 1974, by France from 1946 to 1973, and by Australia and New Zealand in the first half of the 20th century, to excellent effect and without creating price inflation.
5.  Decommission some portion of the military.  When past costs are factored in, nearly half the federal budget goes to the military. The data speaks for itself.
6.  Debt forgiveness. Economists Michael Hudson and Steve Keen maintain that the only way out of debt deflation is debt forgiveness. That could be achieved by the Fed by buying up $2 trillion in student debt and other asset-back securities and either ripping them up or refinancing the debts interest-free or at very low interest. If the banks can borrow at 0.25 percent, why not the people?
7.  Publicly-owned state and local banks.  Municipal governments are facing cliffs of their own. Ann Larson, writing in Dissent Magazineblames predatory Wall Street lending practices. Debt financing of U.S. cities and towns by Wall Street, she says, has inflicted deep and growing suffering on communities across the country.
Predatory Wall Street practices can be avoided by establishing publicly-owned state and local banks, which leverage the public's funds for the benefit of the public. The profits are returned as dividends to the local government. German researcher Margrit Kennedy calculates that a whopping 40 percent of the cost of public projects, on average, goes to interest.  Publicly-owned banks slash borrowing costs by returning this interest to the government, along with many other advantages, detailed here.
Unshackle the Hostages and Let the Good Times Roll
The fiscal cliff has been said to be holding Congress hostage to conservative demands, but the real hostages are the debt slaves of our financial system. The demand for "fiscal responsibility" has been used as an excuse to impose radical austerity measures on the people, measures that benefit the 1 percent while locking the 99 percent in debt.
The government did not demand fiscal responsibility of the failed financial sector. Rather, Congress lavished hundreds of billions of dollars on it, and the Fed lavished trillions more. No evident harm from these measures befell the economy, which has fared better than the austerity-strapped EU countries. Another couple of trillion dollars poured directly into the real, productive economy could give it a serious boost.
According to the Fed's figures, as of July 2010, the money supply was actually $4 trillion less than in 2008.  (The shrinkage was in the shadow banking system formerly reported as M3.) That means $4 trillion could be added back into the money supply before general price inflation would be a problem.
The self-induced austerity crisis is a diversion from the real crises, including unemployment, the housing crisis, a bloated military, and unrepayable debt. Slashing services, selling off public assets, and raising taxes won't cure these ills. To maintain a sustainable and productive economy requires a visionary leap into the new. A new economy needs new methods of public financing.
First posted on

3 Stocks That Could Return Up to 46%... If You Can Beat the Crowd

The analyst community is monitored closely for their opinions on stocks. Just look at how much a stock will gap higher or lower based on a single upgrade or downgrade.

Many investors follow analysts' recommendations as they like to buy and hold along with the "crowd." Let's face it, there's a feeling of security knowing that there are others buying or selling what you are buying or selling. But for us, the analyst rankings serve as a better tool, one that helps us to beat the market.

If you have the ability to determine when a stock is more likely to get upgraded by the analysts, then you've got the potential to get into a stock before it gets the boost of the upgrade buying. This is why we track the performance of our database of 7,000 stocks against their respective rankings. The concept is simple: Stocks that are outperforming the market that have low analyst rankings are more likely to see upgrades in the relatively near future.

Typically, we like to look at companies that have more than 20 analysts covering them, as a stock with very few analysts has less of a chance for upgrades. For today's purposes, we've filtered for companies that have outperformed the S&P 500 by more than 20% over the past three months, providing an interesting list of prospective intermediate-term bullish candidates for the new year.
Bank of America (NYSE: BAC)
Starting at the top of the list, this mega-bank spent much of 2012 dealing with uncertainty surrounding potential increases in regulation in the banking industry. The fact that share prices remained below the $10 mark served as a Scarlet Letter of sorts as fund managers and professional money managers often avoid such low-priced shares.

Now, for the first time, the technical picture for BAC is improving as the price is preparing to cross above the 200-day moving average for the first time since 2007 (yes, nearly five years). The improved technical picture, along with a fundamental improvement in the balance sheet, should get the upgrades rolling in 2013. We're targeting a move above $15 before May of 2013.

Recommended Trade Setup:
-- Buy BAC at the market price
-- Set stop-loss at $10.50
-- Set initial price target at $15 for a potential 33% gain in five months

United States Steel Corp. (NYSE: X)
The steel sector has taken a beating since peaking in 2011. Lower demand for steel due to a slowdown in global economies (China, etc…), along with weaker demand in the auto industry, have had the steel manufacturers on the ropes.

As we move into 2013, the global economic outlook appears to be leveling off, if not improving. In addition, the latest expectations from Detroit are that we will see a gangbuster year in auto sales as improving consumer sentiment and an aging commercial fleet will push buyers into the showrooms.
Technically, X shares are getting healthier. With a recent rally to the $24 level, X has broken above its short-term and intermediate-term technical trendlines, suggesting that the stock is ready to see a long-term improvement in price activity. We're expecting these factors to drive some of the 22 analysts covering the stock to start upgrading their views, helping to move X to the $35 price point before the end of May.

Recommended Trade Setup:
-- Buy X at the market price
-- Set stop-loss at $23.35
-- Set initial price target at $35 for a potential 46% gain in five months

This Internet icon appeared to be all-but-dead as leadership problems in the boardroom led to fledgling stock prices. With the new CEO Marissa Mayer at the helm, the company appears to be on a path to realizing their brand potential again.

Following up on the CEO hire, December has seen some changes of board members, which will likely help the fundamental drivers for the stock. Will YHOO be the next Google (NASDAQ: GOOG), probably not, but they are turning up the heat in the content world again.

We've already seen Goldman Sachs (NYSE: GS) add the stock to its "conviction buy" list recently, but 72% of the analysts covering the stock still have it ranked a "hold" or "sell."

YHOO prices have outpaced the S&P 500 by more than 25% over the past three months as the stock is now trading in its own bull market rally mode. Breaking through the $20 price will free up room for YHOO shares to surge to $25. In our opinion, this is likely to happen before the end of April, sooner if the analyst community wakes up to this performer.

Recommended Trade Setup:
-- Buy YHOO at the market price
-- Set stop-loss at $18
-- Set initial price target at $25 for a potential 29% gain in four months