Saturday, October 8, 2011
MUST WATCH: Brad Meltzer’s Decoded: Fort Knox
Is Ft. Knox Empty?
The gold at Fort Knox is protected by some of the tightest security in the world, but what if there’s nothing there to guard at all? Brad and his team investigate a rumor that some think could damage the American economy.
IMF advisor : Global Financial Meltdown In 2 To 3 Weeks
IMF advisor Doctor Robert Shapiro says "In The Absence Of A Credible Plan We Will Have a Global Financial Meltdown In Two To Three Weeks"
Robert Shapiro who advised Presidents Clinton and Obama and who currently advises the IMF predicts a cascading meltdown of the World's banking system starting with Sovereign debt in the Eurozone, affecting the UK then finally bringing down the global banking system. He says "If they cannot address this in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, ( DELXIA ) we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom,in part through the sovereign debt to Ireland , it will spread everywhere because the global financial system is so interconnected. All those banks are counter-parties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serious than the crisis in 2008." before he adds "... Well what we don't know is the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of Credit Default Swaps held by British banks, nor are we certain of how serious the exposure of British banks is to the Ireland sovereign debt problems."
Robert Shapiro who advised Presidents Clinton and Obama and who currently advises the IMF predicts a cascading meltdown of the World's banking system starting with Sovereign debt in the Eurozone, affecting the UK then finally bringing down the global banking system. He says "If they cannot address this in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, ( DELXIA ) we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom,in part through the sovereign debt to Ireland , it will spread everywhere because the global financial system is so interconnected. All those banks are counter-parties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serious than the crisis in 2008." before he adds "... Well what we don't know is the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of Credit Default Swaps held by British banks, nor are we certain of how serious the exposure of British banks is to the Ireland sovereign debt problems."
How to Trade the VIX
The VIX is everyone's favorite volatility gauge -- but do you really understand how it works?
Volatility has been through the roof in the past couple of months, and as a result, the VIX is becoming a popular trading tool. Knowing how the VIX works can mean the difference between making significant profits in a tough market and losing your shirt. In today's Technical Primer, we'll take a look at what this technical metric tells us and at how to use it effectively in your trades.
It's worth starting off by explaining exactly what the VIX is. The VIX -- or more accurately, the Chicago Board Options Exchange Market Volatility Index -- is a measure of the implied volatility of S&P 500 index options. It's a measure of the volatility that's being priced into the market by investors.
That's a key distinction; the VIX isn't a statistical measure of market volatility. Because the VIX is based on what market participants think, it's subject to bias. That's a big reason for the index's moniker as the "fear gauge" -- it's a better indicator of how scared investors are right now than it is a meter of volatility in the stock market.
If you're looking for a way of measuring the amount of volatility in the market, there are plenty of tools available. Statistical measures of volatility, such as Bollinger bands or average true range, are a better option for investors who are looking to avoid the bias in the VIX.
Still, the VIX is popular for a reason: It can tell you quite a bit about market participants' mindsets. But what's it saying?
Interpreting the VIX
As I type now, the VIX is currently at 40.77. That number means that investors expect the broad market to swing 40.77% annualized over the next 30-days -- more simply, investors anticipate stocks to move 11.74% within the next month.
You can calculate the monthly expectations for the VIX yourself by taking its current value, then dividing by the square root of 12. (For those who are interested, it's because there are 12 months in the calendar year -- the square root is a result of the statistical definition of volatility.)
Remember, the VIX is a quantitative reading of fear in the market. The higher the number, the higher the price swing expectation in the S&P 500, and the higher the fear level in the market. Part of the reason for that is the bias that I mentioned earlier; historically, the VIX index reacts disproportionately to declines in the S&P 500. Put another way, given a loss of 5% in the S&P 500 followed by an offsetting gain of 6%, the VIX will generally decrease on day 2, even though volatility (the swing in price action) actually increased.
In other words, the VIX is inversely correlated with the S&P 500. That directional bias is important to remember when it comes time to use the VIX as a tool for real trading.
Trading the VIX
The VIX isn't just a measure of "fear" in the markets -- it's also a tradable instrument. Starting in 2004, traders have been able to get exposure to the VIX through futures, then futures options, and now exchange-traded products.
Trading the VIX became popular in the wake of the 2008 financial crisis because of its inverse correlation with the broad market. But there are some problems with trading the VIX directly.
The most accessible (and popular) VIX instrument is the iPath S&P 500 VIX Short-Term Futures ETN(VXX), an exchange traded note that most investors believe tracks the VIX Index. It doesn't. Instead, it attempts to track the performance of an index of VIX futures, as do all of the other VIX ETFs and ETNs out there.
That means that VXX is literally a derivative of a derivative of a derivative of a derivative. Having an exchange traded note that's so far removed from its "underlying" asset is problematic. The biggest issue is that VXX muffles the returns of the VIX itself. It's also important to remember the fact that the product is an ETN, which means that investors who hold VXX are exposed to counterparty risk.
Another concern with trading the VIX (in any of its forms) is that most traditional technical analysis techniques don't apply. That's because supply and demand in the market aren't the arbiters of the value of the VIX; the mathematical model is. Technicals work because they help traders identify pockets of supply and demand; those buying and selling pressures are irrelevant in the VIX because its underlying isn't price-based.
Generally, volatility is mean reverting. That means that it reaches extremes, but it eventually returns back to its "normal" zone. VIX traders are essentially trying to pin a timetable on when it'll get back to normal.
Investors with more sophisticated (and risk-driven) approaches may find value in gaining some exposure to the VIX. For aspiring traders, though, I wouldn't recommend it; while some professional traders can consistently trade the VIX successfully, they turn to a different toolbox to do it. If you're just looking for inverse correlations with the S&P 500, there are plenty of "safer" ways to do it. So, how can you use the VIX?
A Contrarian View of the VIX
For short-term traders, the VIX is a valuable metric that can color your market analysis. Because the VIX gives you a direct estimate of fear in the S&P 500, it's a priceless detail about market psychology that's quantified in real time.
It's also valuable for longer-term investors when viewed from a contrarian angle.
The old saying to "buy when the VIX is high and go when the VIX is low" has historically been pretty good advice. Because the VIX measures fear (and it's directional), extremes in the index can indicate the same sorts of extremes in sentiment that provide contrarian buying opportunities.
Yes, the VIX is a powerful tool that traders and investors can use to better understand what's going on in the market and increase their profits. But like any powerful tool, it can be incredibly damaging to your portfolio when applied incorrectly. Use the VIX for what it is, and you'll be better-prepared than the guy on the other side of the trade.
Next time, we'll add to your technical repertoire with another primer that will bring you closer to implementing technical analysis for your portfolio.
Kerry Lutz Interview with Darryl R. Schoon
from The Financial Survival Network:
We connect with Darryl R. Schoon, a world wide leading monetary authority and expert on economic history. In a far reaching interview, Darryl lays the groundwork for understanding how we got where we are and where it’s all heading. Darryl published a widely disseminated paper in 2007 entitled, How To Survive The Crisis And Prosper In The Process, before almost anyone saw the financial collapse on the horizon. He explains why the banks run the government and why we wouldn’t be in the position we are, without the creation of a debt-based currency.
CREDIT SUISSE: BUY THE DIPS – RECESSION IS PRICED IN
The Credit Suisse investment committee has concluded that a recession is now priced in and that further downside should be bought. They believe volatility is likely to continue, but should ultimately provide opportunity to add to solid companies (via CS): “The past few weeks turned out to be very difficult for equity markets overall, driven by erratic news-flow surrounding
macroeconomic data releases and the peripheral European debt situation. We think that this market regime with huge swings is likely to continue for the next couple of weeks and months.Next week, the Q3 2011 earnings reporting season starts in the US, with Alcoa set to report its Q3 2011 results on 11
October 2011 after the close of trading. Earnings momentum has decelerated sharply ahead of the upcoming earnings
releases, led by materials and financials as well as by Switzerland and Europe. We are not sure if the Q3 2011 earnings releases will provide the catalysts to turn earnings momentum around, unless companies give very good and convincing outlook statements, and we bear in mind that revisions of outlook statements are always lagging.So, valuation is indeed fairly attractive on various metrics, even if we take potentially lower earnings following
downgrades into consideration, and our analysis indicates that equity prices now discount a typical recession. However, we think sentiment needs to turn before any upside valuation can be fully realized. While we would not rush into equities right now, we think that investors that are underweight the asset class could potentially use periods of extreme weakness and risk aversion to selectively build up positions with stocks of sector/regions we like and also topics, which we like: Emerging markets and beaten-down stocks.”
They list several of the usual suspects on their overweight listing in the USA including: Chevron, Anadarko, Halliburton, Freeport-McMoran, GE, Deere, Starbucks, Coke, Kraft, Phillip Morris, Baxter, Pfizer, Microsoft, Google, Oracle and Apple.
Silver’s 2nd Most Oversold Reading in a Decade But Parallels of 2008 Still Suggest Caution
Silver (SLV) just completed its second major correction this year after its parabolic rise and peak in April. The second decline that occurred over the last month has led silver to shedding nearly half its value. The decline over the last six months has pushed our silver indicator to the second most oversold value in a decade. Is this a major buying opportunity or are investors now catching a falling knife? The answer to that question hinges on what the dollar (UUP) does over the next several weeks.
Silver Deeply Oversold
Given the sharp selloff in silver over the last few months it’s not surprising to see silver in oversold territory, but how oversold is it relative to prior corrections? To show how extreme silver’s recent oversold condition is, our silver risk indicator below shows that silver is at its second most oversold reading in the past decade, with 2008 the only exception. Quite the whipsaw after our indicator showed the most overbought condition in silver in April, with our silver indicator exceeding the 2004, 2006, and 2008 peaks, and then to see the second most oversold reading six months later. Given the deeply oversold condition silver finds itself in, is now a good time to take advantage of the recent price decline? Yes and no.
Source: Bloomberg
If you compare the average path of the 2004, 2006, and 2008 corrections we should be putting in the final low for silver here and we could witness a sizable Q4 advance that sees silver rally north of $45/oz. My silver correction composite below suggests silver may trade sideways into middle October as it puts in a bottom before making a sizable run heading into the end of November. That said, I would recommend against throwing caution to the wind and scooping up silver right here.
2008 Analog May Hold the Key
Looking at the most recent major correction in silver, the 2008 top, suggests some caution as of the three prior major corrections (04, 06, 08), the 2008 correction shows the closest resemblance to silver’s 2011 correction. As shown below, if silver continues to trace out its 2008 top, it may embark on a further correction beginning next week that could take it to the low $20/oz level heading into November.
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