Tuesday, April 22, 2014

New Video: This Weeks Nasdaq Shorting Opportunity

It looks as though the Nasdaq is about ready for another leg lower. Chris Vermeulen shows us what key resistance levels to look at for a possible short trade on the Nasdaq this week.

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Monday, April 21, 2014

A Crisis vs. THE Crisis: Keep Your Eye on the Ball

By Laurynas Vegys, Research Analyst

Today I want to talk about crises. Two of the most notable ones that have been in the public eye over the course of the past 6-8 months are obviously the conflicts in Ukraine and Syria. The two are very different, yet both seemed to cause rallies in the gold market.

I say “seemed” because, while there were days when the headlines from either country sure looked to kick gold up a notch, there were also relevant and alarming reports from Argentina and emerging markets like China during many of the same time periods. Nevertheless, looking at the impressive gains during these periods, one has to wonder if it actually takes a calamity for gold to soar.

If so, can the yellow metal still return to and beat its prior highs, absent a major political crisis or a full blown military conflict? My answer: Who needs a new crisis when we live in an ongoing one every day?

More on this in a moment. Let’s first have a quick look at what happened in Ukraine and Syria as relates to the price of gold. Here’s a quick look at the timeline of some of the major events from the Ukrainian crisis, followed by the same for Syria.





There seems to be a fairly clear pattern in both of these charts. Gold seems to rise in the anticipation of a conflict; once the conflict gets going, or turns out not as bad as feared, however, it sells off.

We see, for example, that as the news broke that chemical weapons were being used in Syria and Obama was threatening to intervene, gold moved up. But when the U.S. did not wade into the bloodshed and Putin proposed his diplomatic solution, gold slid into a protracted sell off, ending up lower than where it began.
It’s impossible to say with any degree of certainty how much of gold’s recent rise was due to anticipation of the Ukraine/Crimea crisis, but there were certainly days when gold seemed to move sharply in response to news of escalation in the conflict. And again, after it became clear that the U.S. and EU would do little more than condemn Russia’s actions with words, gold retreated. As of this writing, it’s down about $85 from its high a little over a month ago. (We think many investors underestimate the potential impact of tit for tat sanctions, but they are not wrong to breathe a sigh of relief that a war of bullets didn’t start between East and West.)

In sum, to the degree that global crisis headlines do impact the price of gold, the effects are short lived. Unless they lead directly to consequences of long term significance, these fluctuations may capture the attention of day traders, but are little more than distractions for serious gold investors betting on the fundamentals.

You have to keep your eye on the ball.

The REAL Crisis Brewing

 

Major financial, economic, or political trends—the kind we like to base our speculations upon—don’t normally appear as full-fledged disasters overnight. In fact, quite the opposite; they tend to lurk, linger, and brew in stealth mode until a boiling point is finally reached, and then they erupt into full blown crises (to the surprise and detriment of the unprepared).

Fortunately, the signs are always there… for those with the courage and independence of mind to take heed.
So what are the signs telling us today—what’s the real ball we need to keep our eyes upon, if not the distracting swarm of potential black swans?

The big league trend destined for some sort of major cataclysmic endgame that will impact everyone stems from government fiscal policy: profligate spending, leading to debt crisis, leading to currency crisis, leading to a currency regime change. And not in Timbuktu—we’re talking about the coming fall of the U.S. dollar.

The first parts of this progression are already in place. Consider this long term chart of U.S. debt.



Notice that government debt was practically nonexistent halfway through the 20th century, but has seen a dramatic increase with the expansion of federal government spending.

Consider this astounding fact: The government has accumulated more debt during the Obama administration than it did from the time George Washington took office to Bill Clinton’s election in 1992. Total US government debt at the end of 2013 exceeded $16 trillion.

Let’s put that in perspective, since today’s dollars don’t buy what a nickel did a hundred years ago.


Except for the period of World War II and its immediate aftermath, never before has the U.S. government been this deep in debt. Having recently surpassed the threshold of 100% debt to GDP, America has crossed into uncharted territory, getting in line with the likes of…....
  • Japan, “leading” the world with a 242% debt-to-GDP ratio
  • Greece: 174%
  • Italy: 133%
  • Portugal: 125%
  • Ireland: 117%
The projection in the chart above is based on the 9.4% average annual rate of debt-to-GDP growth since the US embarked on its current course in response to the crash of 2008. If the rate persists, the U.S. will be deeper in debt relative to its GDP than Ireland next year, deeper than Portugal in 2016, Italy in 2017, Greece in 2019, and even Japan in 2023 (and the US does not have the advantage of decades of trade surpluses Japan had).

Granted, the politicians and bureaucrats say they will slow this runaway train, but we’re not talking about Fed tapering here. Congress will have to embrace the pain of living within its means. We’ll believe that when we see it.

But let’s take a more conservative, 10 year average growth rate (an arbitrary standard many analysts use): 5.3%. At this rate, the U.S. will still be deeper in debt than Ireland and Portugal in 2017, Italy in 2019, Greece in 2024, and Japan in 2030.

Either way, this is still THE crisis of our times; all of the countries mentioned above are undergoing excruciating economic and social pain. It’s no stretch to imagine the kind of social and political turmoil that has resulted from the European debt crisis coming to Main Street USA, as American debt goes off the charts.

It’s also important to understand that the debt charted above excludes state and local debt, as well as the unfunded liabilities of social entitlement programs like Social Security and Medicare.

This ever-growing mountain—volcano—of government debt is a long term, systemic, and extremely difficult to alter trend. Unlike the crises in Ukraine and Syria (at least, so far), it’s here to stay for the foreseeable future. While some investors have grown accustomed to this government created phenomenon and no longer regard it as dangerous as outright military conflict, make no mistake—in the mid to long term, it’s just as dangerous to your wealth and standard of living.

Still think it can’t happen here? To fully understand how stealthily a crisis can sneak up on you, watch Casey Research’s eye-opening documentary, Meltdown America.



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Chart of The Week - June Crude Oil Futures

As the week starts, our attention turns to the June Crude Oil futures (NYMEX:CL.M14.E). After gaining nearly $7/barrel in less than a month, the market has recently consolidated around $103.50/barrel as it begins to decide which direction it will take. It appears that some of the recent slowing of the market is due to profit taking, as the recent sharp up trend may have gained too much too soon.

There are a number of fundamental factors at play in the market, many of which seem to work in contrast with each other: support from Russia-Ukraine uncertainty, resistance from ample supply concerns, and improved demand prospects following solid U.S. Economic data last week. With a number of different fundamental factors in play – and uncertainty over which fundamental factor the market will focus on moving forward – I will focus on the technical aspects of the market for a potential trading opportunity.



Thursday’s range last week was consolidated within the previous day’s range and a move above or below that range should give us good direction to go off of. The market has started off weak this morning, and being close to $105/barrel resistance, I think that a correction off of this recent move is the more likely direction.

In the case of a move below last Thursday’s low print of 102.75, I would be a seller in this market as it will have broken this consolidation. If filled, I would place a protective stop order above Thursday’s high of $103.92. My short term target would be back down to the recent up trend line, rolling stops behind the position accordingly.

To take advantage of this move with a long term viewpoint, I would look to purchase relatively inexpensive call options and option spreads where risk on the position is limited to what you pay for the option.

Each week our trading partners at INO.com will be providing us a chart of the week as analyzed by a member of their team. We hope that you enjoy and learn from this new feature.


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Sunday, April 20, 2014

Commodities Market Summary for Week Ending April 18th - Crude Oil, Gold, Silver, Coffee and more!

We've asked our trading partner Michael Seery of Seery Futures to give our readers a weekly recap of the Futures market. He has been Senior Analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.

Michael frequently appears on multiple business networks including Bloomberg news, Fox Business, CNBC Worldwide, CNN Business, and Bloomberg TV. He is also a guest on First Business, which is a national and internationally syndicated business show.

Gold futures in the June contract are trading below their 20 day but above their 100 day moving average telling you that the trend currently is mixed as prices are still trading near two year lows and if this commodity could talk it would bark in my opinion as it is becoming a tremendous dog in recent months trading lower by $40 in Tuesday’s trade settling last Friday at 1,319 and going out this Thursday afternoon at 1,295 finishing down about $25 for the trading week. If prices break 1,277 I would be recommending a short position putting your stop above the 10 day high with the possibility of prices heading towards major support at 1,240 and then maybe the possibility of lower prices as it seems that nothing can make gold prices go up not even the fact of the Ukrainian crisis & the recent stock market choppiness as demand for gold at this current time is very weak with very little interest as well. Markets go up due to the fact that money flows come into that commodity and all the money flow is going into stocks at the current time as complacency has set in as nobody seems to care about gold or see any reason to own it at this time, however in my opinion I do believe worldwide problems will come back and I do think losses in gold are limited so I would look for a better trending market & sit on the sidelines unless 1,277 is broken on a closing basis.
TREND: LOWER
CHART STRUCTURE: EXCELLENT

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Silver futures in the July contract are trading below their 20 and 100 day moving average telling you that the trend has turned bearish as prices are settling right near three month lows going out last Friday at 19.80 finishing this shortened holiday week at 19.60 finishing lower by about $.20 while at the current time there’s just very little interest in the silver market which is very surprising. There is major support at $19 which has been tested many times in the last 6 months but fails every single time and if you read any of my previous blogs I keep stating if you have deep pockets and a longer term horizon I do think silver prices are cheap, however if you are a trader that becomes a different situation as the trend now has turned lower and if you’re looking to get short this market I would sell at today’s price of 19.60 placing my stop loss above the 10 day high of 20.40 risking around $800 per contract as volatility in silver is extremely low at this time and I don’t expect that to last much longer as silver historically is one the most volatile commodities.
TREND: LOWER
CHART STRUCTURE: EXCELLENT

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Crude oil futures are trading far above their 20 and 100 day moving average hitting new 1 year highs trading up over $1.00 for the trading week trading at 103.35 a barrel in the June contract as the chart looks bullish in my opinion when prices broke 102 a barrel which was the breakout to the upside placing my stop below the 10 day low which now is 100 risking around 300 points or $1,600 per contract if your trading the crude oil mini. The chart structure in crude oil is starting to improve as we enter the strong demand season as crude oil & unleaded gasoline as both headed higher in my opinion, however make sure that you do have a proper risk management system in place minimizing your risk in case the trend does change. Generally speaking when the stock market sells off that generally puts pressure on crude oil prices however this market has been resilient lately because of the Ukrainian situation and the fact that we are entering the strong demand season of summer where drivers are out on the road increasing demand.
TREND: HIGHER
CHART STRUCTURE: IMPROVING


Coffee futures
have had a wild trading week dropping 2000 points on Tuesday and Wednesday combined only to rally 1500 points this Thursday afternoon finishing at 201.20 a pound and I’m still recommending if you have deep pockets to get long the coffee market as there is a high probability in my opinion that prices could get up to 2.50 – 2.70 as coffee prices have been much higher historically & with severe drought conditions existing in central Brazil I don’t think the bull market is quite over. Harvest is just several weeks away in central Brazil so we will start to get a better figure on how many bags will be produced as prices are trading far above their 20 & 100 day moving average as this is been one of the best bull markets of 2014 so continue to buy dips in my opinion as long as prices stay above 166.
TREND: HIGHER
CHART STRUCTURE: AWFUL


Sugar futures
finished down 26 points at 16.66 in the May contract as prices are trading below their 20 & 100 day moving average still consolidating in recent weeks with really no trend in sight so I’m advising traders to sit on the sidelines and look at another market that is currently trading, however there is major support at 16.50 & if that level is broken the bearish trend will be intact ,however this market is choppy at the given time. Many of the commodity markets are in strong trends however sugar has been choppy so avoid this market at this time and look for another commodity that is trending because choppiness makes it difficult to make money
TREND: LOWER
CHART STRUCTURE: EXCELLENT


Soybean futures
in the July contract rallied another $.50 to close around 15.02 a bushel settling right near session highs and if you’ve been reading my previous blogs I am extremely bullish the old crop soybeans due to the fact that there’s very little supply on hand and I do think there’s a high probability that soybean prices will hit all-time highs in the next month or 2 due to the fact that the carryover level is extremely low and demand especially from China is extremely high. I’m a technical trader but I do look at some of the fundamentals once in a while but this market is trading far above its 20 and 100 day moving average and I hope you been listening because I do think prices will move higher despite the fact that we have now rallied sharply in recent days as I think it’s just the beginning and with a short weekend because of the Good Friday holiday I think the shorts are in trouble next week as we will see sharply higher prices once again and if you need some help positioning your portfolio in the soybeans please feel free to give me a call anytime as I’m happy to help you as I do think this trend is getting stronger and stronger on a daily basis and a top has not been formed in my opinion.
TREND: HIGHER
CHART STRUCTURE: SOLID


Cotton futures
for the July contract are trading right at its 20 but above its 100 day moving average settling last Friday at 90.45 while going out on this short trading week due to the fact of Easter Sunday closing today at 92.34 up around 190 points for the trading week as prices have been consolidating in recent weeks with very little trend at the current time. I’m not recommending any type of position in cotton as the trend has been going sideways and as a commodity trader I need to find the strongest trends and go in that direction so just keep an eye on cotton prices at the current time as I do think higher prices are ahead but the problem is China could be releasing some of the excess reserves putting pressure here in the short term so this is a mixed bag in my opinion so look for another market
TREND: SIDEWAYS
CHART STRUCTURE: EXCELLENT


Orange juice futures
in the May contract settled at 164.75 as dry conditions in Brazil continue to put upward pressure on prices and I’ve been recommending buying orange juice futures contracts for quite some time and I do believe prices are headed up to the 180 – 200 level as greening disease here in the United States is going to lower U.S production as this problem could exist for several more years as the chart structure on the daily chart remains outstanding so if you have not entered this market look for a possible dip to get long while placing your stop at the 10 day low which is around 153 risking around $1,700 per contract from today’s price. The trend in orange juice has been higher for the last 6 months as this has been one of the strongest trends in my opinion so keep an eye on this as a gallon of orange juice at the grocery store currently cost around $6.25 a gallon which is very high but could go much higher as I’ve been talking about in recent weeks.
TREND: HIGHER
CHART STRUCTURE: EXCELLENT


Corn futures
finished down for the 2nd straight trading session near session lows this Thursday afternoon finishing down over $.04 in the December contract for the trading week which is considered the new crop which will be harvested this October closing at 4.97 a bushel hitting a 2 week low & if you have been following my recommendations over the last several months I have been long the corn market but on Wednesday I exited as I have become neutral as I think corn prices are going lower but I’m not recommending a short position but rather sit on the sidelines and wait for a better chart pattern to develop. I have been bullish corn prices for so long however this market may have had an exhaustion spike top at 5.17 after the supply demand report as prices look weak as I do think farmers will start to plant rapidly which should put pressure here in the short term but I do not believe that a bear market has started and I do think that prices could head back down to the 4.80 level as the month of April and early May generally are bearish corn prices due to the fact that there really won’t be any weather problems developing until the month of June or July.

Corn futures
are trading right after 20 day moving average and still above their 100 day moving average telling you that the trend now is mixed so look for a better trending market such as July soybeans because as a trader the easiest way to make money is getting involved in a market that is trending higher by 4 out of 5 days or trending lower 4 out of 5 days while this market currently is becoming choppy so avoid and move on especially if you took my original recommendation at 4.60 bushel as this was a very good trade it just took a long time to develop.
TREND: MIXED
CHART STRUCTURE: EXCELLENT


The 5 year notes finished lower for the 4th straight trading session this week as the stock market sky rocketed to the upside sending bond yields higher with the five-year note to close around 1.73% & I’ve been recommending a short position in the bond market for months and I still think it will be one of the best trades to develop over the course of time as inflation looks like it’s starting to come back as the commodity markets certainly have rallied sharply off their lows and we might be in a bullish commodity cycle at this time which will put pressure on bond futures which means the interest rates rise.

If you’re a long term investor I would continue to sell the five year notes as the Federal Reserve is starting to taper back the purchase of the five year note and that is also can put pressure on this market, however prices have rallied in the recent months due to the fact that volatility is come back into the S&P and I might have been a tad early but this but this a very long term trade which I’m telling investors to stay in for several years as this should be part of a balanced portfolio because you will look back in a couple years and say why didn’t I take advantage of interest rates at 1.73% and not act accordingly because when prices get to extreme highs and the extreme lows sometimes those are the best opportunities and right now yields are not at historical lows but they are very close and eventually in my opinion will rally and if you construct your proposal correctly limiting your risk and maximizing your reward over the course of time the bond market in my opinion is the place to be in the year 2014. The five-year note is trading below its 20 and 100 day moving average which tells you that the short term trend is lower and I constantly recommend investors in the five-year note to sell strength not weakness taking advantage of up days.
TREND: LOWER
CHART STRUCTURE: EXCELLENT

Cocoa futures in New York rallied 46 points at 3020 in the July contract and currently I am sitting on the sidelines in this market but if prices do break 3047 which was the contract high I would be recommending to buy a futures contract placing a stop below the 10 day low 2962 risking around 1,600 per contract as the chart structure remains outstanding so be patient for a possible breakout in tomorrow’s trading session as the soft commodities certainly have bullish trends. Cocoa prices are trading above their 20 and 100 day moving average and I still think higher prices are ahead
but this market has been choppy with a very tight consolidation over the last 3 months so if prices do break out look for a sharp move to the upside. My theory states that the longer a consolidation the stronger the breakout so keep a close eye on this market. TREND: HIGHER
CHART STRUCTURE: EXCELLENT


Live cattle futures
in the June contract are trading below their 20 day but above their 100 day moving average stating that the trend is mixed however in the short term the trend has turned bearish as prices have hit 7 weeks lows finishing at 134.35 a pound down about 200 points for the trading week. If you are looking to get short this market I would sell at today’s prices while placing my stop loss at the 10 day high of 136.35 risking around $800 dollars per contract but at the present time I am sitting on the sidelines.
TREND: LOWER
CHART STRUCTURE: EXCELLENT


Feeder cattle futures
in the May contract are trading below their 20 day but still above its 100 day moving average telling you that the trend is mixed finishing lower by about 200 points at 178.10 a pound. I have been recommending a long position in feeder cattle for many weeks however this market looks to have stalled up at the 180 area and if you took my advice on this trade place your stop loss at the 10 day low of 177.50 risking around $300 per contract as the chart structure has become extremely tight in recent weeks as volatility remains low despite record high prices. I would not be going short this market until prices broke 176 to the downside placing my stop above all time high prices of 180.50 risking around 2,200 if that breakout occurs.
TREND: SIDEWAYS
CHART STRUCTURE: EXCELLENT


Natural gas futures
in the June contract finished up 18 points hitting a 6 week high closing at 4.74 with outstanding chart structure as I am now recommending a long position in this contract placing my stop loss below the 10 day low which stands at 4.44 risking around 30 points or $750 per contract as the trend has now turned higher once again and the risk reward situation is highly in your favor as we enter the demand season of summer. Natural gas prices have been in a bull market for quite some time and if you read some of my previous blogs several months back when prices were in the low $3 I was recommending if you have deep pockets and a longer term horizon to buy natural gas as prices were extremely cheap due to the fact of large supplies, however we had an extremely cold winter which reduced supplies dramatically and I do think natural gas prices will be sharply higher from today’s level in the next year as prices have bottomed out in my opinion. As a trader I focus on today and tomorrow only so when I can buy the natural gas contract with a risk of $600 I automatically take that trade even if I don’t believe in it as I do think a true breakout has occurred. Natural gas prices are trading above their 20 and 100 day moving average for the 1st time in several weeks telling you that the trend has changed to the upside after we consolidated in the month March after the big run up in early winter as prices seem to be resuming back up to the upside so play this market to the upside in my opinion.
TREND: HIGHER
CHART STRUCTURE: OUTSTANDING


Lean hog futures
for the June contract finished this Friday in Chicago up about 100 points to close at 125.00 a pound finishing higher by nearly 500 points for the trading week. If you have been following any my previous blogs this was one of the best trades I recommended in 2014 as prices skyrocketed in the month of March, however at the current time volatility is extremely high so I’m not participating in the hog market as I’m not sure where prices are headed at the current time. Hog futures in the June contract are trading barely above its 20 day but sharply higher than its 100 day moving average with a shortage of supplies as the fundamentals are very strong in this market; however I’m looking at other markets that currently have stronger trends as I’m not sure where prices are headed.
TREND: MIXED
CHART STRUCTURE: AWFUL


Double Bottom and Double Tops:
This indicator is one of my favorite patterns that signals a trend reversal because its considered to be one of the most reliable and is commonly used by many technicians. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long term trend reversals. Their also can be triple bottoms and triple tops which are in my opinion an excellent indicator that predicts bottoms and tops at a relatively high rate and if you look at some of the daily charts you will see some double and triple tops and bottoms. If you are using any indicator such as these make sure you place a stop loss to try and minimize your monetary loss because indicators do not work a 100 % percent of the time so you still need solid money management technique to cut loses.

What do I mean when I talk about chart structure and why do I think it is so important when deciding to enter or exit a trade? I define chart structure as a slow and grinding up or down trend with low volatility and no chart gaps. Many of the great trends that develop have very good chart structure with many low percentage daily moves over a course of at least 4 weeks thus allowing you to enter a market and allowing you to place a stop loss with will be relatively close due to small moves thus reducing risk. Charts that have violent up and down swings are not considered to have solid chart structure but markets that continue to trend like the current soybean complex allowing for you to place close stops as it continues to fall dramatically. I always like to place my stops at 10 day highs or 10 day lows and if the charts have a tight pattern that will allow the trader to minimize risk which is what trading is all about and if the chart has big swings your stop will be further away allowing the possibility of larger monetary loses.


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Friday, April 18, 2014

10 Ways to Screw up Your Retirement

By Dennis Miller

There are many creative ways to screw up your retirement. Let me show you how it’s done.


Supporting adult children. My wife Jo and I have friends with an unmarried, unemployed daughter who had a child. Our friends adopted their grandchild and are now in their late sixties raising a kid in grade school. The same daughter had a second child, and they adopted that one too. When she announced she was pregnant a third time, they finally said, “Enough! It’s time for a third party adoption.”

Last time I spoke with them, their unemployed daughter and her boyfriend were living in their basement, neither contributing financially nor lifting a finger around the house. What began as a temporary bandage had become a permanent crutch. Our friends love their grandchildren; however, they’ve become bitter.

Jo and I also know of retirees who make their adult children’s car payments. I’m not talking about college-age kids; some of these “children” are close to 50. What’s their justification? “If we don’t make the payments, they won’t be able to go to work.” What I can’t grasp is how these adult children have iPads and iPhones, go on vacations, and do other cool things, but can’t seem to make their car payments.

You are not the family bank. There is generally a brief window of opportunity between children leaving the nest and retirement. Use it to stash away enough money to retire comfortably!

Ignore your health. I served on the reunion committee for my 50th high school class reunion. We diligently tried to track down our classmates, but many had not lived long enough to RSVP to the party. The number of deaths from lung cancer and liver cancer were shocking. Many of those six feet under had been morbidly obese or simply never went to the doctor for checkups.

I know this sounds obvious, but your health choices really do affect how long and how well you live. Retiring only to become homebound because of health problems won’t be much fun.

Not keeping your retirement plan up to date. In the summer of 2013, the Employee Benefit Research Institute (EBRI) published a survey about low-interest-rate policies and their impact on both baby boomers and Generation Xers, who are following right behind. The bottom line (emphasis mine):

“Overall, 25-27 percent of baby boomers and Gen Xers who would have had adequate retirement income under return assumptions based on historical averages are simulated to end up running short of money in retirement if today’s historically low interest rates are assumed to be a permanent condition, assuming retirement income/wealth covers 100 percent of simulated retirement expense.”

It is a sad day when people who thought they’d saved enough realize they have not. Run your personal retirement projection annually to make sure you’re keeping up with the times. Otherwise you may have to work longer or step down your retirement lifestyle—drastically.

Thinking you can continue working as long as you wish. While age discrimination is illegal, you may not be able to work forever. If illness doesn’t push you out the door, your employer might downsize (we all know who goes first) or buy you out with a lucrative lump sum.

Many companies want older employees off the payroll because their healthcare costs are high; plus, they are often at the top of the salary scale. More than one employer has made the workplace so uncomfortable that an older employee felt he had to quit. Other employers will systematically build a case to terminate a senior employee with their legal team waiting in the wings to help.

Whatever the reason, you may have to stop working even if you enjoy your job, so plan for it.

Not increasing your rate of saving. A surefire way to end up short is to pay off a large-ticket item like your home mortgage and then continue spending that money every month. Start paying yourself instead! Don’t prioritize saving after it’s too late to benefit from years of compounded interest.

Continually taking equity out of your home. Too many of my friends have been duped into taking out additional equity when refinancing with a lower-interest mortgage. If you can secure a lower rate, use it to pay off your home off faster. When you have, start making those payments to your retirement account.

Retire with a substantial mortgage. The general rule of thumb is your mortgage payment should be no more than 20-25% of your income. If you retire and still have a mortgage, it might be tough to stay within those guidelines.

Taking out a reverse mortgage at a young age. Debt-laden baby boomers are taking out reverse mortgages at an increasingly younger age. Just read the HUD reports. Many have very little equity to begin with and use a reverse mortgage to stop their monthly bank payments for pennies in return.

Locking yourself into a fixed income at a young age is a great way to kiss your lifestyle goodbye. Many of these young boomers will find themselves wondering, “Why is there is so much life left at the end of my money?”

Putting your life savings into an annuity. While annuities have their place in a retirement portfolio, going all in is dangerous, particularly at a young age. After all, your monthly payment depends in part on your age.

I know folks who put their entire life savings into variable annuities. They thought they were buying a “pension plan” and would never have to worry again. The crash of 2008 slashed their monthly checks, and they have yet to recover. Retirement without worry is not that simple.

Thinking your employer’s retirement plan is all you need. The era of pensions is gasping its dying breath. We have many friends who retired from the airlines with sizable pensions. When those airlines filed for bankruptcy, their pensions shriveled. No industry is immune to this danger, so we all need a backup plan.

Government pensions are following suit. Just ask anyone who has worked for the city of Detroit! While the unions are fighting the city to preserve their pensions, an initial draft of the plan indicates underfunded pensions (estimated at $3.5 billion) may receive $0.25 on the dollar.

Don’t fall for the trap! If you work for the government, you still need to save for retirement. Contribute to your 457 plan or whatever breed of retirement account is available to you. The federal government has over $100 trillion in unfunded promises, and many state governments are woefully underfunded. That doesn’t mean your retirement has to be.

Reverse mortgages and annuities are often the undoing of many income investors and retirees. They can be used properly, however, if your situation or the opportunity fits with your needs. With all of the misinformation out there about these two products, we decided to pen two special reports to help you decide whether these are right for you. They are The Reverse Mortgage Guide and The Annuity Guide. Check out one – or both – today and learn where, if at all, these fit your needs.

The article 10 Ways to Screw up Your Retirement was originally published at Millers Money


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Thursday, April 17, 2014

How to Momentum Trade Gold & Silver Stocks

Back on April 9th I posted a short tutorial on how to momentum trade gold along with my short term gold forecast.

Today I wanted to do a follow up video for my gold market traders for three reasons:


1. I had lots of great feedback from traders taking advantage of what I showed to profit in the past week.
2. To show you how and why this strategy works better with gold stocks and silver stocks.
3. To provide my short term gold forecast so you are on the right side of the market for next week.
4. Also you should see my major long term Gold Forecast



 

Get my gold forecast and gold trade alerts at The Gold & Oil Guy



See you in the markets!
Chris Vermeulen


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Wednesday, April 16, 2014

Gold Forecast – This Is Going To Be Exciting

Gold Forecast: During the past year there has been very little talk about gold, silver or gold stocks in the media. Yet the year before it was all the media could talk about and they even had the price of gold streaming live all day in the corner of the TV monitor.

I am always amazed how the masses and media can be so off in their timing of the stock market and commodities in general. For example when Greece was having issues in 2012 and everyone was avoiding investments in that country like it was the plague. Looking back now, Greece is up huge and only recently investors are confident enough to put money into the Greek stock market again.

But the truth is that big move has already happend, and the US and global markets are in rotation (changing trends). Money is slowly shifting from what has been hot during the past year or two, to new investments which have a lot more room to rise in value. And this is leads us back to my gold forecast.

If you are at all familiar with Stan Weinstein’s work, then you understand the four market stages. If not, you can learn these four stages on my Stan Weinstein page. Through stage analysis we can predict the type of price action we should expected and have a rough idea just how long a move (new trend) is likely to last. It is important to know that Stan Weinstein’s stage analysis works on any time frame from a one minute chart to a monthly chart. If you do not know this then you are trading almost blind without a doubt.

Current stage analysis looks as though the US stock market may be starting to form a stage three top. There are several indicators and market behaviors which are screaming, telling us to trade with caution to the long side. But the masses do not see this or hear what is unfolding in front of their very own eyes, and that I fine. It actually reminds me of a funny old movie called “hear no evil, see no evil”.

In short, the market is showing some signs of distribution selling in stocks, and the once market leaders are now getting completely crushed with heavy selling volume like the biotech stocks, social media stocks and other momentum stocks and this is bad.

Gold on the other had has been forming a stage one basing pattern. This provides a very bullish long term gold forecast that investors could ride for several years.

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Q: Where Will Investment Capital Go During The Next Bear Market In stocks?

 

A: One of the places will be precious metals. Click here for my gold forecast which shows the main reason why

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Gold Forecast Coles Notes:

 

1. The U.S. dollar index has setup a massive stage 3 topping pattern on the weekly chart. A falling dollar will send the price of gold higher naturally.

2. Bullish gold forecasts by the media have dropped substantially, meaning everyone is bearish on gold.

3. Gold stocks are already showing signs of massive accumulation. I always use the price and volume action of gold stocks to help create and time my gold forecasts which it starting to look bullish.

Gold Forecast Conclusion:

 

Gold market traders should understand that precious metals in general are still months away from breaking out to the upside and starting a new bull market. Do not be in a rush to buy gold or gold stocks yet. There will be plenty of time folks.

See you in the markets!
Chris Vermeulen 

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Doug Casey’s Coming Super Bubble

By Louis James, Chief Metals & Mining Investment Strategist

In many of my conversations with legendary speculator Doug Casey since the crash of 2008, Doug has talked about a coming super bubble.

Everything Doug has studied about human nature, history, and economics—from Roman times right up to the present—has him absolutely convinced that the global economy is headed for high inflation, with a very real potential for hyperinflation in the US.

Ben Bernanke's panicked deployment of squadrons of cash-laden choppers has been emulated around the world. The Bank of International Settlements estimates that global debt markets now exceed $100 trillion.
The laws of economics—maybe even physics—say that this inflation, whenever it arrives, must have consequences… and that those consequences cannot be avoided forever.

The easiest consequence to predict, and the one we're betting heavily on, is that the price of gold will move higher. Much higher. That move will in turn ignite a bubble in gold stocks and, as Doug likes to say, a super-bubble in junior gold stocks.

Jeff Clark, editor of our BIG GOLD newsletter, recently illustrated what such a super-bubble can look like, citing figures from several historic bull markets. I hesitate to repeat any of his figures because the right junior stocks' gains when the market goes bubbly are, frankly, hard to believe. However, it is a fact that quite a few junior stocks achieved the much vaunted 10 bagger status (1,000% gains) in previous bubbles, and some even returned 100 fold.

Here’s the essential reason why junior mining stocks are Doug's favorite speculations.

Let's start at the beginning: Doug's mantra is that one should buy gold for prudence and gold stocks for profit. These are very different kinds of asset deployment.

It's particularly important not to think of gold as an investment, but as wealth protection. It's the only highly liquid financial asset that is not simultaneously someone else's liability. Every ounce of gold you physically possess is value in solid form—there is no short to your long. Come hell or high water, it is value you can liquidate and use to secure your needs. That's why gold is for prudence.

Gold stocks are for speculation because they offer leverage to gold. This is actually true of all mining stocks and, more broadly, of stocks in commodity-related companies; they all tend to magnify the price movements in the underlying commodity. But the phenomenon is especially strong in the highly volatile precious metals.

Allow me to illustrate—and in an effort to avoid seeming overly promotional, I'll show how gold stocks' leverage works on the downside as well as the upside. Bad news first: here's a chart showing how gold retreated during October and November of 2008, the worst two months of that year's crash for mining stocks. Also shown are an index of gold juniors and our own portfolio performance. This was, of course, a terrific time to buy, resulting in spectacular gains over the next two years.




Now the good news: here's a chart showing the performance of the same three things in January and February of this year, which saw a major rally in the gold sector.





Here's one more, with a particularly telling point to make. This is the stock price of ATAC Resources (ATC.V) over the same time period as the chart above. The point I want to draw your attention to is that the company had no major news during the time period shown. It's a Yukon gold play, buried deep under the famous snows of the Great White North, so there's no exploration under way, and there won't be until the snow melts weeks or months from now.




This third chart shows in one simple yet powerful way exactly why Doug loves buying these stocks when they're on sale and selling them when they go into bubble mode. ATAC essentially did nothing and still shot up over an order of magnitude more than gold. Note that while this third chart looks like the second, the scales are quite different. (ATAC, by the way, is part of my special report, 10 Bagger List for 2014, that details nine companies I believe could show 1,000% or more returns this year. Note that the report was written before the big move upward you see in the chart above.)

It's worth emphasizing that ATAC's performance this year is just on a rebound from recent lows—imagine what a stock like this could do when Doug's super-bubble for gold stocks arrives.

But what if it doesn't? Or worse—what if we already missed it?

I remember a conversation with Doug back in 2011, when gold rose to within reach of $2,000 per ounce. Many mainstream analysts said gold was in a bubble. I told Doug I couldn't understand why anyone would listen to analysts who've called the gold trend wrong every year since the current bull cycle started. I remember Doug chuckling and saying: "Just wait and see—this is barely an overture."

I am certain Doug is right. That's not because he's the guru, nor because I'm a nutty gold bug, but because no government in history has ever multiplied its currency base without sparking serious and often fatal inflation. That's a fact, not an opinion, backed by enough data to make me extremely confident in predicting what lies ahead for the US dollar, even if I can't say exactly when we'll reach the tipping point.

Since that 2011 interim peak, as we all know painfully well, gold has backed off on par with the correction in the middle of the great 1970s gold bull market. But economic realities require that the market turn around and head for his long predicted super bubble in junior mining stocks before too long. That makes the correction the last, best time to build a substantial position in the stocks best positioned to profit from the coming bubble.

And now Doug is saying that he believes the upturn is at hand. He expects a steadily rising market for a year or two, perhaps more, but not many more, culminating in a market mania for the record books.

Our market does appear to have bottomed. It may take a while to go into its mania phase, but it's already heating up. No one is going to want to be short when this train leaves the station—and the conductor has blown the whistle.

To find out what you could be missing if you don’t invest in junior mining stocks right now, watch Casey Research’s recent video event, Upturn Millionaires—How to Play the Turning Tides in the Precious Metals Market. With resource and investment experts Doug Casey, Frank Giustra, Rick Rule, Porter Stansberry, Ross Beaty, John Mauldin, Marin Katusa, and myself. Watch it here for free, or click here to find out more about my 10 Bagger List for 2014.

The article Doug Casey’s Coming Super Bubble was originally published at Casey Research


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Every Central Bank for Itself

By John Mauldin



“Everybody has a plan until they get punched in the face.”
– Mike Tyson

For the last 25 days I’ve been traveling in Argentina and South Africa, two countries whose economies can only be described as fragile, though for very different reasons. Emerging market countries face a significantly different set of challenges than the developed world does. These challenges are compounded by the rather indifferent policies of developed world central banks, which are (even if somewhat understandably) entirely self centered. Argentina has brought its problems upon itself, but South Africa can somewhat justifiably express frustration at the developed world, which, as one emerging market central bank leader suggests, is engaged in a covert currency war, one where the casualties are the result of unintended consequences. But the effects are nonetheless real if you’re an emerging market country.

While I will write a little more about my experience in South Africa at the end of this letter, first I want to cover the entire emerging market landscape to give us some context. Full and fair disclosure requires that I give a great deal of credit to my rather brilliant young associate, Worth Wray, who’s helped me pull together a great deal of this letter while I am on the road in a very busy speaking tour here in South Africa for Glacier, a local platform intermediary. They have afforded me the opportunity to meet with a significant number of financial industry participants and local businessman, at all levels of society. It has been a very serious learning experience for me. But more on that later; let’s think now about the problems facing emerging markets in general.

Every Central Bank for Itself

Every general has a plan before going into battle, which immediately begins to change upon contact with the enemy. Everyone has a plan until they get hit… and emerging markets have already taken a couple of punches since May 2013, when Fed Chairman Ben Bernanke first signaled his intent to “taper” his quantitative easing program and thereby incrementally wean the markets off of their steady drip of easy money. It was not too long after that Ben also suggested that he was not responsible for the problems of emerging-market central banks – or any other central bank, for that matter.

As my friend Ben Hunt wrote back in late January, Chairman Bernanke turned a single data point into a line during his last months in office, when he decided to taper by exactly $10 billion per month. He established the trend, and now the markets are reacting as if the Fed's exit strategy has officially begun.

Whether the FOMC can actually turn the taper into a true exit strategy ultimately depends on how much longer households and businesses must deleverage and how sharply our old age dependency ratio rises, but markets seem to believe this is the beginning of the end. For now, that’s what matters most.

Under Fed Chair Janet Yellen’s leadership, the Fed continues to send a clear message to the rest of the world: Now it really is every central bank for itself. 

The QE-Induced Bubble Boom in Emerging Markets

By trying to shore up their rich-world economies with unconventional policies such as ultra low rate targets, outright balance sheet expansion, and aggressive forward guidance, major central banks have distorted international real interest rate differentials and forced savers to seek out higher (and far riskier) returns for more than five years.

This initiative has fueled enormous overinvestment and capital misallocation – and not just in advanced economies like the United States.

As it turns out, the biggest QE-induced imbalances may be in emerging markets, where, even in the face of deteriorating fundamentals, accumulated capital inflows (excluding China) have nearly DOUBLED, from roughly $5 trillion in 2009 to nearly $10 trillion today. After such a dramatic rise in developed world portfolio allocations and direct lending to emerging markets, developed world investors now hold roughly one third of all emerging market stocks by market capitalization and also about one third of all outstanding emerging market bonds.

The Fed might as well have aimed its big bazooka right at the emerging world. That’s where a lot of the easy money ran blindly in search of more attractive real interest rates, bolstered by a broadly accepted growth story.

The conventional wisdom – a particularly powerful narrative that became commonplace in the media – suggested that emerging markets were, for the first time in a long time, less risky than developed markets, despite their having displayed much higher volatility throughout the past several decades.

As a general rule, people believed emerging markets had much lower levels of government debt, much stronger prospects for consumption led growth, and far more favorable demographics. (They overlooked the fact that crises in the 1980s and 1990s still limited EM borrowing limits until 2009 and ignored the fact that EM consumption is a derivative of demand and investment from the developed world.)

Instead of holding traditional safe haven bonds like US treasuries or German bunds, some strategists (who shall not be named) even suggested that emerging market government bonds could be the new safe haven in the event of major sovereign debt crises in the developed world. And better yet, it was suggested that denominating these investments in local currencies would provide extra returns over time as EM currencies appreciated against their developed market peers.

Sadly, the conventional wisdom about emerging markets and their currencies was dead wrong. Herd money (typically momentum based, yield chasing investors) usually chases growth that has already happened and almost always overstays its welcome. This is the same disappointing boom/bust dynamic that happened in Latin America in the early 1980s and Southeast Asia in the mid 1990s. And this time, it seems the spillover from extreme monetary accommodation in advanced countries has allowed public and private borrowers to leverage well past their natural carrying capacity.

Anatomy of a “Balance of Payments” Crisis

The lesson is always the same, and it is hard to avoid. Economic miracles are almost always too good to be true. Whether we’re talking about the Italian miracle of the ’50s, the Latin American miracle of the ’80s, the Asian Tiger miracles of the ’90s, or the housing boom in the developed world (the US, Ireland, Spain, et al.) in the ’00s, they all have two things in common: construction (building booms, etc.) and excessive leverage. As a quick aside, does that remind you of anything happening in China these days?

Just saying…...Broad based, debt fueled overinvestment may appear to kick economic growth into overdrive for a while; but eventually disappointing returns and consequent selling lead to investment losses, defaults, and banking panics. And in cases where foreign capital seeking strong growth in already highly valued assets drives the investment boom, the miracle often ends with capital flight and currency collapse.

Economists call that dynamic of inflow induced booms followed by outflow induced currency crises a “balance of payments cycle,” and it tends to occur in three distinct phases.

In the first phase, an economic boom attracts foreign capital, which generally flows toward productive uses and reaps attractive returns from an appreciating currency and rising asset prices. In turn, those profits fuel a self-reinforcing cycle of foreign capital inflows, rising asset prices, and a strengthening currency.

In the second phase, the allure of promising recent returns morphs into a growth story and attracts ever stronger capital inflows – even as the boom begins to fade and the strong currency starts to drag on competitiveness. Capital piles into unproductive uses and fuels overinvestment, overconsumption, or both; so that ever more inefficient economic growth increasingly depends on foreign capital inflows. Eventually, the system becomes so unstable that anything from signs of weak earnings growth to an unanticipated rate hike somewhere else in the world can trigger a shift in sentiment and precipitous capital flight.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – Please Click Here.

The article Thoughts from the Frontline: "Every Central Bank for Itself" was originally published at Mauldin Economics


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Tuesday, April 15, 2014

What’s the Frequency Zenith?

By Grant Williams


WARNING: This week’s Things That Make You Go Hmmm... is going to run a little longer than usual, I’m afraid, so if you have some time to kill, strap yourself in for the ride.

Yes. I have read it.


For the last couple of weeks those have been the five words I have used the most — by a country mile.

The second most used five word combination during that time has been “I know, what a tool.”

The subject to which the first group of words pertains is, of course, Michael Lewis’s new book, Flash Boys; and the second phrase refers to a certain president of a certain exchange, who made a complete fool of himself during the fierce media debate that has surrounded the book since it burst upon the public consciousness in the space of what ironically felt like a few nanoseconds. (The particular piece to which I refer has to be seen to be believed; but if you somehow missed it, you’ll have your chance. Stick around.)
Now, before we get started, let’s get a few things straight right off the BAT(s).

Firstly, I am an enormous fan of Michael Lewis’s work. I think he is an incredible storyteller with a gift for narrative worthy of a place alongside many modern greats. I have read each of his books and enjoyed them all tremendously. Michael has an ability to weave complex subject matter into a tapestry that can be understood and enjoyed by many who might otherwise find such material utterly incomprehensible.

Secondly, I am no expert in high-frequency trading, but I have had some experience of it in recent years; and I have spent some considerable time analyzing it from a business perspective, which has given me a reasonable understanding of its mechanics.

Thirdly, whilst I have limited direct experience of HFT, I DO have almost thirty years’ hands-on experience of equity, bond, and commodity markets in the US, UK, Singapore, Hong Kong, Australia, and Japan, as well as in another dozen or so countries across Asia Pacific; and having watched markets of all types move in strange ways for seemingly no reason until, a few moments later, the cause of the move revealed itself, I feel I have developed enough of an understanding about how the markets work and, perhaps more importantly, about the people who MAKE them work, to venture an opinion or two about the subjects raised by Michael Lewis in Flash Boys.

But before we get to the book that is on everybody’s Kindle, we’re going to turn to sport for a little lesson. Let’s go back in time to Game 6 of the American League Championship Series between the Boston Red Sox and the New York Yankees in 2004, and recall the actions of another “Flash Boy,” Alex Rodriguez, the Yankees’ star third baseman.

Now, at this point, I’m sure the thousands of non-baseball fans amongst you are tuning out in your droves; but in order to try to keep you engaged, let me also tell you a parallel story from the football (or “soccer,” if you must) 2002 World Cup in South Korea, a tale that features one of its brightest stars of that era, the Brazilian midfielder Rivaldo ... and some decidedly unsavory antics.

Let’s see how we get on with this whole parallel story thing, shall we? I know Michael Lewis would do a phenomenal job of weaving the two stories together. Me? I’m not so sure.....

Deep breath.

In 2002, Rivaldo Vitor Borba Ferreira was a footballer at the very top of the world game. He had helped Brazil reach the final of the 1998 World Cup (where they lost to France), and four years later he was one-third of the renowned “Three Rs,” alongside Ronaldo and Ronaldinho (sadly NOT referred to as “the Two Ronnies”), who spearheaded the dynamic Brazilian team that was rightly installed as the prohibitive favourite to win the trophy that year.
In Brazil’s opening game against Turkey on June 3rd, Rivaldo scored a goal in the 87th minute to give Brazil a 2-1 lead with only three minutes to play, and was on his way to earning the Man of the Match award (think “MVP,” baseball fans). With seconds of added time left, Brazil won a corner, which Rivaldo wandered across the pitch to take at a pace which could, at best, be described as “lacking a degree of urgency.” The ball was at the feet of Turkish defender Hakan Ünsal, who most certainly WAS in a hurry.....

(Cue Michael Lewis-like change of scene to increase the dramatic tension.)

Game 6 of the 2004 ALCS, played at Yankee Stadium on October 19, 2004, had urgency to spare, as the Boston Red Sox, having lost the first three games of the series to their hated rivals from New York, needed a win to tie the series at 3 games each and force a Game 7 decider, which would be played at The Stadium the following night. One more loss and their season was over. (No team had ever come from 3 games down to take a Championship Series.)

The Yankees were led by their talismanic third baseman, Alex Rodriguez, who had almost joined the Red Sox earlier that year after the team had suffered a heart-breaking Game 7 loss in the 2003 ALCS — to whom else but the Yankees — only to have the deal voided at the last minute by the players’ union, a move which opened the door for the Yankees to steal the highest-paid and, at the time, most prolific player in the game from under the noses of the seemingly cursed Red Sox. (You can see how that whole situation played out in the excellent ESPN short documentary The Deal).

Rodriguez had been on a tear in 2004 and would end the season with 36 home runs, 106 RBIs, 112 runs scored, and 28 stolen bases. (Soccer fans, I’d give you a comparison, but there isn’t one. Think: doing everything. Really well.) This made Rodriguez only the third player in the 100+ years of baseball history to compile at least 35 home runs, 100 RBIs, and 100 runs scored in seven consecutive seasons (joining two other players with names that even soccer fans would know [kinda]: Babe Ruth and Jimmie Foxx). (No, NOT the actor who won an Oscar for Ray, soccer fans.)

During the playoffs, Rodriguez had dominated the Minnesota Twins, batting .421 with a slugging percentage of .737. (Soccer fans, let’s face it, baseball owns statistics. You got nuthin’. Nuthin’. Take it from me, Rodriguez was Messi with a bat.) He had also equaled the single game post season record by scoring five runs in Game 3 as the Yankees seized a 3-0 lead.

But in Game 6, Messi with a bat was about to get messy with at-bats as his form deserted him and he found himself at the plate in the 8th inning, facing Red Sox relief pitcher Bronson Arroyo, in the game for starting pitcher Curt Schilling, who had battled heroically through seven innings with a torn tendon sheath in his right ankle.

With the Yankees down 4-2 and team captain Derek Jeter on first base, Rodriguez represented the tying run......

On that steamy night two years prior, in a purpose-built stadium in Korea, Rivaldo stood by the corner flag, hands on his knees, waiting oh so patiently for the clock to run down Ünsal to pass the ball to him. The fans whistled their derision at the Brazilian’s delaying tactics. Sadly, time wasting in such situations is commonplace in football, and though the referees are obliged to add additional seconds to negate these tactics, they seldom do so effectively.

Ünsal was no doubt frustrated at the Brazilian’s gamesmanship and kicked the ball towards him at some pace in an attempt to speed things up.

Rivaldo flinched and tried to turn away from the incoming ball, which struck him roughly two inches above his right knee.

With the linesman (baseball fans, think: third base umpire) standing no more than two or three feet from the Brazilian, Rivaldo collapsed to the ground, clutching hisface as if he had pole axed by the incoming projectile, and writhing around as if every bone in his face had been shattered by the evil Turk.

To the astonishment of everybody in the stands, commentators from over a hundred countries, hundreds of millions of fans around the world, and, above all, Ünsal himself, the Turkish player was shown a red card and sent off (baseball fans, think: ejected) for his “crime.”

Rivaldo, having made a miraculous recovery, took the resulting corner, and Brazil held on against the ten men of Turkey for the victory.

Back in the Bronx, with the count at 2-2 (soccer fans, that’s two balls and two strikes, which means... oh, to hell with it. Baseball is so much trickier to explain. From here on in, you’re on your own), Alex Rodriguez swung his bat, made contact with Arroyo’s pitch, and sent it bobbling down the first-base line. As soon as he hit it, Rodriguez set off in a furious foot race that he had absolutely no chance of winning as he tried to beat the ball to first base. He knew it. We knew it.

Sure enough, Arroyo, with a head start, got to the ball first and took the two or three steps necessary to tag the Yankee with the ball (before he reached first base, which would render him “out” and send him back to the dugout, bringing the Yankee inning closer to an end).

However, as he reached out to tag Rodriguez, the ball spun loose from Arroyo’s glove and bobbled into right field, keeping the play alive and letting Jeter score from second and throw the Yankees a lifeline.

Rodriguez continued to second base, where he stopped, called time out, clapped his hands, and whooped.
Cue pandemonium.

Everybody in the stadium — except the first-base umpire ... and presumably the millions at home — had seen Rodriguez intentionally slap the ball from Arroyo’s glove, a move which in baseball parlance is known as “cheating.” (Soccer fans, think: cheating.)

After a strong protest from Red Sox manager Terry Francona and a lengthy consultation among the various umpires, justice was done. Rodriguez was called “out,” Jeter was returned to second base, and the score remained 4-2.

The Red Sox would go on to win the game and, the following night, become the first team in baseball history to win a series after losing the first three games. They would go on to defeat the St. Louis Cardinals 4-0 in the 100th World Series (soccer fans, think: national championship with no “world” connotation whatsoever) and to vanquish a famous “curse” that had persisted for 86 years.

Now, armed with that background, watch these two defining moments HERE and HERE.
In the aftermath, both players were defiant. Rivaldo, amazingly, tried to paint himself as the victim:

(BBC): Rivaldo had admitted fooling the referee by clutching his face after Ünsal kicked the ball at his leg while he was waiting to take a corner in the closing moments of the Group C match.

But he shrugged off the fine and defended his faking as part and parcel of the game.

The 30-year-old said: “I’m calm about the punishment.

“I am not sorry about anything.
“I was both the victim and the person who got fined.
“Obviously the ball didn’t hit me in the face, but I was still the victim. I did not hit anyone in the face.”

... whilst Rodriguez was, for some reason, “perplexed”:
(NY Times): Alex Rodriguez was standing on second base when the umpires decided that he did not belong there. He folded his hands atop his helmet and screamed, “What?’’
He was, to use his word, perplexed.

After the game, Yankees Manager Joe Torre demonstrated that, when it comes to seeing important plays that go against your team, there is one thing common to both soccer AND baseball: the unreliability of a manager’s eyesight. These guys see EVERYTHING that goes against their team perfectly but somehow always seem to be curiously oblivious when the shoe is on the other foot:

(NY Times): “Randy Marsh was closer than anyone else, and it looked like there were bodies all over the place,’’ Torre said, referring to the fact that first baseman Doug Mientkiewicz was near the play. “There were a lot of bodies in front of me, so I can’t tell you what I saw. I was upset it turned out the way it did for a couple of reasons.”

Presumably neither of those reasons involved the fact that the call was right.

Anyway, the point of these two stories as they pertain to Flash Boys is this:

Both Rodriguez and Rivaldo knew there were dozens of TV cameras on them. They knew there were millions of pairs of eyes on them around the world, and they knew that they were being watched by officials charged with monitoring the games to ensure fairness and punish malfeasance — and yet, knowing all that to be true, they both instinctively cheated to try to gain an edge.

That is how they, as competitors, are wired. Whether it’s right or wrong is irrelevant. (It’s wrong, in case you were wondering.) They were both given a set of rules within which to play, and both chose to step outside those rules in the hope that they would get away with it.

Rivaldo did, Rodriguez didn’t.

It’s a fine line, but the reward for success — even if it does involve bending the rules — is considerable.
Lewis’s media blitz began on Sunday night with an appearance on 60 Minutes, and in answering a simple opening question with a typically florid response, he sparked a media storm the likes of which I haven’t seen in a long, long time.

Steve Kroft: What’s the headline here?
Michael Lewis: Stock market’s rigged. The United States stock market, the most iconic market in global capitalism, is rigged.

Those words sent financial anchors on CNBC and Bloomberg TV into a state of apoplexy at the mere suggestion that the playing field in financial markets is anything but scrupulously fair.

As I watched the circus unpack its tents, erect them, and send a parade of clowns careening into the ring, I was genuinely baffled at what I was seeing.

The first act was Bill O’Brien, the president of BATS (one of the exchanges which, according to Lewis’s book, offers an unfair advantage to high-frequency traders), going toe-to-toe on CNBC with the hero of the book, Brad Katsuyama, once of RBC and now the founder of IEX, an exchange dedicated to leveling the playing field for the average investor.

Until last Sunday, I had never heard of either man, nor had I ever seen them in action.

What followed was extraordinary.

If you haven’t seen the clip, you can (and should) watch it HERE, because excerpts from a transcript cannot do justice to either the defensiveness of O’Brien or the cool confidence of Katsuyama; but from the off, had it been a fight, it would have been stopped before one of the participants embarrassed himself any further:


(CNBC):O’Brien: I have been shaking my head a lot the last 36 hours. First thing I would say, Michael and Brad, shame on both of you for falsely accusing literally thousands of people and possibly scaring millions of investors in an effort to promote a business model.

Bob Pisani (to Katsuyama): You are very respected on the street. I have known you a little while. You are thought very highly of. Do you think the markets are rigged?

Katsuyama (calmly): I think it’s very hard to put a word on it...

O’Brien (animatedly): He said it in the book. You said it in the book. “That’s when I knew the markets were rigged.” It’s disgusting that you are trying to parse your words now. Okay?

Katsuyama (calmly): Let me walk you through an example...
O’Brien: It’s a yes or no question. Do you believe it or not?
Katsuyama (calmly): I believe the markets are rigged.
O’Brien (somewhat triumphantly): Okay. There you go.
Katsuyama (calmly): I also think that you are part of the rigging. If you want to do this, let’s do this.

From there, Katsuyama proceeded to ask O’Brien how his own exchange (the one he, O’Brien, is president of) prices trades:

O’Brien: We use the direct feeds and the SIP (Securities Information Processor) in combination.
Katsuyama: I asked a question. Not what you use to route. What do you use to price trades in your matching engine on Direct Edge?
O’Brien: We use direct feeds.
Katsuyama: No.
O’Brien: Yes, we do...
Katsuyama: You use the SIP.
O’Brien: That is not true.

From there, O’Brien made the most successful attempt to make himself look a fool that I think I have ever seen (and on CNBC, that’s saying something). It was, I thought, painfully embarrassing to watch.
In my head, all I could hear was Sir Winston Churchill’s booming voice:

“Never engage in a battle of wits with an unarmed man.”

Less than 24 hours later...

(Wall Street Journal): BATS Global Markets Inc., under pressure from the New York Attorney General’s office, corrected statements made by a senior executive during a televised interview this week about how its exchanges work.

BATS President William O’Brien, during a CNBC interview Tuesday, said BATS’s Direct Edge exchanges use high-speed data feeds to price stock trades. Thursday, the exchange operator said two of its exchanges, EDGA and EGX, use a slower feed, known as the Securities Information Processor, to price trades.

Viva El Presidente!

Anyway, the interesting thing to me, once I got past the sheer insanity of it all, was the level of amazement shown by the CNBC journalists that the market could possibly be “rigged” in any way, shape, or form.
That amazement was shared by the two anchors on Bloomberg’s Market Makers show, Stephanie Ruhle and Eric Schatzker, when their turn came to take a tilt at Lewis the following day:

Ruhle (bewildered): The market is rigged? That’s a big claim!
Lewis (even more bewildered): Well it IS rigged. If you read the book, I don’t think you’d put it down and say the market’s not rigged.

Then, after a pretty good casino analogy that was interrupted by the anchors a few times, Lewis got to the crux of the issue that had been bothering me as I watched:

Lewis: Why are you so invested in the idea this is fair? Why are you even arguing about this? It’s so clear... people are front-running the market. There’s plenty of evidence in the book.
Schatzker: Their orders are being “anticipated.”

Lewis (laughing at the escalating absurdity): Anticipated and run in front of.... [The HFTs] PAY to execute the orders. Tens of millions of dollars a year. Ask yourself THAT question. Why would ANYONE pay for the right to execute someone else’s stock market order?... It’s quite obvious. That order is an opportunity to exploit, because he has advance information about the pricing in the stock market. Is that “fair”?

Ruhle: Today, when I go to execute a stock, I feel like, man, how did that get jacked right in front of me, every time? I do feel that way. But fifteen years ago when I did a trade, I was paying significantly more to do it through a specialist because of what the fees were.... Is it a different situation than when specialists were on the floor?

Lewis (with a somewhat confused look on his face): I never said THAT.
Ruhle: So has the system ALWAYS been rigged?
Lewis: Yes.

Yes.

After watching these exchanges, I was so astounded that so many people could STILL live in a complete fantasy world under the illusion assumption that the markets couldn’t possibly be rigged that I turned to my friends in the Twittersphere:


That was the 2,567th tweet I have sent out and, in contrast to the nearly pathological indifference shown by the rest of the world to the previous 2,566, this one was retweeted 96 times. (Button it, Bieber! That’s an impressive number for me, OK?)

But who are these people who believe in unicorns and rainbows fair markets?

Click here to continue reading this article from Things That Make You Go Hmmm… – a free weekly newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.


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Monday, April 14, 2014

Listening to the Canary

By Terry Coxon, Senior Economist

During World War II, the British Royal Air Force (RAF) undertook a plan of misdirection to allow a squadron of bombers to approach an exceptionally valuable target in Europe undetected. The target was so heavily guarded that destroying it would require more than the usual degree of surprise.


Although the RAF was equipped to jam the electronic detection of aircraft along the route to the target (a primitive forebear of radar was then in use), they feared that the jamming itself would alert the defending forces. Their solution was to “train” the defending German personnel to believe something that wasn't true. The RAF had a great advantage in undertaking the training: The intended trainees were operating equipment that was novel and far from reliable; and those operators were trying to interpret signals without the help of direct observation, such as actually seeing what they were charged with detecting.

At sunrise on the first day, the RAF broadcast a jamming signal for just a fraction of minute. On the second day, it broadcast a jamming signal for a bit longer than a minute, also around sunrise. On each successive day, it sent the signal for a somewhat longer and longer time, but always starting just before sunrise.

The training continued for nearly three months, and the German radar personnel interpreted the signals their equipment gave them in just the way the British intended. They concluded that their equipment operates poorly in the atmospheric conditions present at sunrise and that the problem grows as the season progresses. That mistaken inference allowed an RAF squadron to fly unnoticed far enough into Europe to destroy the target.

People will get used to almost anything if it goes on for long enough. And the getting-used-to-it process doesn't take long at all if it's something that people don't understand well and that they can't experience directly. They hear about Quantitative Easing and money printing and government deficits, but they never see those things happening in plain view, unlike a car wreck or burnt toast, and they never feel it happening to themselves.

QE has become just a story, and it's been going on for so long that it has no scare value left. That's why so few investors notice that the present situation of the U.S. economy and world investment markets is beyond unusual. The situation is weird, and dangerously so. But we've all gotten used to it.

Here are the four main points of weirdness:
  1. The Federal Reserve is still fleeing the ghost of the dot-com bubble. It was so worried that the collapse of the dot-com bubble (beginning in March 2000) would damage the economy that it stepped hard on the monetary accelerator. The growth rate of the M1 money supply jumped from near 0% to near 10%. This had the hoped for result of making the recession that began the following year brief and mild.
  1. A nice result, if that had been all. But there was more. Injecting a big dose of money to inoculate the economy against recession set off a bubble in the housing market. Starting in 2003, the Fed began gradually lowering the growth rate of the money supply to cool the rise in housing prices. That, too, produced the intended result; in 2006, housing prices began drifting lower.

    But again, there was a further consequence—the financial collapse that began in 2008. This time, the Federal Reserve stomped on the monetary accelerator with both feet, and the growth of the money supply hit a year-over-year rate of 21%. It's still growing rapidly, at an annual rate of 9%.
  1. The nonstop expansion of the money supply since 2008 has kept money market interest close to zero. Rates on longer-term debt aren't zero but are extraordinarily low. The ten-year Treasury bond currently yields just 2.7%; that's up from a low of 1.7%.

    The flow of new money has been irrigating all financial markets. In the U.S., stocks and bonds tremble at each hint the Fed is going to turn the faucet down just a little. And it's not just US markets that are affected. When credit in the US is ultra cheap, billions are borrowed here and invested elsewhere, all around the world, which pushes up investment prices almost everywhere.
  1. US federal debt management is living on borrowed time. The deficit for 2013 was only $600 billion, down from trillion dollar plus levels of recent years. But this less terrible than before figure was achieved only by the grace of extraordinarily low interest rates, which limit the cost of servicing existing government debt. Should interest rates rise, less than terrible will seem like happy times.
Almost no one imagines that the current situation can continue indefinitely. But is there a way for it to end nicely? For most investors, the expectation (or perhaps just the hope) that things can gracefully return to normal rests on confidence that the people in charge, especially the Federal Reserve governors, are really, really smart and know what they're doing. The best minds are on the job.

If the best minds were in charge of designing a bridge, I would expect the bridge to hold up well even in a storm. If the best minds were in charge of designing an airplane, I would expect it to fly reliably. But if the best minds were in charge of something no one really knows how to do, I would be ready for a failure, albeit a failure with superb academic credentials.

Despite all the mathematics that has been spray-painted on it, economics isn't a modern science. It's a primitive science still weighted with cherished beliefs and unproven dogma. It's in about the same stage of development today that medicine was in the 17th century, when the best minds of science were arguing whether the blood circulates through the body or just sits in the veins. Today economists argue whether newly created cash will circulate through the economy or just sit in the hands of the recipients.

Let's look at the puzzle the best minds now face.

If the Federal Reserve were simply to continue on with the money printing that began in 2008, the economy would continue its slow recovery, with unemployment drifting lower and lower. Then the accumulated increase in the money supply would start pushing up the rate of price inflation, and it would push hard. Only a sharp and prolonged slowdown in monetary growth would rein in price inflation. But that would be reflected in much higher interest rates, which would push the federal deficit back above the trillion dollar mark and also push the economy back into recession.

So the Fed is trying something else. They’ve begun the so called taper, which is a slowing of the growth of the money supply. Their hope is that if they go about it with sufficient precision and delicacy, they can head off catastrophic price inflation without undoing the recovery. What is their chance of success?

My unhappy answer is "very low." The reason is that they aren't dealing with a linear system. It's not like trying to squeeze just the right amount of lemon juice into your iced tea. With that task, even if you don't get a perfect result, being a drop or two off the ideal won't produce a bad result. Tinkering with the money supply, on the other hand, is more like disarming a bomb—and going about it according to the current theory as to whether it's the blue wire or the red wire that needs to be cut means a small failure isn’t possible.

Adjusting the growth of the money supply sets off multiple reactions, some of which can come back to bite. Suppose, for example, that the taper proceeds with such a light touch that the U.S. economy doesn't tank. But that won't be the end of the story. Stock and bond markets in most countries have been living on the Fed's money printing. The touch that's light enough for the U.S. markets might pull the props out from under foreign markets—which would have consequences for foreign economies that would feed back into the U.S. through investment losses by U.S. investors, loan defaults against U.S. lenders, and damage to U.S. export markets. With that feedback, even the light touch could turn out not to have been light enough.

To see what the consequences of economic mismanagement can be, and how stealthily disaster can creep up on you, watch the 30 minute documentary, Meltdown America. Witness the harrowing tales of three ordinary people who lived through a crisis, and how their experiences warn of the turmoil that could soon reach the US. Click here to watch it now.

The article Listening to the Canary was originally published at Casey Research


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