A Correction Fireside Chat with the "10th Man"

By Jared Dillian 

I don’t really enjoy these things like I used to. Keep in mind, I’ve traded through a lot of blowups, going back to 1997...1998...2001...2002-2003...2007-2009...2011...Today. They all kind of feel the same after a while.

Nobody wins from corrections except for the traders, which today mostly means computers. I forget who said this: “In bear markets, bulls lose money and bears lose money. Everyone loses money. The purpose of a bear market is to destroy capital.”....And that’s what is going on today.

For starters, long-term investors inevitably get sucked into the media MARKET TURMOIL spin cycle and puke their well-researched, treasured positions at the worst possible time. But I’m not trying to minimize the significance of a correction, because some corrections turn into bona fide bear markets. And if you are in a bear market, you should get out. If it is only a correction, you probably want to add to your holdings.

How can you tell the difference?

My Opinion: This Is a Correction

So what were the two big bear markets in the last 20 years? The dot com bust, and the global financial crisis. Two generational bear markets in a 10 year span. Hopefully something we’ll never see again. In one case, we had the biggest stock market bubble ever and in the other, the biggest housing/debt crisis ever.

Both good reasons for a bear market.

What are we selling off for again? Something wrong with China?

Again, not to minimize what is going on in China, because it is now the world’s second-largest economy. Forget the GDP statistics. After a decade of ridiculous overinvestment, it is possible that they’re on the cusp of a very serious recession, whether they admit it or not. But the good news is that the yuan is strong and can weaken a lot, and interest rates are high and can come down a lot. China has a lot of policy tools it can use (unlike the United States).

Let’s think about these “minor” corrections over the last 20 years.....
1997: Asian Financial Crisis
1998: Russia/Long-Term Capital Management (LTCM)
2001: 9/11
2011: Greece

All of these were VIX 40+ events.

In retrospect, these “crises” look kind of silly, even junior varsity. The Thai baht broke—big deal.

Russia’s debt default was only a problem because it was a surprise. And the amount of money LTCM was down—about $7 billion—is peanuts by today’s standards. After 9/11, stocks were down 20% in a week. The ultimate buying opportunity.

And in hindsight, we can see that the market greatly underestimated the ECB’s commitment to the euro.
So what are we going to say when we look back at this correction in 10-20 years? What will we name it? Will we call it the China crisis? I mean, if it’s a VIX 40 event, it needs a name.

I try to have what I call forward hindsight. Like, I pretend it’s the future and I’m looking back at the present as if it were the past. My guess is that we will think this was pretty stupid.

What to Buy

I saw a sell-side research note yesterday suggesting that this crisis is marking the capitulation bottom in emerging markets. I haven’t fully evaluated that statement, but I have a hunch that it is correct. China is cheap, by the way. But if China is too scary, they are just giving away India. I literally cannot buy enough. And I have a hunch that Brazil’s president, Dilma Rousseff, is going to be impeached and the situation in Brazil is going to improve relatively soon.

Think about it. The most contrarian trade on the board. Long the big, old, bloated, corrupt, ugly, bear market BRICs. Also the scariest trade. But the scary trades are often the good trades. There’s more. If you think we’re in the midst of a generational health care/biotech bull market, prices are a lot more attractive today than they were a few weeks ago. I also like gold here because central banks are no longer omnipotent.

That reminds me—there was something I wanted to say on China. The reason everyone hates China isn’t because of the economic situation. It’s because they made complete fools of themselves trying to prop up the stock market. So virtually overnight, we went from “China can do anything” to “China is full of incompetent idiots.” Zero confidence in the authorities.

You want to know when this crisis is going to end? When China manages to restore confidence. When they have that “whatever it takes” moment, like Draghi. If they keep easing monetary policy, sooner or later there will be an effect.

I Am Bored

I used to get all revved up about this stuff. That’s when I made my living timing tops and bottoms. I don’t do that anymore. I do fundamental work, and I go to the gym and play racquetball. The mark-to-market is a nuisance. Also, if you can’t get excited about a VIX 50 event, you have probably been trading for too long.
There is a silver lining. The disaster scenario, where the credit markets collapse due to lack of liquidity, isn’t happening. Everyone is hiding and too scared to trade.

Honestly, high-grade credit isn’t acting all that bad. And it shouldn’t. I don’t see any big changes in the default rate. Anyway, if you want to go be a hero and bid with both hands, be my guest. It’s best to be careful and average into stuff. These prices will look pretty good a couple of months from now, I think.


Jared Dillian

If you enjoyed Jared's article, you can sign up for The 10th Man, a free weekly letter, at mauldineconomics.com. Follow Jared on Twitter @dailydirtnap

The article The 10th Man: A Correction Fireside Chat was originally published at mauldineconomics.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

Why Russia Will Halt the Ruble’s Slide and Keep Pumping Crude Oil

By Marin Katusa, Chief Energy Investment Strategist

The harsh reality is that U.S. shale fields have much more to fear from plummeting oil prices than the Russians, since their costs of production are much higher, says Marin Katusa, author of The Colder War: How the Global Energy Trade Slipped from America’s Grasp.

Russia’s ruble may have strengthened sharply Wednesday, but it’s plunge in recent days has encouraged plenty of talk about the country’s catastrophe, with some even proclaiming that the new Russia is about to go the way of the old USSR.

Don’t believe it. Russia is not the United States, and the effects of a rapidly declining currency over there are much less dramatic than they would be in the U.S.

One important thing to remember is that the fall of the ruble has accompanied a precipitous decline in the per barrel price of oil. But the two are not as intimately connected as might be supposed. Yes, Russia has a resource based economy that is hurt by oil weakness. However, oil is traded nearly everywhere in U.S. dollars, which are presently enjoying considerable strength.

This means that Russian oil producers can sell their product in these strong dollars but pay their expenses in devalued rubles. Thus, they can make capital improvements, invest in new capacity, or do further explorations for less than it would have cost before the ruble’s value was halved against the dollar. The sector remains healthy, and able to continue contributing the lion’s share of governmental tax revenues.

Nor is ruble volatility going to affect the ability of most Russian companies to service their debt. Most of the dollar-denominated corporate debt that has to be rolled over in the coming months was borrowed by state companies, which have a steady stream of foreign currency revenues from oil and gas exports.

Russian consumers will be hurt, of course, due to the higher costs of imported goods, as well as the squeeze inflation puts on their incomes. But, by the same token, exports become much more attractive to foreign buyers. A cheaper ruble boosts the profit outlook for all Russian companies involved in international trade. Additionally, when the present currency weakness is added to the ban on food imports from the European Union, the two could eventually lead to an import substitution boom in Russia.

In any event, don’t expect any deprivations to inspire riots in the streets of Moscow. Russian President Vladimir Putin’s popularity has soared since the beginning of the Ukraine crisis. The people trust him. They’ll tighten their belts and there will be no widespread revolt against his policies.

Further, the high price of oil during the commodity super cycle, coupled with a high real exchange rate, led to a serious decline in the Russia’s manufacturing and agricultural sectors over the past 15 years. This correlation — termed by economists “Dutch disease”— lowered the Russian manufacturing sector’s share of its economy to 8% from 21% in 2000.

The longer the ruble remains weak, however, the less Dutch disease will rule the day. A lower currency means investment in Russian manufacturing and agriculture will make good economic sense again. Both should be given a real fillip.

Low oil prices are also good for Russia’s big customers, especially China, with which Putin has been forging ever stronger ties. If, as expected, Russia and China agree to transactions in rubles and/or yuan, that will push them even closer together and further undermine the dollar’s worldwide hegemony. Putin always thinks decades ahead, and any short term loss of energy revenues will be far offset by the long term gains of his economic alliances.

In the most recent development, the Russian central bank has reacted by raising interest rates to 17%. On the one hand, this is meant to curb inflation. On the other, it’s an direct response to the short selling speculators who’ve been attacking the ruble. They now have to pay additional premiums, so the risk/reward ratio has gone up. Speculators are going to be much warier going forward.

The rise in interest rates mirrors how former U.S. Fed Chair Paul Volcker fought inflation in the U.S. in the early ‘80s. It worked for Volcker, as the U.S. stock market embarked on a historic bull run. The Russians — whose market has been beaten down during the oil/currency crisis — are expecting a similar result.

Not that the Russian market is anywhere near as important to that country’s economy as the US’s is to its. Russians don’t play the market like Americans do. There is no Jim Kramerovsky’s Mad Money in Russia.

Russia is not some Zimbabwe-to-be. It’s sitting on a surplus of foreign assets and very healthy foreign exchange reserves of around $375 billion. Moreover, it has a strong debt-to-GDP ratio of just 13% and a large (and steadily growing) stockpile of gold. Why Russia will arrest the ruble’s slide and keep pumping oil
And there is Russia’s energy relationship with the EU, particularly Germany. Putin showed his clout when he axed the South Stream pipeline and announced that he would run a pipeline through Turkey instead.

The cancellation barely lasted long enough to speak it before the EU caved and offered Putin what he needed to get South Stream back on line. Germany is never going to let Turkey be a gatekeeper of European energy security. With winter arriving, the EU’s dependence on Russian oil and gas will take center stage, and the union will become a stabilizing influence on Russia once again.

In short, while the current situation is not working in Russia’s favor, the country is far from down for the count. It will arrest the ruble’s slide and keep pumping oil. Its economy will contract but not crumble. The harsh reality is that American shale fields have much more to fear from plummeting oil prices than the Russians (or the Saudis), since their costs of production are much higher. Many US shale wells will become uneconomic if oil falls much further. And it they start shutting down, it’ll be disastrous for the American economy, since the growth of the shale industry has underpinned 100% of US economic growth for the past several years.

Those waving their arms about the ruble might do better to look at countries facing real currency crises, like oil dependent Venezuela and Nigeria, as well as Ukraine. That’s where the serious trouble is going to come.
The collapse in oil prices is just the opening salvo in a decades long conflict to control the world’s energy trade. To find out what the future holds, specifically how Vladimir Putin has positioned Russia to come roaring back by leveraging its immense natural resource wealth, click here to get your copy of Marin Katusa’s smash hit New York Times bestseller, The Colder War. Inside, you’ll discover how underestimating Putin will have dire consequences.

And you’ll also discover how dangerous the deepening alliance between China, Russia and the emerging markets is to the future of American prosperity. Click here to get your copy.

The article Why Russia Will Halt the Ruble’s Slide and Keep Pumping Oil was originally published at casey research

Get our latest FREE eBook "Understanding Options"....Just Click Here!

Peoples Bank of China "Resets" Crude Oil and Commodity Prices

Yes, that is about what it amounts to, the Chinese will determine world commodity prices. We are reminded again what really matters when it comes to oil and commodity prices now and in the future as the People's Bank of China announced it will raise the one year yuan lending rate to 6.06% from 5.81%, and the one year yuan deposit rate to 3.00% from 2.75%. Obviously the government in China is showing that they are much more serious about the recent inflationary issues that are threatening their economy than most investors thought. And the traders in the crude oil pits are paying attention.

This is shaping up to be a trade war and currency battle like has never been seen before as the U.S. Federal Reserve policy of QE2 keeps driving commodity inflation and demand while emerging markets around the world and especially the Chinese are looking to reel in their inflation woes and drive down those same commodity prices. So who is really in the drivers seat, who has the upper hand? We say the bank is the one that calls the shots and we all know who that is, this is what we get for depending on China to buy our debt while maintaining such a trade imbalance.

Crude oil was lower overnight as it extends the decline off last week's high. Stochastics and the RSI are bearish signaling that sideways to lower prices are possible near term. If March extends the decline off last week's high, January's low crossing at 85.11 is the next downside target. Closes above the 20 day moving average crossing at 89.82 would signal that a short term low has been posted. First resistance is the 10 day moving average crossing at 88.95. Second resistance is the 20 day moving average crossing at 89.82. First support is the overnight low crossing at 85.88. Second support is January's low crossing at 85.11. Crude oil pivot point for Tuesday morning is 88.07.

Natural gas was lower overnight as it extends the decline off January's high. Stochastics and the RSI are oversold but remain bearish signaling that additional weakness is possible near term. If March renews the decline off January's high, the 87% retracement level of the October-January rally crossing at 3.975 is the next downside target. Closes above the 20 day moving average crossing at 4.430 are needed to confirm that a short term low has been posted. First resistance is the 10 day moving average crossing at 4.316. Second resistance is the 20 day moving average crossing at 4.430. First support is the overnight low crossing at 4.069. Second support is the 87% retracement level of the October-January rally crossing at 3.975. Natural gas pivot point for Tuesday morning is 4.160.

Gold was higher overnight and trading above resistance marked by the 20 day moving average crossing at 1350.90. Stochastics and the RSI remain bullish signaling that sideways to higher prices are possible near term. Closes above the 20 day moving average crossing at 1350.90 are needed to confirm that a short term low has been posted. If February renews the decline off January's high, the 25% retracement level of the 2009-2010 rally crossing at 1296.40 is the next downside target. First resistance is last Friday's high crossing at 1360.00. Second resistance is the reaction high crossing at 1394.70. First support is January's low crossing at 1309.10. Second support is the 25% retracement level of the 2009-2010 rally crossing at 1296.40. Gold pivot point for Tuesday morning is 1348.90.


Make Sure to Check Out Our Free Weekly Low Risk Stock Picks

Share

Inflation Woes Take Center Stage in the Commodity Futures Trade

It's not a matter of if inflation woes will hit us in the U.S. but when. The old cliche that the current QE and QE2 money printing programs will be on the backs of our great children is just a myth. The sad results will be painfully laid upon the American people whenever the communist regime in China says it will be. And some very smart people think it's coming sooner then we think.

With the Chinese slowly allowing the Yuan to inflate it is obvious they know it's currency has to eventually be allowed to increase in value. And it won't be our great grand children who will feel that, it will be us. Few Americans seem to understand that all of our Quantitative Easing will then be felt by every one of us when we fill our gas tanks or pass through the grocery store check out line. That is where you will be expected to pay your share of all of this money being printed in Washington. And our "friends" in China will decide exactly when and how that will happen.

In an interview with The Wall Street Journal ahead of this week's annual meeting of the World Economic Forum in Davos, Switzerland, even Jean-Claude Trichet warned that inflation pressures in the euro zone must be watched closely, and urged central bankers everywhere to ensure that higher energy and food prices don't gain a foothold in the global economy.

Sure, markets don't move in a straight line. We will have many pull backs and corrections in commodity prices. But don't think for a second that the long term trend in commodities is any thing but up. So lets pay for them higher food prices in the future by making money today. And here is the pivot, resistance and support numbers we'll be using for todays trading.....

Crude oil was lower overnight as it extends last week's decline. Stochastics and the RSI are bearish signaling that sideways to lower prices are possible near term. If March extends this month's decline, the 38% retracement level of the May-January rally crossing at 85.51 is the next downside target. Closes above the 20 day moving average crossing at 90.91 are needed to confirm that a short term low has been posted. First resistance is the 20 day moving average crossing at 90.91. Second resistance is this year's high crossing at 93.46. First support is the overnight low crossing at 86.33. Second support is the 38% retracement level of the May-January rally crossing at 85.51. Crude oil pivot point for Tuesday morning is 88.26.

Natural gas was lower overnight following Monday's key reversal down following a test of the 50% retracement level of the June-October decline crossing at 4.802. Stochastics and the RSI are overbought and are turning neutral to bearish signaling that a short term top might be in or is near. Closes below the 20 day moving average crossing at 4.488 are needed to confirm that a short term top has been posted. If March extends the rally off October's low, the 62% retracement level of the June-October decline crossing at 5.025 is the next upside target. First resistance is Monday's high crossing at 4.823. Second resistance is the 62% retracement level of the June-October decline crossing at 5.025. First support is the 10 day moving average crossing at 4.553. Second support is the 20 day moving average crossing at 4.488. Natural gas pivot point for Tuesday morning is 4.465.

Gold was lower overnight as it extends this month's decline. Stochastics and the RSI are oversold but remain bearish signaling that sideways to lower prices are possible. If February extends this month's decline, the 25% retracement level of the 2009-2010 rally crossing at 1296.40 is the next downside target. Closes above the 20 day moving average crossing at 1377.40 are needed to confirm that a short term low has been posted. First resistance is the 10 day moving average crossing at 1361.30. Second resistance is the 20 day moving average crossing at 1377.40. First support is the overnight low crossing at 1321.90. Second support is the 25% retracement level of the 2009-2010 rally crossing at 1296.40. Gold pivot point for Tuesday morning is 1342.90.


Don't miss "If Things Work Out Like They Have in the Past This Market is Putting in a Top"


Share

Phil Flynn: Ben Versus The Dragon

The Chinese moved to increase interest rates and Big Ben Bernanke struck back defending quantitative easing and bashing the Chinese. Ben forced the issue with QE2 and now the Chinese are forced to raise rates! Now the question is will the Chinese rate hikes keep coming or will it be too little too late to cool their hot inflation? Right now I would say it’s bordering on too little too late. Ben Bernanke lashed out at China saying they are causing global problems by preventing their currency from strengthening while their economy booms.

It’s just like what I said in my article in the upcoming issue of SFO Magazine when I wrote, “The Fed felt it had no choice (but to print more money,QE2) as the U.S. government moved slow to attack a rising budget deficit and at the same time face an imbalance as the Chinese continue to manipulate their currency." Chinese currency manipulation may help them in the short run yet it could sow the seeds of economic problems in the future.

The Chinese may feel that they have to cheat the world to be successful by controlling their currency but the truth is that if they want to maintain their meteoric economic growth over the long run they would be better served by allowing the market, not the government, to moderate their economy. Chinese currency manipulation is creating a bubble that will burst if they make a misstep, causing major pain the future. Right now that may be hard to imagine as everyone on the globe is so bullish on China yet the recent correction and history is a reminder that things can......Read the entire article.


Jump Start Your Trading, Get Market Club Today

Share

Phil Flynn: G-20 And The Price Of A Barrel

Crude oil hit a two year high as US product and oil exports soar, but perhaps the eventual fate of oil and its price level really will be determined by the action or the inaction from the G-20 nations. Imports and exports will be on their mind as China and the US are at a standoff as to whose policies are a bigger threat the global economic recovery.The Chinese really love QE2 because it really takes the focus off of them for being the only currency manipulator.

Of course the Chinese policy of restraining their currency may help them in the short run but it could also be the seeds of their economic problems in the fore. The Chinese may feel that they have to cheat the world to be successful by controlling their currency, but the truth is if they want to maintain their meteoric economic growth over the long run, they would be better served by allowing the market not the government to moderate their economy.

The truth is that the Chinese current manipulation is creating a bubble in their own economy that will burst at some point in the future. And eventually cause major pain for them in the future. Right now of course that may be hard to imagine as everyone on the globe seems to be so bullish on China that they cannot see the major flaw in this story that is staring us right in the face.

The risk of their bubble bursting is increasing everyday yet they refuse to allow their currency to float. You seein a way the Chinese currency manipulation was just as much a factor in the global economic meltdown as was the Fed and the US government’s ill fated Fannie and Freddie excesses......Read the entire article.

Share