iPad Not a Kindle Killer, TechCrunch survey says. Good thing too. CES is full of tablets but my family is full of Kindle lovers.
iPad Not a Kindle Killer, TechCrunch survey says. Good thing too. CES is full of tablets but my family is full of Kindle lovers.
Duncan Davidson on Wednesday, January 05, 2011 in silicon valley tea leaves | Permalink | Comments (14) | TrackBack (0)
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Margin debt - borrowing to buy stocks - has shot ahead of the S&P. It normally follows the index up and down. When margined stock gets ahead of the market, any significant drop is in danger of snowballing as stock is sold to cover the margin. Call it the old fashioned type of Flash Crash, of the sort we saw in 1929 when stock was bought with subprime margin (90% margin on 10% cash), or right after the Lehman debacle when TARP was pronounced (see chart, courtesy PragCap). How the 'bots might handle that we may find out - technicians are all over themselves with expectations of a 5-7% drop as early as tomorrow.
yelnick on Tuesday, January 04, 2011 in financial waves | Permalink | Comments (17) | TrackBack (0)
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CES approacheth, and so do video dreams. Last year the industry bet on 3D, with Sony going all in. As I reported after the 2010 show, it was not ready for prime time. It flopped.
This year hope changes to "smart TV" - the boob tube turned into a smartphone, with apps galore. Clever, certainly, but smart? Wait 'til you see the remote! Will immediately fail the Wife Acceptance Factor (WAF).
Smart is not well-thought-through yet, but starts with an Internet-connected TV that accesses television online. The onslaught of Netflix continues unabated. Stories fly through the blogosphere about cord-cutting away from cable and into online TV. Cable is indeed losing customers, and about at the pace we saw a decade ago from landline to mobile telephony.
I bought two networked blu-ray players that were simple enough to pass the WAF and yet provide Netflix, Vudu and YouTUbe on the telly. Both came from LG and were powered by Widevine, one of my investments that recently got bought by Google. I believe in online TV and have placed bets.
Stepping beyond "online TV" to "Smart TV" and into the land of apps, and the future gets murky. TV remains a lean-back experience. For TV makers, the cost and complexity to enable an apps layer (typically powered by Google's Android) may be quickly wrung out of the profits in the hyper-competitive TV market. The advantage will inure to Google, Netflix and the new intermediaries who provide the content & apps services.
Let's see what they cook up at CES. More when I return.
yelnick on Monday, January 03, 2011 in silicon valley tea leaves | Permalink | Comments (29) | TrackBack (0)
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"October is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February." - Mark Twain
January has been a cruel month over the past decade. Santa Rallies hit January and fell in almost every year this past decade except 2006 (in 2001 it was already in free-fall). The STU has a nice chart of these January peaks, which shows:
Will 2011 follow the same pattern?
Continue reading "After the Santa Rally: A Technical Analysis" »
yelnick on Thursday, December 30, 2010 in wave count | Permalink | Comments (107) | TrackBack (0)
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Putting The Bernank back in business! The original is here.
yelnick on Wednesday, December 29, 2010 in political waves | Permalink | Comments (6) | TrackBack (0)
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Tesla has bounced back after Monday's lockup drop. Nonetheless, many comments I received on my Tesla posts show skepticism, and ask what is so special about Tesla. This week's Economist tackles that question. Simply put, Tesla went about designing its battery packs the Silicon Valley way, while Chevy with its Volt and Nissan with its Leaf went about it the car company way.
Tesla assembles its packs from thousands of battery cores of the sort found in laptop batteries, leveraging a scale manufacturing ecosystem. The car-makers redesign the batteries into large-format cells, laminated together in tiles, creating a custom-maunfacturing requirement for each car-maker. Which approach do you expect is more scalable and cost-effective?
Tesla puts 6,831 battery cores into blocks, and assembles blocks into its battery pack, which is liquid-cooled. The Leaf uses 192 tiles, each the size of a magazine, and ties four tiles to make a module. The Leaf's battery pack is made from 48 modules and is air-cooled. Which approach to cooling do you think better extends battery life and manages environmental changes?
Tesla may see more competition from battery-pack makers like A123. They also design a custom battery, rather than using laptop cells, and modify the chemistry to make them less prone to over-heating and easier to cool. It also makes them less energy intensive, requiring more batteries for the same drive time, although perhaps they can be managed differently to last longer (ie. allow a lower level of discharge before recharging). Another new entrant is Coda, which initially planned to use A123 batteries but switched to designing a custom battery with a Chinese company that is one of the largest makers of laptop cores.
Game on! Tesla's stock is holding up while A123 is still well below both its IPO price and its first-day pop. My bet is on the Silicon Valley way.
yelnick on Wednesday, December 29, 2010 in silicon valley tea leaves | Permalink | Comments (8) | TrackBack (0)
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Tesla is a bellweather of the cleantech IPO market. Last night I asked how Tesla would fare after the 180 day lockup ends and venture investors start selling. VentureBeat reports that Tesla is down 16% at the moment after an 8% drop last Thursday, the prior trading day.
So far about 6m shares have traded. The lock up added 75m new shares to the market on top of a prior float of 93m shares. Short interest on Thursday was 6:1. All in all, the Tesla drop is not as bad as one might have expected. The stock got close to $25 and is now up a bit at $26, still well above its IPO price. We shall have to see how much more it drifts down all week as the selling continues.
yelnick on Monday, December 27, 2010 in silicon valley tea leaves | Permalink | Comments (33) | TrackBack (0)
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Tesla comes off lockup Monday. Shares available for trading will triple Monday. Typically a potent IPO will fall, as venture investors take profits.
In this case, the funds hold such a large position, they may make a year-end distribution of Tesla stock rather than rushing to sell, leaving it up to the limited partners' to decide to hold or sell, which might smooth out and delay profit-taking.
VentureBeat, which supplied this IPO photo, does a nice assessment of the lockup risk to the stock. Most telling Tesla has attracted a large short interest. The GM IPO drove up short interest, and it hit 22:1 at the end of October right before an earnings report. Right now the short interest expects a drop, and an informal poll of venture capitalists found the highest they expected Tesla to settle was at $18, a huge drop from its current price above $30. Grinches all!
Tesla has defied the skeptics. The stock popped after the IPO then fell below the offering price, but unlike another high-profile cleantech IPO, A123, Tesla then climbed back up and recently got to new highs. Tesla has scored great deals with Mercedes, Toyota and Panasonic (for batteries), buoying its prospects both as a business and a potential acquisition. It expects to unveil its next car in the January Detroit Auto Show.
In the slow Santa trading period, Tesla is the stock to watch.
Disclosure: I have a small indirect interest in Tesla.
yelnick on Sunday, December 26, 2010 in silicon valley tea leaves | Permalink | Comments (4) | TrackBack (0)
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It has been a freaky season in Oz. First, snow fell on December 19, almost giving them a White Christmas - and December is the start of their summer. Next, a flurry of bad retail reports is putting a lump of coal into their stockings. Third, a prominent analyst recommends shorting Australia.
How did this come about? Did the luck of the Lucky Country run out?
Mish explores the implications of a retail sales slump heading into the holidays, the slowest Christmas in 20 years. Blame is tossed around from online sales to rising utility bills. Electricity costs indeed have been rising all around the world, with blame going to an excessive push towards expensive renewables (wind, solar) over cheap coal and natural gas. The New York Times ran a piece that ran like Rudolph across the blogosphere entitled Coal-Rich Australia Grapples With a Price on Carbon and China's Money, posing the dilemma Down Under: how to extract more from coal exports without driving up domestic energy costs. Advocates for a Green Christmas are raising energy prices in a country blessed with cheap coal.
Regardless of blame, Australia has been subsidizing real estate much as the US, and now appears to be facing the Day of Reckoning. A retail slump will likely throw the over-build retail sector into the same wave of bankruptcies and empty buildings that hit the US two years ago. In some parts of OZ, residential property is already appearing to be busting. It has been a long time in the coming, with premature predictions of a bust last summer from Jeremy Grantham, and a noteworthy bet by Steven Keen in 2008.
The play may be to short the $AUD. It closed above parity yesterday and is holding above today with markets largely closed. The logic is that the Great Re-Liquification of global stimulus, easy credit and Bernanke's QE is coming to an end. Austerity rules Europe, China is raising rates to squelch internal inflation, and the Tea Partiers are coming to Town in Washington. The Tax deal may be the last gasp of stimulus for a while, and the new Congress should be tight-fisted.
yelnick on Friday, December 24, 2010 in Australia | Permalink | Comments (3) | TrackBack (0)
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The free-wheelin' days of the Internet are numbered. The Internet now becomes subject to Federal encroachment with the new net neutrality regs. It is not clear if the FCC has the authority to regulate the Internet, and that proposition might be tested in court, but they went ahead and grabbed the power anyway.
The most immediate impact is on Internet stocks: cable is up, phone companies are down, and content companies have gone up a bit then plateaued. Google and Apple went down when the news broke.
It is perhaps no coincidence that this is breaking when WIkiLeaks is under assault. Julian Assange is in jail under a somewhat odd (if not trumped up) sex charge from Sweden, and he may fall into the clutches of the US government.
Where are the civil liberty folks when we need them? Is it that hard to compare WikiLeaks to The New York Times, and the private who illegally leaked to Daniel Ellsberg of the Pentagon Papers? Or are web sites about to lose the protections of the First Amendment, including Freedom of the Press?
Instead, it is left to the WSJ of all places to expose the forces behind net neutrality, which are probably not what you think they are. John Fund unveiled what led to this decision and the motivations behind it - which are to control content, not simply price the fast lanes of the info highway:
The net neutrality vision for government regulation of the Internet began with the work of Robert McChesney, a University of Illinois communications professor who founded the liberal lobby Free Press in 2002. Mr. McChesney's agenda? "At the moment, the battle over network neutrality is not to completely eliminate the telephone and cable companies," he told the website SocialistProject in 2009. "But the ultimate goal is to get rid of the media capitalists in the phone and cable companies and to divest them from control."
There is a lot of blather flying around the blogosphere over this, and over McChesney's background, and the story could easily blow this out of all proportion. The current administration did, however, try to shut Fox News out of the flow of press briefings by the While House, and have floated the idea of reinstating the Fairness Doctrine in order to shut down talk radio in general and critics like Rush Limbaugh and Glenn Beck in particular. Their record on a free press is already suspect.
The FCC decision today is much more limited, but might be the proverbial camel's nose under the tent. This is the angle taken by TechCrunch, which views the fight as just beginning. GigaOm focused on the disparate treatment of wireline and wireless networks, expecting wireless broadband prices to rise. VentureBeat found the exemption of wireless networks "a bit of a head scratcher."
The capstone to this story might be the old adage to be careful what you wish for. Big Internet content companies like Google have been lobbying for some sort of net neutrality rules, and may someday wish they had left things alone.
yelnick on Thursday, December 23, 2010 in political waves, silicon valley tea leaves | Permalink | Comments (40) | TrackBack (0)
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Don't fight the Santa. Markets are at sentiment extremes, at the highest levels since October 2007 just before the all-time top, and this has led the punditry to expect a reversal; but it rarely comes this time of year.
The Santa Rally comes on the soft whispers of machines turned off, as professionals close the books for the year and head home for the holidays. Markets tend to rise on light volume. More stats here. The rise often persists into the first few days of January, making January 10 the day to watch, but be cautious (chart courtesy Doug Short):
A more bearish view comes from Citigroup. They look at three similar prior markets (1906-10, 1937-40, 1973-77) and conclude that the market is likely to turn on January 3 and fall at least 20%. Their chart:
This outlook will be quickly dismissed by almost all market traders, given the optimism that reigns. I will provide a technical analysis in my next post, but let's first explore the fundamental viewpoint. The sentiment extremes are driven by four core beliefs:
QE and Bonds. I explored the first two in a recent post on Japan's QE experience, which supports the view that stocks will tend to rise as the Fed continues some form of QE. One should take such analogies with a grain of salt, as many other conditions are different, especially the fact that the two US bubbles (dot-com and real estate) pulled Japan up; which large economy will pull the US up? This makes the final two beliefs of larger importance.
Tax Deal. I explored the tax deal in my prior post, concluding it is much less stimulative than it has been sold. It can be estimated at adding around 0.9% to GDP based on around $270B of stimulative effect over the next two years, with much of that in 2011. This is not very compelling, but sure beats the alternative of austerity and a real double-dip next year. Of course, this all happened in the lame duck Congress, and the Tea Party influence is not yet being felt.
In general, the Tax Deal bolsters the Four Year Cycle, which is driven by Presidential politics. The Four Year Cycle makes the two years leading into elections bullish. The third year tends to be the best for stocks as the President has taken the hits from his predecessor's mistakes and is pumping the economy towards re-election. If the Prez waits too long to pump, as Bush Senior did in 1991, he risks not getting credit for the pump. (In that case, the economy had bottomed and was in a rebound through the 1992 election, but Bush got too little credit for it.) If he starts too soon, as Jimmy Carter did in 1977, he risks a flagging economy in the fourth year. Obama shot his arrows early, and we are now in the backside of the Stimulus where it will act more as a drag on growth than a spur. Best that can be said is we may avoid the 1937 analogy of a double-dip but are still waiting for a real recovery to start.
Signs of Recovery? So far Santa has left jobs behind. This recoveryless recovery is not showing the type of turn we have seen in prior rebounds. Q3 GDP just got revised up by a small amount (to 2.6% from 2.5%), which was below consensus (2.8%). Goldman has done a great job of parsing through the GDP revisions and concludes that they have to pull back from the prior optimistic view of 2011. Key changes:
There have been signs of improvement in Q4, and I expect a higher Q4 GDP than Q3, but this report puts a damper on 2011. In particular, the consumer is not back, despite some promising holiday sales. Keeping the consumer on life support, such as the two most stimulative parts of the Tax Deal (the FICA tax reductions and the extension of unemployment benefits), is just kicking the can down the road. The Consumer Metrics Institute shows the consumer still in a funk, and starting to trend down again (the blue curve):
yelnick on Wednesday, December 22, 2010 in financial waves, wave count | Permalink | Comments (8) | TrackBack (0)
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There is much less stimulus than touted in the press. Political posturing has resulted in poor policy. Funny to watch the erstwhile critics of the Bush tax cuts turn into Reaganesque supply-siders. They are besides themselves crowing about how a tax cut will stimulate the economy. Where were they when Chirstina Romer was still Obama's head of economic advisors? Her seminal studies showed properly-structured tax cuts had 3x the stimulative impact as increased spending. Instead, they pushed through the Stimulus which they now admit was poorly done.
The tax deal actually creates little incremental reduction in taxes, since it mostly continues what is already in place. Put simply, not letting the Bush tax cuts lapse is NOT stimulative; it just avoids a drag on the recovery. What is actually new is relatively modest in size. If you review this chart from Megan McArdle at The Atlantic, the first three items are continuations; the last four are incremental:
In addition, the highlight of the deal, the payroll tax cut, is poorly structured to have the right type of impact. What the economy needs is business investment that leads to new jobs; this just continues demand-side stimulus of the sort which has kicked the can down the road for the past two years rather than lead to a recovery. Worse, it is temporary, and going back to Milton Friedman, it is well known that temporary tax cuts have no lasting impact.
The politicization extends to the CBO, which normally does sound work; their assessment of the tax deal is being criticized by center-left commentators like Megan, who notes this:
According to the CBO, the low estimate is that temporarily extending the Bush tax cuts for the middle class aren't very stimulative, while extending the tax cuts for those who make over $250,000 doesn't show up at all; in the high estimate, extending the tax cuts for incomes above $250,000 reduces employment by about a tenth of one percent, while extending the tax cuts for incomes below $250,000 lowers it by about half a percent.
It's true that there is some differential effect. But most of that figure is not driven by the fact that wealthy save their tax cuts, while the middle class spend them; it's driven by the fact that the tax cuts for incomes below $250,000 are much larger, in terms of the federal budget, than tax cuts for higher incomes.
According to CNN, the two-year cost of the tax cuts for high earners will be about $75 billion, while the estimated cost of the cuts for incomes below $250,000 is about $310 billion, or four times larger.
yelnick on Sunday, December 19, 2010 in political waves | Permalink | Comments (73) | TrackBack (0)
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Since QE2 was pre-announced in late August, stocks have been on a tear. They pulled back a bit when QE2 was announced in early November, but have since continued to rise. Many people believe they will continue to rise as long as the Fed continues QE. The Japanese experience would agree. This chart (courtesy The Casey Report) shows how a massive dose of QE lifted stocks, which promptly fell back when QE was ended after a one-quarter lag:
What seems different this time than with Japan is the meltdown in Treasuries. Could that scuttle the stock rally? Casey Research thinks not. Alex Daley, Casey’s Extraordinary Technology, comments:
[I] do see at least one compelling reason to stay net long in equities right now: The wheels are coming off the bond market.
And that means money is flowing into equities in a major way. Excess liquidity, especially in the sheer proportions now flowing into the stock markets, tends to drive up asset prices. And the stock markets are seeing liquidity at levels not seen in years. ...
[S]ince the beginning of 2009, the net inflows to bond funds have been more than 11x (!) the inflows into stock funds. But as you can see from this graph, that trend is deteriorating rapidly. It’s such an about face that, bond inflows have gone negative for the first time since the crash (and at that time they were only negative because every asset class saw massive withdrawals):
yelnick on Thursday, December 16, 2010 in political waves | Permalink | Comments (22) | TrackBack (0)
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A plethora of reports on QE2 are coming in with low grades. It launched to a bumpy start, and many observers thought it wouldn't have much of an impact in the real world (vs the worlds of speculation and expectations).
Global Bond Rout
Most noteworthy is that rates have gone up rather than down, and up quite a bit - 60 bp in the ten-year - enough so it has pummeled the bond market and led to descriptions of a Global Bond Rout. PragCap shows how dramatic the reversal has been, albeit we are still below yields earlier in the year:
Doug Short piles on, showing how since the actual QE2 announcement in November, the rate increases have been dramatic:
Econbrowser did a careful, somewhat scholarly review, and generally concluded that whatever impact it was supposed to have had is being swamped but other events. Their primary criticism is that the Fed has executed QE2 in the mid-range of Treasuries, rather than the ten-year (or longer) bonds.
Banks Lending Again?
Another purpose of QE was to right the banks, encouraging them to lend again. Banks make money borrowing short and lending long, so a rise in long rates should encourage capital formaton.
John Mauldin adds a long, careful assessment of QE2 in his weekly newsletter, reprinted here. He sees unintended consequences to QE2: a global sell-off in sovereign debt. Why?
virtually every country in the world is grappling right now with how fast we get out of our fiscal stimulus and much do we worry about this longer term problem of debt
This may explain why rates spiked after the Obama tax deal was announced - it reflects more of the stimulus mentality, piling on more debt, than a change of approach to grapple with excess debt. The bond vigilantes disapprove.
John went on to ask whether QE2 had begin to fix the core problem of capital formation - in other words, are the banks ending again? The answer is a resounding no. Credit continues to contract, and now with the long bond over 4%, mortgages have gone up, further hammering the housing recovery. Indeed, housing has started a double-dip.
Inflation Increasing?
A third goal was to reflate the Dollar, with the view that rising prices would also encourage capital formation. I have always found this goal an odd one, perhaps a post hoc, ergo propter hoc fallacy looking back at the Great Depression. When FDR broke with gold, the USD fell and we had inflation. Did the recovery come for other reasons, brining inflation, or did inflation drive the recovery? In any event, in coming the financial blogs I have seen sophisticated arguments for increased inflation expectations, but no signs of inflation (other than asset speculation). Indeed, the inflation-adjusted Treasuries, TIPS, have not signaled higher inflation, rising with the ten-year not ahead of it. Instead, bonds are weak because of QE, not inflationary expectations:
The market sees the deflationary forces mixed with the inflationary signs and trades it to a draw. The market is shooting bonds because it is afraid and confused about the distortions that QE is causing.
yelnick on Wednesday, December 15, 2010 in political waves | Permalink | Comments (17) | TrackBack (0)
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I have been writing about the tech boom that is emerging in Silicon Valley. Beyond the anecdotes, the boom is showing up in indexes of private company valuations and growth. Despite the dearth of IPOs, the broader forces that are driving this boom are showing up in the Nasdaq100. The explosion in social mobile web apps & devices is energizing stocks like Apple and Amazon. The Naz has shown relative strength since the September-to-Remember rally:
SlopeofHope crowed on Friday about how the Naz100 is about to break to new post-bubble highs (referring to the 2000 dot-com bubble), being the first major index to crest the 2007 highs. The Naz100 is the subset in the Nasdaq of the top 100 non-financial Naz companies based on market cap, and reflects better than the whole index the breakout of this social mobile web boom. Many Naz companies are small-caps not related to this trend.
Slope added a word of caution, that this peak may be a top, consistent with other signs of an impending top in stocks (see my recent post). This seems pro forma. More likely it marks a potential divergence, where the tech boom drives the Naz100 despite a more lackluster or down broader market. This happened in the early 1980s and reflects a boom based on economic fundamentals in a sector rather than a general market bubble. Imagine what comes of the Naz100 if Facebook, Twitter, Groupon, Zynga and Twitter go public in the next two years.
yelnick on Tuesday, December 14, 2010 in silicon valley tea leaves | Permalink | Comments (12) | TrackBack (0)
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It is not often in economics one can get a realtime test of two different theories, but we have one right now with how Iceland and Ireland have handled their debt crisis. Pierre du Plessis comments on a report from BCA Research that highlights the stark difference in policy to remedy their debt debacles.
Simply put, Iceland bit the bullet & repudiated the debt, plus devalued the Kroner, while Ireland kicked the can down the road & took on even more debt. Both were forced to pursue fiscal austerity, but Ireland stayed with the Euro and could not devalue their currency. How is it working out?
Iceland is growing GDP and real wages, and Ireland is dropping in both GDP and wages:
Put in stark terms, Iceland decided to protect its people rather than the global banks:
Iceland takes some very severe one-time pain as the country pays for excesses, but will emerge with a clean slate and limited liabilities for the taxpayer, while the bondholders of debt (in this case Iceland's banks) take the hit.
This is in contrast to what other nations have been doing, which is along the lines of the decisions in Ireland over the past 3 years - that is (a) first shift the debt from the banks from the private sector to the public, and more recently (b) accept bailout funds - that eventually need to be paid back - to keep the whole thing from collapsing.... but to make the global banking oligarchy fat and happy as they suffer no losses.
Ambrose Evans-Prtchard of the UK Telegraph comments how this presents a "risky temptation" to the rest of the PIIGS, to drop the Euro and repudiate the debt in order to protect their citizens from the penury of paying back the global banks. There is an odd moral justice here. When the PIIGS joined the Euro, they got a one-time benefit of lower borrowing rates and higher national wealth, which they squandered with massive borrowing to pad their welfare states rather than invest in future production. Now will they leave, take a one-time hit, and restructure their economies?
yelnick on Monday, December 13, 2010 in Great Recession | Permalink | Comments (16) | TrackBack (0)
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Stock sentiment readings have reached extremes. Friday's STU outlines how many of the market's internal extremes are "stunning." The market enters the Santa Rally "severely overbought and deeply overbelieved." This should not be surprising, since as the The Economist notes, this year has done much better than expected:
Global output has probably risen by close to 5%, well above its trend rate and a lot faster than forecasters were expecting 12 months ago. Most of the dangers that frightened financial markets during the year have failed to materialise. China’s economy has not suffered a hard landing. America’s mid-year slowdown did not become a double-dip recession. ...
Earlier this year investors were too pessimistic. Now their breezy confidence seems misplaced.
Fractal Finance notes how markets ratchet from one extreme to the opposite, rather than behaving rationally. When fear gives way to greed, sentiment runs hot quickly, faster than reality. You can see how the market has rushed from overbought to oversold and back rapidly over the past year (chart courtesy Bespoke, showing the S&P above/below its 50 DMA):
The ARMS Index (TRIN) is at its most overbought since 1956. As ZH so colorful puts it, the TRIN is an indicator of market breadth which "essentially tracks lemming like momentum-chasing behavior." They add that historically any short-term gains after such extremes get "erased during the months ahead." The Big Picture notes that the ARMS Index has a pretty decent track record, and then supplies the following chart with this juicy comment:
This suggests that the Fed's QE2 and euphoria over tax cuts and FICA holidays are up against a rather overbought condition.
The Friday STU continues with a whole series of extremes & inter-market divergences, worth reading if this drives your trading decisions. While they don't peg a level for the top, they say at current levels it satisfies normal relationships - for example, the S&P is slightly above the 62% retrace of the whole drop in 2007-09. Some bloggers have fixated on Sp1246, where this final wave 5 is 62% of wave 1 (of the C wave that begun at the July low of Sp1011). Other relationships could emerge, such as 1291, where wave 5 would equal wave 1.
Picking a top is a difficult game. Neely called for a short on Wed but it got taken out. His wave structure should not breach 1240. And a drop may not be the top, yet. The bullish Carl Futia expects the market to hit strong resistance at 1250, and further expects a 50-75 drop "imminently" before heading back above 1300. Even more ebulliently bullish is a self-described "former bear" over at ZH who thinks the market has a ways to run:
Bears continue to get firehosed by the infinite fiat spewed forth by "The Ben Bernank"
He points to the lack of full retail participation in the market, which normally accompanies a top. Indeed, the small investor has been steadily abandoning this market rather than piling on, not normally a characteristic of a bull market either. So his indicator could be used either way: not a top, or not a bull.
Precious metals remain on a tear but also may be hitting resistance. Silver has been phenomenal since the late August confirmation of QE2. It has risen above $30 and breached a long-term resistance line, suggesting a pullback over the next week. It had hit that line in early November and fell hard off it, before continuing back up. If stocks reverse hard here as well, the STU believes this might mark a long-term top in silver. Of course, they have been bearish silver and gold during this whole rise. They think gold too is at a top, as the USD seems to be on a tear itself, and normally Dollar strength would result on Gold weakness.
(There is a lot of hoopla in the blogosphere that silver is rising due to a massive short position by JP Morgan, but this JPM Massive Silver Short story appears to be bunk.)
A final indication of extremes is that investors hold the biggest commodity positions on record. Speculative contracts in commodities are 17% higher than at the prior peak in June 2008, right when oil hit $147/bbl and fell down to $32 before bouncing. This is apparently not just a bet against the Dollar, but against fiat currencies in general. The CFTC may try to kill this, which will cause a fast reversal. Despite the speculative fervor, the CRB remains below the 2008 level:
yelnick on Sunday, December 12, 2010 in wave count | Permalink | Comments (27) | TrackBack (0)
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Bespoke highlights the Dogs of the Dow strategy - buying the 10 Dow stocks with the highest dividends at the start of each year. The Dogs outperformed the Dow in 2010 (so far) by 2x: 13% vs 6.6% for all 30 Dow stocks. The Dogs ran away from the other 20 Dow stocks, beating them by 4x: 13% to 3.4%.
This is one of the simplest trading strategies, with one decision a year, even simpler than Sy Harding's seasonal pattern, with two decisions: buy in Oct/Nov when the MACD goes positive, and sell in Apr/May when it turns down.
Here are the Dogs right now, for 2011.
Seems to me a real winner would be to combine the two: buy the Dogs in Nov to get the kickoff to the seasonal strong pattern. Any reader done the analysis? Please share.
yelnick on Thursday, December 09, 2010 in investment ideas | Permalink | Comments (33) | TrackBack (0)
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As if ClimateGate wasn't bad enough, the climate politicos in Cancun are amidst record cold temperatures. The Gore Effect, of course, is the inconvenient coincidence that when Al Gore attends a conference to give a climate speech, cold spells and freak snow storms attend. He is not even there this time.
Global temperatures seem to have flatlined over the past decade, despite increases in Co2. The Cancun conference has little hope of changing the political climate, which is decidedly chilling against the concept of hampering economic growth to limit Co2 emissions. Instead it seems to be devolving into demands by the third-world for "climate justice" - meaning transfer payments from the developed world. See picture below.
While the climate parade marches into irrelevance, we do see progress on solving real problems, particularly rotating the fleet from oil to electricity. The electric car momentum continues, with Tesla's stock remaining buoyant and expectations for the Chevy Volt still high.
yelnick on Wednesday, December 08, 2010 in political waves | Permalink | Comments (20) | TrackBack (0)
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The tax deal that is bumbling through our esteemed Congress shows how in the political realm a "compromise" is not what you think it is:
When a politician compromises, it means they get what they want and the begrudgingly let the other side get what it wants. And the voting public gives up something. Consider this deal, which is supposed to be tax cuts for all, but is actually something else:
yelnick on Tuesday, December 07, 2010 in political waves | Permalink | Comments (22) | TrackBack (0)
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The Santa Rally traditionally comes in mid December, but has it already started? This year we saw the seasonal strong period get off to an early start, in September rather than the normal November, which might be a harbinger of an early start to the year-end rally. Retail sales over Black Friday and CyberMonday were "way up" year-over-year, according to SpendingPulse, continuing a trend first gleened in September of increasing spending.
Before we get drunk with excitement, like our Santa here, a little caution. Friday's unemployment disappointment included an increase in seasonal workers, up from last year, but still below pre-crisis levels, and on a seasonally-adjusted basis, still below normal. This means retailers are being cautious.
We all should be cautious about this recovery. Employment has been flat for a year, and you can see that the unemployment is ticking up slightly (the red dots in the next chart). Normally it ticks up as an economy recovers before ticking down, as workers on the sidelines come back to seek employment faster than new hires are made. A little of that is going on, but largely we have not seen job growth other than temporary or part-time work. This remains the Recoveryless Recovery.
We also should be cautious on stocks. We have a conundrum: possibly the early discounts pulled forward sales that normally would have happened in December; or perhaps the American shopper has now become so discount driven, we will see a pause in shopping until the retailers entice with even better discounts, giving a late surge to the holiday sales pattern. How to translate these choices into a prediction for the stock market?
Continue reading "Will the Poor Unemployment Report Kill the Santa Rally?" »
yelnick on Sunday, December 05, 2010 in Great Recession, wave count | Permalink | Comments (16) | TrackBack (0)
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The social mobile web phenomenon with all those colluding superangels and bubbilicious valuations has been so far centered in two places: Silicon Valley (SF) and Silicon Alley (NYC). The Economist now reports that a third center has emerged: Silicon Roundabout in the east end of London:
In 2008 followers of the technology industry began to talk excitedly about a cluster of internet start-ups in the Shoreditch area, near the ugly Old Street junction, to the north-east of the financial district. There are now around a hundred high-tech businesses in what has inevitably been dubbed Silicon Roundabout.
Measured by the concentration of technology firms and the availability of generous and informed investors, California’s Silicon Valley is still in a league of its own. But in the second division of hubs, this chunk of east London is near the top, along with the likes of Boston and Tel Aviv. That its growth took place so quickly, and during a recession, is remarkable enough: the high-tech zone in Cambridge has taken decades to evolve. But the fact that Silicon Roundabout also emerged without government support, or even direct links with universities, should pique the interest of countries that have tried to cultivate technology hubs without the same success.
Observers of Silicon Valley have reported a cluster of forces led to its emergence: universities, venture capital, favorable employment laws, and a density of engineering talent. The Silicon Roundabout story has none of those attributes. How did it emerge so fast?
The Silicon Valley story fit an era of investing in core technology, which spun out of universities, and required heavy venture capital to get launched. The founders of social mobile web companies are working at the top of the technical stack, in the apps layer, where the tools allow rapid product development. They can be funded by angels and super-angels, and get far enough along in market traction to attract funding from VCs that need not be close by.
Simply put, this is no longer about technology, but about imagination.
What is driving Silicon Roundabout is the same phenom that started first South of Market Street in SF and second north of the Village in NYC: birds of a feather flocking together. The 20something Millennials who are driving the social mobile web like to live in cities, and their energy and co-opetition is feeding on itself to lead to long hours and cool products.
So where next? My bet is Silicon Outback: Sydney. It has the same attributes of a place attractive to Millennials, and shares a cultural affinity to social mobile web products. Get on it, down under, will ya?
yelnick on Thursday, December 02, 2010 in silicon valley tea leaves | Permalink | Comments (33) | TrackBack (0)
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Interesting meme racing around the tech blogosphere on this cybermonday: that one of the most respected venture firms, Kleiner Perkins, is switching gears from cleantech to the new social mobile web or whatever it should be called. John still expects some billion-dollar cleantech IPOs next year, but he has been talking up the new sFund and it has sparked speculation about where he sees the next big thing.
CleanTech had a bit of a bubble, and is off the peak, both in values of many deals and in pace of investing. Certainly some deals have done well, in particular Tesla, which in recent days has traded up above the levels of the initial pop after IPO. (Note: I have a small indirect interest in Tesla.) Yet there has not been a green IPO that spawned a rush to the category. It has not had its Netscape Moment. As GreenBeat summarizes:
Basically, cleantech needs a facebook
The social mobile web has its Facebook, and its Twitter, Zynga, LinkedIn, Groupon, etc. While many are awaiting for a series of social mobile web IPOs in the next two years, the market has already treated Facebook private shares like IPO candy. SecondMarket reports that Facebook shares are now trading at $50B market value. This makes it worth more than Yahoo or eBay, closing in on Amazon ($80B), and within 1/4th of Microsoft and Google.
John may be a bit wistful, having so strongly promoted the sFund he has cast a shadow on his cleantech investing. We can see where this is going with a recent funding round of his firm and Accel partners (who just made a killing selling Facebook shares) into an energy efficiency deal, OPower, a deal that crosses over between the Internet and cleantech.
Where John leads, we should not be afraid to follow. The SuperAngel phenom has now crossed over itself into mainstream venture capital. The game is on! The next tech boom is emerging,
yelnick on Monday, November 29, 2010 in silicon valley tea leaves | Permalink | Comments (37) | TrackBack (0)
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Street music made into a marvelous video that captures the modern Thanksgiving spirit of standing by the ones you love in troubled times (hat tip to Barry Ritzholz):
Stand By Me | Playing For Change | Song Around The World from Concord Music Group on Vimeo.
yelnick on Wednesday, November 24, 2010 in Current Affairs | Permalink | Comments (32) | TrackBack (0)
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Funny juxtaposition. The media cannot get the story straight. First the WSJ publishes a Serious Editorial that Few Businesses Sprout, With Even Fewer Jobs, especially from a dearth of venture-capital startups. They added a nice chart (below), and made this assertion:
Venture-capital firms that typically invest in young companies, as well as angel investors that focus on early-stage start-ups, are pulling back as they struggle to sell the companies they already own.
Then the NYT opines As Technology Deals Boom, the Talk Turns to Bubbles, which makes this assertion:
Is the world ready for another Internet bubble? Ready or not, it appears to be coming. In fact, it may already be here. And it seems to look, not surprisingly, like the last Internet bubble.
The NYT is tracking a storyline emerging from Silicon Valley, of the SuperAngel bubble that I have been reporting on. Last week at the Web 2.0 conference in SF two leading venture capitalists faced off for a discussion of whether this was a bubble or not. The facilitator hoped for a SuperAngel smackdown, and instead got a fairly good discussion of what is bubbling in Silicon Valley (and Silicon Alley in NYC).
On the SuperAngel side, Fred Wilson of Union Square Ventures said he had seen irrational bidding up of deals, and was worried. He had blogged that he was seeing Storm Warnings of too much capital pouring into deals:
I think the competition for "hot" deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I'd be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.
On the traditional VC side, John Doerr of Kleiner Perkins, the very model of a modern venture capitalist, sees this as the beginnings of a new tech boom, not the blowoff top of irrational exuberance as in 2000. He concludes with:
Booms are good!
While it comes across as a Gordon Gecko sort of comment, I think John has the better of this argument. The reason the SuperAngel bubble is not showing up in the WSJ stats is that it is a very small phenom right now, nothing like the dot-com bubble. A bubblet, not a bubble. This is how new tech booms start, and it adds more support for a coming tech boom that will rival the PC craze from 1978-83 and the dot-com mania from 1995-00.
yelnick on Tuesday, November 23, 2010 in silicon valley tea leaves | Permalink | Comments (23) | TrackBack (0)
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When QE2 was pre-announced at Jackson Hole, the market took off in the September-to-Remember rally. The fundamentalists touted its advantages to keep rates low, spur stocks to rise, and improve the economy via a cheap Dollar; they also anticipated a Republican victory in the mid-terms. When the election happened as expected, and QE2 was formally announced, markets began major reversals. Was this simply a matter of buy-on-rumor, sell-on-news, or something more?
Fundamental analysis does little good at this point. After the reversals, the fundamentalists changed their tune: QE was ineffective, was leading to currency wars, was driving rates up on inflation fears, etc.
The reason it might be something more comes from Sy Harding, the keeper of the seasonal pattern (buy in Nov, sell in May). His weekly post comments that the seasonal pattern may have started early this year, at the end of August; or perhaps something else is happening: bullish sentiment got to extremes normally seen at a major top, and so perhaps the whole Nov-to-May pattern got compressed in a short two months. As he puts it:
Interesting enough, the market experienced a big triple-digit rally on Thursday that carried the S&P 500, Dow, and Nasdaq back up almost to their 21-day moving averages in one day. But the rally stopped just short of those resistance levels. So the question is still out there. Normally, market analysts would not be focused on such short-term considerations. But a situation is also in place that might have intermediate-term implications, thus making how the market deals with the short-term support and resistance levels more important.
Wave Theory is most useful at these points, to give guidance or at least signposts as to what comes next. Since technical analysis is probabilistic, this guidance is odds-adjusted. Some calls are high confidence, others are low. At those times, best to make no calls at all.
The lack of confidence in the punditry is why I have been off stock predictions for a bit. The pundits have to bravely carry on anyway, and so let's look at them:
Fractal Finance also provides a useful description of the past three months. Markets are order-seeking mechanisms and when they find order they move quickly in a thrust, anticipating the future gains before they arrive. When they reach the limits, they pause to seek order again, driving the market into a sideways move which can often seem volatile. The reversals we have seen so far are the choppiness from being on the edge of chaos, seeking order. The market spiked up to 1227 and came back down into a prior trading range, but has not yet bifurcated out of the range. This suggests a period of sideways motion. The bifurcation out of the range will be the confirmation of a new thrust beginning. They usually come after a triple test of the top or bottom of the range.
Let me illustrate with this chart from Wave Principle. It shows the plateau that formed after the thrust from the end of August. The green lines mark the general zone of chaos in the plateau. We then came above it and have now fallen back into it. We are sitting right on the upper end of the plateau, waiting for a break one way or the other. As you can see, we have so far tested the bottom twice, once before the jump above the plateau, and the second time earlier this week:
Pulling back to the larger picture, we have a much larger plateau that stretches back to January 2010 (and arguably even farther back) and so far has had two tops at the 1220 level. A third test in the 1220-1235 range would be expected, although not required. Prechter thinks it will come in January. Sy Harding would have expected it in May under the normal seasonal pattern.
Let me marry wave theory with fractal finance. The move up since Jackson Hole seems to have ended at 1227, but the not the whole primary wave since the low in July. The recent top likely only reflects an end of wave 3 and we are now in a wave 4 with a higher high ahead above 1227 in wave 5. If we break below 1173 on Monday, that indicates a sharp correction characteristic of 1227 being a major top (although it doesn't confirm it, just increases the odds). If instead we move sideways, that suggests that we are in a wave 4.
Let me illustrate the choices with the next chart from EWTrends, showing the market since July:
If we count the action since the low in July as the primary wave, wave 1 (red) went up for six weeks into early August, and wave 2 (red) fell for three weeks into the end of August. Wave 3 (red) ran up for over 7 weeks into mid-October, where it started a plateau. That plateau was a short sideways action that didn't retrace much of the prior wave, which makes it more likely to be merely a minor wave 4 (blue) of wave 3 (red), and not a major wave 4 (red) of the primary wave. The subsequent spike up to 1227 was also relatively short and brief, again making it more likely to be a minor wave 5 (blue) rather than a major wave 5 (red).
You can see that the chart leaves it a ? which way to count that sideways move, but the STU believes the odds favor it being but a minor wave inside of wave 3 (red). Prechter in the Theorist (EWT) agrees:
We can also count the rally as done, with barely discernible fourth and fifth waves, like the last rally into 2007. But on the basis of form, this must be considered an alternative interpretation.
Wave 4 of the primary wave should go for weeks, to be followed by wave 5. Wave 2 (red) was a sharp correction, so this wave 4 will be sideways, either a flat or a triangle. Possibly we stay sideways into mid-December and then have the proverbial Santa Rally into a January top; but sideways corrections tend to take an annoyingly long time, and could put the triple top out into Q2. Here is what to look for:
Since this short stub week before the two-day Thanksgiving holiday in the US tends to be up on light volume, I favor the triangle case. Also be on guard for the two edge cases:
yelnick on Sunday, November 21, 2010 in wave count | Permalink | Comments (25) | TrackBack (0)
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Tesla is by far the most shorted stock in the Russell 1000 at 64% of its public float sold short. This is incredibly high. The next highest are half this level. The chart below from Bespoke speaks loudly. What gives?
Tesla appears to have run up in the wake of the GM IPO and its hyped car, the Chevy Volt. Tesla even popped above $30, getting back to where it peaked after its IPO. The shorts are betting this is short-lived.
GM offering priced today at the top of its range, which had been revised upwards. Much of the excitement surrounds the Volt, which is winning car of the year awards. I find the Volt to be the most interesting car in the world right now.
The last time a big IPO like this came out to such accolades, it marked the 2007 top. The cheeky site ZeroHedge ran a poll and found 35% expected the IPO to trade below its offer price within 24 hours. Another 35% thought it would take no longer than a week. The WSJ also ran a poll, and 56% thought it would be below within three months.
I hope the Volt proves them all wrong ... but the offering seems over-hyped. Never forget your are buying a stock, not a company, nor a car!
yelnick on Wednesday, November 17, 2010 in financial waves | Permalink | Comments (28) | TrackBack (0)
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Muni bond investors felt that sinking feeling last week as their longer-term munis were swamped in the wake of QE2. "Munis in Trouble" headlined this jaw dropping chart of PIMCO's muni fund (courtesy The Big Picture):
A quick scan of the blogosphere will show boatloads of doom & gloom prognostication for the muni market. The collapse continued today and shows no sign of abating. Advisors are recommending an exit strategy, out of munis.
Out here in the Left Coast of Cali-for-nia, the morning stories were about how the deficit is widening to over $25B, a number previously thought inconceivable. The exiting governator, Arnold Schwarzenegger, is trying to call a special session to deal with it, but the Democrat legislature would rather wait for the second coming of Jerry Brown. Maybe he can find a way to save their pensions and government salaries by cutting, well, what exactly? The Golden State has no defense budget to slash. Muni advisors look this way and see Greece.
Yet munis are one of the few markets left with real investors, and only modest speculative interest. An attempt to turn the staid muni market into a feast for rapacious financial innovation fell apart during the past two years. The muni buyer may have heartburn but is unlikely to roll out quickly. The Muni ETFs are more likely to suffer as investors take to the lifeboats.
I own California munis, and think it will soon be time to buy more. Let me lay out my four reasons:
yelnick on Monday, November 15, 2010 in investment ideas | Permalink | Comments (28) | TrackBack (0)
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Hat tip to Mish for this. He says he especially likes the part about Bernanke being so dumb as to want to raise prices in a recession.
Update: an economist deconstructs the cartoon bunnies' arguments here.
yelnick on Saturday, November 13, 2010 in political waves | Permalink | Comments (10) | TrackBack (0)
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Global interest rates are rising, which is not what Bernanke had in mind with QE. The US 30-year auction went poorly yesterday, reflecting a change in psychology of the Treasury markets the opposite of what QE is supposed to engender: according to this morning's WSJ, fear of inflation is trumping the Fed's buying power, and rates are rising.
Bond buyers have bought ever-lower yields expecting they could bail out if rates began a persistent rise. The spread between the 30-year and the 10-yr has increased in one of those parabolic curves which tend to end badly:
PragCap observes that this means bond buyers are eschewing the long bond so as not to be locked into rates close to the 10-yr, which means the market is expecting rates to rise and the 30 Year Bond Bull to end. Since the QE pre-announcement at the end of August, the long bond has gone from below 3.6% to above 4.2%, a huge move. Can owners of large positions get out fast enough? This is PIMCO's nightmare come to life.
The Dollar continues to firm while the Euro seems in trouble. The sovereign debt problems of the PIIGS have returned. The Euro is close to $1.365, a level which could trigger a dump of the Euro. The AUD remains above parity after ticking below $1 yesterday, and it too might get a sell-off if it breaks 99.5c.
To follow this more closely, note that EWI is offering their forex services for free this week. Click here if interested.
Even stocks are not reacting as Ben expected. Recall that his stated reason for QE2 is to drive stocks up, creating a wealth effect that restores confidence to the economy and spurs more business activity. It is not just that stocks have flatlined since the QE announcement, but insider selling is way up:
Contrarian footnote: while insiders are selling and global markets are reversing, bullish sentiment soars! Small investor bullishness is back to 2007 levels! This is what happens around a top.
yelnick on Thursday, November 11, 2010 in political waves | Permalink | Comments (28) | TrackBack (0)
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The drumbeat of criticism of QE2 is getting louder as we approach the G20 meeting later this week in Seoul, and it have spilled over into big reversals in global markets:
Here is a chart of a silver ETF right BEFORE the 10% fall in the overnight market. You can see the QE2-inspired run up and then the classic parabolic blowoff:
Maybe that errant missile off LA was silver taking off (hat tip to EvilSpeculator for that)? Or some wit said it was Jerry "Moonbeam" Brown taking off. Zerohedge gave a handy chart by the Air Force on how to identify unkown flying objects:
Most likely it was a normal contrail misidentified.
In the same sense, we should be cautious not to jump to a conclusion about these big moves. We are very close to the levels where a reversal is confirmed. The STU put out a special bulletin tonight to note the potential reversal. Still, these big moves may reflect interventions by central banks as they pre-position for what should be a pretty volatile set of meetings on the global currency imbalances. The next few days should prove interesting.
yelnick on Tuesday, November 09, 2010 in political waves | Permalink | Comments (10) | TrackBack (0)
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There is lots of confusion over quantative easing (QE), so much so the markets may have over-reacted. I have been following PragCap's analysis, which is very good, but dense and lengthy to read, so let me try to simplify:
The Treasury sells bonds to Primary Dealers (banks), who resell to the public.
Where does it get the money from?
Isn't this inflationary?
What are these "reserve accounts"?
Why isn't this inflationary?
What a minute. Didn't the Treasury get new money, and won't they spend it?
So why isn't that inflationary?
Yes, but this time the Fed is creating money out of thin air, instead of the prmary dealers (banks) pulling it out of the economy
Here is a chart which shows the before and after picture. You can see the new bonds bought by the banks (primary dealers) are swapped for reserves.
Why don't the banks use those reserves to lend, putting the new money into the economy?
This is the crux of the confusion. Cause and effect are the other way around:
For a long time banks have not been reserve-constrained. They can easily borrow from the Fed when they need liquidity. This is why the current crisis is NOT a liquidity crisis like the 1930s. History shows that bank reserves go up AFTER they increase lending, not before.
Why won't QE make the climate for investment by banks better?
What is the Fed up to?
Does this make sense?
Here is CNBC on the QE2 wealth effect:
Then what is he really up to?
What about all the signs of inflation?
This chart from Calafia Beach Pundit shows how the long bonds are not behaving as Bernanke wants. Their yields are going up, not down, signaling inflationary expectations:
We could end up in a bad place: commodities go up, squeezing middle class families and compressing business margins, as their inputs get more expensive but they lack the ability to raise prices.
Well, aren't stocks a good place to be?
[I]n Japan ... QE caused a brief 17% rally in equities as speculators leveraged up, jammed prices and then later realized that the slightly lower yields hadn’t really changed anything. What happened next? Their equity market fell 40%+ over the next two years. QE was a great big “non-event”. All it did was manipulate markets temporarily and cause a huge amount of confusion.
yelnick on Tuesday, November 09, 2010 in political waves | Permalink | Comments (8) | TrackBack (0)
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A quick and funny video from Slate (tricorn hat tip to Barry Ritzholtz).
yelnick on Monday, November 08, 2010 in political waves | Permalink | Comments (25) | TrackBack (0)
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Contrarians are waiting for capitulation by the final few bearish analysts before picking a top. Most have gone silent after the market broke the April highs this week. The WSJ trumpeted today that the Dow has now recovered all the loss since the Lehman debacle two years ago (see chart, courtesy Bespoke):
A number of traders like to fade the most popular bear, Bob Prechter, and thus are waiting to see how his monthly service, the EWFF, explains the new highs. Rather than turn into a latter-day bull, the EWFF remains firmly bearish, but had to jump through an analytical contortion to get there. They now see the Hope Rally as a large ABC zigzag with the first leg running all the way to the April highs. In a zigzag, waves A and C break as impulsive five-wave structures. In order to get there, they had to concede that that wave A was a five-wave move even though they admit it lacks a clear five-wave structure in its impulsive waves (1-3-5) and lacks alternation in its two corrective waves (2-4). Tony Caldaro should be smiling, since he was the first major wave analyst to call it that way. The mea culpa from the EWFF is "there are times when lower probability outcomes occur, and this was one of them." Somehow this is very unsatisfying from what normally are tough analysts.
In contrast, the third major wave analyst, Glenn Neely, has stayed true to his methodology. He has a different wave structure for the Hope Rally, where he ends the first wave up a year ago amidst that choppy Sept-Nov action, calls the Nov-Feb period last year a corrective X wave, and counts the action since as a large corrective pattern where wave A went to April highs, wave B is the flash crash and its aftermath, and we are now in the final wave C. He thinks odds favor a short right now. No ewaverer he.
Interesting is that both major pundits are coming to a similar near-term outlook. Neely expects a down wave 4 and a final up wave 5 to complete his C wave. Prechter sees wave A ending in April, wave B ending at the July low of Sp1011, and wave C has breaking so far as a 1-2-3 pattern where we are in 3. He too thus is looking for a wave 4 down and a wave 5 up to complete the pattern. He leaves open an alt count where the July low is but wave (a) of B, and we are in wave (b) of B with a (c) to go. This might get confusing with all the waves but it implies that after the little waves 4 and 5, we have a correction to Dow9500 and then a final rally.
Martin Armstrong, still in jail, has restarted his own market numerology, which pegs a major turn point to June 13, 2011. So far all the wave prognostication has prematurely called tops. Perhaps Martin's date will be closer to when the Hope Rally truly fades.
How should contrarians play this? Turns out the net bullish sentiment (bulls less bears) is at its highest of the whole Hope Rally - indeed a three year high (ie since the 2007 top). Futures traders are 94% bullish, the highest since January 2007. How much upside is there when bullish sentiment is higher than at all prior tops, including the all-time high in 2007?
My take: continue to watch the Dollar. It broke below the three-year support level yesterday, but has come back above. The bullish case in stocks is based on a bearish Dollar. A Dollar bottom reverses all the recent trends driven by belief in QE and the Bernanke Put. If it remains above it may have put in the bottom.
yelnick on Friday, November 05, 2010 in wave count | Permalink | Comments (66) | TrackBack (0)
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QEII first looked like the Love Boat, but may turn out to be the Titanic - Art Cashin at UBS.
You would have thought that with three months warning and boatloads of commentary, the Fed's QE2 announcement would have settled in by now. The Dollar took a dive, not a surprise, but bonds fell too (rates rose), which was a surprise, as QE was supposed to lower rates on longer term bonds. The 30-year yields jumped 20 bp to go back over 4% as the market was surprised that the long bond was not targeted by QE this time around. Last time around, during QE1, rates also rose.
PIMCO, the big bond fund, is worried that QE2 will backfire.
"Doubts grow over wisdom of Bernanke's 'super-put' " intoned the headline by Ambrose Evans-Pritchard at the UK Telegraph:
It is the clearest warning shot to date that global investors will not tolerate Ben Bernanke's openly-declared policy of generating inflation for much longer.
Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason: because they are a safer asset class than bonds at the start of an inflationary credit cycle.
Tinkering with markets risks losing control. Is Bernanke already in trouble? Markets are getting disorderly, worldwide. The impact of QE seems to be exporting US inflationary pressure to overseas markets. India hiked rates to quell inflation, as China also did recently. The chorus of criticism from around the world is increasing. China, Brazil and Germany in particular have complained that QE without other measures to turn the US economy will do no more good than literally throwing Dollars out of helicopters.
Global inflation is clearest in commodities. Besides all the metals, oil rose. The Saudi's expanded their budget, expecting to reap windfall profits. Many inputs in products besides petroleum have risen dramatically since August. Cotton is a striking example, showing the signature of a parabolic bubble that will end very badly:
Bernanke is trying to create a general monetary inflation in prices in the US. The inflation indicators (GDP Deflator and CPI) are showing only modest levels of 1-2%. His challenge is daunting in that banks create money in the US and they are not increasing lending in any serious way while the shadow banking system is still deleveraging. Another surprise today is that M2 actually dipped ahead of QE, not what should be happening for his inflation pump to work. Instead of inflation, Bernanke is risking margin compression: the inputs rise, but prices of end products remain about the same, squeezing margins.
He is also trying to drive the Dollar down in an ill-guided attempt to increase US exports. Exports of commodities respond quickly to changes in relative currency rates, but end-products are much stickier. The impact of a lower Dollar will be higher inputs (imports) and less return on about the same exports until the expectations of cheaper end-products causes sales and pre-existing contracts to adjust. This means the "net export" component of GDP is likely to be hammered as imports rise (in price) and exports fall (in value).
The Dollar Index broke a critical trendline today, plunging below a support level that had held for three years. As you can see from this chart, a day before the QE announcement the Dollar Index was sitting on the line:
Breaking it is bad news for the buck. What usually happens with a break is a retest from below. If the Dollar can recover back above, it was a False Break, largely driven by getting caught in the turbulence of the QE announcement as central banks adjust. If the retest fails, we may see the Dollar kiss that trendline goodbye for a while. You can read more analysis at Slope of Hope.
The macro forex environment will now become even more turbulent. Many Asian countries rely on pegs to the Dollar to keep their currencies cheap, and they will now have to intervene. This puts them in an awful trap, as intervention risks importing inflation, but letting their currencies rise risks slowdown of their export-driven industries.
In all of this, stocks rose today. Perhaps it was but a momentary spike, as Neely opined in a special bulletin. If so, we shall find out shortly, as stocks should reverse down. Yet it might instead be a Bernanke Put (see next chart). There has been some suggestion that he is purposely targeting stocks, perhaps in the hope of generating a wealth effect to pull more spending into the economy. This is quite a change for a one-time monetarist, watching stocks and not the money supply or surrounding indications of inflation, such as commodity bubbles.
yelnick on Thursday, November 04, 2010 in political waves | Permalink | Comments (8) | TrackBack (0)
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Uncertainty is now behind the market. The R's accomplished the biggest wipeout of the party in power since 1938, a fitting year given all the macro similarities. The Fed's QE2 announcement at $600B was pretty much as expected. And Jerry Brown as the governator of California again somehow seems fitting.
You can understand California's economic dynamic as Era of Growth vs Era of Limits, or as Pre-Brown and Post-Brown. For those of you who are Back To The Future fans, it is his "density" to preside over the consequences of his decisions 30 years ago. Optimists in the once Golden State hope he takes on the unions. What does he have to lose? And only Nixon could go to China. Pessimists are preparing to leave. Will California be the next bailout? We'll probably get a read on this pretty quickly.
We should get a pretty quick read on this market as well. The STU is hanging onto their ending diagonal, which would be in its final spike up. Recall that it should not get above Sp1208. Their alt count is the thrust out of a triangle, which could go higher, but should not breach the April high of 1219, or their whole model is wiped-out as much as the D's yesterday. Given that the Dow has already broken above, the Election QE Wave may roll over their wave count. For a clue, watch the Dollar Index. It was supposed to retest its recent low at 76.14, but held up last week. Today the QE2 moment got it back down near there at 76.22, hitting the trendline that has provided support for the past three years (70.70 in Mar08, 71.31 in Jul08, 74.19 in Dec09). The last time it bottomed (Dec 2009) it had a sharp thrust down, then a retest that fell short, then a huge up move in a short time.
yelnick on Wednesday, November 03, 2010 in political waves | Permalink | Comments (52) | TrackBack (0)
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There is a general trader view to let the election come, then fade the market. This is no more profound than "buy the rumor, sell the news." More likely, the market stays a bit longer, waiting for the Fed's QE2 announcement the day after, since there is a well-known FOMC pattern: the market usually rises into a FOMC pronouncement, then falls. The question du jour is, does the market follow a simlar pattern during mid-term elections?
Bespoke provides a wealth of data for elections and markets, worthy of baseball-statistician-turned-political-poll-watcher Nate Silver and his 538.com. Stocks normally do well on election day and the days after: a gain of 53 bp (0.53%) since 1970. Before 1970 the market was closed on election day, and looking at the day after as a surrogate, markets have been up 28 bp since 1900, vs. the average of 3 bp for all trading days. Over election week the mid-term election gain has been almost 1%:
The fundamentalist point of view is that QE2 will not do much to help the economy, especially when the expected Tea Party victory will turn fiscal policy towards austerity. Trader's Narrative reports that the word from the pits in Chicago is that the average response from the primary dealers is to expect $930B of QE, but very few expect anything beyond $500B to be announced, setting up the market for a missed expectation and a drop Wed.
The technical point of view is that the market is nearing a top of sorts, even from the bulls such as Carl Futia. The ever bearish STU sees the S&P in the final throes of an ending diagonal, which requires one more sharp move up - perhaps the election day rally. This structure limits the rally to below Sp1209 (or wave 3 would be shorter than wave 5). Their alt count is a running triangle (which has a large second leg) that also means a sharp rally to come. (The current waves do not meet Neely's definition of a running triangle, since leg D failed to finish above leg B.) Normally the thrust out of a running triangle goes at least the widest part of the triangle, which would target 1214.
Under Fractal Finance we have just had a double top at 1196, and a triple top would normally be expected before a change of trend. This would be consistent with an election rally that holds below 1200 and fades. If instead we break and hold above 1196, Fractal Finance would remain bullish, as it has been since mid-Sept.
Another technical issue is an increasing divergence among the leading sectors, typical of a top. Tech stocks have been leading, and quite strongly, having run from a one-year low in relative strength (not price) to a one-year high in just two months (chart courtesy Bespoke):
The fomer leading sector of the Hope Rally, however, financial stocks, have lagged badly in the same period, and are on the verge of breaking to a new one-year low as well as breaking below a support level at 42.5 (chart courtesy EWTrends):
The irony of this divergence is that QE2 is largely designed to shore up the banks, especially in the face of a pending foreclosure-gate disaster. The banks manage the primary dealers of Treasuries, and would be beneficiaries of a concerted program of QE. They could use it to continue to swap toxic stuff out and good stuff in. For some reason the expectations of QE are not rallying the prime beneficiaries. The risk of a second wave of bank issues is trumping the QE bailout.
yelnick on Monday, November 01, 2010 in elliott wave theory, political waves | Permalink | Comments (16) | TrackBack (0)
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Who woulda thunk that the most interesting car in the world would come from GM, and a Chevy to boot. Motor Trend test drove the Volt, and liked it more than the flashy Tesla. The Volt is in fact the first practical electric vehicle, one that fits more than a niche market.
Unlike the Tesla, or the Nissan Leaf, the Volt can be driven as far as a regular car without running out of juice. It is the first true electric (vs a hybrid like the Prius that relies heavily on the gas engine) with a range extender that kicks in to recharge the battery when the all-electric driving has drained it.
The Volt is the first electric to fulfill the American dream of driving with no limits.
The trade press is wrestling with this. Is it really an electric? Or a disguised hybrid? Silly question. The allure of electrics is in normal commuting (say, 40 miles), the car can run all electric, be plugged into the grid at night, and be good to go in the morning. The Prius cannot do this; if it is lightly feathered in the morning commute, it gets perhaps 13 miles on battery and then the engine kicks in. But who does that? In everyday driving, the engine kicks in all the time. It gets over 40 mpg, but so does the new Jetta diesel with "Prius-humbling thrust".
The Volt is designed to run 25-40 miles on batteries without needing the range extender. Motor Trend trucked around LA and got 36 miles before the range extender kicked in. The car kept going, and drove the same way, since the small engine was charging the battery, not clutched into the drive train like a hybrid. They drove 120 miles with the AC on, and even pushed the Volt to 100 miles an hour and up steep inclines. Driving hard, they got 75 mpg. Driving to and fro their office, they got 127 mpg.
They also pushed it up the mountains outside LA. Above 70 mph, the engine clutches to the drivetrtain, giving extra power.
The Volt also has a "mountain mode" to stay at a steady 70 mph on electric power and pass those annoying 18-wheelers heading up steep grades. This is especially useful when on a ski trip.
It may not win the Indy 500, but it won't slow you down. Again, no limits.
The Volt is the best advertisement for the potential of all-electrics. The American driver has nothing to fear of an electric future.
And none too soon, either: on the very day the Volt launched, JD Powers issued a report throwing cold water on the hot electric vehicle category, expecting them to sell poorly, especially when the subsidies run out. The Washington Post picked up the story, with an op-ed that concluded:
[T]he Obama administration's commitment of $5 billion in loans and grants for electric cars is the biggest taxpayer rip-off since corn-based ethanol. It benefits no one but a few well-to-do car buyers and politically connected companies. Any "green" jobs these rent-seeking firms create will vanish when consumers reject their products and/or the subsidies cease.
The Volt may prove JD Powers wrong, if it sells well; and even if it doesn't, this op-ed is a bit over the top. Cars are never just about the money. When I was working in LA, even the assistants and secretaries had BMWs. A car is much more than mere transport. The Volt may never have the sex appeal of a Tesla, but it says something about the driver that the comparable Chevy Cruze never could.
Even if Volt doesn't sell well, it provides a lesson about innovation that is far more important than the car itself:
Amidst bankruptcy, bailout, dealer triage and brand reduction, how could a ragtag team at GM pulled off the best-engineered electric to date?
The lesson is this: it was not in spite of all the turmoil, but because of it, that GM finally got freed from the hangover of Ralph Nader's Unsafe At Any Speed, a book which stifled innovation at GM for over 40 years. The real story here is a how a team unleashed from regulations, lawsuits, intimidation and public excoriation could put the US car industry back in the forefront of innovation.
In Silicon Valley, we celebrate the success of Tesla to show the world how the Silicon Valley approach can revitalize a mature industry. We know small furry mammals can run ring arounds the big dinosaurs. With the Volt, a fossilized elephant has learned how to dance.
Motor Trend thinks it would make a great movie.
yelnick on Monday, November 01, 2010 in silicon valley tea leaves | Permalink | Comments (9) | TrackBack (0)
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G20 was a dud. The US went to the G20 to try to avoid a competitive devaluation of currencies yet redress trade imbalances, and got pushback from the Germans, among about everyone else, for hypocrisy, given how QE2 will act as a large currency devaluation regardless of jawboning about trade imbalances. When we faced a mercantilist threat from Japan in the '80, the US was able to coordinate a halving of the Dollar's value with cooperation from Germany among other trading partners. Not this time.
While the initial reaction was that this meant a continuation of the trend since late August - Dollar down, everything else priced in Dollars up - a series of reversals began late Monday. The Dollar appears to have caught a bottom. I posted on the same theme a week ago, but the break of the Dollar at that time looked like a short squeeze, and after a sharp spike, fell back into the trading range since late Sept. That marked it as a False Break, which under Fractal Finance puts us into a wait-and-see mode for the next move.
Some pundits such as the STU expected the Dollar Index to continue down, retesting and even breaking its recent low (76.14), but a funny thing happened on the way to the retest: the G20 failure. The Dollar Index bottomed above the recent low, and has now run fairly well up above 78, approaching the 78.36 level of that short squeeze false break. If it breaks above, the STU believes it pretty well confirms the Dollar has bottomed.
It may be a bit premature to jump to that conclusion, given the uncertainty surrounding both the mid-terms and the Nov3 Fed QE2 pronouncement. David Petch does an in depth technical analysis of the USD, and in contrast with the STU thinks we have a fake out rally for several weeks and then continue down. His chart shows his wave count and the recent trading rnage of the Dollar Index around 77:
To add a third pundit, Neely expects a several-week Dollar rally and Euro weakness, but not a change in the Dismal Dollar trend. And to add a fourth, here is a longer-term Dollar chart as of last week, which this commentator took as bullish:
My take: along with the pundits, the forex market is now confused as to the Fed's intentions, following the failure to get any coordinated approach out of G20. Goldman first speculated that QE would be $2T, and more recently said $4T for the Fed to accomplish its purpose. They also say it is unlikely the Fed would announce even a $2T program. Instead, what has been pre-announced is $100B to start and then play it by ear.
Besides the Dollar, however, we have other reversals, starting with a (momentary?) end of the slide in bond yields. This has impacted the possible Dollar bottom; or is correlated to it. A few weeks ago the differential between rates in Euroland and the US were favorable to the Euro, but the gap is closing. The market may be expecting the ECB to monetize in order to prevent a slowdown, or perhaps has priced in any expected ECB rate increase. In either case, the Euro rise against the Dollar has reversed for the moment.
Perhaps US bond rates have bottomed. Bill Gross of PIMCO made a splash today repeating his theme that the 30 year bond market is over and trash-talking QE as a ponzi scheme that won't work. Bespoke notes how the Long Bond broke support in the last two days, contradicting the argument among bond traders that the bond trade can't lose! because either the economy strengthens, and the Fed keeps rates low; or the economy weakens, and the rates stay low.
PIMCOs argument is based on QE causing inflation. Not clear it will, as I explored in my prior post; and as noted above, Goldman thinks at least $4T would be required to spur a 2% inflation. Yet an indicator of future inflation gave a stunning signal this week: the inflation-protected TIPS bonds went to a negative interest rate for the first time:
At first glance paying a negative rate may strike you as dumb, but TIPS are instruments which gain in principal depending on the CPI (see table). They can make up for a negative interest with an increase in principal. The spread between the TIPS and the Treasury of same length is the inflationary expectation. Currently the negative rate of -0.55% means the bond market is expecting 2% inflation - spot on the stated intent of the Fed.
The five-year TIPS had briefly gone negative in August, and has been trending around zero since mid-September, but this dip to 55 bp under raises an interesting risk for investors: if the economy remains weak and inflation does not re-emerge, you will end up paying the government to hold its bond. Given how uncertain are both QE2 and its impact on inflation, this seems like a poor bet.
PragCap makes an even bolder argument: that QE is DOA already, even before it has been launched. The 10-yr Treasury has only moved 34 bp since the QE2 was first rumored back in early August. Since Bernanke's Jackson Hole speech at the end of August, rates haven't moved!
The implication is really nasty: QE2 would inflate commodities, meaning the inputs to production, but not cause inflation in prices, the output. Instead of restarting production, it will force it into margin compression. We also saw this in the Great Depression. Rather than helping get us out of the mess, it will push us in even deeper.
yelnick on Wednesday, October 27, 2010 in political waves | Permalink | Comments (35) | TrackBack (0)
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There is a general belief that the pre-announcement of QE2 in late August drove the September-to-Remember rally. The market is in a sloppy, overlapping wave action seems to be somewhat headed higher pending the mid-terms on Nov2 and the expected QE2 announcement on Nov3. This indicates it is churning ahead of those events. It is beginning to take the shape of a converging wedge or ending diagonal, although it is not following the rules, according to the STU. Perhaps it gets to 1220 or thereabouts in a final thrust, but it is behaving as if it will hold up into those dates. If so, we may have a double setup for buy-on-rumor, sell-on-news.
I have already discussed how a Repub victory would likely lead to gridlock, and gridlock may not portend well for stocks. Mad Hedge Fund Trader goes further and characterizes gridlock as a market myth. When the Repubs embraced supply-side economics (aka voodoo economics) in 1980, gridlock with a Demo Congress/Repub President created a dynamic of increasing spending, eschewing the balanced budget, as shown in this chart. Milton Friedman had argued that large deficits would constrain spending increases, and Congress proved him wrong. Bush 42 began to reverse the deficits, and this continued under Clinton, especially after the Repubs took the House in 1994; deficits decreased and we got the fabled balanced budget. Possibly, then, gridlock with an austerity Congress will constrain spending, but after 1994 we had a President willing to triangulate to the center, whereas Obama seems determined to hang onto his reforms.
Similarly, the Fed's actual QE2 announcement is fraught with risk for stocks. There still is a debate inside the Fed as to how large and committed QE2 should be. At one end Krugman urges as much as $10T; and the other is the feeble talk of a mere $100B. If a large slug of QE2 is priced in, the actual announcemnet may disappoint.
Let's go a step deeper. Krugman's call for $10T QE is not as dangerous as it sounds. The hyper-inflationists hyper-ventilate that this is simply printing money! Yikes!
They need to get a grip. It may very well be that even Krugman's QE would have little effect. John Hussman, coming from a very different perspective, essentially agrees. He starts with the impact of being in a liquidity trap, captured in this chart:
Cutting through the fairly dense econo-speak that surround the concept of a "liquidity trap", what this means is at zero interest rates, a short-term bond is the same as cash. Get a bond that pays no or little interest; why not just get a batch of currency? So when the Fed engages in QE by buying bonds, it is not so much printing money as simply swapping a bond that would have issued anyway for currency.
Hussman's analysis is interesting in that it challenges the deeply held belief that increasing money is what causes inflation. He shows that as the currency base increases, velocity decreases, offsetting the inflationary impact of more money. Mish does a good summary of the analysis. The implication is that monetary manipulations have less impact than economists take for granted. This explains why QE had little effect to save Japan from its two lost decades. As Hussman summarizes:
Simply put, monetary policy is far less effective in affecting real (or even nominal) economic activity than investors seem to believe. The main effect of a change in the monetary base is to change monetary velocity and short term interest rates. Once short term interest rates drop to zero, further expansions in base money simply induce a proportional collapse in velocity. ...
Quantitative easing promises to have little effect except to provoke commodity hoarding, a decline in bond yields to levels that reflect nothing but risk premiums for maturity risk, and an expansion in stock valuations to levels that have rarely been sustained for long (the current Shiller P/E of 22 for the S&P 500 has typically been followed by 5-10 year total returns below 5% annually). The Fed is not helping the economy - it is encouraging a bubble in risky assets, and an increasingly unstable one at that. The Fed has now placed itself in the position where small changes in its announced policy could have disastrous effects on a whole range of financial markets. This is not sound economic thinking but misguided tinkering with the stability of the economy.
Hussman is now in agreement with Krugman on the impact of QE. Credit Writedowns does a good job of comparing the two arguments:
Krugman says that the result of this equivalence between short-rates and cash means that the Fed’s QE is really just a duration change by the Treasury. In quantitative easing, as contemplated in this next round, the Fed will be buying long-dated Treasuries. Given the preceding analysis, it’s as if the Treasury started issuing a huge slug of short-term debt and retired a bunch of long-term debt, making short-duration bills relatively more plentiful than ten-year or five-year Treasury bonds. I really didn’t think about it this way until I put the Hussman piece together with my November article. But Krugman’s characterization of this is true.
Hussman goes one step further, however. He has a view of what would create inflation, or the dreaded hyperinflation:
One of the most fascinating aspects of the current debate about monetary policy is the belief that changes in the money stock are tightly related either to GDP growth or inflation at all. Look at the historical data, and you will find no evidence of it. Over the years, I’ve repeatedly emphasized that inflation is primarily a reflection of fiscal policy – specifically, growth in the outstanding quantity of government liabilities, regardless of their form, in order to finance unproductive spending. Look at the experience of the 1970′s (which followed large expansions in transfer payments), as well as every historical hyperinflation, and you’ll find massive increases in government spending that were made without regard to productivity (Germany’s hyperinflation, for instance, was provoked by continuous wage payments to striking workers).
My take: the Fed has now created an Expectations Trap: if they fail to deliver the high expectations of QE2, stocks will fall. If they do deliver and it has little impact, stocks will fall. For traders the arbitrage is between the Nov3 announcement and the discounting of future ineffectiveness of QE.
yelnick on Monday, October 25, 2010 in political waves | Permalink | Comments (58) | TrackBack (0)
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In Fractal Finance, when a break comes out of a trading range, then reverses back in quickly (relative to the length of the range), it is a False Break. Yesterday the Dollar continued an upwards break, but today fell back into last week's congestion zone. The S&P did the same in reverse. Under wave theory, what looked like the start of five-wave impulses in both indexes turned into three wave zigzag (sharp) corrections, as you can see from this chart by Principal Analysis:
The S&P had done a triple top in the e-mini futures but only a double top in the cash index, so a third retest is underway. If we break above the trading range, under Fractal Finance this is very bullish.
Another bullish indicator is the Golden Cross, which now is inevitable:
According to Traders Narrative, the Dow had the Golden Cross on Oct 1, and the Naz is also about there. We had a Death Cross back in June, and it proved to be of little importance. In general I do not give much credence to these crosses, but they are interesting to the extent they create momentum among traders who do follow them.
The bears are running out of things to hang on to. It is close to the kickoff of the seasonal strong period (Nov-May) when bears should go into hibernation. The bears can point to the S&P triple top, and to the reversal today not retracing all of the break yesterday. This bearish wave count is best put in this chart from the site which sounds like a Euro luxury car, gi61et:
Here is a chart of same not-quite-all-the-way retrace in the Dollar Index (courtesy Contrarian Advisor):
For those of you who like to fade Prechter, tonight's STU became short-term bullish, or perhaps more precisely, short-term on the sidelines. They read the false breaks in both the Dollar Index and the Dow/S&P as corrective waves, and therefore expect a final wave to come to retest or even break recent levels (below 76.14 in the DX). It would take another reversal back up above the 78.36 high in the Dollar Index to change this. Yet they remain agog at the bullish extremes in stocks - levels above both the April high and the Oct 2007 high. Some sort of stock correction is overdue, although it appears it will wait for the Dollar to bottom.
Those sentiment extremes came a couple of weeks before the actual top. This would suggest any clarity will await both the Nov2 mid-term election results and the Nov3 expected launch of QE2. The Repub's taking back the House seems in the bag, with around 55 seats likely to switch. Another 44 seats are contested ("99 seats on the wall" was the quip by Politico.) If the 44 split evenly, the power reversal will be historic. The Senate seems too close to call, with a gain to 49 seats likely but getting to 51 seats (necessary for control) problematic. As a consequence, uncertainty as to the future political climate remains an issue. The launch of QE2 is pretty well assumed, but the scale and timing are uncertain, and may be influenced by the Q3 GDP report on Oct29.
Neely expects an imminent strong up move in stocks to complete wave 3 of the final five-wave C. Target would be 1200. After that comes the overdue correction, but not an end to the upwards trend. The interesting site TradeYourWayOut has a bullish view which points to a top in March 2011, but first they expect the overdue correction:
yelnick on Wednesday, October 20, 2010 in elliott wave theory, wave count | Permalink | Comments (91) | TrackBack (0)
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The Dollar has continued the break up since Friday. The reversal has been strong and has all the earmarks of a short squeeze. As I noted a few days ago, the net short position was quite large. This chart from Credit Suisse shows how deep the Dollar bearishness got:
The break up has formed a nice 1-2-3 pattern, which under ewave suggests it has more to run in wave 3 and beyond. It has also bifurcated out of the recent trading range, which under Fractal Finance means we have a trend change, unless it reverses quickly back down. The STU yesterday was written by Peter Kendall, who has a different style than Steve Hochberg who normally writes it, and as it has for several issues, it started with the Dollar. The bounce since Friday traced an initial five-wave pattern and corrected yesterday in three waves. The strong move today confirms the change of trend up. You can see the bifurcation above the recent trading range, and the turning up of key sentiment indicators, in this chart from EWTrends:
If this Dollar Reversal continues, the most immediate impact should be on commodities and gold. Oil and gold fell today. Treasury yields have reversed up in the last few days, despite the overhang of QE2.
The most interesting move today came from China, where the PBOC raised rates for the first time since 2007. China continues to be concerned over inflation and other signs in internal overheating. Growth in Europe and Japan has been turning down, and China may follow. The global economic recovery may be topping.
Optimism still rules in stocks. Carl Futia sees a short-term consolidation before a continuation of the uptrend, targeting 1300 by April 2011. Goldman Sachs has provided their guidance, with targets of 1200 by YE and 1275 within a year:
What is noteworthy is Goldman sees continued earnings growth but fading PE, and hence less of a rise in the S&P even as earnings get back to 2007 levels. Carl's key chart also shows a triple top in the e-mini followed by a bifurcation below the recent trading range, which under Fractal Finance indicates a top, not a consolidation:
The case for bullishness rests largely in fundamentals: QE being good for stocks, and continued earnings growth. If the Dollar Reversal continues, score one for technical analysis, since the overhang of QE would not have caused fundamentalists to expect the bounce. So what about stocks?
One of the better technical indicators at a top is to watch the leaders fade against the trend. While Google popped well after their earnings, Apple, IBM and Amazon all showed weakness. Apple in particular may have been priced to perfection, and yet the reason for the drop after hours yesterday seems spurious: while revenues and earnings blew away expectations, iPad sales were lower. Being in the Silicon Valley community, it is clear that iPad missed due to supply not demand. Apple is selling every iPad they can build. Hardily the cause for pessimism. Perhaps Apple will be back on trend in a few days, but if it and the other tech leaders lag despite good fundamentals, it signals a reversal brewing.
Nowhere is this clearer than with bank stocks. They led the rise off March 2009, and were a huge percent of both earnings growth across the whole S&P and market volume. Facing all kinds of pressure due to foreclosuregate, including threats of buyers of their toxic junk wishing to put it back, financial stocks may be in for a tumble. And indeed, Shanky noted over the weekend (and I also received charts from readers via email) that the banking stocks were noticable laggards:
The bears are being cautious, but some are growling. PrincipalAnalysis thinks a big drop is next, and gives levels that would change his view: SP1177 and Dow 11068. The drop looks like a reverse of the Dollar break up, being a wave 1 down, a wave 2 correction,and now we appear to be in 3 down. The levels to watch are the wave 2 highs, which should not be broken if a big drop is right ahead:
yelnick on Tuesday, October 19, 2010 in political waves | Permalink | Comments (31) | TrackBack (0)
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Once a trend makes it to a major newsweekly, it is usually over. By the time the mainstream media spots a trend, it has already been fully baked into the market and is about to reverse. Historically the newsweekly is Time, although it is hardily the trendsetter it used to be. This week's issue of The Economist has Currency Wars on the cover. Does this signal the end of the free-fall in the Dollar?
I have been noting that 76 in the Dollar Index is a key level, representing the confluence of two trendlines: the down-sloping trendline of the dramatic fall this past two months, and the up-sloping trendline off the prior two bottoms.
The Dollar Index (DX) fell to 76.14 on Friday, and then bounced to 77.13, a large move. This Sunday evening it has gone above 77.20, then stepped back a bit. When the machines come on in Europe, we may find out where the Dollar is really headed, but this sort of V-shaped bounce is what we should expect at the bottom after such a sharp fall.
If the Dollar does bottom, it could be expected to run up towards DX100 by 2012, a strong move that would reflect expectations of deflation coming from debt destruction. Possibly the foreclosuregate scandal will lead to mortgage write-downs that spawn the debt-deflation spiral we have so far avoided. Consensus expectations remain that the Fed can prevent deflation, especially with the injection of QE. In the short run, expectations of QE may be so baked in that any slippage of resolve may by itself reverse the Buck. In the longer run, however, it cannot be presumed that QE will prevent deflation. Massive injections of liquidity since 2000 have failed to reflate, as measured by CPI or the GDP deflator. Velocity of money continues to decline.
The argument that the Fed cannot prevent deflation is one of Prechter's core assertions going back over 10 years. I first blogged about it in 2003. You can read his argument in this excerpt from his book, Conquer the Crash. He has been way ahead of the curve on this issue. His short term update service (STU) has been focusing more on the Dollar lately than stocks, with this observation Friday:
The U.S. Dollar rally appears to be starting. The stock rally is overbought and overbelieved. The conditions are in place that makes a stock market decline a high probability.
In the larger picture, however, the Dollar may still be doomed, which means it has farther to fall in the Dollar Index. Joe Russo provides a Big Picture view of the Dollar, using the next chart as a backdrop to several scenarios going forward.
The chart shows the bottom (listed as green C) at the end of the Carter years, followed by the Volcker Rally into 1985 (green D), when the Plaza Accord coordinated a rapid 50% drop in the Dollar. Under Robert Rubin during the Clinton years (blue A), the Dollar strengthened until the dot-com bubble top (blue B). Since then the massive injection of liquidity by Greenspan and Bernanke has driven the Dollar down to historically low levels (red A).
Russo views this falling wedge pattern as "no better pattern from which our financial masters of illusion could better engineer the most orderly and flexible destruction of currency." He proposes three scenarios:
Whew! We found a technician more bearish than Prechter! I think what Russo is overlooking is that the US is not acting in a vacuum, and has much less leverage now then it had in 1986 (Plaza Accord) or 1971 (going off gold), let alone after the wreckage of WWII (Bretton Woods). Already economic indications are showing an effect of the possibility of QE2 driving the rapid drop in the Dollar: the Eurozone is slowing, and Japan is on the verge of recession. The developed countries therefore have an incentive to stop the Dollar slide. In effect, the US needs to coordinate debasing the buck along with the Euro, the Pound and the Yen; by debasing them together the emerging market currencies (particularly the Chinese) will be forced to rise.
We shall see how this plays out in fairly short order, as G20 is soon to meet. My bet is the Dollar rises into those meetings and continues up into the next election.
yelnick on Sunday, October 17, 2010 in political waves | Permalink | Comments (58) | TrackBack (0)
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There is a high expectation that the Repubs take at least one house of Congress, blocking any further expansion of the Obama agenda, and leading to gridlock for the next two years. There is a general view that gridlock is good for stocks, so a post today that looked at the data caught my eye. PragCap reported on a Fidelity analysis that shows NO positive correlation between mid-term gridlock and stocks:
Large-cap stock returns during post-midterm election years have been about the same, whether or not the outcome resulted in gridlock or harmony (i.e. one party controls both houses of Congress and the White House). Small-cap stocks, meanwhile, outperformed in years of political harmony compared to gridlock.
PragCap goes on to comment that gridlock may be bad for the economy in the circumstances we are in. The next chart shows how the stimulus at least buoyed GDP during the past 18 months, and (as I have commented) once past Peak Stimulus the shrinking stimulus is actually a drag on GDP growth that makes a coming double-dip more likely (the black line is the drag from less stimulus plus less inventory rebuilding):
There is hope that the private sector can more than overcome the drag, and expectations have been that the Q3 GDP report (which is released right before the mid-term elections) would be at least flat to Q2.
In August, however, the trade deficit widened, and it acts as an additional drag on GDP growth: the change in exports less imports is a major component of GDP growth, and a wider trade deficit means it could come in more negative relative to the prior quarter. There had been an import surge in Q2 which was largely based on slightly higher oil prices plus restocking for holiday sales, so expectations were for this component to decrease between Q2 and Q3, which would have pushed Q3 GDP growth up on this component.
Now, the NYT reports that Macroeconomic Advisors has reduced Q3 GDP expectations to 1.2%, a decline from Q2's 1.6%. Calculated Risk had expected a 2% Q3, but calculates that the trade deficit will end up about the same as Q2, meaning it will not improve GDP growth, and now estimates 1.5% GDP in Q3.
Ironically, a poor GDP report boosts the odds of QE2, which should boost stocks until they run up enough to account for the purported benefits of QE. If gridlock results in less fiscal stimulus and less effort to fix serious structural problems (unemployment, exports, bank lending), the normal rise in stocks between the mid-terms and the next election may be less than expected.
yelnick on Thursday, October 14, 2010 in elliott wave theory, Great Recession | Permalink | Comments (74) | TrackBack (0)
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I have been beating up on 3DTV, and now surveys strongly support my position. NewTeeVee reports that surveys of consumer interest show only 15% interest in 3D at home, with 63% not seeing the need. In contrast, the interest in online (Internet) TV is 51% higher.
The third strike against 3DTV (after lack of content and those darned glasses) is the GoogleTV announcement, with Android-powered online TVs and blu-ray players been launched by Sony.
This launch is huge since the TV now joins tablets and smartphones as the next connected device, which I see as the foundation for the next tech boom. The price increment for an online TV is fairly small, and I expect it to largely disappear as Internet becomes a requirement in future TVs and blu-ray players.
While online is gaining strong interest, estimates for 3DTV shipments are decreasing from earlier optimism in spite of chirpy optimism normally seen in market research firms trying to sell reports to manufacturers. (A key to understanding these reports is that the "higher numbers win", meaning the ones trying to promote the market will buy reports with higher numbers, so when the chirpy researchers drop forecasts the market is really weak and they are scrambling to regain credibility rather than sell reports.)
The biggest differentiator of online TV vs 3DTV is: it's the content, stupid. For many viewers, it is a simple as getting Netflix online, which looks like an online subscription movie service with much broader selection than HBO or Showtime. There is also keen interest to add new channels (especially special interest and international) as well as to watch social videos from YouTube and other sources. Sports viewing gets enhanced as well with additional viewing angles and commentary, and it is possible to watch NFL games online despite the blackout on local TV.
There is still much to be worked out. Sony bet their strategy on 3G back at CES, and now seems poised to make a new bet on online TV. They need to fix a few things, like this overly complicated remote. TV is a leanback experience ...
yelnick on Wednesday, October 13, 2010 in silicon valley tea leaves | Permalink | Comments (51) | TrackBack (0)
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In the last two days the Dollar appears to be forming a bottom. You can see in the attached chart how its rapid decline has paused, and it even spiked above the upper trendline of its descent. Overnight it has fallen back inside, and it still may get to DX76 before bouncing. Currently it is right above DX77.
EWTrends adds to this a discussion of the circled technical indicators, which appear to have reversed.
Sentiment is more bearish than at any time in history (at least since the Dollar was finally severed from gold in 1971).
The downward momentum stalled late last week when the Euro hit $1.40. The AUD is hovering around 98c and flirting with parity, hitting 99.2c so far.
The most crisp analysis comes from Credit Suisse, which predicts a 100% chance of a rally from here based on net speculative positions. They believe QE2 has been fully priced into the USD "and then some."
yelnick on Tuesday, October 12, 2010 in political waves | Permalink | Comments (79) | TrackBack (0)
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Ever since the Fed pre-announced QE2 (and QE Lite) at the end of August, the Dollar has fallen sharply, and other asset classes (stocks, bonds, commodities) have risen in Dollar terms. There is nothing in the economic fundamentals that should drive those assets to rise, as economic news in the US is ambiguous at best if not worsening. Indeed, the continuing 'recoveryless recovery' is the prime reason for the Fed to consider QE2.
The Fed is running into the endgame of the Triffin Dilemma, an eventual day of reckoning of the reserve currency that was noted in 1960 and reiterated in 2008: the nation that runs the reserve currency gets a seemingly free benefit of being able to consume more than it produces since it gets to (indeed has to) run budget deficits along with trade deficits to create enough global currency liquidity; but inevitably the value of the reserve currency falls as foreign accounts hold more Dollar claims than the US GDP can support.
The good news for the Fed is that a near-term bottom for the Dollar may be in reach. The Dollar is rapidly approaching a support level in the Dollar Index represnted by the lower trendline off the two recent bottoms (chart from PragCap):
The Dollar Dive is also running in a channel, which is expected with a zigzag style correction, and the lower trendline of that channel hits the rising trendline of the first chart at the same area, DX76:
You might wonder how the Dollar could bottom when QE2 has not even been launched. Why wouldn't it continue to dive as the Fed proceeds to execute on QE2? Markets may have already anticipated the impact of QE2 and reacted. Goldman Sachs believes QE2 is largely priced in, estimating that $1T of QE is priced into bonds (see chart) and stock traders have taken positions expecting $500B of QE:
Goldman may be too conservative with respect to stocks - the Wilshire5000 has already gained $1.3T of market value since QE2 was announced. This continues a trend since 2000, where the drop in the Dollar (from 120 to under 80 in the Dollar Index) has kept stocks afloat in nominal terms even as they have plummeted in real terms. This chart from The Big Picture shows the S&P in gold (blue line) vs the S&P in Dollars (red line). One looks good, the other is bad.
Econbrowser agrees with Goldman with respect to bonds, then raises the question of why commodities have risen when inflation expectations (as reflected by lower long term bond rates) are absent? This may be one of those cases where economists are still fighting the last war (the '70s) and not looking at the current fight (the credit bubble), where commodities are up in Dollar terms because the Dollar is down, not because of a rise in inflationary expectations. We saw this in 2008, with oil running parabolic well after stocks had turned down and deflationary fears ran rampant.
Bullish optimists point out that if the market has already priced in QE, maybe the Fed can skip it altogether? The mere "Bernanke Put" to prevent deflation at all costs may be enough.
This brings us back to the Triffin Dilemma. I have discussed previously how the apparent free lunch of endless budget & trade deficits, which enable the welfare state as well as cheap goods from China, has a terrible cost, but one that only becomes apparent after years of living high. That cost is the eventual erosion of the currency.
The Triffin Dilemma can be managed by increasing interest rates at about the same rate of foreign clams, which should maintain the foreign exchange value of the Dollar, but that option seems unavailable to the Fed which is trying to restart commercial lending against deflationary headwinds with ZIRP (the Zero Interest Rate Policy). Or, the Fed can try to manage the decline of the currency via inflation at a pace somewhat in balance with the increase in foreign claims (in effect debasing the currency as fast as foreign claims increase, keeping real debt even), but it is having a devil of time trying to reflate.
In 1933 the US could reflate by going off gold, and had the benefit of doing so after a huge debt-deflation spiral that rid the wold of excessive Dollar indebtedness. This time we went off gold 39 years ago, and cannot pull that trick again; and have kicked the can down the road on deleveraging at scale, and thus have been unable to restart lending, which is how money is "printed" in the fiat currency regime.
I see bloggers opining that since QE1 failed, so will QE2. The comparison is inapt as QE1 sprung from a different purpose, to essentially back the failing interbank lending markets, as I describe in the post Peak Debt. The Fed has been calmly trying to explain this and apparently falling on the deaf ears of noisy bloggers. Still, there is a big lesson to be learned. During QE1, commercial credit fell, which in effect sterilized the impact of higher reserves.
John Mauldin has a good discussion of why QE2 may fail. One issue is that the banking system has not been fixed, and so QE2 may not spur any increase in lending; if anything, with the foreclosure mess brewing, more rapid debt deleveraging seems to be ahead. That is deflationary, and the size of potential debt destruction dwarfs the scale of QE2. Also, QE2 has already spurred competitive devaluations from countries such as Japan, and if a general Currency War erupts, as predicted by the head of Brazil, we might see most major currencies race for the bottom, and ironically the Dollar might rise based on falling less fast! At the moment, however, there is no general debasement of currencies.
yelnick on Monday, October 11, 2010 in political waves | Permalink | Comments (88) | TrackBack (0)
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As we go into the final stretch this year, the IPO pipeline is building, but their valuations are sinking. TechCrunch reports 67 deals entered the pipeline since July, and so far this year the first nine months were up over the same period in 2009. IPOs were up to 32 in Q3 from 20 in Q3 a year earlier, but the size was down, with one over $500M. The WSJ gives more data on the pipeline, looking at 49 venture-backed IPO candidates:
This is not a very compelling distribution, and it is also a bit skewed by two outliers (see charts). It appears we will have to wait for the balance of social media winners (Facebook, Twitter, Zynga, LikedIn) to spark a revival of IPOs.
yelnick on Friday, October 08, 2010 in silicon valley tea leaves | Permalink | Comments (12) | TrackBack (0)
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One of the most interesting phenoms of the Internet Era is the remarkable predictive value of synthetic trading markets like Intrade. My son did a study of the predictors of a movie's success used by Hollywood, and found the synthetic trading market among Hollywood insiders was more predictive than the studio heads and all their models. These markets are of course widely used for predicting elections, and you can scan Intrade to see how your favorite candidates are doing.
Yesterday Joe Biden at a fundraiser quipped "You're the dullest audience I have ever spoken to." Normally a midterm election is fairly dull. A study shows that of the 27 midterms since 1900, the party in power only changed 7 times, and the change occurred in both houses of Congress only 4 times. The stock market appeared to be a non-factor. War is a bigger factor, with the change occurring only once in wartime (2006).
This one is anything but dull, and raises the core question for investors: does the switch in power have any predictive value for stocks in the next two years? Normally the two years into re-election are good for stocks:
Most investors remember how after the switch in 1994, the market took off in one of the greatest bulls runs in history. Based on the seven change midterms, one can say the market should be up: in the four where both houses switched, the market was up 3 times; and in the three when one house switched, the market was up one year later in two of those years, and up two years later in another two (but not the same two). Now, the market tends to be up; it is flat or up 80% of the time. When no change occurred in the midterms, the market was normative, up 80% of the time. Hence, these historical comparisons have too little statistical predictive value.
More important is the reason for the likely switch: a strong desire to cut spending and end the bailout culture. This suggests the new Congress will change course from the past decade of easy credit and large deficits. The more dramatic the change of economic policy, the more unpredictable the markets will be. And it seems increasingly likely that a major change will occur. For a while the Intrade markets have shown the House likely to switch:
Today the Intrade prediction of Biden's party holding onto the Senate went below 50%:
yelnick on Friday, October 08, 2010 in political waves | Permalink | Comments (10) | TrackBack (0)
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More indications of a coming tech boom are showing up. Not so long ago, the angel or seed round would value a company at around $1-2M. With the rise of the SuperAngels and the Cambrian Explosion of interest in consumer Internet deals, seed round values have crept up to $3-4M, levels normally seen with traditional Series A rounds.
Now observers are noticing that they are jumping over the $4M line as well. Two recent deals received around $1M each at values above that $4M line. I know of a number of other financings above that line, but what is striking about these two deals is that they are getting done by newer entrants to this game:
Both may be one-off situations, particularly the gang of four VC stepping down to the angel level. Sometimes these types of investments make sense due to relationships and are not the start of a new trend. Nonetheless, it is clear the rapid rise of SuperAngels is disrupting the traditional VC business.
yelnick on Thursday, October 07, 2010 in silicon valley tea leaves | Permalink | Comments (25) | TrackBack (0)
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