Market Frustrates Bulls, Gold Regaining Mojo

Businessweek article a bit depressing

I just finished up last week's issue of Bloomberg Businessweek that featured the cover article chronicling and interviewing the prominent bears who gained notoriety during the 2008 market crash. For the most part the article is somewhat dismissive of these few people, more or less labeling them as perma-bears. In terms of the likes of Marc Faber and Nouriel Roubini, I couldn't agree more, even Nassim Taleb though Fooled by Randomness was a brilliant work. Yet, they misstate Meredith Whitney's record as I distinctly recall her interview on CNBC in early 2009 advising clients to cover their shorts as she did not see much more downside. Not only that great call she recommended Goldman Sachs (NYSE:GS) just a few months into the 2009 rally and then told clients to sell basically at the top.

The quote below is an excellent appraisal of the constant bull-bear debate:

The bias is inherent in the situation. The problems are known. If you write for a major publication, you are rewarded for analyzing the negativity. If you go on TV, you are expected to parrot the analysis of problems. This makes you seem smart.

By contrast, the solutions are vague and unknown. If you even talk about them, all of the "hot shots" are skeptical.
(A Dash of Insight)

The fact of the matter is there are a lot of clouds on the horizon. But when will there not be? And the solutions are unknown otherwise the problem would already be solved. So in a lot of ways distinctly diagnosing the problem looks smart while offering possible solutions just looks blindly hopeful and optimistic.

A brilliant portfolio manager I recently spoke with argues that US firms have not seen a real recession in a couple decades so they have not looked inward. This recession has forced firms to discover new efficiencies and this is clearly reflected in the massive increases in productivity over the last few quarters. Hiring will turn when small businesses turn around and that will occur as credit lines continue to open up.

Gold makes higher low, bounces strongly

Gold was a winner today after NYSE:GLD tailed through $120 yesterday and then rallied today before fading late. My nerves were tested a bit but I held on and got rewarded today. The brutal stop out fall on Monday and into Wednesday may have cleared out overhead resistance and opened the path of least resistance to the upside. To reiterate, I'm looking for first target at $130 in NYSE:GLD with stops at $118.80.

Equity market frustrates early bulls

It appears that I joined the large swath of eager beavers trying to buy the $1,075 level. My losses were limited as I bought well and simply held my position up and then right back down as the market failed back through lows of the day. I will attempt nearly the same trade tomorrow but it will be a bit trickier since the swing trade will require weekend risk.


Disclosure: Long GLD.

Taleb-Style Trade Idea: Long CNY

While I'm certainly not the originator of this trade idea, I find it very interesting for a longer-term play. It is a trade with low downside risk and out-sized upside gain potential. The idea is long the Chinese Yuan through the Van Eck Market Vectors-Chinese Renminbi/USD ETN (NYSE:CNY). The primary risk in this trade is the opportunity cost of capital should revaluation not occur in the near future. Yet, exposure to the possible right tail payoff could be well worth it.

China is currently struggling to fight inflationary pressures much of which are driven by an artificially low managed floating exchange rate against other currencies. For decades the renminbi was pegged to the dollar at various rates used to achieve economic goals. From 1997 to 2005, the renminbi was pegged at $1:¥8.27. The $:¥ is currently at ¥6.8272 and is managed by the People's Bank of China (PBOC) to remain within a 0.5% band around parity against a basket of currencies as determined by the PBOC. The International Monetary Fund estimated purchasing power parity (PPP) in 2008 was ¥3.798 whereas the renminbi averaged a value of ¥6.9451 throughout that year. This implies that 2008 rates were a 45% discount to PPP. The shift from a peg to a managed floating rate has gradually allowed the yuan to appreciate up to current levels but a significant under-valuation remains.

Pressure on China's central bank to revalue the remnimbi continues to build from both internal and external forces. China is well aware that in order to become a leading global economic power it will need to transition to a floating rate regime. Externally, the US has threatened to label China a currency manipulator while European counties have likewise voiced their complaints. April 30th readings on inflation showed consumer prices increasing 2.8%, producer prices jumping 6.8% and property prices rising a staggering 12.8% year-over-year. Retail sales rose 18.5% for the month. These data points show that even with the debt woes in Europe, the PBOC may have to further tighten monetary policy. Part of the policy could very well include a re-valuation of the yuan.

This trade idea is modeled after the Nassim Nicholas Taleb concept where rather than striving for the consistent, high probability gains while exposing yourself to the black swan left tail event, look for circumstances that offer a skewed risk/reward structure where the mean return is relatively low, there is virtually no left tail risk yet there is exposure to a large right tail profit potential.

Disclosure: No position currently.