Friday, December 19, 2014

Short Baby Boomer Collectibles


"[A] generation is still holding on to boxes upon boxes of baseball cards: children’s toys, essentially, that somehow became transmuted into something quite different. Mr Jamieson recalls his own experience attempting to unload his hoard in 2006, boggling at the rock-bottom prices they commanded on eBay, an auction site. 'One guy wanted $1,500 for his ten thousand cards. He didn’t understand: we all still had our ten thousand cards.'"
Here's a prediction: baby boomer junk isn't worth nearly as much as they think it is. This category on ebay is in trouble. Baseball cards, coins, Corvettes: get rid of it. And, of course, modern art.

Trouble With The Curve?

Hardly. This was a good year to be long the long bond.

But this week was time to rotate out of long duration and into something that looks more attractive.

I think the value is in the 5y note. You get 1.65% yield vs 2.77% on the 30 year.

See what other countries' five year paper is yielding:

  • France, 21 bps
  • Germany, 4 bps
  • Italy, 1%
  • Portugal, 1.4% (!)
  • Japan, 3 bps
All lower! So, the U.S. 5y looks like a value to me relative to other countries, to the fed funds rate (much higher) and to the 30 year yield (only 112 bps lower).

If you agree that the USD is the best currency to own right now, then it's doubly strange for U.S. rates to be higher than these other countries'.

Thursday, December 18, 2014

RadioShack Zombie Kept Alive By Sellers Of Credit Default Swaps


If you've sold CDS on a company, you should try to make the company not default. And that's exactly what RadioShack's CDS writers did: “The sellers of the protection built up quite a large war chest, and it took a relatively small amount of money to keep the company going,” said Peter Tchir, a former credit-swaps trader who is now head of macro strategy at Brean Capital LLC in New York. “They have huge incentives to keep the company alive to not trigger the swaps.”

That provided RadioShack’s biggest shareholder, Standard General LP, a potential pool of lenders when it arranged the loans in October. The financing gave the retailer enough cash to stock up for the holiday season while negotiating with other creditors that are blocking a plan to close underperforming stores.

The CDS writers made a lot of money selling CDS, and get to keep it if RadioShack doesn't default before their CDS expires. So they used some of that money to subsidize a loan to RadioShack to keep it afloat.

"Fun on the Permanently High Plateau"

A correspondent writes,

“Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.”
- Irving Fisher, Ph.D. in economics, Oct. 17, 1929

We hear a lot of investors and pundits referring to the “New Normal” which is a Twenty First Century code phrase for a “permanently high plateau” in which stock prices are elevated and will remain so indefinitely because of zero percent short term interest rates. When I read in the main stream press and the blogs that we are in the “New Normal” or a permanently high plateau I cannot escape the feeling that the pundits really mean that common stock prices will continue rising but just at a somewhat slower rate. A permanently high plateau with a mild upward slope, if you will.

Nobody seems to talk about what happens when we are on this permanently high plateau. Sounds to me like a trading range with no further upside progress. How would you like to be stuck in a permanently high plateau for the next five years? Dead money? What happens when there are no further upside gains to be made in the broad indexes on that permanently high plateau?

How many bullish investors are willing to remain parked in highly priced stocks after they have waited for a year or more with no gains? Being pushed out on the risk spectrum by zero interest rates might seem like fun, but then why would one expose himself to the risk of equities at prices elevated by PE multiple expansion when there has been no reward for several months? You might as well move to cash and eliminate the risk.

We have actual historical experience with a permanently high plateau from 1966 through 1982, in which the Dow touched 1000 five times during that period only to retreat from that high water mark each time. On an inflation adjusted basis at that permanently high nominal plateau, the Dow was cut in half [1,2].

Shifting to more modern times and the S&P 500, we see that the Wiley Coyote hang time at the more recent “permanently high plateaus” measures about nine months at the year 2000 high before we collapsed into the lows in 2003 and also about six months at the 2007 peak. In hindsight technicians would call these chart formations “double tops.”

Thus it would appear that investors in the Twenty First Century have shorter time horizons and are much more impatient than they were back when I began investing in 1969 and got my first good shellacking in 1974!!

The bottom line is that a “permanently high plateau” is a very unrewarding place to be.

Wednesday, December 17, 2014

Credit Bubble Stocks Book Reviews

5/5 - These Are "Must Read"


Chart of New Highs Minus New Lows

Check out this chart from for $USHL5

Visit to see more great charts.
Fewer and fewer net new highs even with market rallying this year. Bearish indicator.

Tuesday, December 16, 2014

The "Commodity Supercycle", Once A "Well Known Fact", Is Over

Important essay, "Where Did The New Middle Class Citizens Go?":

"The 'well known fact' with regards to oil over the last decade read like this: because of huge GDP growth in emerging markets like China, there were going to be 400 million new middle class citizens born of uninterrupted prosperity; they were going to want all the autos, consumer goods, $10,000 watches and food that Americans have. The demand for commodities was going to be endless because capitalism practiced under authoritarian control was going to be better than the 'invisible hand' of the free market. No recessions or depressions required. [...]

Part of the job of the long-term contrarian investor is to identify a body of economic information which is not only known to all market participants, but has been acted upon by anyone in the marketplace who wishes to participate. We call this the 'well known fact.' [...]

Nearly every major institutional and high-net-worth individual investor had to adjust their portfolio to this particular 'fact' about China and the emerging markets over the last decade. The most successful money managers of the prior decade, who had successfully participated early in the 'well known fact,' were validated and received adulation for promoting it (think BRIC-trade). As Warren Buffett likes to say, 'What the wise man does at the beginning, fools do at the end.'."
Think Jim Rogers. Think Grantham and his commodity scarcity essays. Here's what I was saying a year ago about commodities:
"[The China] construction bubble would explain why commodities prices have been bid up so much. That would mean that Grantham and the inflationists are wrong; that we are at the end of a commodity upcycle not the beginning of one. It would mean that you wouldn't be able to give copper or iron ore away. You'd see true commodity price collapses as in the Great Depression. The effects would spread around the world: Chile and Australia with their mineral exports."
Young Money came up with a theory to explain the commodity supercycle:
"[T]he mining industry is heading for a perfect storm in which: 1) Chinese demand will fall as they stop building empty cities, 2) there will be a supply glut as the industry finishes bringing enormous amounts of new capacity online, and 3) financial demand will disappear and metals stocks that have been hoarded will flood the market as prices fall. There will be a huge sell-off that pushes prices below the marginal cost of production and keeps them there for years, and that will put the commodity supercycle theory to rest."
Just as so many of the leveraged solar panel and renewable energy companies went under in 2012 and 2013, I think we will see many, many resource extraction companies go bankrupt over the next two years: coal, iron ore, oil, and some of the big diversified mining companies.