Subprime Insight

I have been talking about the Gold/Oil Ratio since February. I called for 1% interest rates and sub 2% Treasury yields (I meant 2 Year Treasuries, I thought that was implied). Although I was not very knowledgeable about gold then, I’ve had a lot of time to learn. That’s besides the fact that I called 2 key trends 9 months before they happened. I got the call on Oil despite the fact that it rallied 50% because I never called a sell.

Here is a historical look at the Gold/Oil ratio again:

Historical Oil vs Gold

Brad Zigler of Hard Asset Investors analyzed recent activity and made a bullish case for gold and a negative one for oil.

Even more interesting is the fact that the Gold/Oil ratio closed at 15 on Thursday and 16 on Friday. Could we really begin to see 30 multiples again? Zigler and I both say yes. But how will this play out?

I once thought we would see both expensive gold and oil. However, recently it looks like we will see a high multiple of the Gold/Oil ratio due to cheap oil and above $1,000 gold. With Oil trending to $30, that would mean a gold oil ratio of 33! A reversion to the mean of 15 could then take place through an oil rally rather then a gold plunge. Where as before I was bullish on gold and oil, now I am only bullish on gold.

Before all my evidence is laid out here the man that called the collapse as he talks about gold on Thrusday:

To call “The Great Depression Part 2″ half a year before the media and government took action has been a highlight of my blog.

I called for government nationalizations in February. At the time, I had a chance to ask Jim Cramer what he thought about Fannie and Freddie. He actually said to go long both. I almost laughed after hearing the response. As a matter of fact, I was harping on nationalizations before Bear Stearns.

On interest rates, I called for 1% Fed Funds rate before summer end in February. Although I got the timing about one and a half months off, I was calling for rate cuts before the Fed Funds went below the rate of inflation. No one thought this was possible.

On currencies, I called the rise of the Yen before people were thinking about about the Eurozone slashing rates.

On the equity markets, I accurately called a market bottom on March 7th on March 6th as the market tip toed with 12,000. I also said that the next time the market touch 12,000, it would crash through.
On Apple (AAPL), I called its agressive move into gaming and sky rocketing sales. However, I have been short the stock understanding that technical reasons are more important in today’s market.

How did I see so much coming? It is important that everyone who invests develop an investment thesis.

If you look at all of the above predictions came from correctly gauging the gravity of the crisis and government intervention. I presented plenty of evidence on why this crisis was unprecedented and global in nature. Bernanke is a student of the Great Depression. He has written about how absurdly far he would be willing to intervene in order to avoid a Great Depression. With a maniac at the helm, you expect drastic action. That means 1% interest rates and government nationalization. That means reversal of carry trades, international cooperation, and most of all deleveraging. Where positive and negative aspects of the thesis interact it is important to determine the dominant factor to gague the dominant trend.

With the release of the new Wordpress App for the iPhone, any downtime can now be blogging time. This is great for my daily 1.5 hour train comute to and from the city (especially since I don’t have Internet at my place in Queens).

This post marks my first in a long time due to many restrictions. First off, the lack of available internet at my house is key. Second, work has been taking up a lot of time. Any post from here on needs to disclose two things: I have been interning at the JP Morgan Investment Bank middle office for the Securitized Products Group. This actually happened by pure coincidence.

Here is the last post I wrote before taking the two month break from the Blog. I did not post it, but as a way of getting back into the fray, here it is.

I have previously claimed that it was me who brought Non Borrowed Reserves to the attention of Wall Street with my Monterroza Research blog. I will admit that I had help from Mish’s Global Economic Trend Analysis who introduced me to Net Free of Borrowed Reserves, but I was pointing out how much non-borrowed cash banks had in their accounts. So I looked for the number and found that the trend was was literally off the charts. Immediately after my first blog post Wall Street began it’s offensive to dismiss the number as irrelevant and as the writer as a conspiracy theorist. Unfortunately for them, the number is neither irrelevant and the writer was an accounting major, economics minor and investor. Shortly after, there was an announcement that the Bush administration was shutting down a website that aggregates major sources of economic indicators from many federal websites. I thought nothing of it at the time but I thought that the reason for shutting down the website was ridiculously idiotic: the website was shut down due to budgetary constraints. However, when I went back to check my favorite data series, Non Borrowed Reserves, I was startled at what I found: the series was altered.

If you check the Fed of St. Louis website right now what you will see is a series entitled Total Non Borrowed Reserves and Term Auction Funds. What is amazing is that the two phrases, “Non Borrowed Reserves” and “Term Auction Funds” are a conundrum when put together. Non Borrowed Reserves are just that non borrowed, while the TAF loans are temporary loans that were invented three months ago. Non Borrowed Reserves have since the 1960s never included any type of borrowing, not even discount window borrowings. If someone does not call the government out on this small data manipulation who knows what they will be inventing next and what crap we’ll be accepting next.

I analyzed the difference between total reserves and non borrowed reserves since the 1960s in excel last month but I did not bother to post the charts since I thought people would get the point. Since people have not, I will release the data and excel soon. It is important to note that I made this during the beginning of February.

I have not blogged about many things that I have followed in the market simply due to time restraints. The truth is I read and analyze a lot more than one post a day of market news. The market is way too complex to accurately analyze properly with minimal analysis, but just simple enough to meaningfully predict profitable trends. With that said, there has been a sad trend that I have followed but not really talked about because I thought it was unimportant to the market. However, this past week I was proved wrong.

On March 7^th, I wrote a post called, “Apple’s Ace up Its Sleeve.” I proclaimed that Apple was about to take off and I explained why I was stocking up on Apple options. How good was the call? Just like my calls on the market, I was spot on. However, just how good the call was surprised even me.

If you look back at my posts, you will see that I accurately called the bottom of the market. On March 7^th, I sold my Citigroup puts (I had been shorting from 29 to 20) and began stocking up on Apple options (I began buying at 122). However, I did not put my entire portfolio in Apple since that would be a very risky move. I still held onto my commodity positions in case I was wrong but overexposed myself to Apple. This way if the market crashed, I would lose money on Apple but make money on commodities but still make money if the opposite was true.

This week was the week that I finally went balls out and put all my money into Apple. I bought April 135 calls and scaled up to 145 as the price rose to gain more upside exposure. Although I would love to take you through all the technical analysis that I did to make the money I did, I can’t. That would take a three page paper. However, I will take you through the money losing play I did today. Here is the Apple chart since March 6th with the yellow oval indicating when I advised buying options (click for a larger image):

First off, I’ve written before about the selling on strength or cashing out pattern that Apple has almost always displayed after events. Knowing that, any informed individual would then buy options on the way down, not up.

I erased all my other technical analysis I did by mistake while trying to clear my technical studies. What you see today is why I sold my Apple options. Previously I had bought options at the price points defining the lower extremes that defined that trading channel. Today, when that trading channel broke, I knew it was time to sell. However, that was the last of the confirmations that I needed. Here is a closer look at the sell signal:

What were the other technical signals? From 122 to 140, the pros were at work. There were clearly defined trading patterns that everyone was taking advantage of. Once we got to 143 to 145, those trading patterns disappeared. The price fluctuations started to move in random directions. What did this signal? It was clear to me that this was uncontrolled enthusiasm and a lack of discipline at work. It is the exact opposite of what I saw on March 7^th which marked uncontrolled fear. In laymen’s terms, those late to the party wanted in and were willing to pay any price.

How does this look technically? Look at the Money flow indicator at the bottom of the chart. See how on Wednesday the flow of money into the stock stayed flat while the stock price rose? The experts were selling while the rookies were buying.

So this morning, I woke up knowing this and decided to still go long Apple with caution. As soon as that channel broke, I decided to cut losses. Taking a loss is not easy, but when technical indicators are all pointing south you have to admit defeat. I lost $2000 in about 30 minutes. Ouch. But then again I’m still up $5000 in four days from only $4000 of invested capital. If I wouldn’t have cut losses at that moment, I would be looking at a $5000 dollar loss for the day and a $2000 dollar gain for the week. It’s amazing what a couple of hours can do to returns. Options are not for the uninitiated or stubborn.

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I missed out on predicting most of the month of March due to my spring break being right in the middle of the month. However, I can finally come to my weekly article with rest and confidence as many of my predictions have, to my surprise, eerily come true all too soon. I’d like to remind everyone why it is so important to make general predictions. As I said about a month ago: if you know where you are going, you know what to expect on the way there. Right now, the Market is using an old map to get to a place they’ve never been before (15,000 on the Dow).

• CORRECT: An inter meeting fed cut is likely to occur or a dramatic fed cut during the meeting (75 basis point).
  • This could be put on hold as inflation concerns, due to the weak dollar, underscore Fed moves. But now we know the Fed could give a rat’s ass about inflation.
  • I think it’s interesting how the market FINALLY agrees with me. It took them long enough. I’ve been saying this for the past month.

Comment on the Prediction:

When everyone said 50 basis point cut, I said 75. When everyone said 100 basis point cut, I said 75. Remember, I said 75 basis point cut back in the beginning of February, so that is foresight. I also put the bond ETF TLT in my original crash portfolio due to this prediction and it has outperformed all other bond ETFs out there. That is amazing. Why didn’t I go with a 100 basis point cut? Strategy. If the Fed cut 100 basis points, it would lose 25 basis points of future “ammunition,” as it is being called nowadays. Furthermore, giving the market less than what they expected is a bullish sign. It is the Fed telling the market, “things aren’t as bad as you think, really.” However, anyone that knows anything knows that completely false.

• CORRECT: The next time we drop to 12,000 we won’t stop there.
  • It just might be this week! If we don’t get there within two-three weeks, I don’t think we’ll test new lows.
  • All the cool kids on the block are talking about, “testing new lows.” The Market is simply comprised a bunch of followers.

Comment on Prediction:

I hit this right on the nose again. I’m even amazed how accurate the time frame I gave was. I said on March 3^rd that we could be seeing new lows within the week and said that if we didn’t cross that 12000 barrier within the next weeks, we wouldn’t test the lows. Now, two weeks later, it just so happened that we retested the lows within the week. Then, I advised wrote about why I was buying Apple call options by the end of the week because we would be seeing a rising market in the near future.

Read the rest of this entry »

One of the reason’s I’ve been paying close attention to the market is because a close study of them can tell you exactly what the smart money is betting on. Two months ago I came to a horrible realization that the smart money has been betting on truly catastrophic events happening for quite sometime now. We have a couple of choices, but neither are good. We could go through stagflation, which we’ve been through before, no problem. However, it’s looking like we will be going through deflation if every step is not taken to prevent it, but, again, we’ve been through that during the Great Depression. Yet, the worst of all economic outcomes is an inflationary depression. We have not been through that and the outcomes of such economic times are horrific. Here is a visualization of that possibility from MTV.

Most people think they are bulls because they believe stocks are going up. However, when stocks dip bulls get hurt bad since prices drop faster than they rise. Really, dividing investment methods by the typical bull or bear is simply a false dichotomy. I do not understand the stigma associated with being either or why people are proud of attaching themselves to either label. Doing so completely misses the fundamental point of investing completely.

Why are you taking risk with your money? Because you hope that the sum of all returns for stocks (1. Capital Gains 2. Dividends 3. Currency Exchange), will outpace inflation. Memorize that. Beat it into your head. Write it on your wall. Tattoo it to the back of your hands. Do something to get that point.

Here are some investment examples:

Read the rest of this entry »

Amazing strength by the Dow this morning. I would not advise jumping just yet, but in a few short days we are going to have one of the best buying opportunities of our lifetimes. I’ve been bearish for month’s but during bear markets we always see 20 percentage point bull runs.

Why will I be stocking up on AAPL options?

As I’ve mentioned before, I have followed Apple for a long time. Yesterday, I saw a pattern I was familiar with: Selling into strength or cashing out. It says nothing about the announcement! It’s just a great buying opportunity! We are truly living in historic times. Apple has just unveiled that the iPhone is the biggest game changer since the advent of the personal computer.

I’ve written about the Nintendo Apple comparison for some time now. Just last month I claimed that Apple was copying Nintendo, not the other way around. Let’s see if I can put this in perspective. Apple has done what Microsoft couldn’t with the iPhone internet browser. Apple beat Google to the completely open platform. Apple beat Nintendo by turning gaming truly mainstream. Absolutely amazing. Now, if Apple buys Yahoo! the technological arsenal will be complete for a technological onslaught in the second half of 2008.

I’ve said it before: Apple won’t be going below $113. Why? I don’t know, it’s just a hunch. Like the 75 basis point cut call three weeks ago or that we would be retesting the lows by early march. The last time it was valued at $113 was last August when the credit markets first came under turmoil, right before the first emergency fed funds rate cut.