Vix Below 15 -- Time to Worry? - Wed, 2012-03-14 10:32

The S&P 500 VIX Volatility index traded below 15 yesterday for the first time since early 2011.  A number of financial players have commented that a drop below 15 for the VIX is a warning sign for the market.  A look at the historical trading patterns of the VIX and the S&P 500, however, show that this is simply not the case.

Below is a chart of the S&P 500 since 1990.  The green shading represents any time that the VIX was below 15.  As shown, the VIX was basically below 15 from mid-1992 through early 1996 as well as mid-2004 through early 2007.  During these time periods, the S&P 500 experienced huge gains. 

A VIX at 15 really isn't that low based on historical standards either.  Since 1990, the median daily close of the VIX has been 19, and during the two periods mentioned above, the median was 13. 

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I Will Gladly Pay You 100 Years From Now, For a Hamburger Today

UK Chancellor George Osborne proposes 100-year bonds. Essentially his message is "I Will Gladly Pay You 100 Years From Now, For a Hamburger Today". Whether it's Tuesday of next week or Tuesday a hundred years from now, the safe bet is the debt will never be repaid.

The Telegraph reports Britain to offer 100-year gilts
Britain is to offer 100-year gilts, meaning current Government borrowing will not be repaid until the next century, under a radical plan to be unveiled by George Osborne in next week's budget.

The Chancellor hopes that the 100-year gilts will help to "lock in" the benefits of Britain's international "safe haven" status.

Currently, the average duration of the Government's £1 trillion debt is around 14 years – with maturities ranging from months to a 50-year bond issued in 2005. Longer-dated debt is widely thought to offer a country more stability.

A Treasury source said tonight: "This is about locking in for the future the tangible benefits of the safe haven status we have today. The prize is lower debt interest repayments for decades to come.

"It is a chance for our great-grandchildren to pay less than they otherwise would have done because of the government's fiscal credibility." Fiscal Credibility?

Only a politician could make such a preposterous claim. For another take, please consider The Guardian report George Osborne budget plan could mean never having to pay his debts
George Osborne is to exploit Britain's historically low borrowing rates by making plans to issue "perpetual" government bonds which will never have to be repaid.

In an unprecedented move in the modern era, the chancellor will unveil plans in the budget to relieve the debt burden on future generations by extending the length of bonds to 100 years or into perpetuity.

Britain last issued perpetual gilts in the aftermath of the first world war. These are still being paid at a rate of 3%, which makes it cheaper to carry on paying the loan than pay off the whole debt.Note that Osborne pledged to eliminate Britain's structural deficit by 2015-16 and to ensure that government debt is falling as a proportion of GDP by 2014-15.

That is clearly not going to happen.

Other Side of the Coin

By the way, if it's such a great deal for the UK Osborne claims, then surely it is not a great deal for fools willing to hold 100-Year bonds for the duration.

Of course, no one will hold 100-year bonds for the duration, except perhaps government pension plans willing or forced to buy the damn things. Rather 100-year bonds will become a plaything of hedge funds speculating on when they will blow up.

A Good Deal for Anyone?

Forget the coin and please explain the need for government to borrow money in the first place. The same question applies to the US, China, Germany, and the rest of the world.

There is no "need", there is only political expediency of vote-buying promises that cannot be met with money that will never be paid back (by inflation or default). This is what happens when there are no fiscal constraints anywhere. This is what happens when currencies are backed by nothing and can be borrowed into existence at will by central banks in response to out-of-control spending by politicians.

At some point, even if there is no default, those 100-year bonds will go for 20 cents on the dollar if not less.

Neither the UK, nor the US, nor anyone else needs 100-year bonds. What we need is sound money, backed by gold, coupled with balanced budget amendments, and an end to fractional reserve lending.

Since that set of needs is highly unlikely barring a global currency crisis, I advise preparing for one. I just cannot tell you when. I can only tell you it's a wise thing to have some gold in your portfolio for when the inevitable happens.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Santorum Wins Alabama and Mississippi, Romney 3rd in Both; Brokered Convention Math Update; Another "Super Tuesday" on April 24

Following a credible albeit nowhere near a knockout performance by Mitt Romney on "Super-Tuesday" pundits came out of the woodwork proclaiming Romney has it locked up.

That message continued all the way through Tuesday morning culminating in Jennifer Rubin's post Time to stop dreaming of a brokered convention.
We're talking about the country’s future. And if conservatives really do care about getting rid of Obamacare, disarming the Iranian nuclear threat, restoring funding for defense, avoiding a debt crisis and picking the next couple of Supreme Court justices, isn’t it time to cast aside the foolish gamesmanship? Those conservatives, including Santorum, who insist on playing a destructive game that benefits only the president should engage in some introspection and decide if they are in this for their own cockeyed reasons and ambitions or for the good of the conservative movement and the country. And the rest of the party should take note of the GOP version of birthers (“conventioners”?), recognizing just how nonsensical and counterproductive they have become.This conservative begs to differ with Rubin's opinion that Romney would be good for the country.

Five Points to Consider

  1. Obamacare and Romneycare are essentially the same
  2. The US does not need and cannot afford a war in Iran
  3. Defense spending needs to be cut
  4. There is little practical difference between Romney and Obama except Romney wants a trade war with China
  5. Romney has a Foolish Pledge to Re-Fight the Cold War and is more prone than Obama to start a real war in Iran

That above analysis is not an endorsement of President Obama.
I am writing in Ron Paul.

On Monday February 27, I laid out the Mathematical Case for Brokered Convention. Since then,  "Super Tuesday" has come and gone, and this evening some serious cracks in Romney's campaign  have developed in the deep South as I expected.

Santorum Wins Alabama and Mississippi, Romney 3rd in Both

This snapshot from Real Clear Politics tells the story.

The Huffington Post adds this commentary.
The possibility that Romney himself won't make the 1,144-delegate threshold to formally wrap-up the nomination became a bit more real on Tuesday.

The strain that this primary has caused on Romney's campaign was evident once again. Romney continued to have trouble winning the GOP base. In Alabama, 67 percent of voters described themselves as conservative. Of those, 36 percent backed Rick Santorum, 35 percent backed Newt Gingrich, while just 24 percent supported Romney. In Mississippi, 72 percent of voters described themselves as conservative. Of those, 35 percent backed Rick Santorum, 32 percent backed Newt Gingrich, and 29 percent supported Romney, according to exit polls.

Faced with those numbers, Romney spokesman Ferhnstrom stuck to a different calculus.

"Our goal was to take out one-third of the delegates and possibly do slight better than that. I think we will exceed that goal," he said. " I don't think anybody expected Mitt to win Alabama or Mississippi. As Mitt said, this was an away game for him, and I think that's absolutely true."

But if defeat in those states was always in the cards, Romney, his aides, and his most deep-pocketed supporters failed to get the memo. The candidate himself boldly declared during his one public appearance in Alabama on Monday: "We're going to win tomorrow." Meanwhile his campaign and an allied super PAC outspent Santorum and Santorum's allied super PAC by a 5.5-to-1 margin in both states combined.

Money, it increasingly appears, can't buy states. More important than the cash, however, may be the continuity of the field. Despite failing once more to notch a win, Gingrich pledged to keep his campaign going -- a vow that will hurt Santorum far more than any super PAC ad. Brokered Convention Math Update

Totals through March 13 in the table below are from Real Clear Politics 2012 Republican Delegates.

StatePrimaryCountRomneySantorumGingrichPaul Total to Date-99747622914064 IowaJan 3286700 New HampshireJan 1012*7003 South CarolinaJan 212520230 FloridaJan 3150*50000 NevadaFeb 42814365 Minnesota **Feb 74021714 Colorado **Feb 73691721 Maine **Feb 11249307 MichiganFeb 2830*161400 ArizonaFeb 282929000 Wyoming **Feb 292912716 Washington **Mar 34325708 GeorgiaMar 676193520 OhioMar 666382100 TennesseeMar 6581629100 VirginiaMar 64943003 OklahomaMar 6431314130 MassachusettsMar 64138000 Idaho Mar 63232000 North DakotaMar 62871128 AlaskaMar 6278736 VermontMar 6179404 KansasMar 104073300 GuamMar 1099000 Northern MarianasMar 1099000 Virgin Islands **Mar 1097001 Alabama **Mar 13501017120 Mississippi ** Mar 13401113110 Hawaii **Mar 13200000 American Samoa **Mar 1390000
* States penalized half of their delegates.
** Not all delegates assigned, or assigned to candidates who have dropped out

Florida and Arizona Delegates in Dispute

Romney does not quite have half the outstanding delegates so far, but Hawaii and American Samoa results have not yet been posted.

More importantly, Newt Gingrich Will Challenge Winner-Take-All Rules in Florida and Arizona.

I do not know if the challenge will be successful, but Gingrich has a good case. Republican National Committee’s rules state that no contest can be winner-take-all prior to April 1, 2012.

"RNC Chairman Reince Priebus warned Florida Republican Party Chairman Lenny Curry of the violation in a December letter quoting the rule, 'winner-take-all' states cannot hold a primary or caucus before April 1, 2012."

Looking Ahead - Dates, Delegates, Current Poll Numbers

Missouri (52) March 17: Romney 32%, Santorum 45%, Paul 19%
Puerto Rico (23) March 18:
Illinois (69) March 20: Romney 35%, Santorum 31%, Gingrich 12%, Paul 7%
Louisiana (46) March 24: Santorum 25%, Romney 21%, Gingrich 20%, Paul 6%

Those numbers do not look good for Mitt Romney to say the least. However, the Missouri poll is stale. It's from February 7. We will find out how stale in a few days.

Another "Super Tuesday"

April 24: New York, Pennsylvania, Connecticut, Rhode Island, Delaware

The fate of a brokered convention may be settled on the next "Super Tuesday" coming up on April 24. However, April 24 is more than a month away, and all the candidates have ample time to stick their feet in their mouths again. Both Romney and Santorum have a tendency to do just that.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

S&P 500 Trading Range and Breadth Charts - Tue, 2012-03-13 18:12

As shown in the first chart below, the S&P 500 is now trading two standard deviations above its 50-day moving average, putting it into extreme overbought territory. The index hasn't been this extended since last October.  While the number of new 52-week highs expanded significantly today, the percentage of stocks in the S&P trading above their 50-days is only at 83%.  Back in October when the index was as overbought as it is now, the percentage of stocks above their 50-days was in the 90s.  Breadth still has some work to do.

New Highs in the S&P 500 Surge - Tue, 2012-03-13 17:31

Yesterday we sent out a report to Bespoke Premium subscribers highlighting the fact that the number of new highs in the S&P 500 was nowhere near the levels it was at last April when the S&P 500 was at similar levels.  Normally, a narrowing in the number of new highs is considered a negative divergence.

In the report, however, we highlighted the fact that more than 25% of the stocks in the S&P 500 were within 3% of their 52-week highs.  We went on to note that "it is very likely that if the market manages to exceed last April’s highs by more than a percentage point or two, the expansion in new highs that we have been waiting for would finally materialize." 

Today, the S&P 500 rallied 1.8% to 1,395, putting the index nearly 2.0% above last Spring's intraday high.  Sure enough, the number of new highs in the index rose above 10% for the first time this year.  In fact, in today's rally, 14.8% of the stocks in the S&P 500 hit new 52-week highs.  This is the highest daily reading since 5/2/11, when the S&P 500 made its 2011 intraday high of 1,370.58.  We're still not quite seeing the number of new highs that we were seeing in early 2011, but at least this indicator is now moving in the right direction.

Today’s Winners and Losers

TheDailyGold - Tue, 2012-03-13 16:45

GDX fell by -0.50% while GDXJ fell by -0.19% and SIL gained by 1.23%

Here are today’s best performing Silver and Gold stocks:

Cheap Loans From the ECB: What Banks Have Borrowed the Most as Percentage of Funded Assets?

Inquiring minds might be interested in knowing which banks have borrowed the most in absolute and percentage terms from the ECB via LTROs.

Courtesy of Google Translate, please consider a Ranking of Borrowings from the ECB.
After two rounds of cheap financing of the ECB European banks via LTRO (3-year loans at 1% interest) the ECB Balance sheet looks like a Botero sculpture, swollen to represent over 30% of euro area GDP.

Detail is now available that shows the level of funding requested by each bank individually. According to estimates by UBS, in a ranking where it relates the amount of funds borrowed to balance the size of each entity, the list of financial institutions that have most filled their balance sheets with cheap loans from the ECB.

Euro System Borrowing by Institution

The Portuguese Commercial Bank is in first place, followed by Bankinter, Bank of Ireland, the Portuguese also Holy Spirit, the Banco de Sabadell, Mediobanca, and BFA (Bankia). In these first 8 entities, the ECB's cheap financing represents over 10% of bank assets, a huge figure.

Graphic via Finacial Times AlhpavilleEuro System Names n’ Numbers

A link back to Alphaville Euro System Names n’ Numbers sports an additional chart by absolute numbers.

The reference to Botero piqued my curiosity. Here is a link to 17 pages of Botero Sculpture Images.

I believe I found the perfect one that represents Mario Draghi's LTRO programs.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

HUI Stocks vs Gold

TheDailyGold - Tue, 2012-03-13 15:11

In this article we will have a look at the performance of the HUI index (Amex Gold Bugs) compared to the performance of Gold.
First of all, here is a composition of the HUI index:

Source: AMEX

Now here is a chart that plots the HUI index since January 1st 2000:
We can see that the HUI index had a very impressive run, from about $35 at the end of 2000 to about $635 last year.
That is a MUCH better performance that the SP500 index for example, which is now roughly at the same point as where it started about  12 years ago.

Chart courtesy

When we take a look at the medium term (5 years) for the HUI index, we can see that in 2008 it got flushed because of the liquidity crisis. Everything was being sold for cash, even the best quality assets. However, from the low of $150 in 2008, the HUI rallied more than 4-fold over the next 3.5 years, which is very impressive to say the least. In the autumn of 2010, the HUI broke out above the pink dotted line, and as we can see, it retested this level several times. If this line fails to hold, then the Fibonacci Retracement levels come in to play.

Chart courtesy

The performance of the HUI index seems to be very strong. But is it really that strong? Perhaps not.
Mining stocks are expected to provide some sort of leverage to the price of the underlying metals.

However, when we look at the following chart, which plots the HUI index divided by the price of Gold, we can see that the HUI index is not acting that strong at all. In fact, since April-May 2011 (remember that Silver set a top back then), the ratio of the HUI:Gold is falling, indicating that Gold outperforms the mining companies (or that the mining stocks underperform the price of Gold).
The ratio is now laying at an important Fibonacci Retracement level from the bottom in 2008 to the top in 2009. If this level breaks,  the first support would lay at the green line (around 0.26), followed by the low of 2008.

Chart courtesy

That’s a bit scary, isn’t it?
Now let’s have a look at the medium term chart. We can see that the HUI:Gold ratio is showing signs of weakness, just like it did in 2008, right before the big crash:

Chart courtesy

However, this doesn’t necessarily mean that we are going to see a similar crash this time around, but a warned investor counts for 2.

Now here is an interesting observation: Gold is acting in a similar way as it did in 2006.
I have written about this observation more than once (see HERE and HERE for example).

Check out the chart below, which compares the Gold price since early 2011 until now to the Gold price in 2006 and beyond.

Chart courtesy

If the pattern holds, one would expect Gold to trade sideways for the remainder of the year, followed by a new sharp increase in price, which could take it up to $2,800 per ounce.

The interesting about it, is that the HUI is also acting similarly to 2006, as price has been trading sideways for over a year now:

Chart courtesy

Last but not least, below you can see a chart of Silver.
We can see that every time silver had a very sharp run up, it also came down sharply, which was then followed by a long period of price consolidation.
The last time the sharp increase occured was in late 2010 until May 2011, which was followed by a sharp drop (almost 50%) in price.
If the observation we made in Gold would be correct, this could mean that Silver might also trade sideways throughout the year (of course with ups and downs), followed by a new rally into the $75 area:

Chart courtesy

In another article (subscribers only) called “A Look At The 16 HUI Stocks“, I analyzed the performance of each component of the HUI index relative to the price of Gold and had a look at fundamental valuations (Price/Earnings, Price/Sales and Price/Book ratios). You can read a brief excerpt here:

Barrick Gold (ABX):

Barrick Gold, the world’s largest Gold producer, has underperformed Gold over the last 12 years as the following chart shows:
The ratio of ABX:$Gold is now near the 2008 low:

Chart courtesy

Barrick Gold is trading at only 7.5 times Forward Earnings, the lowest level since at least 1990 and pays a Dividend Yield of 1.30%:

Chart courtesy Zacks Research Wizard

ABX is trading at 3.22 times Sales, which is not far above the level reached in 2008:

Chart courtesy Zacks Research Wizard

ABX is trading at 1.80 times BookValue, and appears to bounce when trading at 1.4-1.60 times BookValue:

Chart courtesy Zacks Research Wizard

Dave Skarica 3/13

TheDailyGold - Tue, 2012-03-13 14:51

Dave and I talk about what the heck is going on with the gold stocks.

David Skarica is the founder and Editor of the newsletter Addicted to Profits and is launching an investment newsletter with the conservative media outlet Newsmax. Skarica entered the financial markets at a young age. At the age of 18 he became the youngest person on record to pass the Canadian Securities Course. His newsletter, Addicted to Profits, is known for its stellar performance in up and down markets. In 2008, at the depths of the financial panic, Addicted to Profits published a letter stock picks were up 100 to 200%. 2009 say his picks climb, on average, over 130% in value where as the S and P 500 climbed 50% over the same time period.

David Skarica is a regular speaker at Trade and Investment Shows in Canada and is a regular guest on The Business News Network (BNN) the flagship Canadian business broadcasting network. He has also appeared on the Vicky Gabereau show and featured in The Globe and Mail. His work has appeared in publications such as The Bull and Bear Financial Digest, Barron’s, Investor’s Digest of Canada and Canadian Moneysaver.


Gold Buyers “On the Sidelines” Playing “Wait and See” Ahead of FOMC Announcement

TheDailyGold - Tue, 2012-03-13 14:41

Tuesday 13 March 2012, 08:30 EDT

Gold Buyers “On the Sidelines” Playing “Wait and See” Ahead of FOMC Announcement

SPOT MARKET gold prices drifted as low as $1694 per ounce Tuesday morning in London – 1.3% down on the week so far – while stocks and commodities rose slightly and US Treasuries dipped ahead of today’s US Federal Reserve interest rate decision.

Silver prices fell to $33.43 per ounce – 2.5% down on last week’s close – before, like gold, recovering some ground before lunchtime.

“There’s not much going on, especially on the physical side,” Dick Poon, Hong Kong-based precious metals manager at refiner Heraeus, said Tuesday morning.

“Everybody is staying on the sidelines.”

“On and off, we are still seeing some buying, but it’s not much,” one Singapore dealer tells Reuters news agency.

“It’s all about wait-and-see.”

In Washington later today the Federal Open Market Committee is due to announce its latest monetary policy decision. The Federal Reserve has held interest rates at 0.25% since December 2008. Since then it has also launched two rounds of so-called quantitative easing, as well as Operation Twist last September, which runs until June this year.

“If there are no announced changes to the Fed program [today], then the Fed statement is unlikely to have any obvious implications for the US Dollar,” says James Steel, chief commodities analyst at HSBC in New York.

“This would also mean that the FOMC meeting is likely to have little effect on gold.”

Gold prices could be supported if we see some fresh easing talk from the US Fed,” says Natalie Robertson, commodity research strategist at investment bank ANZ in Melbourne.

“But at the moment the market does not appear to be pricing in that outcome.”

“QE3 [a third round of quantitative easing] is not a guarantee,” adds says Michael Hanson, US economist at Bank of America Merrill Lynch.

“We would expect the Fed to ease further only if growth drops below trend, inflation undershoots their target and possibly the equity market sells off.”

“I don’t think they’re convinced they won’t need to add additional stimulus,” counters Carl Riccadonna, New York-based senior US economist at Deutsche Bank.

“But the tone of data in last three months seems to have been surprising the Fed to the upside.”

Monthly nonfarm payroll data released last Friday show that the US economy added 227,000 nonagricultural private sector jobs in February, slightly above analysts’ consensus expectations.

The unemployment rate meantime held at 8.3%, having fallen from over 9% last year. The latest US consumer price inflation data are due to be published this Friday.

Earlier on Tuesday, the Bank of Japan left its main policy rate on hold at 0.1%. Like the Fed funds rate, the BoJ’s main policy rate has not changed since December 2008.

Here in Europe, Spain agreed to additional budget cuts at Monday’s meeting of Eurozone finance ministers, lowering its deficit target as a percentage of GDP this year by half a percentage point.

Earlier this month, Spain said it would not comply with the European Union’s 2012 target of 4.4% of GDP. Instead, in what is called a “sovereign decision”, Spain announced a target of 5.8%.

Eurozone finance minister chairman Jean-Claude Juncker last night described that target as “dead”.
Spain has agreed to target a deficit-to-GDP ratio of 3% in 2013.

“That is the main figure that should be kept in mind,” said Juncker on Monday.

Spain’s 2011 target, agreed by its previous administration, was 6%. The actual figure achieved was 8.5%, the Wall Street Journal reports.

The German government meantime only managed to implement 42% of its planned spending cuts last year, German newspaper Der Spiegel reports.

The ongoing investigation into alleged “manipulation” of the benchmark Libor exchange rate – which acts as a measure of the rate at which banks lend to each other – could lead to a change in the method of calculation, news agency Bloomberg reports Tuesday.

At present, bank employees are asked to report their estimates of what it would cost to borrow in the interbank market, rather than reporting rates from actual transactions. The US Justice Department has begun a criminal investigation into whether banks have underreported the rates they have been charged in order to appear healthier and thus hide any financial difficulties. Enforcement agencies in Europe, Canada and Japan have also launched investigations.

“Proved manipulation of index rates could expose banks to a legal and regulatory bonanza,” the Financial Times writes, “from big fines to class action lawsuits, several of which have already been filed.”

Libor, referenced in many standard financial contracts, is used as the benchmark rate for $360 trillion of securities, Bloomberg reports.

Barclays, Citigroup and UBS have all voluntarily given information to regulators about possible abuse of the Libor setting process. Employees at several other institutions have been “fired, suspended or placed on administrative leave”, the FT reports. These banks include Deutsche Bank, HSBC, interdealer brokers Icap, JPMorgan Chase, Brokers RP Martin and Royal Bank of Scotland.

RBS is facing potential legal action meantime from shareholders who allege that the information in its rights issue prospectus, published in 2008 just weeks before the UK government bailed out the bank, was misleading.

RBS is also among a group of banks the New York Times reports is offering to buy claims from customers of MF Global for up to 91 cents on the Dollar. MF Global collapsed late last year, resulting in losses for some investors who were using the brokerage to buy gold via futures contracts.

Ben Traynor

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Avoid Low Volume Rally at Your Own Risk - Tue, 2012-03-13 14:32

It seems like a day doesn't go by where someone isn't pooh poohing the rally in equities and writing it off as a rally on low volume.  This isn't just a recent trend either.  It has been going on the entire bull market, which coincidentally has been one of the ten longest in history.  If we could give one piece of advice regarding these naysayers, it is to listen to them at your own risk.

In the chart below we calculated the performance of the S&P 500 since March 2009.  We also calculated how the index would have performed if we backed out the performance of the index on days when the S&P 500 was up on weaker than average volume.  We consider weaker than average volume to be any day where the volume in S&P 500 Spyder ETF (SPY) was below its 50-day moving average.  

As shown in the chart, the S&P 500 is currently trading at around 1,384, which works out to a gain of 103% from its bear market low on March 9, 2009.  Now, if we back out all days where the S&P 500 traded higher on weaker volume, the performance of the S&P 500 since March 9, 2009 would look considerably different.  Without these days, the S&P 500 would currently be trading at a level of 128, which would be a decline of 81%!  Say what you want about a rally on low volume, but gains are gains no matter how they happen.


Country Default Risk - Tue, 2012-03-13 13:06

Below we highlight the current 5-year CDS (credit default swap) prices (in basis points) for 52 countries around the world.  The list is sorted from countries with the lowest default risk to the highest. 

The average country on the list has seen default risk drop by 16% this year.  As shown, Norway currently has the lowest default risk at 27.74 bps, followed by the US at 33.18 bps.  Switzerland, Sweden and the UK round out the top five in terms of the lowest CDS prices.  All five of these countries have seen default risk drop by more than 30% so far in 2012.

Market Performance Pre and Post FOMC Announcements - Tue, 2012-03-13 12:52

The S&P 500 is currently up roughly 85 basis points as we get closer and closer to the FOMC rate policy announcement at 2:15 PM ET.

Below we highlight the S&P 500’s return on Fed Days since Bernanke & Co. implemented ZIRP (zero interest rate policy) back in December 2008.  As shown, the index has averaged a gain of 0.68% on these 26 days with positive returns 18 times (69%). 

Breaking up the returns on an intraday basis before the FOMC announcement and after the announcement shows that the bulk of the gains on Fed Days during ZIRP have come...

Continue reading...  (Must be a Bespoke Premium member to view.)

Video: "Day Made of Glass" Provides Fascinating Look at Future Possibilities for Photovoltaic Glass

Here is a very interesting video that came my way called a "Day Made of Glass". It is effectively an ad for Corning, but the technology shown is well worth a play.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

February Retail Sales Grow 1.1% - Tue, 2012-03-13 10:07

This morning's release of retail sales for February showed monthly growth of 1.1%, which was inline with forecasts.  Ex Autos and ex Autos and Gas, the numbers came in better than expected.  Not only were these numbers better than expected, but January's results were also revised higher.

On a year/year basis, retail sales rose 6.5% in February.  After accounting for inflation, the y/y reading drops down to 3.5%, and although that is down from last year's highs, it is still well above the historical average of 2.1%.  As shown in the chart below, the Consumer Discretionary sector closely tracks retail sales, so this month's strength helps to explain the continued resilience of the Consumer Discretionary sector.  Continue reading.

A Need for Updated Gold Stock Indices

TheDailyGold - Tue, 2012-03-13 03:25

The underperformance of gold stocks was a hot topic at PDAC and continues to dominate discussion in industry circles. As to why the sector is underperforming, we hear numerous reasons. The conspiracy crowd will claim manipulation or hedge fund shorting. More well-reasoned thoughts include the struggle of large miners to adequately replace reserves and grow production and the continued issuance of shares. We believe one key reason is that the bull market is in the wall of worry phase and in this phase valuations compress as investors are nervous of among other things, another major correction. The HUI is trading at 15x trailing earnings and only 13x 2012 earnings. If the market returned to the historical average valuation of 28x earnings, then share prices would double (and that assumes present earnings). Yet, does the HUI or XAU even adequately represent the mining stock universe anymore?

The HUI is the go-to index for the sector but it is failing to represent precious metals equities as a whole. The HUI is currently trading at the same level as in November 2009. That means it has made no net progress in 27 months! In the same time period, Gold is up 42%. GDXJ, the junior ETF is up only marginally. The CDNX is up only 15%. I don’t know about you but I can think of numerous companies that have performed fantastically in the same period.

One problem is that these indices are being polluted by dramatic underperformance by certain companies which is not a reflection of gold stock fundamentals. Newmont Mining, which is a percentage of numerous indices, is at the same price as it was in 1996. Kinross Gold, Agnico-Eagle and IAM Gold have fallen 40% or more in just the past six months. This performance has little to due with negative sector fundamentals, yet it has a negative effect on the index and can greatly distort a correct analysis of the gold stocks.

Being sick and tired of the HUI, XAU, GDX, and basically any of these indices, we decided to create our own. This equal weighted index includes 10 of the largest, best performing gold companies. It is up about 40% in that 27 month period. The index closed Friday at 80 and we see a confluence of support at 68, which is also the 38% retracement from the 2008 low to 2011 high.

We’ve relied on our own proprietary silver stock index for a while. SIL, the silver stock ETF, is not too bad but it is exposed to Hecla, Pan American, Silver Standard and Couer D’Alene. These are four companies which have dramatically underperformed Silver in the past four years. Our index (shown below) contains 10 silver producers which are focused on growth.

The underperformance of the mining stocks occurred in the 1970s and is occurring again. As we’ve argued countless times, there is no historical record of the large mining stocks outperforming. Mining is an extremely difficult business and even more so the larger the firm. It is the law of numbers. It is difficult to grow from a large starting point. Smartly, large gold miners are starting to increase dividends. They aren’t attracting growth investors so they decided to seek out value investors. This is a smart move.

Nevertheless, as you can see from our indices, there are many companies that are actually outperforming. The market of precious metals equities is not limited to the HUI or XAU. There are hundreds and hundreds of other companies out there. Moreover, it is very important to note that the large miners did not go parabolic in the late 1970s. The Barrons Gold Mining Index performed well but actually performed better in the 1960s. The reason is because the last third of a bull market sees increasing speculation. It was the juniors and small cap miners which received the speculative interest. At somepoint the market will diverge and the smaller miners will outperform the large caps. This is why we are focused on the smaller companies which show value and excellent growth potential. If you’d be interested in professional guidance in this endeavour then we invite you to learn more about our service.

Jordan Roy-Byrne
The Daily Gold

How Far Have Home Prices "Really" Fallen? HPI Upcoming Changes; HPI and the CPI

Various charts show home prices are now back to levels last seen in September-October 2002. I posted such a chart constructed from the LPS Home Price Index (HPI) in LPS Home Price Index Shows U.S. Home Prices Accelerated Decline.

Real vs. Nominal Prices

Nominal prices are arguably not the best way of looking at things. I asked Doug Short at Advisor Perspectives if he would chart "Real" home prices. His answer was "In a heartbeat, if I can get the data".

"Real" in this case means "Inflation Adjusted" price, nominal simply means the "Current Price".

After receiving an Excel spreadsheet of the HPI data from LPI, I passed the spreadsheet on to Doug Short. I suspect he did not know what he was getting into, because once I supplied the data, I started asking for all kinds of charts.

I asked Doug for help for the simple reason his charts and the charts by Calculated Risk are in a class of their own. Advisor Perspectives frequently uses my articles so I went that route.

Note that "Inflation Adjusted" itself can mean many things, and indeed this post will take a look at "Real" home prices from several angles.

HPI Nominal Price, PCE Adjusted, and CPI Adjusted

click on any chart for sharper image
The two most common ways to adjust for price inflation are the CPI (consumer price index) and the PCE (personal consumption expenditures index). We use the CPI in the rest of the charts below because individual components' percentage weights are readily available.

HPI Comparison

  • Nominal prices have fallen to a level first surpassed in August 2002
  • PCE adjusted prices have fallen to a level first surpassed in March 1999
  • CPI adjusted prices have fallen to a level first surpassed in March 1998

That sounds pretty dramatic and it is. However, I propose the bubble is bigger and the crash worse than using the CPI deflator straight up.

CPI Flaws

One of the biggest flaws in the CPI is its measure of home prices. The CPI does not track hope prices per se, rather the BLS uses a concept called "Owners' Equivalent Rent" (OER) as a proxy for home prices.

The BLS determines OER by asking the question “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?

If you find that preposterous, I am sure you are not the only one. Regardless, rental prices are simply not a valid measure of home prices.

Indeed, home prices rose three standard deviations from rental prices, a sure sign of a a housing bubble, and the Fed ignored it every step of the way.

I propose home prices straight up do belong in the CPI. Homes may have a longer lifetime than other consumables, but homes (not the land they are sitting on), are indeed consumed. Without maintenance, painting, upkeep, air conditioning, heat, etc., homes will slowly but surely rot away.

Whether or not one holds that view, it is absurd for the Fed to have ignored (more precisely cheered) the housing boom every step of the way.

Please check out the following graph of OER compared to the HPI.


To the Fed, everything looked "hunky-dory" in the face of the biggest housing bubble in history because they paid attention to OER rather than actual prices.

OER Weighting in CPI

OER has the single largest weight of any component in the CPI, at 23.957%.

Let's play "What If?" Specifically, "What if the BLS used actual home prices instead of OER in calculating the CPI?"

I asked Doug Short to graph that concept. By the way, I did this once before using Case-Shiller data with help of a friend "TC" who also put together some fine charts made by substituting the Case-Shiller index for OER in the CPI.

I called that result Case-Shiller CPI. See CPI and CS-CPI vs. Fed Funds Rate from November, 2008 for a description of Case-Shiller CPI.

Let's call these results HPI-CPI.


The Fed kept interest rates at historic lows between 2002 and mid-2004. The last two rate cuts by Alan Greenspan were not justified at all, by any measure, and downright absurd considering the bubble brewing in housing prices vs. rent.

Allegedly the Fed held interest rates low to prevent "deflation". Instead it exacerbated "price deflation".

Clearly the Fed had no idea what it was doing, and still doesn't, (unless of course you believe this is a Fed conspiracy to deliberately screw the middle class). The result is bubbles and crashes of ever-increasing amplitude as the Fed chases its own tail. New bubbles have formed in the stock market and commodities right now.

HPI Upcoming Changes

Changes are coming up next month in the calculation of the HPI index. Here is a relevant snip from LPS via email.
"Beginning next month, LPS will be basing its findings on an updated view of market structure to more accurately reflect the dramatically increased proportion of short sales transactions as compared to historical norms," said Raj Dosaj, who leads the HPI team for LPS Applied Analytics. "Starting with January 2012 transactions, the base HPI will shift, as short sales are excluded; though given the fact that there were few short sales prior to 2007, the impact will be most pronounced on data from that point forward."Fed Policies Devastated the Middle Class

Inflation benefits those with first access to money, namely the banks and the already wealthy. In the case of housing, by the time money was made available to those lowest on the totem pole, a housing crash was baked into the cake.

In that manner, Fed policies have devastated the middle class, complete with bank bailouts at taxpayer expense, Fannie Mae and Freddie Mac bailouts at taxpayer expense, and the robbing by inflation of those on fixed income struggling to get by on 0% interest rates on their savings while the Fed holds interest rates at zero.

This concludes part one of two-part series on HPI data, the CPI, and interest rates. Still more charts and an analysis of treasury rates are coming up shortly.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

A new twist on “Operation Twist”

TheDailyGold - Mon, 2012-03-12 22:39

Below is an excerpt from a commentary originally posted at on 11th March 2012.

Just when we think that Bernanke has exhausted his ability to come up with harebrained schemes to distort prices, he proves us wrong. Last week it was reported that the Fed was considering a new way of putting downward pressure on long-term interest rates. Why? Because as everyone knows, the US economy would be doing much better if interest rates weren’t so darn high.

The new tactic would be a variation on the old tactic that goes by the name “operation twist”. Under the old tactic, which the Fed began to implement during the second half of last year, the Fed sells short-dated debt securities from its stash and uses the proceeds to buy long-dated debt securities. This would tend to contract the yield-spread (flatten the yield curve) by pushing long-term interest rates downward and short-term interest rates upward, except that at the same time the Fed does whatever it needs to do to keep the official short-term interest rate near zero. The idea, then, is that the yield-spread contracts due to falling long-term interest rates.

The problem with the old tactic is that it is limited by the Fed’s holdings of short-dated securities, which isn’t good. After all, if the Fed and the government wanted limitations they would have stayed with the Gold Standard. One of the main purposes of the monetary system’s current design is that there be no financial limitations on the extent to which intervention can occur. The new tactic under discussion would solve this problem.

Under the new tactic the Fed would have the ability to buy an UNLIMITED amount of long-dated debt securities using money created out of nothing. It would also have the ability — so the story goes — to eliminate the inflationary effects of this monetisation by issuing new short-dated debt securities. Putting it simply, the Fed would create new money to buy long-term bonds and then ‘soak up’ this new money by selling short-term bonds. The result is that long-term interest rates would be forced lower, provided that short-term rates continued to be pegged near zero. And the best part: there would be no inflationary effect! Or would there?

The reality is that there would be at least three inflationary effects.

One is due to money being injected into the economy at one point and withdrawn at a different point. This means that even if the Fed ‘soaked up’ the extra money as promised, the act of injecting and removing the money would distort relative prices.

A second inflationary effect stems from the fact that the money ‘soaked up’ by the Fed wouldn’t disappear. It would, instead, be temporarily removed from the economy in exchange for short-term interest-bearing securities. In effect, the money would be parked in time deposits at the Fed. At some future time the owners of these deposits would want their money, at which point the Fed’s original purchase of the long-dated securities would effectively become an outright debt monetisation (QE).

A third effect that also comes under the “inflationary” umbrella is that the creation of these new short-term deposits at the Fed would alter the private banking system’s deposit structure. This is similar to the first effect, in that it wouldn’t bring about an economy-wide loss of money purchasing power but it would distort relative prices. By way of explanation consider the hypothetical situation of Bill, a wealthy investor who has $100M invested on a short-term basis with an investment bank. Bill decides that he’d rather invest his $100M in the new short-term securities issued by the Fed, so he sells his existing investment. In this hypothetical example the Fed’s policy has resulted in money being transferred from the buyer of Bill’s investment to the Fed, and the transfer of money from the Fed to the seller of the long-term bonds purchased by the Fed. Who knows what the seller of the long-term bonds will do with the cash received from the Fed? The answer is that nobody knows. Maybe he will buy oil futures, thus boosting the cost of energy.

There are undoubtedly other effects, but you get the picture. Like all attempts by the central bank to manipulate money and interest rates, this new twist on “operation twist” will cause problems in addition to the most basic problem. The most basic problem is that the central bank shouldn’t be making any attempt to force interest rates below where they would otherwise be.

Bernanke is like a kid with a new chemistry set who is gleefully mixing chemicals together without the slightest clue as to what the reaction will be. The difference is that whereas the kid with the chemistry set is probably going to do no worse than burn a hole in his parents’ carpet, Bernanke’s monetary experiments are burning holes in the US economy.

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Market Performance on Fed Days - Mon, 2012-03-12 21:35

Tomorrow will mark the 27th FOMC meeting since Bernanke & Co. implemented ZIRP (zero interest rate policy).  Below we highlight the S&P 500's performance on these Fed days.  As shown, the index has averaged a gain of 0.68% (median 0.46%) on these 26 days with positive returns 18 out of 26 times (69%).  The positive returns on Fed Days go back much further than ZIRP, however.  Since 1995 when the Fed began announcing its policy decisions on the day of meetings, the S&P 500 has averaged a gain of 0.37% on FOMC days.

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Japan's Debt Disaster and China’s Non-Rebalancing Act: Economic Toxic Brew Portends Currency Crisis

Every country in the world understands the need for global trade rebalancing. Yet, politicians have done nothing but take stances that mathematically cannot work.

Mathematical Impossibilities

  1. Germany wants the rest of Europe to raise exports and become more competitive while simultaneously protecting its export machine and imposing numerous austerity measures on the rest of Europe. Mathematically, it cannot happen.
  2. China wants to wean itself off an export model but does not want the pain associated with  measures that would actually increase domestic demand. Mathematically, it cannot happen.
  3. Japan wants to raise taxes, increase consumer spending, and protect its export model, all at the same time. Mathematically,  it cannot happen.
  4. The US needs to reduce its budget deficit, rein in pension promises, and fix various structural problems (many associated with public unions - the same as in Greece and Spain), but lacks the political will to do so. Mathematically, U.S. deficit spending is not sustainable.

In all four situations above, I have described situations that are mathematically impossible, not just unlikely.

Bug in Search of Windshield

With the world's worst demographics, Japan has no politically acceptable solution to its trade imbalance problem. Japan is a "bug in search of a windshield" as writer John Mauldin puts it.

Global Trade Imbalances Poised to Worsen

With the  above principles in mind, please consider a few snips from an email from Michael Pettis at China Financial Markets regarding "Japan's Debt Disaster and China’s Non-Rebalancing Act".
China’s current account surplus has declined sharply from its peak of roughly 10% of GDP in the 2007-2008 period to probably just under 4% of GDP last year. Over the next two years the forecast is, depending on who you talk to, either that it will rise significantly, or that it will decline to zero and perhaps even run into deficit. The Ministry of Commerce has argued the latter and the World Bank the former.

I am not sure which way the surplus will go, but I would argue that either way it is going to be a very strained and difficult process for both China and the world. On the one hand if the Ministry of Commerce is arguing, as many do, that the rapid contraction in the surplus indicates that China is indeed rebalancing and will continue to do so, I think they are almost certainly wrong. China is not rebalancing and the decline in the surplus was driven wholly by external conditions. In fact until 2010, and probably also in 2011, the imbalances have gotten worse, not better.

For proof take a look at the graph below sent to me by Calla Weimer, a Visiting Scholar at the US-China Institute, University of Southern California. It shows China’s total savings rate as a share of GDP as well as China’s total investment rate. As you can see, both numbers are extraordinarily high.

The current account surplus, of course, is equal to the excess of savings over investment – any excess savings must be exported, and by definition the current account surplus is exactly equal to the capital account deficit. This is the standard accounting identity to which I have referred many times in my newsletters.

As the graph shows, the last time investment exceeded savings was in 1993-94, and during that time China of course ran a current account deficit.

So is China rebalancing? Of course not. Rebalancing would require that domestic consumption rise. Is the consumption share of GDP rising? From the graph it is pretty clear that consumption has not increased its share of GDP since the onset of the crisis. If it had, the savings share of GDP would be declining.

And yet savings continue to rise. This is the opposite of rebalancing, and it should not come as a surprise. Beijing is trying to increase the consumption share of GDP by subsidizing certain types of household consumption (white goods, cars), but since the subsidies are paid for indirectly by the household sector, the net effect is to take away with one hand what it offers with the other. This is no way to increase consumption.

What then explains the decline in China’s current account surplus over the past three years? The graph makes it pretty obvious. The sharp contraction in China’s current account surplus after 2007-08 had was driven by the external sector, and in order to counteract the adverse growth impact Beijing responded with a surge in investment in 2009.

Meanwhile investment continues to grow and, with it, debt continues to grow, and since the only way to manage all this debt is to continue repressing interest rates at the expense of household depositors, households have to increase their savings rates to make up the difference.

Can China’s surplus rise further?

Declining trade deficits around the world require declining trade surpluses. Part of the adjustment in Europe I suspect will be absorbed by a contraction in Germany’s surplus, but the Germans of course are resisting as much as possible since they, too, are dependent for growth on absorbing foreign demand. I don’t know how this will pan out, but certainly Europe as a whole expects its trade surplus to rise, and if instead it begins to run a large deficit, German growth will go negative and the debt burden of peripheral Europe will be harder than ever to bear.

Don’t expect Europe, in other words, easily to accommodate China’s need for a growing trade surplus. If foreign capital flows to Europe increase – perhaps as China and other BRICs lend money to Europe – Europe’s exports will certainly decline relative to imports, but because this means much slower growth for Europe, I don’t think it is sustainable.

The problem of Japan

Tokyo is clearly worried that it is running out of time to manage the debt, and the indications are that it has finally become serious about reducing its debt burden. What’s more, Japan’s current account surplus has already contracted substantially in the past two years, and in January it ran the biggest monthly trade deficit it has ever run – $5.4 billion, although the early Spring Festival this year may have distorted the number.

[Mish comment: For further discussion, please see Japan Faces Moment of Truth: First Annual Trade Deficit Since 1980; New Trend or Simply the Tsunami Effect?]

How can Japan reduce its debt? I am no expert on Japanese policies but according to much of what I am hearing Tokyo is planning to raise taxes further, especially consumption taxes, and to use the proceeds to pay down the debt.

[Mish comment: Japanese government officials without a doubt want to hike taxes. Please consider Japan's Prime Minister Seeks Doubling National Sales Tax; No Winning Play for Japan.

Also consider World’s Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe]

In addition Tokyo and the business community are putting downward pressure on wages in order to increase the competitiveness of the tradable goods sector. The Financial Times article Low wages compound Japan’s grim prospects highlights the problem.

Bonuses have been coming under heavy pressure in Japan for years as part of a wider effort to restrain incomes. And while workers around the developed world have been complaining of a squeeze on incomes over the past two decades, in Japan thinner pay packets fuel wider deflation. That makes it even harder for the government to rein in its runaway debt and for the central bank to use monetary policy to boost growth.

Japan Reverses Course

Yikes! This could turn out to be a huge problem for China and the world. Why? Because raising consumption taxes and reducing wages will push up the Japanese savings rate substantially. Either action pushes the growth rate of disposable income down relative to GDP growth, and lower disposable income usually means lower consumption – which is the same as higher savings.

These policies will probably also reduce the investment rate. Lower Japanese consumption, after all, should reduce business profits and so reduce the incentive for expanding domestic production, while pressure for austerity should restrain or even reduce government investment.

By definition more savings and less investment mean that Japan’s trade surplus must rise. Japan, in other words, is planning to move backwards in terms of rebalancing.This Isn't Going to Work

Pettis concludes with "Needless to say this isn’t going to work. The 'good news' is that if this conflict leads to much slower global growth, as it certainly will, the resulting reduction in commodity prices, including oil, will help absorb some of the changes in the trade imbalances as commodity exporting countries see their exports fall sharply. But I don’t see much other relief."

That bit of "good news" is certainly not good news for the commodity exporting countries like Australia, Canada, and Brazil all of which have their own problems, especially Australia and Canada with enormous property bubbles.

Moreover, Europe is an absolute basket case. Greece, Portugal, and Spain are in economic "depressions". Expect European balance of trade problems to worsen until those countries exit the eurozone. Unfortunately career politicians like German Chancellor Angela Merkel have bet their reputations on preserving the impossible.

Eventually, Germany is going to pay an enormous price for European imbalances and ECB president Mario Draghi's LTRO program, now hailed as an enormous success, is likely to be viewed as anything but success when countries exit the eurozone piecemeal down the road.

Economic Toxic Brew Portends Currency Crisis

As I said upfront, every country in the world understands the need for global trade rebalancing. Yet, politicians have done nothing but take stances that mathematically cannot work, some of which are likely to further exacerbate the problems.

This economic toxic brew will simmer until the pot explodes in a massive currency crisis at some unknown point down the road.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.