Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Roubini, Deflation, Inflation & Gold (by Gary)

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Good morning slopers.  Gary from Biiwii here again.

There is nothing like the inflation/deflation debate and the misperceptions therein to get as many people off-sides as possible at the exact wrong times.  Case in point:  It was time to be bullish in March because the media were working full Armageddon into the public consciousness and markets were sold out.  We all knew that deflation ruled the day.  

But a funny thing happened on the way to depression; panicked inflationary policy, working 24/7 for months on end, took hold and combined with an extremely bullish sentiment backdrop as Armageddon '08 morphed into Hope '09, which of course became the current late stage phenomenon, Full Tout '09.

Below is an excerpt from this weekend's newsletter.  I personally interpret Nouriel Roubini and what he represents as a signpost I will need in the future when the time comes to position for change once again in the inflation/deflation game of cat and mouse:

Roubini:  “I
don’t believe in gold. Gold can go up for only two reasons. [One is]
inflation, and we are in a world where there are massive amounts of deflation
because of a glut of capacity, and demand is weak, and there’s slack in the
labor markets with unemployment peeking above 10 percent in all the advanced
economies. So there’s no inflation, and there’s not going to be for the time
being.

The only other case in which gold can go
higher with deflation is if you have Armageddon, if you have another depression.
But we’ve avoided that tail risk as well. So all the gold bugs who say gold is
going to go to $1,500, $2,000, they’re just speaking nonsense. Without
inflation, or without a depression, there’s nowhere for gold to go. Yeah, it
can go above $1,000, but it can’t move up 20-30 percent unless we end up in a
world of inflation or another depression. I don’t see either of those being
likely for the time being. Maybe three or four years from now, yes. But not
anytime soon.”

I found the above quote in
an interview titled Big Crash Coming with professor Nouriel
Roubini here http://tinyurl.com/nftrh56a
at something called Index Universe.  The
link is to page 2, where the gold segment is, but I recommend reading the entire
interview.  It is fairly brief.

On gold specifically I have
to disagree with the good professor, just as I do with Prechter and I don’t
know how many other deflationists out there. 
That is of course because Roubini comes at the subject from the
standpoint of ‘price’ as opposed to value. 
In my opinion, there is too much focus on the prices of assets,
what gluts of capacity and slack demand will do to prices and hence, price
inflation or the lack thereof in Roubini’s view.

“So there’s no
inflation.” 
There is inflation.  Over the
last year plus there has been a ton of it and it has been aimed at keeping prices
up.  And it has succeeded thus far
in its task.  But inflation is not
rising prices.  Inflation is what is
promoted in the face of declining asset prices.

I will stick by my stance
that holds the deflationary pressure Roubini sees is the lever by which future
inflationary policy will be pulled into existence. 
Okay, I have been polite thus far.  What
I actually think is that analysis like Roubini’s above, ends up being a tool
for policy makers.  Whether
knowingly or unwittingly, prominent economic talking heads (and the media that
dote on every word) are important to the cause for business as usual by policy
makers.

From last week’s NFTRH55:  “If the current system is to survive, these guys [policy
makers] need an event and they need is soon. 
That is what I thought I saw on the faces and heard in the voices of Tim
[Geithner] and Larry [Summers] last week.”

Roubini’s oncoming crash
would be the event.  The
event’s fallout would be the lever. 
The lever would be pulled and a new round of inflationary policy is all
but a given since the public, hysterical and frightened by the event, will
support it wholeheartedly.  In other
words, confidence, induced by fear though it is (again), would remain intact in
our leaders’ ability and willingness to come to the rescue with more
‘policy’.

We here at NFTRH will wish
to take risk management steps leading up to the event, and then capitalize on
the inflationary results.  Simple,
isn’t it?  Well yes, simple in a twisted kind of way. 
This is how people are systematically disenfranchised, over cycles and
over decades, through misperceptions about inflation and deflation.

Meanwhile, per NFTRH55 last
week, money supply graphs from the Fed show money supply having leveled off.  This is the first step to what may one day evolve into
deflationist hubris, again.  That
will be about the time gold has once again separated itself from the asset pack
as a unique holder of liquidity and long-term value.  It will rise relative to everything even if it
declines temporarily in nominal US dollar terms. 
That would be yet another buying opportunity that the deflationists will
miss the boat on.

But
we get ahead of ourselves, as this is all just theory for the future. 
At the moment we have the inflationists, commodity bulls, peak oil
believers, stock touts and their respective hubris to deal with.

Anatomy of a Trading Blowout (by Biffermas)

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I'll never forget 2002, the year I began trading.  Initially I
followed very simple chart patterns based on William O’ Neill and Investor’s
Business Daily (hey, a cup and handle!). 
For several months I did pretty well, averaging a 2-5% gain per month
taking short-term position trades on individual stocks.  It didn’t seem too difficult
consistently making small gains.  At the
time I was reading every book on trading I could locate and rapidly adding an
array of indicators and methods to my plan. 
One book I read covered the business cycle, and it seemed that steel
stocks and the economy were ripe for a rebound after the crushing bear market.  Another book I read covered options, but I
didn’t read beyond chapter 1: calls and puts. 

Blowup

I watched
American Steel carve out a double bottom with a bullish divergence in
MACD.  It’s long, declining trend line
was breached, and like a good trader I waited several days before buying to
avoid a potential false break.  My account
at the time was $45,000, and I used it all to buy front month call options that
were out of the money by $2.00.  I
initiated this trade near the top click of the range, and within 5 minutes I
was down $2000.  I’d never lost more
than $150 on a trade until then, and I became oddly paralyzed, unable to sell
and accept such a hit.  A week later my
account was below $20,000, I eventually sold the options when it hit $3000.

Blowup 2

The worst
part wasn’t losing the money, it was losing hope that I could actually trade
successfully, something that I absolutely loved doing.  I didn’t trade again for two years.  As you see, American Steel took off nine
months later, quadrupling in short order, but I was not aboard.

With
every market defeat lessons are learned. 
Roughly half of my current trading plan is geared towards avoiding a
repeat of that awful trade.  Here are
some of the lessons I learned:

  1. When
    faced with severe losses, it’s nearly impossible to objectively evaluate your
    position.
  2. Leverage can be a killer.
  3. A trading
    plan should be simple, not based on the collective opinions of 15 financial
    authors.
  4. Never buy
    front month out of the money options, they are strictly for crazy
    speculators.  If you're going to use
    these, sell them to crazy speculators against your longer-term positions.
  5. Bullish
    and Bearish divergences fail frequently.
  6. If you
    want to arrive early to the party, be prepared to wait a long time for the
    action to arrive.
  7. Those funny
    Greek names, Delta and Theta, actually mean something!
  8. It’s not
    acceptable to have multiple blowups like this. 
    Many great traders have suffered a crushing capital blow early in their
    careers, only to return stronger and wiser. 
    Others, like Jesse Livermore, ended his career (and life) after one too
    many detonations.

 Thanks
for reading, and trade safe!

We Got To Move Those Refrigerators…..

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For those fascinated by financial history, like me, there is an excellent blog summarizing the day in news from 1930 (http://newsfrom1930.blogspot.com/).  One of the notable aspects of news from the fall of 1930 is the amount of cautious optimism about how things are turning up.  It sounds quite similar to this fall:

F.
Purnell, Youngstown
Sheet & Tube Pres.: “There are plenty of evidences that the steel industry
is looking up. We have passed through many months of depression but that is all
behind us. … Industries consuming steel are increasing activities.” (10/16/30)

Many of the Q3 earnings reports so far have been “fair reading,” especially in
light of the pessimism going into earnings season (10/22/30)

One fact I found interesting is the parallel in the decline in rail car loadings, 2009 versus 1930, which I have put in a table below:

Rail Car Loadings:  First Week in October

 

Current Year

Year Earlier

Change

1930

954,874

1,179,540

(19.0%)

2009

273,429

330,228

(17.2%)

For those who might think this is irrelevant, given the diminished role of railroads in our modern society, take a look at one of the better measures of "real" economic activity — Port of Long Beach container statistics.  The story is quite similar:

Port of Long Beach

Latest Month

Container Trade in TEUs*

 

September

Fiscal Year to
Date***

 

2009***

2008

%Change

2009***

2008

%Change

Loaded Inbound

224,924

279,137

-19.4%

2,612,227

3,337,717

-21.7%

Loaded Outbound

109,337

129,630

-15.7%

1,331,872

1,782,298

-25.3%

Empties

106,103

146,070

-27.4%

1,338,286

1,616,741

-17.2%

TOTAL (T.E.U.)

440,364

554,837

-20.6%

5,282,385

6,736,756

-21.6

Is this information "tradeable.'  Not really, unless you are looking into companies like UPS and UNP, both in a tailspin due to earnings I believe.  But does this information add some big picture conviction to my conclusion that the current rally has gone too far, too fast? No question.

Pushing on a String

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I read a quote from Robert Prechter's Elliott Wave Forecast (10/19/2009) in which he described how he felt "calm" for the first time since the low in March about the markets.

I absolutely agree. Recently, I have been more "at peace" with where we are at in the markets than I have at almost any other time last year. In spite of 2009 being very rough for me, I am viewing the markets with a quiet, firm confidence. Even in the face of heckling posts and emails, I know firmly where I need to be positioned in the markets.

And I will say this: the kind of reaction we're seeing at the opening this morning is the best recipe the bears could hope for. Because blow-out earnings may send the markets spiraling higher shortly after they are announced, but it's a flash in the pan. AAPL earnings are great (for the moment) for those long AAPL, but it's not going to save this market. I think the feeding frenzy going on with stocks right now is wonderful.

Thanks for all your feedback last night on getting other contributors to the blog; I haven't read the comments yet, but I will, and I will take what you all have said very seriously.

Sir Timid

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I've heard the old saying "There are old traders; there are bold traders; but there are no old, bold traders."

I'm inclined to agree. Being an aggressive bear in a market like this is a one-way ticket to the poorhouse. I have become increasingly conservative as this market has continued to explode higher. I'm a big believer in taking losses early. That has saved my skin.

The quantity of all my positions on all my portfolios, both personal and professional, numbers a mere 55 – which is almost flat for someone like me. The kind of market I'd like to find myself in is one where I've got hundreds of small positions. But there's no way on earth I'm going to get aggressive in a market like this.

Earnings announcements this week continue to be loaded with risk. When's the last time GOOG disappointed anyone? With all the lifts lately, isn't it reasonable to expect a huge double-digit price pop on GOOG as well?

I remain in a highly defensive mode. Capital preservation is job one.