Saturday, January 31, 2009

Treasury Bond Market Update

On January 11, 2009 I published this post calling for a rapid fall in long term treasury bonds. At the time TLT, the 20+ year treasury bond ETF, was trading at 112.73. Since then, TLT has dropped to 103.75, a fall of 7.97%. For a stockholder, a short term drop of 7.97% is no big deal but for a long term bondholder, this is a big loss. Considering that 30 year treasury bonds now yield 3.6%, that is a loss greater than two years worth of interest payments.

Those that got out of their long positions in TLT saved themselves a lot of money. Those that shorted TLT did quite well. Those that bet against the price of long term treasuries by buying TBT, the ProShares UltraShort 20+ year treasury bond ETF, did even better and are now up 14.66%.

My original call was for a fall in TLT to 83.74 by February 15th. Let's re-examine that call today.

Here is a 6 month candlestick chart of TLT with bollinger bands:

TLT 6 month candlestick chart with bollinger bandsTLT pierced the top of the band in December and has since come crashing down. It is now sitting right at the bottom of the band.

Here is a 1 year candlestick chart of TLT with 100 day and 200 day moving averages:

TLT 1 year candlestick chart with 100 and 200 day moving averagesTLT took off in the middle of November while sitting at the 100 and 200 day moving averages. It has since crashed back down to sit exactly at the 100 day moving average but is still well above the 200 day moving average.

The technical characteristics for TLT of sitting at the bottom of the bollinger band and at the 100 day moving average points towards at least a short term bounce.

Here is a 6 month candlestick chart of TBT (the ProShares UltraShort 20+ year treasury bond ETF):

TBT 6 month candlestick chart
The chart itself is not important, but take a look at the volume. Volume has exploded from only 100,000 per day just a few months back to 5+ million in the past month! Compare this to TLT, which has had strong but not extraordinary volume. TBT has increased in volume so much that it is actually more heavily traded than TLT at the moment! This jives with the anecdotal evidence I have seen on financial websites, blogs and message boards in the last month. I never saw TBT discussed before but now I see it brought up in almost every discussion. This trade has gotten awfully crowded awfully fast.

Finally, if you have not done so already, please refer to my previous post titled The Fed Will Buy All Treasury Bonds in Existence if Necessary. In that entry, I made the case that the Fed's threats of buying up long term treasury bonds might not be just a hollow threat. Ben Bernanke said himself in a 2002 speech that the Fed can control long term bond prices by announcing a price floor on bonds and then buying up all bonds at that price. Since Bernanke has followed through with all of the other policies that he outlined in that speech and the seemed wild at the time, I see no reason to doubt that he will not go forward with this policy as well. This simple announcement by the Fed would cause unimaginable pain for those short TLT or long TBT.

When we look at the technical signals in TLT and TBT and then examine the potential for the Fed to step in and move the long term treasury bond market at a moment's notice, now looks like an excellent time to reverse positions and cover any short positions in TLT or long positions in TBT. Aggressive traders can go long TLT or short TBT to play this trade, though I would suggest a tight stop loss for those that do so. I hate to reverse my prior call before the deadline of February 15 that I had previously set, but when the facts change I change and I think it is time to reverse positions.

Note: I can and will be wrong with my trading suggestions. Do your own due diligence and never commit more funds to a trade than you are willing to lose.

Wednesday, January 28, 2009

The Fed Will Buy All Treasury Bonds in Existence if Necessary

The Federal Reserve and Treasury have taken unprecedented action over the past year. A record low in the federal funds rate, the purchase of large amounts of securities, the bailing out of countless financial institutions and other activity ad nauseam. It might seem like many are making things up as they go along, and in some respects I believe that they are. Ben Bernanke, however, knows exactly what he is doing. How do I know this? Because he told us everything he has been doing and what he will do going forward back in 2002.

Want to know what Bernanke and the Fed will do next? Continue reading.

Today the Financial Open Market Committee made another of their regular announcements. To read the full announcement, click here.

After you are done reading that, please read a very important speech that Ben Bernanke gave back in 2002. The speech, titled Deflation: Making Sure "It" Doesn’t Happen Here is now very famous. Why? Because it tells you the exact playbook that the Fed and Treasury have been using for the past year. Below I have excerpted the most important sections from that speech. If you read the following you will know exactly what the forthcoming Fed and Treasury actions will be. I kid you not. Ignore at your own peril...

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero?

This is precisely where we stand today. From today’s announcement “The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent.”.

Do you think the following might be a bit relevant? Keep reading!

One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.

This is exactly what the Fed is attempting to do at the moment.

There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates.

The Fed has stated as such already. From today’s announcement: “The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years).

This has not been done yet. Is this the next step?

The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields.

From today’s Fed announcement: “The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.” The Fed has not made mention of an interest rate ceiling or unlimited purchases yet. Make no mistake about it, this is the next step.

If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).

The Fed has already purchased agency debt. From today’s announcement: “The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets…”

Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951. Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable.

The Fed believes that it can control the prices of treasury bonds across all maturities. Note that this speech was given in 2002 and that government debt to GDP has increased tremendously since that time and will continue to increase into the foreseeable future.

At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding. For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.

So there you have it. The Fed absolutely believes that it can keep Treasury bond rates down all across the yield curve. They will do this by enforcing a ceiling on yields. They believe that they can do this by buying only a small portion of outstanding bonds but if that does not work they are not sunk. Bernanke said “At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills.” Therefore, the Fed plans to buy as many bonds as necessary to enforce their policy. If the market does not respond with a small number of purchases, they will just keep on buying until they are the only buyer left. We are talking about the purchase of trillions upon trillions of securities.

What would these actions do from an economic perspective? I think I will leave that for another article so for now draw you can draw your own conclusions and if you would like share your thoughts please visit the comment section.

Saturday, January 24, 2009

College and Student Loans - It's YOUR Responsibility

I would like to address an article found in the February 2, 2009 issue of Forbes and also found on Forbes.com. The article, The Great College Hoax, is written by Kathy Kristof.

The central premise of the article is that college graduates may make higher salaries than high school graduates but the costs of college are so prohibitive that it is no longer worth it. Most importantly, to make up for a shortfall in funds, students have taken up ever increasing student loans that kill any advantages of a higher salary. Private student loan companies in particular are taking advantage of people by strapping them with a lifetime of debt that they cannot hope to repay.

For an indication of how out of touch the degree factories are with economic reality there's no need to pick on UCLA's course in queer musicology or Edith Cowan University's degree in "surf science." U.S. universities also minted 37,000 history degrees in 2006, including 852 Ph.D.s. That for a field with fewer than 500 job openings and average pay of $48,500. Plumbers, by contrast, enjoyed 16,000 new jobs that year and earned only $6,000 less than historians, census figures show.

I completely agree with this part of the article. If you are exceptionally smart, go to a prestigious school and have industry connections, you will probably do well no matter what you study in school. For everyone else, you better study something that pays well if you plan on taking out school loans.

Lacking honest input, three-quarters of high schoolers still seek to go on to college, many deluded about the financial prospects it holds, says American Institutes for Research's Schneider. "Part of the drive is the idea it pays," he says. "We need somebody making more realistic statements about the risks."

I agree again. We can start by explaining to prospective college students that taking out $100,000 in loans to get a degree in history or photography is crazy. A simple chart showing a ratio of expected starting salary against loan value would be a good place to start. I think a 1:1 ratio should be the maximum threshold. If you want to take out $60,000 in student loans you better be studying chemical engineering. If you want to study journalism you better not exceed $30,000 in loans. If you plan to take out $100,000 you better be able to put the initials JD or MD after your name.


The writer goes so far as to call the college and student loan system a "con" and the students taking out loans as "marks." She cites issues with the student loan industry, including poor disclosure of loan terms, variable rates of interest, kick back agreements between lenders and colleges and good old fashion fraud.

While I agree that college can be outrageously expensive and the student loan system is highly flawed, the writer is wildly off base in her judgment. There are plenty of ways for students to obtain a college degree with minimal funds. From the other angle, if students intend to take out big loans to fund their education, they need to be smart and realize that they have to obtain a degree that will afford them to pay off their loans. Once a student does decide to take on large loans, they then have to understand that they will have to live below their means for several years after school in order to reduce their debt load.

This reasonable amount of logic never seemed to occur to the writer. The article falls flat on its face with a cursory examination of the three alleged victims of the college and student loan "con." Let's examine each one:

JOEL KELLUM
Joel Kellum says he's living proof that the claim is a lie. A 40-year-old Los Angeles resident, Kellum did everything he was supposed to do to get ahead in life. He worked hard as a high schooler, got into the University of Virginia and graduated with a bachelor's degree in history.

Accepted into the California Western School of Law, a private San Diego institution, Kellum couldn't swing the $36,000 in annual tuition with financial aid and part-time work. So he did what friends and professors said was the smart move and took out $60,000 in student loans.

Kellum's law school sweetheart, Jennifer Coultas, did much the same. By the time they graduated in 1995, the couple was $194,000 in debt. They eventually married and each landed a six-figure job. Yet even with Kellum moonlighting, they had to scrounge to come up with $145,000 in loan payments. With interest accruing at up to 12% a year, that whittled away only $21,000 in principal. Their remaining bill: $173,000 and counting.

First of all, let’s do some math. Joel Kellum took out $60,000 in student loans. He and his wife graduated with $194,000 in debt. Even if we assume that he took out the $60,000 loan his first year of law school and interest started accruing right away, that still leaves roughly $110,000 in other debts. Were these his wife’s debts or additional debts of his own? Regardless, that is a lot of debt but it is manageable for two lawyers. If we assume the worse case scenario, all debts accrued at 12% so that is $23,280 in interest per year.

Kellum and Coultas divorced last year. Each cites their struggle with law school debt as a major source of stress on their marriage. "Two people with this much debt just shouldn't be together," Kellum says.

What kind of lifestyle were they living? Did they buy an overpriced house? Did they have two luxury cars? Did they pay for an expensive wedding?

[Upon starting Law School] Kellum filled out a fat packet of forms in his school's financial aid office. Weeks later, he says, he got a call asking him to sign over a check to the school without any discussion of the loan terms. Kellum complied.

Only after he graduated, and his payments came due, did he dig into the details. What Kellum discovered was that, instead of cheap government loans, the bulk of his debt was in Signature loans: variable-rate debt from Sallie Mae. Kellum's variable rate has ticked as high as 9% and his ex-wife's to as much as 12%.

Do I have this right - A law school student signed a contract without reading the terms? This guy got his education alright. How much sympathy should we have for someone who could not be bothered to ask a few simple questions and read what he were signing?

Like many grads, Kellum and Coultas hit bumps along their career paths. They deferred payments once when they were unemployed and twice more after their children were born. Each time, Kellum says, Sallie Mae tacked on fees for the delay. When he was a few days late making payments, he says, he got hit with more fees, which also accrued interest, and with a scolding.

They were both unemployed at once? I find it hard to believe that two lawyers were both unemployed at the same time for an extended period of time.

They also could have spent a few years reducing their debts and then decided to have children. I would not call deferring loans twice to have children “doing everything one is supposed to do.”

"When you're a second late, you get 20 or 30 calls," he says. "It [Sallie Mae's Signature loan] is coated as a sweet government loan, but you can get better interest rates, and better treatment, borrowing from Vito in downtown Brooklyn."

How would he know? He apparently did not do any legwork in figuring out what the terms of his loan were in the first place, let alone shop around for better terms.

I think what you have here was a couple of people who thought that law school was their ticket to riches Once they got their law degrees and their highly paid jobs they started immediately living the hot shot lawyer lifestyle. They did not examine the true costs of their debts until it was too late. What they should have done was save money and live below their high income levels for a few years to reduce their debts. Once they reduced their debt, they could begin living the lifestyle they wanted. Even with their estimated $23,000 in interest payments per year, good lawyers living comfortable lifestyles are capable of saving $25,000 a year each towards any debts. If they did this for 3 years after graduation they would have reduced their principal to about $100,000 and cut their interest payments in half.

MINDY BABBITT
Mindy Babbitt entered Davenport University in her mid-20s to study accounting. Unable to cover the costs with her previous earnings as a cosmetologist, she took out a $35,000 student loan at 9% interest, figuring her postgraduate income would cover the cost.

Instead, the entry-level job her bachelor's degree got her barely covered living expenses.

She has a degree in accounting and could not find a respectable paying job upon graduation? Accounting is one of the most sought after positions for employers. Accounting is also typically listed in the top ten majors for starting salaries for new college graduates. $35,000 in loans at 9% is only $3,150 a year in interest payments. Nothing to scoff at but certainly affordable for an accountant.

Babbitt deferred loan repayments and was then laid off for a time. Now 41 and living in Plainwell, Mich., she is earning $41,000 a year, or about $10,000 more than the average high school graduate makes. But since she graduated, Babbitt's student loan balance has more than doubled, to $87,000, and she despairs she'll never pay it off.

So she first deferred loan payments and then she was laid off? Why did she defer her loan payments while still working?

"Unless I win the lottery or get a job paying a lot more, my student debts are going to follow me to the grave," she says.

I agree. With $87,000 in debt at 9% interest she is now racking up $7,830 a year in interest payments. With $41,000 a year in income, she will have a tough time just making the minimum monthly payments.

According to this article the average entry level salary for an accountant is now $47,413. It looks like this woman lives in a low cost area of the country, so her salary might suffer some, but I do not see how she is making $6,000 less than entry level accountants. She is doing something very wrong.

TRACY KRATZER
Tracy Kratzer, 27, enrolled in the International Academy of Design & Technology in Orlando, Fla. in 2003. With visions of making big bucks as a Web designer, she didn't give much thought to the interest rate on her loan from Sallie Mae, the Fannie Mae of student lending.

The premises are preposterous. First of all, web designers can do well for themselves but big bucks is rare. Second of all, if you want to design websites you do not need a degree. Lawyers and accountants need a degree - web designers just need to learn the trade. Anyone can start their own website using Google blogger and have a site up and running in ten minutes with zero programming or publishing experience. Best of all, it is all free!

I built my first website in eighth grade. This was back in the early days of the web so you had to at least learn HTML and pay for a domain name and hosting or else be stuck with a horrible editor. Nowadays the technology is far better and the ease of building a site is remarkable. This site is a good example. I can produce it in my spare time, I make a few bucks on ads and my fixed costs are precisely zero dollars. There is still a lot to learn to become an expert web designer but there are free resources on the web to teach you how to build almost any type of website.

Shortly after graduating with an associate of arts degree, she discovered that the high-paying jobs she'd hoped to qualify for go to people with bachelor's degrees and years of experience. After a bout of unemployment, when she lived off credit cards, Kratzer recently found an hourly job as a clerk at a magazine, where she earns less than the average high school grad. In the meantime her $14,000 student loan has mushroomed to $27,000--more than she makes in a year--and continues to accrue interest at 18% a year. She says collection agents for Sallie and others hound her to hit up relatives for the money she owes.

If you have student loan debt you need to find a job as soon as possible after graduation. Turning to credit cards to tide you over until you land that dream job is suicide.

Which high paying jobs was she hoping for? If she was applying for software engineering jobs, then yes she is shut out of the industry because she probably has little real programming ability. If she was applying for web design jobs, she needs to have a portfolio of websites to show off her skills. Did she build her own sites to show off to prospective employers? My guess would be no. At the least, she could be working her current job and in the meantime building her own websites. This would allow her to show off her skills to prospective employers or develop a second income stream.


These three examples of victims are preposterous. If these are the best examples that the writer can come up with then it takes away from the arguments made in her entire article. I actually agree that the student loan system is deeply flawed but in many cases “greedy lenders” are scapegoats for individuals making poor financial decisions.

I accept hardships brought about by illness, family problems or gross lender fraud as acceptable excuses for getting into financial trouble with student loan companies. In these cases, I think it is reasonable for the individual to be able to file for bankruptcy and to have a portion of the debts removed by a judge. Most other cases come down to personal responsibility. In the end, it is your life and you are responsible for making the right decisions or you will suffer the consequences. No college, government or other external entity can possibly protect you from yourself.

Tuesday, January 20, 2009

Precious Metal ETFs and ETNs

So you want to invest in precious metals? You have many choices for investment vehicles. You can buy mining companies. You can buy coins - please see my post Introduction to Gold Bullion Coins. You can also purchase ETFs (Exchange Traded Funds) and ETNs (Exchange Traded Notes) that track the price of various precious metals. All funds mentioned below are for US investors.

GOLD
There are 5 funds that track the price of gold:

GLD - SPDR Gold (ETF)
IAU - iShares COMEX Gold (ETF)
DGL - PowerShares Gold (ETF)
GOE - ELEMENTS Gold (ETN)
UBG - UBS E-TRACS Gold (ETN)

GLD is by far the most popular among investors, with an average daily volume of 12 million. IAU is also fairly popular, with an average daily volume of 558,000. The last three funds are not nearly as heavily traded.

Let's take a look at a 3-month comparison chart of these 5 funds:


As you can see GOE (orange line) and UBG (brown line) do not track well with the other funds. This is because they are very illiquid securities with low volume. I think we can safely eliminate these as investment choices.

If we zoom in further on the 3 remaining funds, we can see that DGL (green line) also does an inadequate job of tracking with the other funds:


DGL also has an expense ratio of .50% compared to .40% for GLD and IAU. We can safely eliminate DGL.

For most investors, GLD and IAU should perform in identical fashion so I recommend using either one.

SILVER
There are three silver funds:

SLV - iShares Silver (ETF)
DBS - PowerShares Silver (ETF)
USV - UBS E-TRACS Silver (ETN)

Let's take a look at a 3-month comparison chart of these 3 funds:


As you can see, USV (green line) does a poor job of tracking the other funds. This is because it has a daily trading volume of only 100 shares - wholly inadequate.

Let's zoom in further on the remaining funds:


We can see that DBS is also fairly illiquid. Both funds have an expense ratio of .50% so I see no reason not to use SLV.

PLATINUM
There are two platinum funds:

PGM - iPath Platinum (ETN)
PTM - UBS E-TRACS Platinum (ETN)

Let's take a look at a 3-month comparison chart:


Notice the large tracking error with these two funds. PGM is up 4% in three months while PTM is down 5%! This is not a condemnation of PTM as it actually outperforms PGM in time spans of 6 months and 1 month. This just shows that both funds are somewhat illiquid and thus you could catch a bad break if you try to move in and out of either of these funds frequently. PGM has an average volume of 13,835 while PTM stands at 37,185. PTM has an expense ratio of .65% compared to PGM's .75%, so therefore I think PTM is the better choice.

DIVERSIFIED
An alternative to precious metal specific funds are funds that track the price of multiple metals:

JJP - iPath Precious Metals (ETN) - 77.57% gold, 22.43% silver
DBP - PowerShares Precious Metals (ETF) - 81.44% gold, 18.56% silver
PMY - ELEMENTS Precious Metals (ETN) - 52% gold, 32% platnium, 8% silver, 8% palladium
CEF - Central Fund of Canada (ETF) - 58.5% gold, 37.9% silver, 3.5% cash

JJP, DBP and PMY all have relatively low trading volumes and with expense ratios of .75%, higher than those of GLD, IAU, SLV or PTM, I have a hard time recommending any of these funds. CEF, however, has high trading volume and low expenses (.43%) so I have no problem recommending it.

RECOMMENDATIONS
In summation, I recommend the following ETFs and ETNs to investors:

GLD / IAU - Gold
SLV - Silver
PTM - Platinum
CEF - Gold/Silver

COMMODITY ETF AND ETN SPREADSHEET
I compiled a list of all the funds listed here along with other commodity ETFs and ETNs available to US investors. Commodity types include precious metals, base metals, agriculture, energy and livestock. Note that I have only included those ETFs and ETNs that track the commodity prices themselves, and not funds that track commodity based companies. Also note that I have excluded any leveraged funds as well.

Click here to view the google docs spreadsheet. You can edit, save or download the document to excel.

Sunday, January 18, 2009

Commodity ETFs and ETNs Update

Commodities took an absolute beating in 2008. This is true for all groups of commodities, including energy, precious metals, industrial metals, agriculture and livestock. After such a horrible sell off, is it time to start wading back into these markets?

There are now dozens of Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs) that allow US investors to speculate in the price direction of commodities. For the full list of funds including a rundown of expense ratios, volume, composition and more information, please see my previous post Commodity ETFs and ETNs.

Let's take a look at recent price action. Afterwards, I will provide my commodity picks and pans. Click on all charts for larger views.

ENERGY
USO (United States Oil Fund)
Current price: 29.88
52 week high/low: 119.17/27.23
% off high/low: -74.93%/+9.73%
4/10/2006 to Present

UNG (United States Natural Gas Fund)
Current price: 19.83
52 week high/low: 63.89/19.60
% off high/low: -68.96%/+1.17%
4/18/2007 to Present

The most heavily traded commodity in the world, oil, took an absolute beating in 2008 with the worst performance among commodities, down nearly 75%. Natural gas fared poorly as well, dropping nearly 69%. No end in sight to the price declines at this point.


PRECIOUS METALS
GLD (SPDR Gold Trust)
Current price: 82.71
52 week high/low: 100.44/66
% off high/low: -17.65%/+25.32%
11/18/2004 to Present

SLV (iShares Silver Trust)
Current price: 11.11
52 week high/low: 20.73/8.45
% off high/low: -46.41%/+31.48%
4/21/2006 to Present

PTM (UBS E-TRACS Platinum)
Current price: 11.68
52 week high/low: 27.29/8.56
% off high/low: -57.20%/+36.45%
4/1/2008 to Present

Gold, the de-facto safe haven of commodities, has only fallen 17.65% from its peak and is well off its lows. With that being said, it is now firmly in a down channel. If gold breaks out of its trading channel, watch for new all time highs. Silver and platinum are precious metals but they have industrial purposes as well so they have not held up as well as gold. Both have bounced more than 30% from their lows, however, so watch these closely as they may have made their bottoms.


INDUSTRIAL / BASE METALS
JJC (iPath Copper)
Current price: 21.46
52 week high/low: 58.40/17.97
% off high/low: -63.25%/+19.42%
10/30/2007 to Present

JJU (iPath Aluminium)
Current price: 22.14
52 week high/low: 54.16/22.14
% off high/low: -59.12%/+0.00%
6/25/2008 to Present

JJN (iPath Nickel)
Current price: 16.38
52 week high/low: 53.46/13.80
% off high/low: -69.36%/+18.70%
10/23/2007 to Present

JJT (iPath Tin)
Current price: 25
52 week high/low: 52.46/21.79
% off high/low: -52.34%/+14.73%
6/25/2008 to Present

LD (iPath Lead)
Current price: 31.13
52 week high/low: 62.20/23.87
% off high/low: -49.95%/+30.41%
6/26/2008 to Present

The industrial metals have all taken a huge pounding, with all being cut in half or worse. Lead has rebounded strongly, now off its low by 30.41%. Copper, nickel and tin have also rebounded some. Aluminium is by far the weakest of the group, now sitting at its 52-week low.


AGRICULTURE
NIB (iPath Cocoa)
Current price: 38.88
52 week high/low: 48.23/30.21
% off high/low: -19.39%/+28.70%
6/25/2008 to Present

JO (iPath Coffee)
Current price: 36.55
52 week high/low: 49.79/32.40
% off high/low: -26.59%/+12.81%
6/25/2008 to Present

BAL (iPath Cotton)
Current price: 28.13
52 week high/low: 46.65/23.19
% off high/low: -39.70%/+21.30%
6/26/2008 to Present

SGG (iPath Sugar)
Current price: 42.39
52 week high/low: 57.65/36.36
% off high/low: -26.47%/+16.58%
6/25/2008 to Present

DBA (PowerShares DB Agriculture)
25% corn, 25% soybeans, 25% sugar, 25% wheat
Current price: 25.29
52 week high/low: 43.50/21.52
% off high/low: -41.86%/+17.52%
1/5/2007 to Present

The agriculture commodites have held up relatively well overall. Cocoa in particular had a shallow drop and has rebounded strongly. If it breaks above it's recent high, cocoa could climb much higher from here. Cotton also looks strong, now up 21.30% from its bottom. Sugar and coffee are starting to look strong as well.


LIVESTOCK
COW (iPath Livestock)
67.9% live cattle, 32.1% lean hogs
Current price: 32.81
52 week high/low: 46.66/31.78
% off high/low: -29.68%/+3.24%
10/24/2007 to Present

Livestock has continued to fall and make new lows. This is among the weakest of the commodity groups.

Overall, commodities may still have farther to fall but some groups are starting to look quite strong. The precious metals have all bounced strongly and if gold breaks out they could all rise quickly. Industrial metals still look weak, with lead being the lone exception. Agriculture looks strong, particularly cocoa and cotton followed by sugar and coffee. If oil stabilizes, these commodities look like good bets. If oil rises, their case becomes even stronger.

You could take the opposing view, and look to invest in the weakest performing commodities, such as natural gas, aluminum and livestock. I think this is a mistake and you want to buy the stronger plays. I will provide an update in a month or two to see if my thesis turns out correct.

Picks:
GLD (Gold)
LD (Lead)
NIB (Cocoa)
BAL (Cotton)

Pans:
UNG (Natural Gas)
JJU (Aluminium)
COW (Livestock)

Saturday, January 17, 2009

Ken Lewis - CEO of America, Inc.

On Friday, Bank of America announced a fourth quarter loss of $1.79 billion, which does not account for a loss of $15.3 billion at Merrill Lynch, whose acquisition by BOA closed just a few days ago. The government agreed to loan BOA $20 billion and guarantee assets totaling $118 billion. This is on top of the billions of dollars the bank has already received from the government in prior months. In regards to the decision to go forward with the Merrill Lynch acquistion that was annouced in the fall, Bank of America CEO Ken Lewis had some choice quotes in this article:

“We did think we were doing the right thing for the country,” Lewis said.

"We just thought it was in the best interest of our company and our shareholders and the country to move forward," Mr. Lewis explained...

Funny, I thought the job of the CEO of a corporation is to protect the interests of SHAREHOLDERS. Ken Lewis's motivations point towards the first quote being accurate while the second quote makes no sense. What part of knowingly going forward with a terrible acquisition represents the best interests of shareholders? To me it looks like he put the desires of government officals ahead of the interests of his shareholders.

Is Ken Lewis the CEO of America, Inc.? I guess so, since that is apparently whose interests he is looking out for, at the expense of BOA shareholders. Anyone still holding BOA shares has a pretty obvious lawsuit on their hands. Ken Lewis clearly broke his fiduciary duty as CEO.

Government, rather than shareholders are now calling the shots at the major US banks. The line between big business and government went from blurred to invisible in the last six months. Anyone disagree?

Sunday, January 11, 2009

Technical Analysis of TLT

We could very well be witnessing the bursting of the US government bond bubble. Here is a chart of TLT, the iShares 20+ year treasury ETF, from 2002-2009:


One look at the chart shows that the current run up in prices is unprecedented. What you had was a trading channel for roughly a year followed by a fast breakout to the upside. When I looked at the chart I noticed that there was another case of a quick breakout in prices following a trading channel: 2002-2003. Let's zoom in on that time period:


In the second half of 2002 and the first half of 2003, TLT traded in a range from $85 to $91. On May 12, 2003 it broke out of that range. TLT hit it's high on June 9, 2003 - about 1 month later - at $97.18. This was a breakout of 7.31% from the top of the previous range. Following that peak, TLT bottomed on August 11, 2003 - about 2 months later - at $82. This was a breakdown of 3.53% below the bottom of the prior trading range. Indeed, what happened is that a breakout led to an overshoot to the upside, which caused a crash and an overshoot to the downside.

Now let's look at the current period:


From the beginning of 2008 to November 2008, TLT traded in a range from $89 to $97. On November 17, 2008 it broke out of that range. TLT hit it's high on December 15, 2008 - about 1 month later - at $122.26. This was a breakout of 25.52% from the top of the previous range. This was a breakout and an overshoot to the upside.

Now, if December 15, 2008 was indeed the peak, the fall coming in TLT is going to be enormous. If we breakdown and overshoot to the downside, TLT is in for a world of hurt. Based on the 2002-2003 scenario, this would portend a bottom in TLT on February 15, 2009 at a price of $83.74. This is a drop of 25.72% from current levels and a total drop from the peak of 31.5%.

Now, nobody knows what is going to happen here. With that being said, the charts look quite grim. If this scenario plays out, all those people that fled equities in the last few months for the "safety" of government bonds are going to get killed. My advice is to get out of government bonds until things settle back down. If you are an aggressive investor, the setup for shorting TLT has never looked better.

Note: Please see my updated posting on TLT and long term treasury bonds: Treasury Bond Market Update.

Saturday, January 10, 2009

Introduction to Gold Bullion Coins

There are many ways to invest directly or indirectly in gold. You can buy a gold Exchange Traded Fund (ETF) such as GLD. You can buy common stock in gold mining companies such as Goldcorp (GG). A third way is to buy gold coins.

Gold coins are commonly divided into two types. The first type, bullion, are generally coins minted recently, common and trade at a small premium to the spot gold price. The second type, numismatic, are generally old or rare coins that have a collector value and thus trade at a premium to the spot gold price. For those interested in gold coins but not knowledgeable in the ins and outs of coin collecting, bullion coins are the way to go.

Gold bullion coins typically come in four sizes: 1 ounce, 1/2 ounce, 1/4 ounce and 1/10 ounce, with the 1 ounce coins being the most popular. Pure gold is soft and susceptible to scratches so traditionally gold coins were made of 90% gold and 10% a variety of harder metals. This carries over to modern bullion coins, with some of them also containing roughly 90% gold. Many coins nowadays, however, are made of 99.99% gold or in other words .9999 pure. For modern coins, if they contain only 90% gold, there is still 1 ounce of gold, so the total coin size is bigger than a pure gold coin.

There are many places to buy coins online. You can buy them directly from the US Mint, Royal Canadian Mint, Perth (Australian) Mint, or thousands of privately owned coin dealers. The full list of US Mint approved coin dealers can be found here. This list is also sortable by state, so you can find coin shops near you.

Below are some of the most popular gold bullion coins traded around the world:


American Eagle
.9167 pure (91.67% gold, 3% silver, 5.33% copper)


American Buffalo
.9999 pure (99.99% gold)


Canadian Maple Leaf
.9999 pure (99.99% gold)


Chinese Panda
.9999 pure (99.99% gold)


Australian Kangaroos
.9999 pure (99.99% gold)


South African Krugerrands
.9166 pure (91.66% gold, 8.34% copper)


Austrian Philharmonic
.9999 pure (99.99% gold)

Sunday, January 4, 2009

The First Step to Solving the Current Economic Crisis and Preventing a Similar Crisis In the Future

The economic crisis of 2008 raises a lot of questions in the minds of civic minded individuals. Why is the economic system so fragile? Why are financial institutions allowed to get so big that their failure will shut down our markets and economy? These are important questions that deserve their own essays, but I think the most important first question to ask is the following: If an individual now in power did not correctly identify the current economic problems as they developed, why would we expect their solutions to the crisis to be effective?

The internet has kept a living, breathing record of events for over ten years. If a corporate executive, regulator, politician or prominent economist has issued a public writing or speech over this time period, the internet has an explicit record of these views. News articles, papers, speech transcripts and even YouTube videos offer abundant research material. Step one is to go through these records and find out who has been right in their predictions and who has been wrong.

Those that brushed off the crisis as it developed are immediately discredited. This includes everyone who laughed at the notion of massive problems in the housing market and with Fannie Mae and Freddie Mac. Others believed that hedge funds and derivatives need not be regulated. Those that continued to state, “The fundamentals of the economy are strong” despite contrary evidence need to be held accountable for their words.

Conversely, the opposite needs to be done as well. Go though the records, find out who has been right in identifying the risks in the system and give them jobs. I do not care if the person is a government regulator, Nobel laureate or blogger - if someone correctly identified the risks we have to find a way to get their current ideas into action. We can use their ideas as a basis for policy going forward.

Let me give one important example. In 2004, the SEC redefined the net capital rule, which specified maximum levels of bank leverage, for certain financial institutions. The five largest investment banks at the time – Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs – applied and were accepted to be regulated under these new rules. This turned out to be a major catalyst of the economic crisis. The SEC Commissioner at the time of the rule change, Harvey Goldschmid said, "If anything goes wrong, it's going to be an awfully big mess." Why then, did he allow the rules to be changed? Who supported the change and who did not? These answers can all be found by anyone with an internet connection.

That is all there is to it. Get the right people in important positions and remove those from power that have done a poor job. Government needs to implement this basic self-correcting mechanism or history will repeat itself. My plan is just the beginning but it is the necessary first step towards solving the current economic crisis and preventing a similar crisis from developing in the future.

Thursday, January 1, 2009

BetterTrades

I'm a sucker for cheesy infomericals. Don't get me wrong - I don't buy the garbage they try to sell but I will watch their sales pitch. Some of my favorite infomericals are the ones selling trading systems. I just caught one today called BetterTrades.

The basic idea is that BetterTrades can make you money trading options in any sort of market condition. They especially rail against buy and hold strategies, as many long term investors are feeling bad these days due to the bad markets. The commercials seem to be completely devoid of their specific strategies and instead want you to attend one of their free seminars to find out more. At that seminar , I am told they sell you on attending a 2-day seminar that costs $3,000. Once you attend the second seminar, they sell you on trading software that costs $6,000.

Sounds like a lot of money, right? But wait - Better Trades has a secret weapon...

bettertrades guest speaker jimmy johnson


Jimmy Johnson! From their website:

Jimmy Johnson is a recent graduate of the BetterTrades Market Essentials course and an NFL commentator. He will be the keynoter at the Traders Super Summit. Having been affiliated with BetterTrades for learning stocks and options trading, Jimmy Johnson is uniquely qualified to share his experiences at this year's event.

Stock options have been a real boom for market hucksters in the past few years. It amazes me that individuals with little investing experience think that trading options will pay off. A few years back, I attended a trading expo in Manhattan. Most of the salesmen were pitching stock option trading stategies with exotic names such as the condor and the butterfly. These typically involve the simultaneous purchase and sale of several options and are basically there to get investors to rack up as much money in trading commissions as possible. I was amazed that many people in attendance were ferverantly taking notes as these salesmen spoke.

The popularity of options trading with amateurs makes me think that a covered call strategy is an excellent choice for today's market. Simply buy high quality stocks that you intend to hold for at least several months and sell overpriced calls to amateurs.