Check Out the SOXX

Research company Gartner Inc. is out this morning with a cut to their previous forecast for chip sales, now projecting a .1% decline in worldwide sales this year versus an earlier forecast that called for a 5.1% increase.  They also cut their 2012 forecast from a gain of 8.6% to a gain of 4.6%, citing a worsening economic outlook.

See Bloomberg article for further details:

Chip Sales to Fall This Year, Gartner Says           

At a minimum, this serves as a decent heads up.  With a defensive eye, you may want to review your portfolio for semiconductor positions and consider being proactive…pruning where necessary.  A more offensive/aggressive approach might involve the use of Direxion’s Daily Semiconductor Bear 3X etf (symbol SOXS).  If you were to use the Philly Semiconductor Index (symbol SOXX) as a trigger, it almost looks like it has room  to run into the $55/share area (currently sits around the $51/share mark).  It may make sense to watch for a SOXX rise to $55 area (potential resistance) before you “put the SOXS on”.

Individual stocks/charts of interest include:

adi, altr, amat, amcc, amd, asml, intc, isil, klac, lltc, lscc, lsi, mrvl, mu, mxim, nvls, pmcs, rfmd, wfr, xlnx

None of this commentary should be viewed as a recommendation.  I’m simply sharing my thoughts this morning.  If this gets the juices flowing and you do some homework, that would be great.  Either way, think for yourself and keep an eye on the semi’s going forward.

TD

CPI Calculations…the footnotes

With CPI to be reported tomorrow morning, I thought today was a good opportunity to review the Bureau of Labor Statistics’ use of hedonics  and substitution when calculating this heavily referenced inflation number.

Hedonic adjustments were introduced by the BLS (L is optional) in the 90’s to determine how much of a product’s price increase is driven by inflation and how much is purely driven by quality improvement.  The idea is that a $100 increase in the cost of a refrigerator (for example) isn’t really a $100 price increase if the refrigerator now offers more features.  With the magic of hedonics, the government is able to state their subjective value increase (an extra shelf in the freezer and a new crisper drawer for our example) wipes out the price increase…and voila, no inflation.  The reality is that technology is where the real potential for smoke and mirrors exists.  In the areas of computer equipment and software, the  potential to negate price increases is seemingly boundless.

The reality of technology related price movement is summarized very nicely by Barry Ritholtz in this link:

Why Technology Price Drops Are Not Proof of Deflation | The Big …

The bottom line is that most of the time, consumers do not have the choice to buy the old technology and therefore these “technology-related” price increases are just that:  PRICE INCREASES.

Substitution is another little trick used by the BLS to avoid acknowledging price increases within our economy.  This one states that if the price of  a commodity rises, people will simply buy less of that commodity or substitute another commodity in its place.  For example, if the price of steak goes up, we’ll simply buy more chicken…..fantastic logic.  I really don’t disagree with this assertion.  The problem is that it does not diminish this tidbit:  THE PRICE OF STEAK JUST WENT UP!  Through the magic of substitution, it most certainly did not.

For those of you who may question why the government would want to keep cpi low, consider it’s impact on social security payments (not to mention certain welfare payouts, military and federal civil service retirement payouts and even school lunch programs) during a budget crisis like the one we are currently experiencing.  Another massive beneficiary of low inflation figures is the bond market (again, think US treasuries).  Rising inflation would typically bring about a rising interest rate environment and obviously be very costly to the US due to the challenges that would present to our constant debt issuance and refi’s.  This is clearly theoretical and does not take into account the Fed’s highly active role in purchasing our own treasuries…but I digress.

In any event, watch prices for yourself and don’t get too caught up in the stats being spewed by the BLS.  This is not rocket science.  You don’t need anybody to tell you that prices are going up or down.

TD

Global Inflation Watch

Bloomberg reporting that both UK and French inflation rates increased further in August.  Both countries thought to be leaning toward further easing versus limiting inflation trend as growth worries dominate.

US Producer Prices Due today and Consumer Prices on tap for Thursday.

French Inflation Advances to Highest in Almost Three Years

U.K. Inflation Accelerates to 4.5% in August

 

 

 

“Modern” Portfolio Theory

Zerohedge has a great post this afternoon on stock correlations hitting 97.2% recently.  In other words, the difference in investing in emerging markets stocks, developed markets stocks and high yield bonds right now is almost zero.  For those of you relying on modern portfolio theory to spew out the precise asset allocation to fit “your unique risk profile”…GOOD LUCK!  Think about it, if most assets are moving in lock step, what good is MPT going to do?

Like I’ve said in the past, MPT is a nice sales tool.  It sounds fantastic and has the type of return/volatility  data that would tend to help you sleep at night.  The problem is that MPT does not account for crazy market volatility to the extent we are seeing unfold daily.  I can’t tell you when things are going to “go back to normal” , nor can I even tell you what normal will be over the next 3-5 years.  I do think it’s safe to suggest that a 4.3% stake in small cap global growth equities combined with a 11.8% stake in domestic mid cap value equities (you get the point here) will likely provide the same amount of safety as an anvil does in a Wile E Coyote cartoon.

Sorry, it’s not going to be that easy.  Think for yourself and if you feel it necessary to work with an investment guru, make sure you ask questions AND understand the answers.  The fee based programs pushed by so many of these investment people are typically based on MPT.  You’ll be fine as long as the market goes up…might not even notice the 1%-3% fee you’re paying.  Heads up!

TD

Ford Continues to Impress

Short article here on the Ford Evos, which apparently will be making its way to US showrooms next year as the next Fusion.  The 2013 model year for mid-sized auto’s looks to be interesting with makeovers coming for the Toyota Camry, Volkswagen Passat, Chevy Malibu, Honda Accord and Nissan Altima.

Ford Is The New Design and Technology Leader

Noteworthy Headlines

Geithner Heads to Europe as Debt Fears Mount (Reuters/9-12-11/7:49pm)

Europe taking financial advice from Geithner is akin to Oprah taking diet advice from Kirstie Alley.  For a quick reminder on the respect Timmy Boy garners when he travels outside of our borders, my favorite memory is his 2009 trip to China.  During a speech at Peking University, he was asked about the safety of China’s investment in US treasuries.  After stating:  “Chinese assets are very safe.”, the crowd broke into loud laughter.  The head of the United States Treasury laughed at…when he assured them that US treasuries were safe.

Thailand May Give Up Top Rice Exporter Role (Bloomberg/9-13-11/4:36am)

In this article, the Deputy Prime Minister of Thailand explains that he will begin to set prices for rice by directing the central government to purchase domestic rice directly from the farmers.  Direct quote:  “I’m not proud of being the largest exporter.  I’m proud that Thai farmers can grow and sell their products at reasonable prices and they can smile.”  Could it be that Bernanke is employing the same strategy when the Fed jumps in to purchase US treasuries?  I’ve always thought this was a complete joke, bordering on ponzi scheme.  But really, old Helicopter is simply looking to put smiles on the faces of all of those treasury officials…sort of sweet when you think about it this way.

Don’t Expect Any Obama (or Bernanke) Miracles (Barrons.com video/9-12-11)

Viewers of this video are advised not to get their hopes up with regard to economic proposals put forth by President Obama or Ben Bernanke.  Allow this earth shattering message to really sink in before moving forward with your day.

TD

 

 

Got SLABS?

A post over on Michael Panzer’s www.financialarmageddon.com site renewed a few thoughts of mine about consumer credit.  Bear with me, since these thoughts hit this subject from a few different angles…but lead to the same unfortunate conclusion.

First, we have the ridiculous situation within the student loan world:  rising tuition, questionable payoffs for those that graduate, no differentiation in awards (ie:  culinary students avail themselves to much the same financing as does a chemical engineer…sorry, misdirection of funds) rising delinquencies, blah, blah, blah.  For those not familiar with SLABS (Student Loan Asset Backed Securities), these are to the student loan world what RMBS (Residential Mortgage Backed Securities) were to the housing market…yeah, nice.  And like I mention above, delinquencies are getting out of control.  They are probably difficult to play for the retail investor (although I’m going to dig a little more before giving up) due to the high likelihood that a future washout most likely brings in government intervention.  Nonetheless, this is something to keep your eye on. Despite the unsecured nature of these securities as well as the high delinquency of the underlying loans, S&P continues to rate many of them as AAA. The articles below are slightly dated, but offer a decent summary (worth a read).

Student Loans and Debt are not a pretty sight for new college …

The next debt bubble: college loans

The next thought I have in this area relates to the easing of auto credit.  I won’t blather on here, but since I’m reading a lot about supposedly impressive auto sales volumes, I just thought I’d add a footnote.  Specifically, keep in mind that these results have been dependent upon auto financing packages that require little to nothing down (sound familiar?).  This is not sustainable.

Finally, I recently spoke with the owner of a mom and pop electronics retailer regarding the improvements in his business over the past 12-15 months.  He said things had improved dramatically, which appeared to be the case as I stood in his store watching the checkout.  I asked if anything in particular had changed (different products, a new pricing strategy, etc.).  He said the one huge change for him was that GE Capital was back in a big way and that almost all of his biggest tickets were being financed through them.  He said it’s just a matter of marketing, because if he can get them in the front door, he can get “just about anybody” financed.

Smoke and mirrors…smoke and mirrors.

TD

Check out the Yen.

Last week I mentioned the Japanese miss of an already horrible estimate of machinery orders for July (8.2% drop versus the 4.1% estimate).  The very popular culprit was a strengthening domestic currency….in this case, the Yen.  This story was preceded days earlier by a similar story on economic activity in Switzerland and problems being experienced due to the strong Franc.  The Swiss waited only days to take action (instead of waiting until their regularly scheduled meeting on September 15th).

Basis for trade idea:     Japan will need to need to hop aboard the currency debasement train.

Supporting Data:          As is the case with almost any currency in US dollar terms, the Yen is flying high and appears to need a breather.  As with all trends, keep in mind that these things can last longer than logic would seem to allow.  This is especially true during a time in which global government intervention is rampant.

Trade Specs:                I’m considering either some near term puts on Rydex Currency Shares Japanese Yen (symbol FXY), which is an ETF that aims to track the value of the yen.  Another idea would be the Proshares Ultrashort Yen Fund (symbol YCS), which attempts to provide 2X the inverse move in the Yen.

These are speculative thoughts (NOT TRADING RECOMMENDATIONS).  There’s definitely more money thinking the other way on this as FXY inflows have been huge of late.  Also, the Bank of Japan’s last attempt to reduce the value of the Yen hit the currency for only 3%, a decline that lasted only 4 days.  In contrast, the Swiss National Bank move last week hit the France for over 8%.

TD

 

Articles of Interest

How bad is it?….It’s BAD:

Greece has cash until October

Favorite quote of this newsletter article:  “To beat the market, investor portfolios must be different than the market”.  Yeah, I get how basic this statement is, but I simply ask how many of you want to mirror the markets right now.  If you’re doing what everybody else is doing, you’re likely toast over the next 3-5 years:

 Equity Allocations: Thinking Outside of the Box

Interesting technology (short article on BBC):

Supercomputer predicts revolution

Although a logical byproduct to some degree, the extent of our manufacturing decline is worrisome (long article in New York Times):

Is Manufacturing Falling Off the Radar?

If you watch one 9/11 video….

 

 

 

 

An inspiring perspective, narrated by Tom Hanks… 12 minutes:

 

Boatlifters: The unknown story of 9/11