Saturday, January 31, 2009

G-O-L-D

It seems these days everyone is bullish on gold for the obvious reasons. I myself, am bullish on gold and silver. You dont need charts, moving averages or a breakdown on supplies. This is all very simple, All currency in the world is FIET


The world has only fiat currencies- paper money backed by the full faith of the (incompetent) government. The world’s largest banks are printing money around the clock, which makes the paper you hold worthless.

Thursday, January 15, 2009

Outlook 2009

Simek Investment Outlook-- 2009

Let us begin by giving credit where credit is due.

Just as Friedrich A. Hayek and Ludwig Von Mises were able to predict the economic crisis of 1929-1931, there have been modern-day clairvoyant who have also been able to foreshadow the current economic conditions. Props to Peter Schiff, Nassim Nicholas Taleb, Nouriel Roubini, Jim Beeland Rogers, and the most engaging medium in the retail sector, Howard Davidowitz.

The best way to handle the current economic situation is to let the market mechanism work itself out and clear out the excess, therefore moving assets from weak hands to strong hands and ultimately resulting in the economy having a stronger base to build from. Government intervention may very well help with this in the short term, but the strategy fundamentals unfortunately lead to a larger problem long term. What our country is experiencing today is a direct result of monetary policy, government intervention to try and revive the economic stagnation of early 2000. The disaster we are living through today is a direct result of the following: a huge appetite for risk, financial risk models based on a Gaussian infrastructure that does not Work (this enabled the risk taking) and good old fashion greed. The purpose of this outlook is not to dwell in the past, but rather to focus on the future and discuss trading opportunities that lie in the months ahead.

The demand for goods has plummeted (see Figure 1). This is the Baltic Dry Index, the barometer of world trade. In less than six months, the Index has lost 94% of its value. It is currently lower than it was back in 2000. Watch this index as a forward indicator of any recovery.

We look for continued volatility in the short term; continued downside movements in the VIX (a bounce due to an oversold condition and stimulus package) and the upside of 50 being tested again.

Figure 2 shows that the VIX reached the 50 level four times since 1997, which could be considered a good ceiling for option writers or trading strategies. Bull call spread, buying under the 50 level and selling above 50. Selling VOL this year is dangerous.

Figure 3 shows a floor of 20 and trading channel of 20 -30. You can look for the 30 level to be tested. We would be buyers at this level and very aggressive at the 20-25 level with longer dated call options above a 35-40 strike (can be part of a Black Swan trade strategy). We also believe the Black Swan Trade Strategy, BSTS, will be a strong performer again this year and can be applied to all tradable markets. With large opportunities in FX (more in next letter)

The inflation/deflation outlook is demonstrated in Figure 4. This chart shows the Adjusted Monetary Base dated from the beginning of 1979 until present day. The purple line is the trend line of US $ GDP for the same time period. The expansion of the monetary base is almost equal to the growth in GDP, a correlation average of .95 (range of 90-99, no outliners).
Now look at the 100 % increase, from 843,601,000,000 to 1,687,202,000,000. The printing presses are going full steam with Bernanke at the helm. A larger problem lies on the road ahead. Never in all of history has the AMB moved this much, this fast. This is
VERY DANGEROUS.

If money truly grew on trees and began to fall from the sky—it would not spur demand. Americans are scared of losing their jobs. No one will lend. No one is able to borrow. Now we are faced with a trillion dollar stimulus package. Who will fund this package and who will fund our deficits? Moreover, at what RATE? Who in the world is willing to purchase more paper at current rates (2yr .80 / 10yr 2.5 / 30yr 3.0)? Our position is simple: rates move higher as the final "bubble" bursts.

Figure 5 shows the long bond since 1980. We expect yields to move back to over 5. You can short long-dated Treasuries through the TBT, and hit the sell button if you hold long-dated treasuries. All the qualitative easing in the world will not help long term rates. Long term rates should go higher to attract savers and the surplus of funds the government does not have. The low rates in early 2000 forced a surplus of funds to seek risky returns and drive asset prices higher. The other opportunity will be going long hard assets—commodities being the benefactor of both inflation and the weakening dollar. One can go long agriculture, metals and energy as financing for new supply dries up. This will be a longer term trade as the demand side stays weak for some time.

As far as asset prices go in the short term—CASH is KING. Look for fire sale prices in real estate, collectibles, cars—anything and everything. The longer term investment horizon you have, the less liquid you can purchase. Keep your eyes and ears open, as there are deals to be had everywhere.

In the coming months one should be aware of the following:

· Massive closings of retail stores adding pressure to an already weak commercial real estate market. Large vacancy increases in malls and office space.

· Continued collapse of real estate prices (the key to recovery in residential real estate will be job creation and real [adjusted for inflation] income). There has been a large disconnect from real wages and home prices, until this converges to normal levels the price level will decline in real terms.

· Resets on option arm mortgages, as many holders are unable pay the teaser rate and will not be able to pay the higher adjusted rates.

· A complete shift of geopolitical concerns as countries enter into survival mode and resources become scarce.

· A stimulus package rally that will end in another sharp decline for equity indexes.

· China faces civil unrest as demand for exports tumbles and GDP plummets toward zero.

· More in the next update

Wednesday, January 14, 2009

Figures for Investment Outlook


Figure 1 the Baltic Dry Index , barometer of world trade


Figure 2 Volatility Index weekly since 1997


Figure 3 Volatility Index daliy with targets


Figure 4 Adjusted Monetary Base weekly from 1979 trend line GDP


Figure 5 Long Bond Yield weekly from 1980.


*Source for all images above Bloomberg LP.