Raghuram Rajan Speaks

By Biiwii

Of all the world’s Central Bankers, one stands out as a teller of truth and an adherer to sensible long-term policy.  Yes, my personal hero (insofar as one has heroes in the financial realm), Raghuram Rajan.  Thanks to Joe for the link…

India’s central bank chief accuses G-7 of currency manipulation

I mean sure, we all see and to varying degrees understand the bald faced currency manipulation (and other policy machinations) going on out there.  But it is important when a Central Banker cries out in the wilderness.  Even if said Central Banker is not overseeing the finances of a fully developed nation (yet).  It doesn’t sound like the IMF is listening.  That would be the International Muppet Fund.

Faro; Time Was…

By Biiwii

In Q4 2014 NFTRH (+) presented for its subscribers a long/short trade involving FARO and HURC, respectively.  I never got on the HURC short because it turned down before my optimal shorting point.  But I did get long FARO for a nice and profitable trade.

The gist was that any late year revenue bump – per our analysis of traditional year end sales increases in the Machine Tool and related industries – would be an opportunity to long a great company like Faro for a trade and short an over valued vanilla company like Hurco.

Why short Hurco (and take profits on Faro)?  Because of the effects of the strong Dollar, weak Euro and weak Yen.  That is the play that everyone (incl. Mr. Druckenmiller a couple posts ago) is on these days.  But in Q4 2014 few were.  We were.  It was the pro-USD exports trade, which would hurt the likes of American companies like HURC and FARO.

Now, Faro is suffering currency exchange fallout and getting killed in the market.  Wall Street catches on as Needham downgrades to ‘hold’ and Noble to ‘sell’ on a revenue miss.  Just look at this mess…


For the same reason NFTRH is following closely the correction of quality Japanese machine tool and robotics manufacturer, Fanuc, we will once again do the same with Faro, a company that is not going anywhere over the long-term.  It’s best of breed in its highly innovative niche.

But still, this is what happens when you follow the Wall Streeters that have never set foot on a machine shop floor.  But it should have been considered possible by these financial types because it is for strictly financial reasons Faro is getting blown up.  Check these tidbits out from the press release.  It’s not manufacturing stuff, it’s macro financial stuff…

  • negative foreign exchange impact of approximately $7 million driven primarily by the decline in the Euro and Yen relative to the U.S. dollar;
  • weaker macro-economic conditions in Japan combined with the limited release of manufacturing stimulus funds which, in turn, decreased industrial demand in Japan for capital purchases; and 
  • weaker industrial demand in Brazil due to recent macro-economic events.

In addition to the negative impact on sales, changes in foreign exchange rates are expected to generate net foreign currency losses of approximately $1.3 million related to the Company’s intercompany account balances denominated in different currencies, primarily the Swiss Franc.

Whoa!  That’s a mouth full.  Time was, you were a manufacturing guy, you were productive and you tended to your manufacturing business.  Time was, you were a financial guy and even if you were not fully versed in an industry and the underside of your fingernails was completely clean, you at least were a crack macro analyst.

Time was…

Whack-a-Mole: China Pops its Head Up

By Biiwii

US Stock Index Futures Rise on China…

“If the second largest economy in the world, right, says ‘we’re going to inject as much liquidity as we have since the financial crisis’, that is a big deal.  So I think that is a message that PBOC’s sending that says like risk assets; grow your appetite for risk assets.”

whackamoleThis reminds me of last October when super Fed Hawk James Bullard puked out talk of QE 4 the minute US markets showed something impulsive to the downside.  Turned out (as we noted at the time) that the Semiconductor element of that mini panic was entirely hype and the Dove in drag went away to gather himself, most recently coming back to the mic with his sharp beak and talons and that glaring look in his eyes.

Ha ha ha… now China panics in an effort to soft peddle the rational policy it enacted of allowing shorting of its ‘free’ markets.  We called the ‘China allows shorting’ news non-fundamental hype on Friday and we call the ‘China eases’ news today hype as well.  Though its implications could be felt well beyond a hype burst, if players are indeed compelled to “like risk assets” and to grow their “appetite for risk assets.”

The bottom line is that we are on a long journey toward losing confidence in these policy moles.  Here in the US a cranky and sometimes malcontented website has dubbed the phase Peak Fed ©.

Bulls and bears are getting ground up during the process, which will either resolve up (manic acceleration) or down (cyclical trend change).  But it is a process and by definition a process is “a natural or involuntary series of changes”.  Believe it or not, the process is natural.  In this case it is addressing unnatural things.

Stan Druckenmiller Interview

By Biiwii

Thanks to subscriber Marcus for forwarding this to me.

Very nice interview.  I personally think he soft peddles the timing and intensity of the risk side of the risk vs. reward proposition.  But his themes are sound and very in line with my thinking and NFTRH analysis.  “Why does the economy need holding up now?”  Exactly, Stan… and “I just think they’re very myopic.”  Yup.

Listen to the interview.  I have to run, but 10 minutes in I already know I’ll return to finish listening because sane peoples’ views are always welcome here.

[edit]  I can’t stand that the interview got into politics (I am not a Republican, I am not a Democrat, and though I had thought I might be at one point, I am not a Libertarian), but listening to the rest of the interview, I agree with much more than I disagree with on the financial markets.  Oh and I disagree on minimum wage.  I mean, theoretically an increase should not be needed, but in this inequitable system the reality is that it is needed.

NFTRH 339 Out Now

By Biiwii

We do indicators ‘n stuff.  We stay on the right side of the trends, playing the swings.  We refine the elements in play to coming trend changes.  We succeed over the cycles.  That’s market management.


Treasury Yields Today

By Biiwii

On a stressful day in the stock market, yield spreads are not reflecting much stress.  Here is the state of the 10yr-2yr spread at yesterday’s close.  It looked constructive as it was gently rising.


But today, as global markets take a good hit (off some hype out of China* no less), the 2’s are not indicating a rush to short-term liquidity instruments.  Quite the contrary.  While long-term yields are slightly down (30yr) to slightly up (10yr), the 2yr is up significantly more and this is not a risk ‘OFF’ structure.


This in-day stuff is noisy and has nothing to do with greater trends.  That’s what we write 30 page weekend reports for; to stay on the correct trends and anticipate those that are coming.  But this snapshot is not indicating financial market stress (today at least) that is commensurate with the downside in stock markets.

* And surely, the news about officials allowing shorting of Chinese stocks is not material fundamentally, but is material to knee jerking momos the world over (in the short-term at least).

Post-CPI Summary

By Michael Ashton

Summary of My Post-CPI Tweets

Below you can find a recap and extension of my post-CPI tweets. You can follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments.

  • Core CPI+0.23% m/m is the story, with y/y upticking to 1.754% (rounded to +1.8%). This was higher than expected, by a smidge.
  • Core services +2.4% y/y down from 2.5%. But core goods -0.2%, up from -0.5% last mo and -0.8% two months ago. Despite dollar strength!
  • Core ex-housing rose to 0.91% y/y from 0.69% at the end of 2014. Another sign core inflation has bottomed and is heading back to median.
  • The m/m rise of 0.20% in core ex-shelter was the highest since Jan 2013.
  • Primary rents 3.53% y/y from 3.54%; OER 2.693% from 2.687%. Zzzzz…story today is outside of housing, which is significant.
  • Accelerating major groups: Apparel, Transport, Med Care, Recreation (32.1% of index). Decel: Food/Bev, Housing, Educ/Comm, Other (67.9%)
  • …but again, in housing the shelter component (32.7% of overall CPI) was unch at ~3% while fuels/utilities plunged to -2.26% from flat.
  • [in response to a question “Michael we have been scratching our heads on this one… is it some impact of port strike do you think?”] @econhedge I don’t think so. But core goods was just too low. Our proxy says this is about right.
  • @econhedge w/in core goods, Medical commodities went to 4.2% from 3.9%, new cars from 0.1% to 0.3%, and Apparel to -0.5% from -0.8%.
  • @econhedge so you can argue Obamacare effect having as much impact as port strike. But it’s one month in any case. Don’t overanalyze. :-)
  • Medicinal drugs at 4.46% y/y. In mid-2013 it was flat. That was a big reason core CPI initially diverged from median. Sequester effect.
  • @econhedge Drugs 1.70%, med equip/supplies 0.08% (that’s percentage of overall CPI). 8.7% and 0.4% of core goods, respectively.
  • Median should be roughly 0.2%. I have it up 0.21% m/m and 2.22% y/y, but I don’t have the right seasonals for the regional OERs.
  • Further breakdown of medical care commodities: the biggest piece was prescription drugs, +5.74% y/y vs 5.19%. The other parts were lower.

The main headline of the story is that core inflation rose the most month-over-month since May. After a long string of sub-0.2% prints (that sometimes rounded up), this was a clean print that would annualize to 2.7% or so. And it is no fluke. The rise was broad-based, with 63% of the components at least 2% above deflation (see chart, source Enduring Investments, and keep in mind that anything energy-related is not part of that 63%) and nearly a quarter of the basket above 3%.


This is no real surprise. Median has consistently been well above core CPI, which implied some “tail categories” were dragging down core CPI. These tail categories are still there (see chart, source Enduring Investments), but less than they had been (compare to chart here). Ergo, core is converging upward to median CPI. As predicted.


The next important step in the evolution of inflation will be when median inflation turns decisively higher, which we think will happen soon. But that being said, a few more months of core inflation accelerating on a year/year basis will get the attention of the moderates on the Federal Reserve Board. I don’t think it will matter until the doves also take notice, and this is unlikely to happen when the economy is slowing, as it appears to be doing. I don’t think we will see a Fed hike this year.

US Taxes & Economy…

By Tom McClellan

US Taxes Returning to Economy-Killing Level

US taxes as percentage of GDP
April 17, 2015

The April 15 income tax filing deadline came this week, and so taxes are on the minds of a lot of Americans.  As Arthur Laffer noted 3 decades ago, it reaally is possible to set tax rates too high such that it actually hurts the economy.  We appear to be in such a condition now.

I wrote about this topic back in January, when lawmakers were contemplating raising the tax on gasoline.  But it is worth revisiting as we see total federal receipts creeping up toward 18% of GDP.  Whenever total federal tax receipts have exceeded 18% of GDP, the result has always been a recession for the U.S. economy.  And sometimes we can see that effect from a total federal take at less than 18%.

Continue reading US Taxes & Economy…

Good Gold Stock Performance

By Biiwii

Given Steve Saville’s all too accurate portrayal of the gold stock sector as one of big thrills and all too bloody spills (Poor Gold Stock Performance…), I thought I’d put up a chart of one of mine that I have held, traded a little, but mostly held.

Klondex is just a little engine that could and has been able to since establishing a bull market for itself in 2013, long before the sector bottomed (assuming it bottomed).


Here’s the weekly showing the beginning of KDX’s bull market (black arrow).


So if your resident gold stock expert does not have the likes of KDX.TO, KGI.TO, LSG and/or other relatively strong out performers on their recommended list, you might wonder why.  These have been among the items I perceive as ‘relative quality’ as listed in NFTRH each week.  And I am not a gold stock expert… duhhh.

Here’s a hint though… neither are the gold stock experts, most of the time.

Mines & Metals

By Bob Hoye

Mines & Metals: Global Perspective

Click for full PDF


Poor Gold Stock Performance…

By Steve Saville

Poor gold-stock performance is mostly due to poor gold-mining-business performance

If you are speculating in gold-mining stocks it is important to have your eyes wide open and to not be hoodwinked by the pundits who argue that the current low prices for these stocks imply extremely good value. The fact is that at the current gold price not a single senior gold-mining company is under-valued based on traditional valuation standards such as price/earnings and price/free-cash-flow. Also, while some junior gold-mining companies are very under-valued, most are not. In other words, the low price of the average gold-mining stock is not a stock-market anomaly; it’s an accurate reflection of the performance of the underlying business.

The relatively poor operational performance of the gold-mining industry is not something new. It is not something that has just emerged over the past few years or even over the past two decades, meaning that it can’t be explained by, for example, the advent of ETFs (the gold and gold-mining ETFs actually boosted the prices of both gold and the stocks owned by the ETFs during 2004-2011). The cold, hard reality is that with the exception of the banking industry, which usually gets bailed out once per decade at the expense of the rest of the economy, since 1970 the gold-mining industry has wasted capital at a faster pace than any other industry. That’s why the gold-mining-stock/gold-bullion ratio is in a multi-generational decline that shows no sign of reversing.

It’s certainly true that a lot of money can be made via the judicious speculative buying of stocks in the gold-mining sector, because these stocks periodically generate massive gains. It’s just that in real terms (relative to gold) they end up giving back all of these gains and then some.