The Case for Shorting BAC (Bank of America)

Should the bear market in US equities resume in the coming months, which I think it will, BAC (Bank of America) may be an excellent shorting opportunity. Here's why:

1. The stock has a beta of 2.41 -- quite high. High beta stocks will be appealing to short for those who are very confident in a forthcoming bear market, as a higher beta suggests greater volatility and a more powerful move in the direction of the overall market trend.

2. A P/E ratio of 38.18, more than twice that of the S&P 500, seems a bit excessive in my opinion -- doubly so when one considers that BAC is a mature company in a troubled industry (banking). Based on P/E ratio alone, I would expect price to fall by 50%.

3. The technicals are particularly appealing, in my opinion. Below is a daily chart. Note the RSI divergence -- prices make new highs, but RSI does not. This suggests the uptrend is running out of strength. We also see a doji and an inverted hammer in the last two candles -- this fact, coupled with the rangebound price action, also suggest the uptrend is running out.

On the weekly chart (see below), we also see RSI divergence. The weekly chart also shows resistance at around 18.30, with support at 12.30. This creates an opportunity to short at a favorable risk/reward ratio -- the stop-loss order can be placed just above resistance, with the profit target being support.

Disclosure: No position.

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The Case for Shorting Google

Today's sharp drop in US equities has permabears asking: has the next leg down for US equities begun?

From a fundamental perspective:

1. Google is a mature company in an industry of questionable growth potential. While the company is in a league of its own, its league -- CPC/CPM advertising -- is on the way out, and Google's size and maturity hinders its ability to adapt accordingly. I expect new ad networks and publishing networks to slowly eat away at Google's primary revenue source -- text link advertising -- while revenue from text link advertising declines due to macroeconomic woes. New ad networks that can find ways to deliver engaging promotional material without relying on CPC/CPM pricing fit into the context of a disruptive innovation, in that they compete on a dimension that the incumbent -- Google -- cannot compete on. Specifically, something like a gaming company that offers in-game advertising, is the kind of model that could disrupt Google's position as emperor of online advertising.

2. The company's P/E ratio is currently at 30.87 -- the average of the S&P 500 is currently 16.93, according to Robert Shiller. As bears do what they do best -- put the smackdown on overvalued assets -- I expect Google's P/E to fall noticeably, so that it is closer to the S&P 500.

From a technical perspective:

The daily chart is interesting. While volume is low -- attributed to seasonality, and the lower volume that typically comes with August -- we do see a doji candle from several days ago. We also see MACD just turn bearish, which could signal the onset of a new short-term bear trend.

The weekly chart is a bit more sobering for permabears, and suggests bears may need to wait a bit longer before dining on bulls. A rising wedge suggests the market is still bullish on Google, and MACD remains bullish.

Ideas for Trading Google

More conservative bears may wish to wait for a pullback to the upper trendline on the weekly chart, which would happen at around 500. However, such a pullback may not occur. Alternatively, bears may wish to short now, with a protective stop loss order right above the high of Monday's candle which gapped down. The target profit would be the trendline drawn on the daily chart. This would only be a risk/reward ratio of 1:1, so perhaps not the best trade. However, if we are ready for the next leg down, we may see a break below that trendline. As a result, traders who scale into positions may wish to enter some now, and add to their position on a close below the lower trendline.

Disclosure: No position.

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In Spite of Prolonged Rally, Top Permabears Still Sticking To Their Story -- Here's Why

As a permabear, my natural inclination is to be bearish on US equities. However, even hardcore permabears like myself are forced to acknowledge an uptrend, and clearly an uptrend exists on the S&P. Below is a weekly chart of SPY, an ETF that tracks the S&P 500. Since March of 2009, we've been in a clear uptrend.

However, let's look at some arguments why it may not last:

1. You will hear many arguments about recovery will be W-shaped, U-shaped, V-shaped, etc. Personally, I agree with fellow permabear Eric Janzsen, who noted that we need to look to the Cyrillic alphabet to find a letter whose shape corresponds to the current economic cycle in the US. Janzsen argues for a Cheh-shaped progression. Basically, that while we may have some seemingly strong bull trends, as we did during the Great Depression, the ultimate trend is still bearish.

2. Stefan Karlsson notes that stocks are still overvalued from a fundamental perspective, noting that earnings of broad baskets of stocks are down 30% while prices are down just 20%.

3. Strict adherents to Austrian economics will note that a recovery cannot really happen so long as malinvestments are not liquidated. Bailouts prevent the liquidation of malinvestments and the return of asset prices to appropriate levels; so long as this situation maintains, a recovery seems unlikely. I agree with this notion from a philosophical perspective, although from a financial perspective, it does not seem to be particularly meaningful. We can have a rally in the stock market and a plagued economy; the two are not mutually exclusive.

Personally I focus on trading the US dollar, though my bias is to short the S&P as it approaches strong resistance levels.

Tracking the Collapse of the US Dollar

The case for a severe weakening, and perhaps even total collapse, of the US dollar is something I've been making for some time on my blog. As the dollar has begun experiencing some deeper bouts of weakness and has given back all of its gains since October 2008, I wanted to step back and take a big picture look at where we are on the path to dollar collapse -- and re-evaluate whether or not we will stay on this path.

The first big picture event we should look at is the price of gold. A new bull market in gold began in 2001. This is a long-term trend, I believe the next leg of this trend will start shortly.

The second big picture event worth noting is the collapse of the US stock market in 2008, particularly the second half of the year. Remember there are two sides to a currency crisis: (1) an overproduction of supply of the currency and (2) a loss of confidence and demand for the currency. The Federal Reserve's monetary policy is, in my opinion, the primary contributor to the oversupply of currency, and the corresponding price inflation/currency weakness we've seen over the past decade. The stock market collapse reflects a weaker demand for US financial assets, and thus a weaker demand for the US dollar -- particularly when one considers that the finance industry is a major component of the US economy.

At this point, we should ask ourselves if these trends have reversed: has monetary policy sought to tighten money supply? And has the US economy repaired its banking sector? In my opinion, the answer to those questions is no. Bernanke is firmly committed to inflation as a monetary policy, and the Obama-led stimulus packages has already resulted in an increase in broad measures money supply like MZM. So fundamentally, I think we're still on the track to dollar devaluation.

Recent Milestones in Treasury Bonds and the Dollar

There are two milestones which recently occurred which suggest the US dollar devaluation trend may be set to accelerate. Those trends are:

1. Treasury yields have spiked sharply. This suggests bond buyers are now demanding a greater rate of return on the money they lend. The reason for this, in my opinion, is concerns regarding a weaker dollar in the near future.

2. UUP, the ETF which tracks the US dollar index, is on the verge of breaking a major support level. See the chart below.

Trading This Environment

My trading outlook remains the same, in that dollar devaluation is the primary trend, and that it is here. I favor buying precious metals, commodities, and commodity currencies. I favor shorting the US dollar and US Treasury bonds. At this point, I view it as a relatively safe bet that long gold/short long-term Treasury bonds will likely end up as the trade of the year.

Disclosure: Long gold, silver, and Canadian dollars. Short US dollar.

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The Best Current Short Dollar Trade Currently in the Market

All may seem calm to the casual observer, and there may even be indications of a recovery: the Dow and S&P have outperformed Treasury bonds and precious metals, and the dollar has remained stable. Is this the beginning of a new bull market? Is it time for permabears to pack it up and go home? The chart below illustrates the situation.

To my fellow permabears: fear not, for contrary to what the always happy-go-lucky bulls may think, this is simply a rally within a bear market. Short-term traders may find it enjoyable, but the buy and holders? Well, now remains a good time to continue accruing precious metals.

But for traders like myself who are always looking for opportunities to trade their long-term perspective, know that the market is currently giving us a very good opportunity. Inflationists/Dollar bears have been eyeing commodities, and on the Australian dollar and the Canadian dollar -- currencies closely correlated with commodities.

Check the chart below on the Australian dollar.

And the chart below on the Canadian dollar.

Trading This Setup

I've already entered a short USDCAD trade, and will be scaling into this position as it moves in my favor. I would like to see a test of the 1.05 area. I'll add on the break below each key level, and will close out if there are signs the trend has reversed or is stagnating.

Simit Patel
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The Road to Hyperinflation

As most of us who have been watching the financial markets know, yesterday was quite a day. The Federal Reserve announced they would print money to buy Treasuries and mortgage-backed securities.

The Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

The market promptly responded:

1. Gold shot up and stayed up; it is currently trading at $958 at the time of this writing. Silver is rallying as well, trading at $13.48 per ounce at the time of this writing.
2. The US dollar dropped sharply against all other major currencies.
3. Crude oil rallied above $50 per barrel.
4. Treasuries rallied.

From these events, we can deduce two things:

1. The Fed is clearly aggressively pursuing its an inflationary monetary policy. This is further evidence that the Fed can do what it wants; if the Fed is truly determined to inflate, it will be able to do so, regardless of whether or not banks will lend. Monetary policy is a fiat matter.

2. The market is clearly willing to run from the dollar in the face of outright monetization.

As money supply is expanding while demand for US dollars is collapsing, and as dissatisfaction with the political environment in the United States is at a nearly unprecedented level, it is clear the ingredients for hyperinflation are in place. See our previous analysis of hyperinflation for a more detailed explanation.

Moreover, CPI data released yesterday by the Labor Department in the US noted that consumer prices rose for the second consecutive month. Should this trend continue, it sets the stage for a price/wage spiral, whereby higher prices lead to higher wages, which in turn lead to higher prices, and so. Declines in demand due to higher prices may not be sufficient to stop prices from rising further should the Fed continue an inflationary policy.

The New Trading Environment

As we have discussed before, "playing defense" against monetary policy is crucial to wealth preservation in a centrally planned economy. Based on the signals the market and the monetary authorities have recently given us, here are some trading thoughts for the near future:

1. Gold and silver. I've advocated precious metals many times before, and continue to do so, as they are the conventional inflation hedge, and remain the market's monetary commodities of choice.

2. As the Fed is distorting the free market process in the Treasury market through intervention, Treasuries may be difficult to trade without technical analysis.

3. Watch oil. Should it continue to rise, which seems very likely to me, it would be further evidence of an inflationary spiral, as rising oil prices will lead to rising gas prices, which in turn will lead to rising prices, and a demand for rising wages. With that said, I find oil's behavior a bit perplexing, and thus I personally favor precious metals as an inflation hedge. Those with a larger capital base and a need to diversify, though, may seek solace in oil.

4. The stock market remains a trader's environment, even more so than before. Those who can use technical analysis to understand momentum will be best positioned to find profits in the stock market, in my opinion. Fundamental analysis will be less effective, as the Fed's interventionist behavior will make rational analysis difficult and perhaps fruitless.

Disclosure: Long gold and silver.

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The Case for the Australian Dollar as a Long-Term Trade

One of my favorite currencies on a three year outlook is the Australian dollar. There are three reasons for this:

1. In light of the increase in US government spending and the diminishing tax base, I think substantial dollar devaluation is likely over the next 3-4 years. This increases pressure to "decouple" -- specifically for China to discontinue buying US Treasury bonds, and to invest that capital into its own economy, which it has been doing. As China invests more in its own domestic economy, it will boost the economies of geographically related countries that can export necessary commodities to China. That's where Australia comes in.

2. Australia's central bank, the Reserve Bank of Australia, currently has an interest rate target of 3.25%. In a world where zero percent interest rates are becoming the norm, this is quite appealing, and may attract capital that is seeking the security and liquidity of a currency but with an interest rate yield as well. Put another way, the Australian dollar could be the new carry trade.

3. The Australian economy has, at least for now, remained relatively unscathed by the global economic crisis. In Australia, wages are up, business investments are up, retail sales are increasing, the housing sector is expanding, and the country si running a trade surplus.

In light of the aforementioned, the Australian Dollar seems like a viable long-term alternative to the British pound and the US dollar.

Trading the Australian Dollar

Personally I've been riding the recent short-term rally in AUDJPY (Australian dollar against the Japanese yen), though price action is suggesting this rally may be out of steam in the short-term. Patient traders, though, may wish to keep an eye on AUDUSD and look to enter as momentum turns upwards. The chart below illustrates key price points that can serve as areas where prices may consolidate -- and thus where traders can look to enter or exit positions.

Disclosure: Long Australian dollar.

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