“Here’s an interesting bit of correlation (and causation?) for you.  Have a look at the chart I formulated below showing NYSE Margin Debt and the S&P 500.  The two data sets show a correlation over 85%.

Now, this is really interesting in that it melds with our work on Monetary Realism and monetary theory quite nicely.  Using Werner’s concept of disaggregation of credit we can clearly formulate how credit is being used at various times to benefit from improvement in the stock market.  If you’re not familiar with the concept of disaggregation of credit please see here.  But, in short, it is based on the understanding that our monetary system is almost entirely built around credit and how banks issue credit to perform various functions.  These functions can be both good and bad.

Full article and chart

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“Japanese stocks are off to a nice start this year. The iShares MSCI Japan ETF (EWJ), a popular option among investors for getting access to Japan’s biggest traded companies, is up 4% for the year and 14% over the past month. Enjoy it while it lasts.

Japan’s recent surge is due to its new quantitative easing program — its largest in years — and the stated intentions of Prime Minister Shinzo Abe to weaken the value of the yen and boot Japan out of the deflationary slump it’s been in for the better part of two decades.

But Abe should be very careful what he wishes for. Deflation is what keeps Japan’s borrowing costs as low as they are. As of Feb. 12, Japan’s 10-year government bonds yield a pitiful 0.75%.

According to financial writer John Mauldin, an increase of just 100 basis points in borrowing costs would devour 10% of tax revenues.

Writing for Bloomberg, Gary Shilling notes that debt service now accounts for 43% of Japanese government revenue and quarter of all spending. Furthermore, more than half of all Japanese government spending is financed by new borrowing.

This means that half of every yen borrowed is used to service existing debts. It’s a debtor’s nightmare that gets worse every year with budget deficits that are consistently higher than 7% of GDP.

All of this has been made possible by Japan’s seemingly inexhaustible supply of domestic borrowers. But those days are now over….”

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“A recent study by Ernst & Young has revealed that euro-land banks in the aggregate now hold € 918 billion ($1.23 trn.) in non-performing loans (7.6% of all loans outstanding). E&Y sees about 15.5% of all loans in Spain and 10.2% of all loans in Italy as likely to be in NPL status (this exceeds the most recent official numbers somewhat).

In light of such staggering numbers, the idea to use the ESM for direct bank recapitalization seems somewhat ambitious. This is especially so as the idea to employ the ESM to take over the costs of already bailed out banks is being pushed by a number of euro area members. No doubt Ireland and Spain would be happy to see that (in fact, Spain is already the ‘exception’ as the ESM is potentially on the hook for € 100 billion for its banks – but this is structured as a loan to Spain’s government, not a direct bank bailout)….”

Full article and graph 

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“NEW YORK (Reuters) – Hedge fund billionaire Steven A. Cohen is feeling the pinch from the federal government’s insider tradingprobe as outside investors in his SAC Capital Advisors submitted a request to withdraw $1.68 billion from the firm by year’s end.

The dollar value of investor redemption notices exceeds the $1 billion figure Cohen had been telling the 900 employees at his $14 billion hedge fund to expect. The firm was bracing for withdrawals as the insider trading investigation increasingly focuses on the activities of former employees of Cohen’s fund.

But the figure likely will not impede SAC Capital’s operation in the near term, since those dollars will be returned over the course of year. And roughly 60 percent of the money managed by Cohen’s firm is either his or his employees’.

A representative for one of Cohen’s outside investors said even if all of the roughly $6 billion inoutside money was withdrawn from SAC Capital, the hedge fund would still be able to operate but would likely be smaller.

An employee of SAC Capital who did not want to be identified said, “SAC could handily cover all costs for operation,” in the unlikely event all the outside money was withdrawn.

A person familiar with the firm said the firm’s trading profits will help offset losses from the $1.68 billion investors are redeeming.

The deadline for outside investors to put in notices was Thursday night.

SAC’s biggest outside investor, Blackstone Group, is keeping most of its $550 million with the firm. The asset management arm of the private equity firm decided to stay with Cohen’s firm after negotiating more flexible redemption terms on behalf of all of the firm’s investors.

Right now investors who redeem in the first quarter will get their money, spread out over the four quarters of this year….”

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There’s plenty of evidence supporting the belief that the dollar’s days as the preeminent currency are coming to an end, a development that would be catastrophic for the world’s largest economy.

“Generally speaking, it is not believed by the vast majority that the American dollar will be overthrown,” Dick Bove, vice president of equity research at Rafferty Capital Markets, said in a note obtained by CNBC. “But it will be, and this defrocking may occur in as short a period as five to 10 years.”

The greenback is declining as a percentage of the world’s currency supply. Compared with its peers, it has dropped to a 15-year low, as nations show a willingness to use other currencies to conduct business, according to the International Monetary Fund….”

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“Prominent hedge fund manager John Paulson continued to hold significant gold investments in the fourth quarter of 2012, even as other investors pulled out.

Notable institutional investors, including George Soros, Julian Robertson and Allianz’s Pimco reduced their bets on gold during the quarter, when bullion posted its biggest quarterly loss in more than four years.

Paulson & Co owned 21.8 million shares in the world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, at the end of December, unchanged from Sept. 30, a filing with the U.S. Securities & Exchange Commission showed on Thursday.

“That’s a good sign as he’s a big player. It shows that he still has long-term faith in the market,” said Bill O’Neill, a partner in commodities investment firm LOGIC Advisors.

Paulson is by far the biggest shareholder of the SPDR gold ETF. He has often advocated gold to offset risks related to currency exposure and U.S. dollar depreciation.

The value of Paulson’s SPDR ETF holdings, however, dropped to $3.54 billion in the fourth quarter from $3.75 billion in the third, resulting in a paper loss of $215.5 million for his fund.

The decline was because of a 5 percent, or $100, drop in the price of spot gold during the fourth quarter.

Some analysts cited year-end hedge fund redemption for gold’s pullback in the quarter….”

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NYSE

NASDAQ

AMEX 

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“Emerging-market stock volatility fell to the lowest level since 1997 as the benchmark index headed for the biggest weekly gain in a month. Indonesian stocks rose to a record, while shares in Russia fell.

Geely Automobile Holdings Ltd. advanced to the highest level in more than two years in Hong Kong, extending yesterday’s gain after January sales jumped to a record. PT Bank Rakyat Indonesia led gains in the nation’s benchmark index in Jakarta. Dr. Reddy’s Laboratories Ltd.slumped as Bank of America-Merrill Lynch downgraded the stock. OAO Sberbank dropped by the most in three months in Moscow.

The MSCI Emerging Markets Index climbed for a fourth day, adding 0.1 percent to 1,066.53 at 4:55 p.m. in Hong Kong, poised for the longest winning streak since Jan. 3. The measure’s 50- day volatility sank to 8.06 today, the lowest level since July 15, 1997, data compiled by Bloomberg show. The gauge has increased 0.5 percent this week, heading for its biggest weekly gain since the five days ended Jan. 18. About five stocks dropped for every four that increased.

“The market is very quiet and will have to be driven by earnings,” Vivien Loh, who helps manage the equivalent of $420 million at Phillip Capital Management Sdn., said by phone from Kuala Lumpur.

About 60 percent of companies in the emerging-stocks gauge that have reported earnings for the quarter ended Dec. 31 have missed estimates, according to data compiled by Bloomberg.

Trading Volumes…”

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“Spain is set to usurp Germany as the strongman of Europe, due to the increasing competitiveness of its exports, say Morgan Stanley analysts, who think fiscal rebalancing will continue in the country despite its current political turmoil.

“Spain, where unit labor costs are falling due to recession and reforms, and where exports performance is strong, is on its way to become the euro area’s next Germany,” wrote analysts Joachim Fels and Sung Woen Kang in a weekly note on the global economy.

“Germany, helped by super-low interest rates, rising wages and inflating property prices, will see domestic demand improving and its external competitiveness deteriorating.”

Fels told CNBC.com it would take three-to-five years for Spain to rival Germany as an export-led economy, due to the time lag before fiscal and structural reforms are felt.

He said that labor costs will remain low in Spain even when it recovers from recession, as “unemployment will still be high for years to come.”

But Moorad Choudhry, a professor at Brunel University, disputed Fels’s view that high unemployment benefited Spain’s economy….”

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” “The large operator does not, as a rule, go into a campaign unless he sees in prospect a movement of from 10 to 50 points. Livermore once told me he never touched anything unless there were at least 10 points in it according to his calculations.”

 

So writes Richard Wyckoff, the legendary trader who in the 1930s wrote a manifesto that gained him a cult following on Wall Street.

His 1931 book, The Richard D. Wyckoff Method of Trading and Investing in Stocks – A Course of Instruction in Stock Market Science and Technique, is somewhat difficult to find these days (not impossible), but even in 2013, hedge fund managers still swear by it.

One of the key takeaways from the book is that if you want to succeed, you have to learn to recognize the professionals and understand what they are doing. That’s what those who follow Wyckoff do – they watch the big operators.

Wyckoff walks us through the process of how a big operator will manipulate a stock up or down – so that next time one sees it unfolding on the screen before his or her own eyes, he or she can react accordingly.

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“Worldwide gold demand in 2012 was another record high of $236.4 billion in the World Gold Council’s latest report. This was up 6% in value terms in the fourth quarter to $66.2 billion, the highest fourth quarter on record. Global gold demand in the fourth quarter of 2012 was up 4% to 1,195.9 tonnes.

Central bank buying for 2012 rose by 17% over 2011 to some 534.6 tonnes. As far as central bank gold buying, this was the highest level since 1964. Central bank purchases stood at 145 tonnes in the fourth quarter. That is up 9% from the fourth quarter of 2011, and the eighth consecutive quarter in which central banks were net purchasers of gold.

The World Gold Council said:

Central banks’ move from net sellers of gold, to net buyers that we have seen in recent years, has continued apace. The official sector purchases across the world are now at their highest level for almost half a century.

If you want to know why Silver Wheaton Corp. (NYSE: SLW) is changing its mix to gold and silver, now you know. Investors of the SPDR Gold Shares (NYSEMKT: GLD) and ETFS Physical Swiss Gold Shares (NYSEMKT: SGOL) will want to pay attention to lower gold demand. There were some interesting observations:

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NYSE  $HNZ is the star of the morning @ $72.59 up $12 bones or 20%

NASDAQ

AMEX 

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“Call them the “whatever-it-takes” central bankers.

As the world’s advanced economies grow at half the speed of the pre-crisis years amid persistently high unemployment, governments are turning to a new set of monetary-policy makers who in word — and they hope deed — are more aggressive than their predecessors.

A revolution that began with the arrival in November 2011 ofMario Draghi at the European Central Bank now is gathering speed as Canada’s Mark Carney joins the Bank of England and the Bank of Japan awaits a new governor. The shift could culminate a year from now if Federal Reserve Chairman Ben S. Bernanke is succeeded by someone even bolder.

The changing of the guard reflects both a need for central banks to offset fiscal paralysis and a bet that monetary policy remains a potent force. At the same time, investors are increasingly weighing the costs and benefits of quantitative easing, while suggesting too much is expected of central banks.

The appointments of activists “reflect the case that economies are still struggling to sustain solid recoveries and there’s pressure from political quarters to be more stimulative,” saidNathan Sheets, a former adviser to Bernanke and now global head of international economics at Citigroup Inc. in New York. “Central banks have stuff in the bag, but it’s largely untried and may generate unwelcome side effects.”

Market Effect…”

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“The Bank of Japan rejected a proposal for keeping interest rates virtually at zero until a price target is in sight and refrained from adding to stimulus, ahead of leadership changes next month.

The central bank kept its asset purchase fund unchanged at 76 trillion yen ($813 billion), according to a BOJ statement released in Tokyo today. That was in line with analysts’ forecasts. Policy makers rejected board member Ryuzo Miyao’s call for the pledge on rates.

A report today showing that gross domestic product shrank for a third straight quarter strengthens Prime Minister Shinzo Abe’s case for boosting fiscal and monetary stimulus to counter deflation and revive the world’s third-biggest economy. BOJ Governor Masaaki Shirakawa and two of his deputies are set to step down on March 19, leaving behind a global debate on whether Japan’s government is triggering an excessive depreciation in the yen.

“The BOJ will probably wait until the installment of new leadership,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co. “Whoever takes the position, the BOJ will have to be more aggressive to help the economy as Abe is eying elections.” …”

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“Japan’s economy unexpectedly shrank last quarter as falling exports and a business investment slump outweighed improved consumption, bolstering Prime Minister Shinzo Abe’s case for more monetary stimulus to end deflation.

Gross domestic product contracted an annualized 0.4 percent, following a revised 3.8 percent fall in the previous quarter, the Cabinet Office said in Tokyo today. The median forecast of 32 economists surveyed by Bloomberg News was for 0.4 percent growth. Nominal GDP shrank 0.4 percent on quarter.

The prolonging of Japan’s recession into a third quarter shows that benefits from a weaker yen and rising stocks have yet to be felt. The lower house of parliament passed Abe’s fiscal stimulus package today, while Bank of Japan GovernorMasaaki Shirakawa and his colleagues raised their assessment for the economy and left monetary policy unchanged.

“These are pre-Abe numbers,” said Takuji Okubo, chief economist at Japan Macro Advisors who formerly worked at Goldman Sachs Group Inc. “He was only prime minister for about the last week of the quarter. We will see a fairly big pick up this year, led by exports recovering on the weaker yen.”

The yen snapped a two-day advance today after Kazumasa Iwata, a former BOJ deputy governor who is a possible candidate to replace Shirakawa, said in a statement ahead of a meeting with ruling party lawmakers that a level around 90-100 per dollar would be a return to equilibrium. The currency was 0.1 percent weaker at 93.52 as of 4:34 p.m. in Tokyo, while the Nikkei 225 Stock Average closed up 0.5 percent.

Korean Concern…”

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“…….Here we are in this wonderful new world where everyone values nominal stock prices more than they value the actual output that underlies it.  If this indicator isn’t a sign that we are still residing in this Fed driven asset targeting mania then I don’t know what is.

To me, the whole thinking is backwards and more disruptive than anything else, but the party must go on.  Lord knows the Fed isn’t taking the punch bowl away any time soon.  So drink up.  Maybe you’ll get so drunk you’ll sleep through the inevitable bad parts when they arrive.

Chart via Orcam Investment Research:

 

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“….The consensus view among economists and analysts is that a weaker yen, driven by recently-elected Prime Minister Shinzo Abe’s stimulative fiscal and monetary policies, will be great for the Japanese economy. They represent a fighting chance to overcome deflation for the first time in a long time.

Ryutaro Kono, the top Japan economist at BNP Paribas, takes a decidedly different view on “Abenomics,” as these new policies have been dubbed.

Kono writes in a note to clients, “Fiscal expansion only boosts growth while it is happening. When its effects fade, what remains is likely to be a sluggish economy with high inflation, coupled with public debt so swollen that the probability of a fiscal crisis soars.”

Here is the roadmap to how “Abenomics” in 2013 translates to fiscal crisis in 2015, according to Kono (emphasis added)….”

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“Hedge fund titan Bill Ackman, who has been in the spotlight for his Herbalife short, is answering investor questions live at the Harbor Investment Conference at JPMorgan Chase right now.

Ackman’s $12 billion Pershing Square Capital Management is shorting more than 20 million shares of Herbalife.  Ackman believes the multi-level marketing company that sells nutrition products is a “pyramid scheme” and has a price target of $0.

We’re on site and live blogging Pershing Square Capital Management’s responses.  Refresh this page for updates.

Before the Q&A, Ackman auctioned off lunches with himself and the others who presented today.  Blue Mountain’s Andrew Feldstein lunch brought in $30,000.

Now we’re gettng to the Q&A, but first Ackman is going to talk about his Herbalife short….”

Updated presentation

 

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MPS, HRB, THC, TSN, BLK, GS, VLO, CI, TMO, HRL,

“As the market continues to make new highs, we wanted to look at the 10 most overbought names in the S&P 500 based on our proprietary countertrend.

As many of you know, we have been pretty constructive on the market, and in my last few columns, on Jan. 8 ,Jan. 23 and Feb. 4 , respectfully, said that the S&P 500 (SPY) was not extended based on our proprietary countertrend reading.

You may recall from our last column we showed the most overbought markets in the last 18 years based on our countertrend measure. Currently we are at a reading of -.63 on our countertrend reading, below are the six most overbought markets in the last 18 years and how they performed 30 days later.

Dec. 15, 1995, countertrend: -.90.97

Aug. 5, 1997, countertrend: -.74.19

Jan. 16, 2004, countertrend: -.72.28

Feb. 14, 2007, countertrend: -.69.03

Jan. 14, 2010, countertrend: -.74.52

Feb. 2, 2011, countertrend: -.72.52

Here is how the S&P 500 performed 30 days following these readings.

Dec. 15, 1995: -3.13%

Aug. 5, 1997: -2.20%

Jan. 16, 2004: +1.00%

Feb. 14, 2007: -3.15%

Jan. 14, 2010: -5.63%

Feb. 2, 2011: -2.69%

In our last column, we pointed out our thesis for the possibility of having this current market go down as one of the most overbought market in the last 18 years. You had the greatest credit deleveraging in the past 70 years with an unprecedented flood of global liquidity pushing all asset prices up. Many of the known risks of 2012 are out in the open at this juncture would need a new tail risk to reset prices….”

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