Toro's Running of the Bulls Market Blog

On Semi-Permanent Hiatus

First, my apologies.  I made this decision months ago.  It took me two months to fully accept that I had to do this.  Once I made the decision, it was two months of sloth before I found the energy to write this post.  Then, it was a few more months before I actually posted it.  I should have posted this article at the beginning of November but I was overcome by a lack of motivation, which isn’t fair to those who have read this blog over the past four years.  And to you, I apologize.  It was unprofessional of me.

Running of the Bulls is on official semi-permanent hiatus.  I am no longer regularly blogging, which should be blatantly obvious.  I may occasionally post an item on economics, I intend to keep up with my book log – which is on the right – and I may do the occasional “myth-busting” and clarifying misperceptions like they do over on snopes.com. But apart from one or two items in the hopper, I will no longer be commenting on markets and investments.  I may revive Running of the Bulls in the future, but for now, I am in hibernation.

I regret halting publication.  I have enjoyed blogging.  And though this blog never garnered a vast readership (it was the best readership – ed.), it was fun adding my voice to cacophony of financial commentary.

So why am I stopping?  Simply put, I believe it is in the best interest of my employer.  Given my current duties, I believe it is the correct decision for all involved in my professional life.  This is a decision I have reached on my own with no input from anyone else.

Running of the Bulls has primarily been a forum for my own opinions.  I have gone out of my way to avoid giving specific investment advice. An investment program should be constructed around each individual’s unique risk/reward parameters, and my risk/reward parameters are most certainly different than most others.

However, I am going to deviate from this a bit.  I have written an article below giving advice on how to navigate the market.  Read it at your own peril. 

I have also written an article about how I see the future, which I will post soon.  I give zero credence to prognostications.  I suggest you do so too.

Finally, I would like to thank readers and active participants of Running of the Bulls.  It is a cliché but it is true – it is you who made this worthwhile.

I am going to turn off the comments section in the coming days.  I thoroughly enjoy comments from the readers, but this blog will get spammed to death if I do not.  And spammers annoy the hell out of me.

I want to restart Running of the Bulls when circumstances permit.  And I would like to stop blogging anonymously when I do.  I am no one special, but I think putting a name adds more credibility to the words.

Until that time, take care and Godspeed.  I wish you all the best in life and investing.  I hope you make a fortune.

T.

Gold Underowned

Early in the week, it appeared to me that gold was topping out, at least in the short term, so I liquidated most of my GLD calls.  I blew out the rest on Thursday after the $35 plunge.  I have long-term positions that I have not touched.  I will look to re-establish positions in GLD calls in the future.

Paul Kedrosky has an excellent post on gold being underowned compared to the last big financial crisis.

Crash

I have no idea what caused the collapse intra-day today, whether it was a bad trade or the withdrawal of liquidity by the machines or what.  What I do know is that it was amazing to watch.  At one point, the Dow was down nearly 1,000 points.  I have never seen anything like it.

I got lucky.  On Monday near the close, I hedged out all my equities positions to net flat.  I had also been buying gold calls the past week and have been long the dollar since the beginning of April.  So my book since Monday's close has been long gold, long the dollar.  

I closed out most of my dollar long position and have kept only a small position.  That does not mean the euro is going to rise.  In fact, it will probably keep melting down.  Remember, it was 85 cents several years ago.  And on a purchasing power parity basis, it is worth $1.15-$1.20, so it is still expensive.

I am a long-term bull in gold but have traded in and out of the yellow metal over the past eight years.  I started buying a week ago when the price action was acting very well.  I expect that we will go back and re-test the $1225 highs, back off a bit, then blast through it.  I expect to add to positions on a break to new highs or on a light pullback.

My equities book right now looks primarily like this - long small banks, long semiconductors, short the S&P 500 and Russell 2000. 

Over the past year, I have been buying banks, primarily very small banks.  My criteria for banks has been to buy stocks trading below tangible book value that made money through the crisis and are forecasted to make money this and next year.  I own 14 banks, most that trade by appointment.  I hope to add to my bank position during this sell-off.

My semiconductors position is now a residual of a basket that I began building in 2008, and continued to buy through the end of the year and into the Spring of 2009.  At one point, I owned 18 different chip companies.  I have sold most of my basket and now own six names.  I will sell into strength.

The hedges I own are the Direxion Russell 2000 3X Bear ETF, ticker TZA.  I own the double inverse Horizons S&P 500 Bear Plus ETF in my Canadian RRSP account, ticker HSD.TO.  I also hold the double inverse Horizons S&P/TSX 60 Bear Plus Fund, ticker HXD.TO for other accounts I manage in Canada. 

My intention in buying the leveraged inverse ETFs was not to short the market but to eliminate equity beta.  Since Monday afternoon, my net position became net short, so I peeled a small part of my hedge.  Interestingly, during the 600 point 20-minute plunge this afternoon, I tried to sell some TZA, which is normally pretty liquid.  However, it did not get filled, even though I kept it open for 20 minutes. I pulled the order as the market bounced.

I have been expecting a 5%-10% correction for some time now.  Today, we got it, with the S&P 500 down 13% intra-day from the highs of a few weeks ago.  I had thought it would merely be a correction in the midst of a cyclical bull market. I'm not so sure now.  This may be a correction within a cyclical bear market but I must respect the action, and the market action today was just horrible, no matter what the reason for the sell-off. 

Sovereign debt crises are very serious, and must be respected.  I expect more downside pressure in the near-term.

Long US Land

In November, I closed on a piece of land.  The property is beautiful and quiet, albeit a bit small.  It is in a small subdivision with 10 other properties.  Four properties have been built.  I have no deadline to build.  There is a swimming pool in the common area and the small subdivision road is made of cobblestone.  It is two blocks from a very trendy area where everyone wants to be.

And it is a minute’s walk to a beautiful beach.  There is no main thoroughfare obstructing beach access.  It is wonderful.  I could not be happier.

For the last four years, I have been making a trip to a resort area in hopes of finding a dirt-cheap bargain after the inevitable real estate bubble crash.  I was originally hoping to find a condo but last summer, I changed my mind and started looking at land instead.  Land prices had completely collapsed.  Condo prices, on the other hand, had merely imploded. 

Ten years ago, this was a relatively unknown but naturally gorgeous part of the world, if perhaps a little kitschy.  At the beginning of the decade, I think there were seven or nine condo complexes built along the beach in entire the county. 

Then, things got crazy. 

Nearly 30 condo complexes were built in a few years.  Literally thousands of condo units flooded a market that had a small local population.  There was construction everywhere. Upscale replaced kitsch. 

Prices exploded.  In 2005, my wife and I stopped into a two-story house built in the 1980s on the beach but on the wrong side of the highway.  The owners were selling the second floor.  Asking price?  $2 million.  The house probably went for $100,000 a generation ago.

Virtually none of the units in the newly-built condos were owned by locals.  Less than 2% had applied for the tax emption eligible for primary residences.  There was no rise in the number of children registered for school.  Everything was owned by non-residents.  Many bought several units financed with subprime, Alt-A and assorted “liar” loans.  This place was the poster child for excesses during the Housing Bubble.

For those with an understanding of history and value, what was about to happen was clear as day.  And it did.  The market crashed. Foreclosures skyrocketed. 

I would guess that the entire beachfront is now worth much less than the debt that underwrote it.  Most properties are upside down.  Banks are the largest property owners and are ridding their inventories at firesale prices.  It is a great time to be a scavenger.

When I discovered the subdivision, there were two identical properties for sale. Both properties were owned by banks.  One bank had owned its property for over two years, the other bank owned its property for less than two months.

Believing that the bank which held its property for two years would be a more motivated seller, I made an offer.  I was shocked at the response – “No deal.”  They weren’t willing to budge.  They thought prices had fallen far enough.  A property had changed hands at the same asking price a month earlier but that property was a third larger in size and was arguably better situated.

I thought the bank was being unreasonable.  I told the bank that on a per square foot basis, they were overpricing the property.  “Sorry” came the response.  They weren’t selling.

So I made the same bid on the property owned by the other bank. This bank was far more motivated to sell and we quickly reached a deal.  It is actually a better property than the one I originally bid on since it is closer to the beach.

The subdivision was originally purchased by very clever real estate developers.  They bought the land when it was covered in brush, cleared it away, paved it, built a swimming pool, and carved out 10 properties.  In 2005, they started selling, listing each property for $679,000.  Eight sold quickly.  A year later, one of the properties was flipped for $885,000. 

But then, the market froze. 

People mark 2008 as the beginning of the credit crisis, but that is wrong.  In one resort area near where I live, transactions literally stopped dead in the fall of 2006.  A few months earlier, titles were being flipped before closing.  The suddenly, bids completely evaporated.  The bubble had peaked.

The real estate developers – being clever – understood what was happening, and in 2007, dumped their last two properties for $100,000 each. 

The bank that wouldn’t budge originally listed the property for $500,000.  They lowered it to $330,000. Then to $250,000. Then to $125,000. Finally, they lowered it to $90,000, which was the listing price when I found it. 

I bought my property for $70,000.  Three years earlier, a similar property in the subdivision changed hands for $885,000.  My purchase represented a 92% decline from the peak.

I ask the reader this – where in the world can you find assets down 90% that will benefit from the massive inflation the world’s central banks are creating? 

Stocks have soared, bonds have soared, commodities have soared but real estate just sits.

Yes, there are structural problems in real estate.  There is way too much of it.  There is too much real estate debt.  And that is why real estate has lagged.

But the Fed’s actions to Save the World are highly inflationary, not necessarily inflationary in terms of consumer and producer prices paid, but in terms of asset prices.  We live in an asset-driven economy, where asset prices are the primary benefactor of easy money.

The dogma of modern central bankers has been to focus on the general level of prices paid in the economy for goods and services, not the level of asset prices (unless asset prices fall too low and imperil the system).  As long as consumer prices are not rising (or falling) much, the amount of money created is a minor focus, if any at all. 

The opening of China and the commercialization of the Internet were both powerful deflationary forces.  Prices should have fallen over the past 15 years, or at least not risen as much.  In a quest for price stability, excessive liquidity was created in the system, which found its way first mainly into stocks, then into residential real estate, but also elsewhere – bonds, commodities, real estate, art, wines, sports teams, you name it. 

This cycle has not changed.  To offset deflation, the Fed’s balance sheet has exploded, and liquidity from the largest fiscal and monetary stimulus ever is flooding primarily into asset markets.

Most asset prices have soared.  Stocks have exploded.  Bonds are way up.  Commodities have more than doubled and gold hit an all-time high.  Yet real estate just sits there.

It won’t for long.  When I closed, I had to wire funds for purchase at a local bank. I asked the banker how the real estate market was doing.  She told me that at the lower end, houses that were listed on Monday were under contract by Friday.  Prices had fallen far enough and now people were buying again.

I may buy more land.  When I went out to my new property a few weeks ago, I had planned to look at a few more listings my broker had sent me.  But they have since been sold.  I was hoping that the first property on which I bid would still be available so I could convince the bank of the error of their ways and they would sell to me at my purchase price.  But that is not going to happen.  Last month, the bank sold the property for $74,900.

I am long US land.

 

Aaannnddd I'm Back Out Again.

Making my broker happy, I blew out of my gold position Friday.  Had I not sold my position on Friday, November 27, I still would have sold it anyways. 

Gold was down 5.7% intra-day. One difference Friday compared to the Friday over Thanksgiving was that volume was huge. This is worrisome. Another big difference is that there was no intra-day reversal as there was over the Thanksgiving holiday.

So I blew out my position. We bounced a little at the close, but we ended the session near the day’s lows, which is usually a sign of more selling to come.

I don’t think this is the end of the gold bull market. I think that we are going to get to $1500-$2000 eventually. But I might be dead wrong. This may be the top in gold. Large declines on huge volume after a parabolic run is not a good sign.

If you study past parabolic moves, there is often a correction and a period of consolidation. This may be such a period. If gold behaves in a similar manner, I expect a period of backing and filling for 2 to 6 weeks and then another move higher. However, when you trade, you have to be intellectually flexible. If we run immediately back up on light volume, then begin to roll over, that might signal the top and a shorting opportunity.

Back In

After selling my gold position two days ago, I have re-established my position.  I may be doing this totally wrong, but following Friday's sell-off, it appears gold wants to go higher.

We are in a melt-up in gold, and I believe one must be quick on the trigger if you want to play it here, because when it does sell off, you are not going to want to hang around.  It will be ugly.

I have not re-established my long position in stocks, though I may do so if we break to the upside.

Of course, I could change my mind tomorrow and sell gold again, making my broker happy.

Out of Stocks, Gold

I liquidated my gold position on Friday.  A large down day after strong upside momentum like the sell-off Friday is usually met with either consolidation or selling.  I will be watching gold closely and hope to re-establish my position in the not-too-distant future.

This bull leg in the gold market is acting remarkably similar to the upswing in 2007 and 2008.  We had a similar sharp pull-back in November 2007, followed by a consolidating bullish wedge formation, which broke out a few months later and moved to $1032 in March 2008.  I will watching closely to see if a similar pattern develops over the next few weeks.

I have been selling down positions in the stock market this month and hedged out my remaining positions on Friday.  I am now actually slightly net short, primarily because I apparently can no longer do math.  Having said that, I am happy to be net short, and will be looking to get even more short in the near-term.

As long-time readers of this blog know, I could change my mind tomorrow and completely reverse my positions once again.  Thus, it is best not to trade and invest solely on what I write.  (Oh, they know that. - ed.)

Net Flat

I hedged out all my longs by putting on new shorts today.  I do not like the action of the market.  However, I am not looking for a tremendous break on the downside.

Now that I have gone net flat, it probably means stocks are going higher.

What Worries Me

I would very much like to extend my appreciation to all the kind words yesterday.  One of the reasons why I started this blog was to provide unbiased (though, in retrospect, not always correct) observations about what is happening in the market.  If I have helped you understand things a little clearer, then I have accomplished one of the missions of this blog.

I have not gone away, at least not yet.  However, circumstances are changing such that it may no longer make sense for me to actively blog as I have done so in the past.  That decision remains to be taken, and I will continue to post, but only occasionally until decisions have been made.  Then, we will see.

I do owe at least one post as Isam reminded me in the comments yesterday. And that is what really worries me.

The economy and the markets have gone through a traumatic shock unlike anything we have seen in seven decades.  You know the story by now - housing bubble collapse, Lehman bankruptcy, subprime mess, credit market implosion, deleveraging, etc. 

I believe the market had priced all of this in, and more, given the record spreads in credit and dirt cheap valuations in equity.  If we are to break to new lows, then another convulsive shock must occur to the economy.  There must be something as big or bigger than what has already been experienced to send the market into a free-fall once again.

Bears argue that the shock is going to be commercial real estate and/or credit cards.  I disagree.  I believe the market has already priced in the decline for both.  The REIT ETF, ticker IYR, fell 77% from the highs, while credit card giant American Express fell over 80%.  Those are depression-like returns.  These are well known and have already occurred.  I also believe that both are no where near as threatening as what has already happened in the housing and mortgage markets.

But there is one thing that I believe is not well known, and it does worry me. 

And that is the potential collapse of Eastern Europe.

The collapse of the economies of Eastern Europe is an event that could rival or even surpass the collapse of the housing market, and I do not think American investors fully realize the ramifications of such a collapse. 

The region is not particularly important in terms of global output.  However, it is the exposure of European banks to the former eastern-bloc countries that could cause a chain reaction which could bring down the European banking system, causing the economy to plunge further and markets to collapse once again.  Given the hodge-podge of European financial regulation and a patchwork political system, the European authorities are less able to respond to such a crisis than the United States.

By some accounts, the eastern European countries are in worse shape than the Asian countries were at the start of the Asian Contagion in 1997, with sky-high indebtedness and large current account deficits.  Western European banks financed the borrowing in eastern Europe, and large defaults could bankrupt the European financial industry.

I do not know if the ultimate denouement is the implosion of the European banking system triggered by a collapse of the highly-indebted countries in Eastern Europe, but it worries me.

Dialing Down

I am decreasing the amount of posting, at least for the time being. 

Since I began this blog, I have made an effort to post on finance and markets at least once a day Monday through Thursday, and on economics on the weekend.  For a variety of reasons, I am no longer going to maintain this schedule over the immediate future.  Instead, I will post periodically when an issue of particular interest arises.

T.