Should you fear that the FED hikes rates?

Tomorrow we will see the end of a two days meeting from the FED. Some indicators seems to show strenght from the US economy such as the unemployment rate and total initial claims who both dropped. Will that be enough for the FED to hike rates?

Highly unlikely in my opinion. 

First, we can question the strenght of the economy. The big boys know this and that's why you hear the media still talking about a "recovery" 6 years after the recession. Some signals are more difficult to decode than others, like the ones sent by the bond market.

"The message from the bond market, supposedly, is that the world today is worse than it was than at any point during the Great Recession, which is nonsense," says Paulsen. 

-Yahoo Finance

Is it really nonsense? No one knows for sure, not even Paulsen. No one really knows what's the extent of the benefits and the dommages of the emergency measures the FED used and is still using.

Secondly, we have to think about the consequences of a rates hike. The US dollar would appreciate against other currencies making it more difficult for foreign investors to invest in the US. On top of the loss markets would inccur directly from the currency, investors would start to quickly get out from the stock market. Like Warren Buffet said: "Interest rates are like gravity for the stock market." The real question is not if people would survive another market crash. The real question is whether or not big businesses and the financial system would be able to absorb the shock. I don't think they would.

Finally, analysts are not expecting a rates hike tomorrow, but rather they want to see if Yellen will take out the word "patient" from her speech. If she does, it would mean a rates hike could be close. However, even if she removes that word, I think we won't see a rates hike this year. That being said, tomorrow could be a bloody day for the stock market if Yellen takes that route.

Banks stress test, stock market, and gold

You probably already heard of the Dodd-Frank Act Stress Test that puts 31 big banks through a crisis scenario. They basically test a wide array of scenarios that goes from a small drop in the stock market to a severe collapse of real estate, the stock market, and main street economy.

Such a scenario would include an unemployment rate of 10%; a 25% decline in home prices; a stock market drop of nearly 60% and "a notable rise in market volatility."   USA today

This test is the first half of the big test (the second one is a qualitative test), and the Federal Reserve concluded that it was a success for all 31 banks. 

All 31 U.S. banks passed a 5 percent minimum hurdle for top-tier capital in an annual health check by the Federal Reserve, the central bank said on Thursday, as the industry continues to rebuild buffers after the crisis. Yahoo Finance

You can access the complete test by clicking here.

Should we be surprised of that good result? I don’t think so. If we look at the chart below, we can see that Reserve Balances with Federal Reserve from banks are at an all time high.

In simple terms, after the crisis the Federal Reserve “printed” the money and sent it to reserve accounts. Banks can then expand the currency supply and create more chequebook money through Fractional Reserve Lending.

This newly created money is supposed to flow into main street economy, but the reality is that it has found its way in majority into some assets such as the stock market. Matter of fact, you can take a look at the velocity of M2 Money Stock on the chart below.

This shows that while banks get healthier and the stock market rises, money is not circulating in the real economy. So I’m not really surprised that banks passed the test with a good score. They have plenty of reserves to support a recession.

The stress tests are so named because they measure whether the banks have enough capital to withstand major economic stressors, such as the 2008 collapse of the housing market. A passing grade means they have enough capital to withstand, say, rising levels of unemployment or plunging commodity prices. - USA Today

Now, the real question that we can ask ourselves is if regular people would pass a stress test. Let’s take a look to Real Median Income to answer the question.

Since the crisis regular people earn less money. But at the same time it looks like they understand the importance of saving money since the crisis as you can see on the chart below.

However, I don’t think the majority of people would pass a stress test. If there was a major crisis, the system and banks would be ok for a certain period of time, but I think regular people would suffer.

Another interesting point is the correlation between Reserves Balances and the S&P500 as you can see on the first chart of this article. It basically shows that if the S&P500 would crash by 60%, banks have a big enough cushion. It also shows that when they’ll start pulling out the money from the stock market there will be a danger for inflation if they inject it in the real economy.

At that step, we may see a rush into gold to protect wealth. But before that turning point, I doubt gold will be traded at August 2012 levels. However, I believe gold will remain of strong value in the meantime.

In conclusion, I don’t think a crisis would crash the whole system and banks like some people say. However, I think it will be a much greater threat to regular people who could see their wealth be wiped out if they don’t protect it.

Alibaba: A good investment or a short term trade?

Yesterday in my post I wrote that:

"By analyzing BABA I found an interesting cycle with the S&P500 which suggests it’s a good time to buy Alibaba."

Today BABA jumped almost 6% which made it interesting for a quick day trade. Many people wonder if trading is the only thing Alibaba is good for, or if it is a real investment. When trying to answer such a question, I like to surf the web to read articles and comments, just to give me a hint of how the company is perceived. I could find many negative comments such as:

"Is this company a scam? Judge it yourself and not 'Analyst' of obvious intent to ask you to buy! Hongkong delisted BABA after they noted their mickey mouse structure. Taiwan found out BABA lied and tried to use a Singapore base to get into Taiwan and asking them to get out. Only the greedy US financial people accept this fraudulant company and ask you to 'BUY'. If you do not live in China or HK. Ask a friend there to tell you what kind of company is BABA and actually many others. These are fraud by China standard. They also sell products that kills people. Heard of the poisonous baby formula case?" - aspx

Whether that comment represents the truth or not, you can see that the perception of BABA is volatile. That volatility in the perception of BABA by people can be transmitted to its stock's price. In fact, the repercussion has already been felt since the IPO.

"A lot of what's happened over the last one to two months is that some of the optimism from the IPO has worn off," Sheridan told CNBC's "Squawk on the Street" on Wednesday. "We believe growth is still going to be good." - CNBC

I believe that BABA will rise in price in the following weeks, but the question for investors is "Will that company rise in value?"Applying a DCF model makes Alibaba look in good shape for a tech company, but growth in my opinion is not really interesting because it carry a great amount of stability risk. Basically, I think there's better places to invest your money.

As a trade however, I think there is enormous potential. 

Time to jump in Alibaba (BABA:NYSE)?

Alibaba is currently trading at an all-time low, down 30% from its high in early November. Investors and traders are nervous because the Wall Street Journal published an article stating the following:

“The Journal reported that the company was being plagued by "brushers," or users who are paid by vendors to buy products at cost and then write positive reviews in an effort to move a vendor's listings higher up in search results.” – Yahoo Finance

I think that practice, if really used, is certainly not unique to Alibaba.

Alibaba actually trade at a P/E of 45, which is low if we compare to eBay (1,569) and Amazon (EPS negative). I also like a nice 38% profit margin which is way higher than competitors.

However, flood of shares will be coming via lockup expiration as pointed out by 247wallst.com:

“How big is the flood? On March 19, some 429 million ordinary shares will be available for sale in the public market, which is more than the 320 million shares the company sold in the IPO and about 17% of the shares outstanding. That is easily trumped by a massive 1.58 billion shares that will available for sale later this year, on September 21, which represents 64% of the shares outstanding.”

By analyzing BABA I found an interesting cycle with the S&P500 which suggests it’s a good time to buy Alibaba (in blue, Alibaba):

However, one should not forget that the stock market valuation is really high. A major down move could dramatically impact BABA. Major stock market indexes are positively correlated with Alibaba.

Will you jump in for a quick trade, hold it for the long run, or avoid it?

Yellen Turning from Friend to Foe for Dollar Bulls: Good for gold?

From a long term perspective, gold and the dollar have an inverse relationship. If the Dollar gets stronger, people tend to drop gold. On the contrary, if the Dollar weakens people tend to buy gold to hedge, bidding the value up.

The Federal Reserve has encouraged a stronger Dollar these last couple of years, but this may be about to change.

“While Bloomberg’s Dollar Spot Index climbed to a record on Tuesday, the measure is rising at the slowest pace since June and speculators including hedge funds are paring bets on how much the currency will strengthen. Yellen told Congress last week she won’t be locked into a timetable for boosting borrowing costs, just days after minutes of the Fed’s January meeting underlined the damage a stronger dollar can do to the economy.” – Bloomberg

Of course, this won’t happen overnight. For the time being we can expect a strong Dollar in the short future. That being said, I think the picture could change quickly and drastically. The strength of the Dollar is a relative strength rather than a fundamental strength in my opinion.

Let’s take a look at an interesting cycle chart comparing UUP and GLD:

We can clearly see that GLD (in orange) has a lot of room to go up and UUP (in blue) will eventually be pulled by gravity.

 “While bullish-dollar bets remain the biggest position in the market, investors are reducing the amount they’re speculating, according to data from the Commodity Futures Trading Commission in Washington. Net longs on the dollar versus eight major peers fell for the past three weeks to 404,276 contracts as of Feb. 27, down from a record 448,675 in January.” - Bloomberg

I believe we will see GLD move above $120.00 in the months to come. 

Iraq minister sees oil at $64 to $65 per barrel

BAGHDAD (Reuters) - Iraq's Oil Minister Adel Abdel Mehdi said on Sunday world oil prices were gradually rebounding and he expected to see a barrel of crude selling at around $65.

"I don't think they will return to their previous levels. I can see that oil will be sold at $64 to $65 a barrel," he told a news conference in Baghdad.

I often see people trading and investing based on news like that. Will it go up? Will it go down? The answer is two times yes. There will be another bubble and another crash one day.

The reason that politicians from countries heavily dependant on oil prices say such things is that they have no choice. Truth is we might see some ugly stuff in the future if some countries start to be severely impacted by low oil prices.

From our perspective, small traders and investors, we should not try to time the market. We should simply buy what's cheap by historical norm. Is oil cheap now? Yes it is. 

Link to original article.