GENERAL COMMENTS ON THE CAPITAL MARKETS
THE DATA IS IN; THE TREND SHALL CONTINUE AND THE BUDGET SHALL GET BALANCED!:
In speeches we give one of the central focal points is that we have lost faith in nearly all government data, whether it is the data from the Washington, from Ottawa, from Berlin, Paris, London, Moscow, Beijing et al. Being Libertarian in our thinking, we tend to believe that government is not nefarious, it is simply incompetent. We do not believe that Washington wants to do ill. Indeed, we believe that those who go to Washington truly do want to do the right thing…truly want to be or service…truly want to help. The problem is that government, and especially large, centralized government, cannot help but fail. To put libertarian twist upon an old line, the government that governs least errs least, for its sights are lower. This, we think, is a very good thing.
Thus, we are left to believe in one data point above all others: tax revenues. We believe that although tax payers will (and should) try their darndest to cheat; it is tax revenues that tell us the most about the health of the US economy. What we know is that since the mid-‘90’s and the advent of the computer, the dichotomy between GDP growth as reported by Washington and the growth of tax revenues into the states and into the federal government has widened consistently and materially. Back in the 40’s, 50’s, 60’s, 70’s, 80’s and early 90’s, as went GDP growth, so went tax revenues, with a lag. Since the mid-‘90’s, although GDP figures have grown, tax revenues have grown far, far more. That relationship…or more properly that semi-relationship…between GDP growth and tax revenues continues today. According to the data for January, tax revenue growth into Washington was up a stunning 11.5% year-on-year. Even we stand in awe of that growth.
What is really important to understand is that as tax revenue growth is up 11.5%, spending too is up…but at a much lesser pace: +5.5%. We would of course prefer to see spending decline year-on-year, but we’ll take what modest “progress” we can get. So even if spending is rising, the fact that it is rising at a lesser pace than revenues, we chose to smile. Further…and this is important…if these growth rates continue, without making any changes in the tax laws, the US budget will be balanced by mid-year next year. Now that shall mandate that current economic growth continues and that tax payment rates hold firm, but no where has this information been made public. It is, however, correct using “back-of-the-envelope” projections which we believe to be right. Even if we are wrong, the balance point shall be no further than early ’09. That we find really interesting!
RECOMMENDATIONS:
- Long of Eight Units of Gold/short of Seven Units of Crude oil and One Unit of US stocks: The gold/crude ratio is trading 11.1:1, down slightly from yesterday’s levels. Three weeks ago we expanded the trade by buying gold and selling US stocks…one unit of each in equal dollar terms. That ratio of the DJIA to gold is 18.5:1, moving modestly against us in the past twenty four hours; however, it shall likely move back in our favour materially today. We’ll “risk” this portion of the trade to 21:1.
- Short of Six Units of the WTI crude: Our average is October +92 over July and the spread closed yesterday at $1.48, in our favour by one more “pip” and closing again at new high in our favour!
3. Long of One Unit of the Yen and One Unit of the EUR/short of Two Units of the C$: This morning the EUR/C$ cross is trading 1.5325, materially in our favour. Further, the Yen/C$ cross is trading 103.05, moving back in our favour modestly. However, we have been concerned about this position for some while and believed it was time to “do more of that which is working and less of that which is not”. Thus we exited half of this position yesterday morning upon receipt of this commentary. Losses are an inevitable part of trading; accepting them is an incontrovertible part of it.
- Long of Four Units of Gold: We added to the trade four weeks ago as gold traded above $653. Three weeks ago we added another unit as spot gold traded above $662/oz, and Friday we added another unit as gold traded approximately $676. We said we’d not add until gold traded upward through $680 and then corrected. It did and we did, and now we sit tight with spot gold trading approximately $685/oz.
- Long of One Unit of Japanese shares: We bought “Japan” last week by buying the Japanese ETF: We’ll consider that this position was purchased at or near $14.95. We’ll not want to see the ETF trade below $14.45 on a closing basis, and our target to the upside shall be $15.75 - $16.00. The only question is when to add to the trade, and that, for the moment, is beyond our ken.
- Long One Unit of Coal: We could own coal futures, but the market is relatively illiquid and therefore we prefer owning coal shares. We were ambivalent to owning Peabody, or Arch, or Massey, or even the Fording Coal Trust (the latter of which is a steel related coal, not an electricity or heat generating coal). All broke out to the upside four days ago on huge volume and we know precisely where we have to admit error…last week’s low.
Our position was hurt yesterday by the news of the TXU buyout, for TXU said that it would stand down from several previously announced coal-fired generating plants it had expected to build. This is disappointing news; but is it material? We think not.
Good luck and good trading, Dennis Gartman.
