Tharp's Thoughts Weekly Newsletter (View On-Line)


Workshop2014 January - March Workshops Confirmed!

Highlights for early 2014:

All three Peak workshops in January

Van returns to Australia in March

Plus, Day Trading and Forex Trading Systems February-March!

For our full workshop schedule, including pricing and discounts, click here.


ArticleDR

Where Does the Fed's Stimulus Money Go?
Part III

The Repo Man

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I had a most interesting conversation over lunch yesterday with a modern day “repo man” where he talked about one of the least well-known activities in the financial markets — securities repurchases, known broadly within the industry as a “repo.”  I mentioned that folks like him doing repos probably have an identity crisis since the term repo has another connotation in the work-a-day world, and the bond repurchaser sitting across the table readily agreed!

Ask a person on the street what a “repo” is and most will call to mind the off-beat, black Sci-Fi comedy Repo Man starring Emilio Estevez.  The movie depicts, in Hollywood fashion, the life of a young punk rocker that has lost his way and finds a career repossessing cars whose owners have fallen behind on their payments. (Another movie of the same name from 2010 starring Jude Law and Forest Whitaker follows a very different premise/plot and has not reached the “cult classic” status of the 1984 film.)

As mentioned above, in the financial world, the term “repo” is shorthand for a repurchase or, more correctly, repurchase agreement.  Repos are very common and important activities that allow institutions to generate short-term cash using less liquid securities as collateral.

In essence, a repo functions like a loan backed by collateral with the key distinction that the collateral actually changes hands. In simplified terms, it works like this:  the owner of non-liquid securities (e.g. corporate bonds or any security with longer term hold periods) will sell that asset to an ersatz lender in exchange for cash with the agreement to repurchase the asset at a later date. 

Because the entity providing the cash actually takes control of the asset (so they can sell them to a third party or at least use them as collateral for other transactions), the transaction costs of the “loan” can be quite small, making this a very efficient transaction.  Hence it is a low cost way for companies to generate short term cash or cash from “idle” assets.

In terms that my third grade economics students would understand, repos are a bit like the finance world’s pawn shop — things with value but no liquid market (like the ruby encrusted gold broach you inherited from Aunt Mabel) can be turned into cash. (Thanks to my good friend CRC for this analogy!)  In the same way, everything from long maturity treasuries to dusty old corporate bonds sitting in the corner of the vault and just taking up space are turned into short-term cash by using the repo system.

Coming to a Bank Near You: the Reverse Repo

In the first article in this series, we talked about one of the unintended consequences of QE — the reduction in high quality collateral on bank balance sheets.  In essence, the Fed has been buying up high quality collateral (treasury securities) and replacing them on bank balance sheets with reserves held at the Fed; reserves that can only be traded among banks and NOT with third parties.  This action, along with higher perceived risks, have reduced the repo market considerably since the Great Recession:

Chart 1

This reduction in repo transactions has contributed to the reduction in the velocity of money in the broad economy.  The velocity of money is one of ways that we measure the amount of “lubrication” in the market — how easy it is to transact commerce.  For that reason, this chart on velocity is well worth repeating:

chart2

The collective effects of dwindling amounts of high quality collateral, reduced repo transactions, and contracting velocity of money means that sooner rather than later, the Fed (and other central banks) will have to start unwinding the huge amount of reserves they have created over the last five years. 

Next week, we’ll dig into the “reverse repo” transactions that many in-the-know players expect the Fed to use and why it’s important for traders and investors to understand this arcane bit of financial alchemy.

Until then, your thoughts and comments are welcome — please send them to drbarton “at” vantharp.com

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".

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Trading Education

The Swing Trading Workshop is trending toward selling out.
Also, early enrollment discounts will expire soon.

November 8-10

Swing Trading Systems Workshop
with Ken Long

8:00am-4:30pm

November 8-10

NEW! Turbo Charge these Swing Systems
with Ken Long

6:00pm-9:00pm
Stay late and Ken will show you how to use swing trading systems to catch intra-day moves.

November 11-12

NEW! Live Trading for Turbo Systems
with Ken Long

2 days of live trading alongside Ken Long

This is the last Oneness Event this year. And thus far none have been scheduled for early 2014. If you'd like to attend soon, try to get into this one.

November 16-17

 Oneness Awakening Weekend
with Van Tharp and Janie Guill

 

Early 2014 Workshop Schedule Confirmed!

January
January 16-18

Peak Performance 101

with Van Tharp

January 20-23

Peak Performance 202

with Van Tharp and Libby Adams

January 25-27

Peak Performance 203

with Van Tharp

February
February 7-9

Day Trading Systems

with Ken Long

February 10-11

Live Day Trading

with Ken Long

March: Sydney, Australia
March 7-9

Peak Performance 101

with Van Tharp and RJ Hixson

March 11-13

Blueprint for Trading Success

with Van Tharp and RJ Hixson

March 15-17

How to Develop a Winning Trading System That Fits You

with Van Tharp and RJ Hixson

March: Cary, North Carolina
March 28-30

Forex Trading

with Gabriel Grammatidis

March 31-April 1

New! Live Forex Trading

with Gabriel Grammatidis

 

If you are in South Africa and would like have Van host a workshop there, please contact us at van@vantharp.com. There is a possibility he will be visiting South Africa in early to mid 2014.

Click here to see the full workshop schedule or to register.

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Trading Tip

Gold and Silver Update: October 13, 2013

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Arguments for lower prices:

  • Gold overall still in a downtrend. US$1,525.00 is the line in the sand. Gold will need much more time to break through this heavy resistance.
  • MACD sell signal on monthly chart still active.
  • MACD sell signal on the daily chart active since early September.
  • RSI on the weekly chart rolling over
  • Fibonacci support from the rally into the highs in late August around US$1,270.00 more or less broken.
  • HUI Gold Bugs Index did not confirm Gold´s recent high at US$1,432.00.
  • HUI Gold Bugs Index testing the June lows already.
  • Seasonality for October is not good. As well during bear market years rally attempts tend to be muted in autumn.
  • ETF Gold demand continues to be very weak.
  • The Indian government continues to fight against Gold.
  • Despite a weak US-Dollar and positive seasonality Gold was not able to rally.
  • CoT-Report from 09/24/13 for the Euro: Commercials heavily increased Euro short-position during the last couple of weeks.

Arguments for higher prices:

  • MACD buy signal on the weekly Gold chart still active.
  • Last Friday, Gold closed below lower Bollinger-Band (US$1,270.13). This a situation where professional traders cover their shorts as prices tend to stay below Bollinger Band only 2.5% of the time.
  • P&F-Chart for Gold does not look that bad. A daily close above US$1,320.00 and the downtrend since October 2012 is broken.
  • There was no COT report this week and last week, but commercial short position should be even lower now and therefore bullish.
  • Extreme constellation in sentiment towards Gold and Silver. Gold is hated. As my colleague Alan Micik (The Micik Market Letter ) pointed out: "On a Long-term and/or Intermediate-term basis Gold is now in the final psychological “low” phase of despondency and depression based on the cycle of market emotions".
  • Despite seasonal cycle for precious metals remaining down until end of October the lows in bear-market years often come in around October/November in Gold.
  • Silver stronger than Gold. Silver topped 4 months before Gold in 2011. Silver still maintains a pattern of higher lows and a rising 50 day MA even after two months of downtrend, so it is not beyond the realm of possibility that silver ends up dragging gold back up. Gold/Silver Ratio Chart looks promising. A break below 58.80 gives a new buy signal for the whole sector.
  • Today HUI Goldbugs index stronger than Gold and with potential W-Double-Bottom-Formation.
  • US-Dollar trading below its 50-MA (81.15) and below its 200-MA (81.78). Death cross now clearly in place on the daily US-Dollar chart.
  • US-budget theater continues.
  • The Fed will continue with QE and might even increase it.

Conclusion:

  • Despite the long-term positive fundamentals for Gold & Silver the technical picture continues to be quite challenging.
  • The chances for a surprising turnaround and a new rally are pretty high due to the extraordinary depressive sentiment in Gold. But there is no indication on the charts so far. A daily close above US$1,320.00 would be extremely bullish and a clear buy signal on the P&F chart.
  • A daily close below US$1,265.00 instead would signal that the bear-market continues and would point to a test of the June-lows at US$1,180.00.
  • Short-term this continues to be a tricky situation. My advice for traders would be to wait patiently at the sidelines until the picture becomes more clear. Focus on the buy trigger at US$1,320.00 and as well on the sell trigger at US$1,265.00. In the meantime be patient.
  • Investors with a longterm perspective should continue to accumulate physical Gold and Silver while they are hated and cheap.

Longterm:

  • Nothing has changed
  • Precious Metals bullmarket continues and is moving step by step closer to the final parabolic phase (could start in summer 2014 & last for 2-3 years or maybe later)
  • Price target DowJones/Gold Ratio ca. 1:1
  • Price target Gold/Silver Ratio ca. 10:1
  • Fundamentally, Gold is now starting to move into the final 3rd phase of this long term bullmarket. 1st stage saw the miners closing their hedgebooks, 2nd stage continuously presented us news about institutions and central banks buying or repatriating gold. The evolving 3rd and finally parabolic stage will end in the distribution to small inexperienced new investors who will be subject to blind greed and frenzied panic.

Click here to see larger chart images in the original format.

About the Author: Florian Grummes (born 1975 in Munich) has been studying and trading the gold market since 2003. In addition to his trading business, he is a very creative and successful composer, songwriter and music producer.


MatrixTrading Beyond the Matrix

Matrix Insight Entry

I find it amazing how we live our lives engulfed in the Matrix and never realize it.  I have often thought how interesting my life could have been had I been exposed to Dr. Tharp and this book so many years ago.  It has awakened me to the concept that life is what we make it.  Everything can be viewed from so many different places in the room, the question is; “are we viewing from the most beneficial place in order to live better and more fulfilling lives?”

Here’s a little short story about me and my friend Daniel who used to play and write music together.  Now we are both married with children, and our music days are a happy memory from our past.  But when we were in our early twenties we wrote this song called “The Keeper of the Realm.”  We didn’t realize the song was about our awareness of the Matrix and how we were basically stuck there.  Only after we read Dr. Tharp’s new book did it all come together 26 years later, “we had the power to create the life we wanted.”  The only thing keeping us from doing that was our inability to find this incredible information at that time.  We had awareness of something bigger than what was being offered in life, but could never get the clarity we needed to make real change.  The Matrix is a powerful place and does all it can to maintain that incapacitating grip it holds on us.

Well through reading, highlighting and re-reading this book numerous times we have made some real life changes.  Our approach to so many things has changed as well as our understanding of what a successful life is about.  It truly is what we make it, which brings me back to that silly little song we wrote.  Our chorus to that song went as follows

“The mind is the keeper, the door is the mirror, if you see yourself you’ve the key.”

Only through reading Dr. Tharp’s new book did we have this revelation of how close we were, but yet so far.  We constantly search into the future for the answer to our lives when it lies right inside us, waiting to be discovered.

So for me and my good friend Daniel, we believe the most powerful lesson we’ve learned from reading this book was;

“We create the results we get in our lives, and as soon as we accept that, the transformation begins."

Thank you for this life changing book, it has helped us both in so many ways, and it continues…

Our warmest regards to all at the Tharp Institute.

Matthew F.
Daniel D.

Forever traders

 

Editor's Note: We want to hear about the one most profound insight that you got from reading Van's new book, Trading Beyond the Matrix, and how it has impacted your life. If you haven't purchased Trading Beyond the Matrix yet, you can do so here. When you are ready to tell us about your insight, send an email to van@vantharp.com. We are looking forward to hearing from you. If we pick your submission we will share it this newsletter. Learn about this contest.

 

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October 16, 2013 #651

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