Gold’s 2015 performance in various currencies (chart)

The Brazilian Real was walloped and the dollar was clearly a standout winner. Gold’s relative underperformance shows against US dollars that the US dollar is still seen as a safe haven currency.

Until that changes gold will underperform as measured by US dollars. I think we’re closer a that point in time when we see positive price action then we were a year ago, but I can’t say for certain if the markets will agree until stocks move in to a bear market.

As seen in the start of 2016, when stocks were out of favor, gold caught a bid and moved higher each day stocks were sold off. Now that stocks are catching a bid, gold is selling off.

Whether or not 2016 is the year that stocks enter a bear market remains in question. I am inclined to think that we have only seen a prelude for the downside in stocks that could occur this year.

An open letter to Barracuda Networks (CUDA) management

I am a recent investor in Barracuda Networks (CUDA).  Needless to say the earnings miss and subsequent market reaction between Thursday evening and market close on Friday was quite disconcerting.

During the conference call on Thursday, January 7th, Barracuda Networks CEO BJ Jenkins stated that a ‘faster than expected‘ migration to hybrid and cloud-based solutions was a catalyst for weaker than expected billings.

The problems, from my standpoint as an IT veteran and tech investor, seem to be in planning and execution.  There are a number of shortcomings which I can see that may give pause to Barracuda’s long term growth prospects:

1: Employee retention, compensation and work environment morale complaints are considerably higher than the industry average.  This leads one to believe that productivity would also be impacted:

2: Product prices that may scare away small businesses.  Thus pushing them in to subscription-based cloud offerings as an alternative.  I have dealt with this problem first hand with many of my clients who are inclined to move from on-site equipment in to cloud-based solutions.

Something has to give, whether it’s the core product price or the energize update price.  A discount would incentivize higher sales.

3: Slow, inexperienced front line support.  From an IT consultant who works with Barracuda Networks products and support regularly, I think that there is room for improvement.  I recently called in Barracuda Networks for support on a VPN product.  The first person I spoke to clearly had no technical knowledge whatsoever.  This, combined with the long hold time to reach an actual technician was a less than optimal customer experience.  Fortunately the technician who eventually came on the line was helpful.

4: Lack of trust.  I cannot emphasize this enough.  In the wake of all of the data breaches, espionage and with Barracuda Networks trying to gain a larger foothold in cybersecurity, trust has to be a number one priority.  Some years ago a remote backdoor was discovered in Barracuda Networks products and the management effectively stated it was not a big deal.

From an IT consultant’s perspective that’s a very, very big deal because we have a moral obligation to warn our customers against using such backdoored products.  After all, backdoors rarely stay secret for long.  My advice is to get ahead of the trust issue.  Ensure the public knows that Barracuda Networks would never install any backdoors, remote management or other sorts of potential security vulnerabilities.

Believe it or not in my network of IT contacts, there are many that still to this day refuse to buy or endorse anything Barracuda-related because of the issue not being publicly addressed to satisfy their quandaries.

5: We need true, industry disrupting innovation.  Not incremental improvement.  A renewed focus on virtualization, cybersecurity, threat detection and mitigation is path forward that will be greeted by the highest revenues.  IT spending has plateaued and in all likelihood so has the US equity market.

What will make Barracuda Networks stand apart from its peers is innovative, unique and cost effective solutions to the growing data breach epidemic, keeping virtualized environments secured from attack, working on automated threat mitigation strategies and showing these technologies as Barracuda Networks’ core focus for 2016.

In closing, I hope that this information is found to be constructive. I am cautiously optimistic that Barracuda Networks can turn itself around and rebuild value lost to investors.  It will take a lot of hard work, ambition and some calculated risk taking to reach that point.  And once there, even more to maintain it.

This message was sent to Adam Carson, VP of Finance and Investor Relations at Barracuda on January 9th, 2016.

China halts, dollar faults, buyers bolt

Storms are brewing. The wind will carry them from the east to the west. Be careful out there.

Thursday will be another difficult day in stocks and risky credit markets. The dollar is no longer being seen as much of a safe haven. Gold is catching a bid, but for how long?

This time it’s different

The last time the market crashed, commodities were booming until they weren’t — and then equities tanked even more.

This time commodities are ahead of the business cycle as represented by equities.  At least in the US.

It seems as though we are confronting a new era. One where many other asset classes, including commodities, credit (bonds) and foreign currencies may be first in line to suffer from headwinds in global economic growth.

But that doesn’t mean that stocks will lag too far behind.  It just means that investors have been given every single warning indicator possible that something is amiss.  The question is, will anyone pay attention?

Stocks, dollar topping. Commodities closer to bottom.

It’s my opinion that the stock market rally, which lasted from early 2009 until late 2014 by many accounts, is largely over. Charts show a consolidation churning over the last year that gives reason to believe that the bull market is long in the tooth. The momentum in stock market buying has significantly stalled on a technical basis.

Fundamentals don’t look much better as earnings haven’t been particularly stellar in retail, materials, energy, construction and industrial equipment.

The dollar rally, which brought the dollar from about 78 in 2011 to just over 100 in 2015 seems to be topping out as well.  There’s not much conviction over the 100 level and the long dollar trade is quite lop sided with bulls outnumbering bears by the highest levels in years.

Meanwhile, commodities have been sold off to lows we haven’t seen in years if not decades in some cases.  The very stuff that drive economies, trade and the basic fundamentals are selling off as if the abundance of supply and lack of demand now is a permanent situation.

Markets always look ahead, until they don’t.  And sometimes they get a bit emotional both on the way up and the way down.  That emotion can drive exaggerated reactions.

The biggest emotional reactions tend to happen during periods of excessive greed during a top or excessive pessimism during a bottom. These emotional extremes can drive prices in to areas where opportunities may be realized by taking the opposite position.

That is to say, sometimes being a contrarian, while risky, can also pay off big.

I’m of the belief that this is one of those times.  The emotions are running high with stock and dollar bulls as well as commodity bears.  In fact I think it’s reasonable to speculate that many of these trades are tied together: long the dollar and stocks and then short commodities (and their equities) to maximize alpha.

It’s been a great trade for several years — there’s no doubt about that.  Most funds participating in such a trade have delivered outsized returns.  But now that positioning has matured, the gains have been largely realized and taking the opposite position may be more lucrative and less risky.

It may be time to consider going long commodities and taking a short position against equities. But don’t do anything risky without talking with a qualified investment professional. Good luck investing!


Crude’s crash could cause conviction crisis

Oil prices haven’t been this low since 2009. Energy stocks are collapsing, credit markets are rattled and the commodities complex is capitulating.

What does it all mean?

Commodities, and especially energy, are a barometer of global economic health.  The current reading indicates we are heading in to a serious storm.

China’s exports have been dropping, which shows curbed demand from Europe and the United States.  Thus, demonstrating that the consumption-driven global economy is struggling.

Where do we go from here?

It’s quite possible that a global recession is the next leg down.  We’re already seeing signs in the economies of the Euro zone, Japan, Canada, Brazil, Russia and others that a soft landing may not be in the cards.

How does one protect their capital?

Conventional financial investments tend to get bludgeoned during recessions.  This is because risk adversity grows and investors convert stocks in to bonds, cash and other assets that are perceived to be ‘safe havens.’

My inclination is that gold, silver, the Japanese Yen and Treasury bills will see a supportive bid in 2016.  The US dollar and equity markets will likely see a corrective pullback, if not a larger decline.

Commodities crash below 2002 lows

Prices of commodities tend to reflect underlying global economic health. With the recent crash below 2002 lows (as priced by the Bloomberg Commodity Index), concerns are mounting that the world is headed toward recession.


Dwindling demand deepens downside

China’s days of double digit GDP growth appear to be on pause, if not over. The lower demand from China and other countries, combined with the ramp up on commodity production during the global growth boom that China led has created elasticity.

The greater slack has then lent itself to lower prices due to the combination of greater supply and lower demand.  A problem which seems to have no short term resolution on the horizon.

Gold may be closing in on a bear market bottom

As we approach extremes in bearish sentiment, the number of gold ounces promised per contract (on the Comex at least), relative strength and the dollar rallies on the promise of a tightening cycle — I think it’s important to take a moment and reflect.

Interest rates make a bad situation worse for debtors

The US government currently spends over 6% (about $250 billion per year) of its budget on interest alone.  If interest rates were to normalize this figure would swell significantly.  So the idea of a tightening cycle being a possibility without a significant (and deflationary) reduction in government spending is unlikely.  Even if spending were to be decreased, it would not be in time to reduce the deficit or debt burden.

Further, liabilities in the private sector are explodingStudent loans, car loans, credit card debt, mortgages and debt-driven share buybacks are all at unprecedented levels.  This is further evidence that the system at large is far too debt-dependent to move to a higher rate structure without a significant rise in insolvencies.

Leverage and volatility don’t mix well

Lest we forget the interest rate complex at large.  The biggest swath of derivatives in the world, hundreds of trillions of dollars of leveraged OTC instruments, are tied directly to it.  To give you an idea of its scale, the amount of interest derivative products alone dwarf the global GDP by nearly 7 fold.

Large moves in short periods of time render leveraged trades insolvent due to the trade turning against them.  If one is borrowing $9 for every $1 they put in to a trade, then if the trade goes against them by 10% they are wiped out.  More than 10% and they owe more than the $1 they put down.

This is precisely the risk present in the world of derivatives.  The only difference is the leverage is much, much higher than 10 to 1.

Another problem is that in a tightening environment that’s unilaterally led by the US central bank (when other central banks do not follow), deflationary shock waves may proliferate throughout the global financial system and wreak havoc on interest rate derivatives markets, emerging equity and bond markets, US corporate debt and ultimately global financial markets as a whole.

Sensitive markets showing stress

Corporate bonds are beginning to sell off. Emerging markets have been in a funk for some time as they were once the beneficiaries of QE.

Given the level of medicine applied, one would expect the patient (the global economy) to have either rebounded or died of an overdose. Neither has happened, but markets are essentially in the eye of the storm.  The troubles past are gathering speed again at a remarkable pace behind the scenes.

Consequences are continuing to climb

This time around it is not just the financial system at risk, it is many governments of the world and many of their respective central banks that risk insolvency.  We are witnessing the biggest bubble that has ever been blown in history.

No wonder there is so much effort in preserving such a bubble.  The result of its end is a mind blowing problem.  And that’s precisely why the rate normalization cannot happen.  We may see a push higher by 25-50 basis points.

Policy road fork ahead

Such a hike, however, will in all likelihood pale in comparison to how the Fed manages its maturing balance sheet of bonds.  A new round of QE-like activity will likely emerge as those funds that mature are put to use to purchase longer dated bonds to re-stimulate debt markets in a variant of operation twist.

As equity markets finalize what appears to be their ultimate topping formation, I assume that we will witness another sharp move downward.  The Federal Reserve appears to be more sensitive to the gyrations of financial markets than the economy at large.  As a result it will likely pause and possibly even reverse in to this new variant of operation twist.

Ultimately this is bullish for gold

I believe we will have already formed the bottom in precious metals and begin to see a resurgence in prices once the stock market has topped and the Federal Reserve is no longer willing to tighten.  Whether the gold price tests the $1,000 level is still on the table, but I don’t see much further downside from here based on these assumptions.