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09242012 September 24, 2012

Posted by easterntiger in economic history, economy, financial, gold, markets, oil, stocks.
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Weather Report 09242012

Current Positions  (Changes)
I(Intl) – up to 5*%; S(Small Cap) – up to 5*%; C(S&P) –up to 5*% ; F(bonds) – up to 30%; G(money market) – remainder

*-these I, S & C entries are ½ positions; a round of selling/profit taking is possible, but not guaranteed, within the next few weeks after the end of the quarter ‘window dressing’. Positions will be doubled with the initial ½ position on that dip.  If a correction exceeds projections, I will notify of my exit at -5%, which will result in a loss of 0.75% of the total TSP balance versus a possible upside of about 6% between now and the end of the year.  This is a reward/risk ratio of 8:1.  When the DJIA reaches an entire quarter (63 trading days) without a 1% decline, while recently trading at a 52-week high, and since 1900, there were 16 such cases,  over the next six months, the Dow was positive all 16 times, with a median return of +6.0%.  The maximum decline during those periods averaged -3.5% versus a maximum gain that averaged +8.0%.

Weekly Momentum Indicator (WMI***) last 4 weeks, thru 9/21
-1.16, +7.77, +22.73, +25.13
(3wks ago/2wks ago/ 1 wk ago/this week)

Amid continuing concerns about the US economy and fiscal policy (taxation/spending), the European debt crisis, and the slowing growth in China, financial markets have been subject to a higher level of uncertainty.  The slate of factors that are bearish for equities at this point is significant. One economic bright spot revolves around the iPhone5, which is projected to add as much as 0.3 to the quarterly GDP.  That’s impressive.

From a technical standpoint, the recent Fed announcement to continue another extended round of asset inflation through QE3 occurs at recent market highs, unlike in the past when QE was initiated nearer to market lows.  This move was in anticipation, or fear, of recent rounds of unusually weak data around the world. Given this open-ended, artificial support by the Fed combined with the traditional fall rally into the end of the year (money and fund managers like to show results into year-end to justify higher bonuses), there is probably a short 2-4 month window where stock indexes should continue an advance, albeit a likely weak one, into December.  Net outflows from equity markets are still expected to maintain their negative trend, as has been the case since mid-2008. Bond inflows have maintained strength.

At +16% in just over three months, the current leg up in the cash S&P 500 ranks as only the 88th longest and 50th greatest (of 134), in percentage terms, since the advent of daily stock-price averages in 1886. A median leg would lift the index 3.2% higher in just under 5 months, so this market can’t yet be considered overbought. Gains over the past two months must be taken into proper context.  The bulk of any increases since the start of August occurred over TWO days, following the announcements of European Central Bank Stimulus and the U.S. Fed announcement of quantitative easing.  Overall volume levels continues to indicate very little interest in continuing a strong and reliable trend.

The next substantial overhead resistance comes in at the March 24, 2000 top of 1,552.87, followed by the slightly higher October 11, 2007 record peak at 1,576.09.  This is unlikely to occur quickly. This index closed at 1460 on Friday.

For much of the past seven weeks, world markets have traded around a combination of market data and a series of meetings and announcements from every corner, summarized here, by date.

8/30 – Eurozone retail sales decline for 15th straight month
8/31- Fed Chair Bernanke makes no major announcement at the ‘Changing Monetary Policy’ speech at Jackson Hole, Wyoming, after the market stood basically still for the month of August in waiting as if he would; Japan Manufacturing index falls to 16 month low, still in contraction mode; Spain’s budget deficit already exceeds the forecast for the entire year
9/3 – China New Export orders drop most since 3/09
9/6 – US Services index rises, showing divergence between services economy and manufacturing economy; European Central Bank initiates bond buying program (stimulus)
9/7 German drop in construction new business, services new business and manufacturing new business; China announces stimulus program
9/9 Japan’s revised GDP growth cut in half; German manufacturing declines to 37-month low
9/11 – Canadian exports including energy, autos, agriculture, forest products and machinery/equipment collapsed in the latest report
9/12 – Fed Meeting and announcement of QE3/QE ‘Infinity’, $40B/month purchases of mortgage-backed securities, duration undefined ‘until the labor market/unemployment improves’ (stimulus)
9/13 – Lakshman Achuthan of Economic Cycle Research Institute (ERCI) says the US is in recession now, since June
9/17 – Oil plunges in delayed reaction to new Fed QE policy, sensing major disruptions underway to world-wide economic trends
9/19 – FedEx profit down 1.1%, FedEx shipments, down 5% yr over yr. FedEx shipments are highly correlated to GDP trends; UPS cut it’s earnings outlook; Japan will increase the size and duration of it’s bond-buying program (stimulus)
9/21 – Dow transportation index ends at lowest level since June, showing conflict between current and future trends; (the Dow Theory holds that stocks cannot advance strongly if transportation stocks are indicating weakness.)

Opinions on the current round of quantitative easing, round 3, have been strong and mostly non-supportive.

Paul Volcker, Fed Chairman under Presidents Carter & Reagan
“I think people think the quantitative easing helps pep up the stock market and may reduce long-term interest rates a little bit. But I don’t think it does enough to make a really significant difference in the basic outlook, which remains one of limited job creation in the private sector, but not really enough to reduce the unemployment rate at all rapidly. There is slow progress toward de-leveraging and that’s the outlook. And the Fed action doesn’t remove the need for tough fiscal policy in a medium-term horizon.

From the unofficial transcript of an interview with Dallas Federal Reserve President Richard Fisher today, Tuesday, September 18th, at 7AM ET on CNBC “Squawk Box.”
“…and I feel strongly about this. Our job is not to provide Ritalin to the traders…our job is to do what’s in the long-term interests of the American people.  The stock market provides what economists refer to as the ‘wealth effect…”

Nigeria’s Central Bank Governor Sanusi put it quite bluntly: The European Central Bank and US quantitative easing driving oil price.

How is QE3 supposed to lead to job growth?
1.    Increasing the supply of – securities should raise market liquidity, sending investors to the rising prices of riskier assets and overall wealth and to push down mortgage rates
2.    Stimulating the housing market, raising housing prices, raising consumer confidence and consumption
3.    Stimulating job growth

Record unemployment in the Euro area and a jobless rate stuck at more than eight per cent in the U.S. may crimp an export rebound, while slumping corporate earnings, bad debts at banks and property curbs are restraining investment in China.

Global purchasing managers indices represent the state of manufacturing in countries around the world.  Right now they indicate slowing manufacturing growth world-wide.  This suggests falling demand in the global economy.

One of the biggest concerns surrounding Europe’s future is the impact another recession would have on it’s debt crisis.  Right now it’s telling us Europe may be headed for a deeper recession than many analysts may be anticipating.  This could wreak havoc on deficits and debt reduction plans, leading to an even deeper crisis elsewhere.

In China, the Purchasing Managers Index fell to 49.2 in August from 50.1 in July, the National Bureau of Statistics and China Federation of Logistics and Purchasing said from Beijing.  50 is the line between expansion and contraction.

China’s manufacturing unexpectedly shrank for the first time in nine months as new orders contracted and output rose at a slower pace, signaling the slowdown in the world’s second-biggest economy is deepening.

  • Manufacturing sector operating conditions worsened at the sharpest rate in 41 months
  • Renewed decline in factory output is signaled
  • New export orders fell to the greatest extent since March 2009
  • Average input costs down at steepest rate in 41 months
  • New export orders contracted at the fastest pace since March 2009, this, combined with a record high in stocks of finished goods sub-index
  • China’s exporters are facing increasing difficulties amid stronger global headwinds

Australia & New Zealand Banking Group Ltd cut its estimate for China’s full-year growth after the report.

In spite of QE’s expected positive impact on gold and silver, both of which are expected to significantly advance over the next two years, the outlook for oil is still negative, against conventional QE wisdom of raising commodity prices by pressuring the dollar. Oil is expected to continue to react to the falling usage figures, continued slow decline in GDP and the heightened concerns of a return of full recessionary conditions.

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