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05252013 May 25, 2013

Posted by easterntiger in economic history, economy, financial, markets, stocks.
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Weather Report 05252013

Current Positions  (No Changes)
I(Intl) – exit; S(Small Cap) – exit; C(S&P) –exit

F(bonds) – up to 60%; G (money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 05/24/13
+10.24, +32.01, +35.32, +15.51 (S&P100 compared to exactly 3 weeks before***)
(3 Friday’s ago/2 Friday’s ago/1 Friday ago/this past Friday)

F fund positions lost much of the profits that had accumulated since March, but, they are still above the levels where entry was made in February.

Seasonally, equity market corrections that do not begin by May often postpone until after Independence Day.  Price support due to end of  month, end of quarter ‘window dressing’ for May and June is very appealing to fund managers.  Minor allocations to S, C and I funds are slightly less risky now than in April, although, as with the year so far, gains are likely to be infrequent, news-driven, listless, jerky, i.e., one day gain, followed by several days of little or no gain/small losses.

Naturally, it is your discretion, depending on your tolerance for risk.  HOWEVER – normally, the longer the delay in a correction, the more SEVERE that correction when it finally arrives!!  Be very alert for quick exits.

With the sudden blaze of activity in the past 4-6 weeks, it’s a really good time to ask the question ‘…where are we now….?

I use a lot of images in my own conclusions. I rely on the images of others to help me correlate to my conclusions.  So, I decided to include a few here for impact.

Price Action

First, the bullish meter is pushing extremes (Investor’s Intelligence registers 55% bulls, a 2 year high and considered ‘over-bullish’; 49% from the American Association of Individual Investors), as is always the case at ‘tops’…. Corporate insiders have used almost 7 of the past 12 months as selling opportunities. Commercial traders and institutions are holding their largest ‘net short’ positions in over 5 years, indicating an expectation for lower prices sooner than later.

Bullish(it’s always brightest at the top)


“Dow 16000!” – Barron’s Magazine Big Money Poll 4/20/2013

And, in case no one remembers…..

“Dow 14000?” – Barron’s Magazine Big Money Poll, May 2, 2007

“Still Bullish! (Dow 13000)” – Barron’s Magazine Big Money Poll, May 1, 2000

Someone also believed that this wouldn’t stop the last two times that it did.

How does this 4-year rally compare with the past?


This chart shows at the ‘You are here’ point that the rise since the 12-year bottom in March 2009 is well below average both duration and magnitude when compared to all rallies from previous 30% declines.  The rallies of 1903, 1933 and the average of all 1900-2010 rallies are above the current trend.  We’re only performing slightly above the 2002 rally.  You’d never know this from the repetition of the ‘all-time highs’ mantra being promoted by the media, trying to convince you that the good times are back again, even at this over-extended peak, just 100 S&P points above our levels of almost 6 years ago.

In order to justify claims of how great a market you’re missing, the media can’t decide whether it’s better to use last November as a bottom, prior to the now-forgotten fiscal cliff time bomb, or, the March ’09 bottom of 1000 days ago, the peak of the financial crisis period.  Either way, it’s ok, after the fact, of course, to ignore the many other barriers that were ahead of us at either time, i.e., the many unknowns that have now become ‘knowns’.  Hindsight is always so 20-20.  We should just trust them, expose our funds to risk and pat ourselves on the back when (if) it all works out.  Some of these former barriers have yet to be solved, yet, conveniently, they can be ignored for now.

Current hindsight suggests that a pre-Thanksgiving allocation would have been the right thing to do.

But, only with the benefit that hindsight offers, I have assembled a table of just what events it took to move the markets in the past 28 weeks.  In the absence of well-timed doses of ‘jaw-boning’ by the central banks or high ranking officials, the movement of about 15 days out of the past 130 would not have made a dent at all, exposing much more risk than reward.

Note how the average daily movement was under 1 point per day, in the absence of some ‘encouragement’ from the sidelines, in the form of promises , crisis aversion, or direct stimulation.  So, where was the buying, strong fundamentals or true participation by motivated investors?  It’s still mostly absent.

Week 1 =  Nov 19-23

   Avg Changes
    Over        Points
   1 Week       Per Day



Japan Weakens Yen, Feeding Loans to Other Stock Markets


















  Last-minute fiscal cliff resolution



























Outgoing Chinese leader pledged record stimulus spending















Federal Open Market Committee notes show no bad news



Weaker Chinese growth signaled in weak GDP



Contractions in European data signals possible Eurozone QE



Positive(?) Jobs Report










Fed  ‘Tapering’ hint <thru <5/24

Viewed differently, what kind of ‘signal’ was being given after each market day from the first of the year, and, during the most recent slightly more positive period?

Last 100 days                 Last 60 days

from Jan 1st                   from March 1st

42.00%                        45.00%                   Positive or Long Signals

22.00%                         21.67%                  Neutral Signals

36.00%                         33.33%                  Negative or Short Signals

Less than 50% of the indications could be considered safe or low risk during these periods.  If you’ve benefited from positions this year in equities, consider yourself among the risk-embracing fortunate ones.  A reminder – gains are slow; losses are rapid – stay alert.

US markets have performed only average compared to markets worldwide. PercentChange

Best returns came mostly from markets with major economic or competitive disadvantages or loose monetary policies, flirting with future inflation or other future imbalances.  How much risk are we willing to take to maintain our ‘wealth effect’?

Smithers & Company, a London market-research firm, says that, according to a number of market indicators, US stocks are, by historical standards, forty to fifty per cent overvalued at our current levels.

The most recent surges in world market levels have also been influenced by Japan’s decision (see week 1 in the table) to create a competitive advantage through currency expansion….a flood of cheap money, i.e.,  Japanese money printing has helped weaken the yen and boost Japanese stocks.  This advantage has risks and has so far not provided substantial benefit. (Japanese exports are still below expectations). However, more recently, this has also put extreme upward pressure on interest rates in Japan, which they can ill afford.  It has also served as a source of newly borrowed money by world traders to speculate (short-term) in US and European markets.   That’s the good news.  The bad news is these are loans and they must be repaid.

There is no free lunch.

In an interview with Talking Numbers Bill Fleckenstein of Fleckenstein Capital said he thinks Japanese easy money and “Abenomics” in general is “dangerous” for the domestic economy and global markets.

“What is going on in Japan is potentially very, very dangerous not just for Japan but for world markets. And, I’m not speaking about the Nikkei. What has taken place in the Japanese JGB [Japanese government bond] is extraordinary. In the last three days, the yield has gone from 60 basis points to 86. Can you imagine what would happen in America if yields on 10-year Treasuries went from 6% to 8.6%?

“There are huge derivative books in Japan where there’s been tremendous amount of derivatives written assuming that rates would stay low forever. I think this could be on the verge of blowing up. This may be the start of it, this may get quiet, or it may get ugly right now. That will impact the American bond market and it will affect equities everywhere. So, it’s potentially dangerous.”

The impact of some rising rates in the US has already had an undesirable impact.

The last 2 weeks have seen mortgage applications plunge at their fastest rate for this time of year (a typically busy time) since the financial crisis began.

Back in the US, the hype of the ‘positive’ US jobs reports, with a headline number of +165,000 on the establishment survey, and 293,000 on the household survey, failed to officially acknowledge some the less attractive details – 441,000 voluntary and involuntary part-time jobs by those who would rather have full-time work, and an actual LOSS of over 148,000 full-time jobs.  The labor force participation rate was flat at 63.3%, dating back to a 1979 low.

Inconsistency in properly interpreting jobs data by the media is creating a gap between hype and reality.

Analogy – If I replace my 10 year-old car, because of fear of long road trips, with a 13-year old car, I still have a net loss of zero on car ownership (-1 job, +1 job = zero net loss), but, will my automobile ‘output’ improve, or will it decline?  If more jobs lost are replaced by equivalent or better jobs, then, positive jobs numbers are good news.  If lost jobs are replaced with jobs of lower quality, or, average lower income, then, even ‘positive’ jobs numbers are not truly positive.

Fact – net income has been falling for over seven years.


Where are we?

It’s much more than price action that matters; if the price action is so encouraging, why do we still need stimulus?  Because price action is what shows up in the front window to keep customers coming in.  Here’s what’s going in the corner offices upstairs.

The hint of further stimulus 4 weeks ago (week 24 in the table above) began a surge of European markets, primarily the French CAC (+8.6%), the London FTSE (+6.6%) and the German DAX (+11.6%) year-to-date, near their highs for the year.

So, you see, the market participants want it both ways…..

Strong economic data?  = Rally!  Because it’s good news.

Weak economic data  = Rally!  Because, it’s bad news and the Fed/ECB will step in.

It’s like expecting your grass to be green year-round.

“…U.S. stocks rose, sending benchmark indexes to records, after Federal Reserve Bank of St. Louis President James Bullard said the central bank should continue its bond buying to boost growth….”

Read more: http://www.businessinsider.com/fleckenstein-abenomics-could-end-american-stock-rally-2013-5#ixzz2Tzgwv1cp

Economic activity continues to wind and slow decline off of the post-recession burst.  QE (quantitative easing) is losing it’s effectiveness.

EconomicActivityU.S. Economic Activity and QE, 2000-present, chart courtesy John Hussman

It was this discussion on whether or not to continue stimulus at the current levels, and the mention of a keyword ‘tapering’ that caused this weeks’ roll back over to reality, and away from last weeks’ ‘we’re in the money’…..until we’re not.

Notes from the Federal Open Market Committee

“a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant…. One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability.”

Be careful for what you wish.


Where are we?

It’s certainly unusual for corporate profits to soar during a slow recovery.

The four most dangerous words in investing may be “This time, it’s different.”

Take taxes: one big reason that after-tax corporate profits are much higher than their historical norm is that corporations pay much less in taxes than they used to. In 1951, corporations had to pay almost half of reported profits in taxes. In 1965, they had to pay more than thirty per cent. Today, they pay only around twenty per cent.

Then, there’s globalization. Many of the “American” companies in the S. & P. 500 are multinationals: a study of two hundred and sixty-two of them found that, on average, they got forty-six per cent of their earnings from abroad. This is a relatively new phenomenon. As late as 1990, foreign earnings accounted for only a small fraction of corporate profits in the U.S. Today, they account for almost a third of corporate earnings, and they’ve nearly tripled since 2000. So comparing corporate profits only to American G.D.P. yields a false picture of how companies are doing. The global economy, even with its current woes, is projected to grow more briskly than the U.S. economy over the next decade, so corporations will continue to benefit.


Where are we?

The blue lines on the chart below identify each point in history where the following (1) overvalued, (2) overbought, (3) over-bullish, (4) rising bond yields syndrome would have been observed: (1) overvalued S&P 500 with the Shiller P/E (the ratio of the S&P 500 to the 10-year average of inflation-adjusted earnings) greater than 18; (2) overbought within 3% of its upper Bollinger band (a) standard deviations above the 20-period average at daily, weekly, and monthly resolutions, (b) more than 7% above its 52-week smoothing, and (c) more than 50% above its 4-year low; (3) over-bullish with the 2-week average of advisory bullishness (Investors Intelligence) greater than 52% and bearishness below 28%; and (4) bond yields rising with the 10-year Treasury bond yield higher than 6-months earlier.  August 1929 can also be included, given that we can impute bullish/bearish sentiment with reasonable accuracy based on the size and volatility of prior market movements.



The amount of borrowed money in the market now exceeds that amount at the last peak in 2007.  Margin calls to over-leveraged investors in a quick market turn are primary causes of unexpectedly rapid downward price movements.   A bit of unplanned events are all that it takes to get the ball rolling.  Negative net worth of NYSE accounts has reached the highest level since late 2000.  To get the net worth figure, we subtract margin debt from the free credits to get an aggregate estimate of the net debit or credit sitting in margin accounts at brokerage firms.  In other words, existing margin debt exceeds cash in these accounts by the largest margin in 13 years. (see red areas below).


Normally, I touch upon gold, silver or oil when it is appropriate.  With the length of this current post, I will avoid any further discussions at the moment.  Suffice it to say that the changes in gold and silver have been near epic since mid-April and warrant lengthy discussion on their own.  If you have immediate questions, contact me directly, I I otherwise, look for some coverage on my next post.   One word – caution.



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