jump to navigation

07182014 July 18, 2014

Posted by easterntiger in economic history, economy, financial, gold, markets, oil, silver, stocks.
Tags: , , , , , , , , ,
trackback

Weather Report 07182014

Current Positions  (No Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) –exit

F(bonds) – up to 80%; G (money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 7/17/14

(S&P100 compared to exactly 3 weeks before***)

-2.7,-0.5, +14.7, +4.87

(Today from 3 Fridays ago/2 Fri’s fm 4 Friday’s ago/3 Fri’s fm 5 Friday’s ago/4 Fri’s fm 6 Friday’s ago)

Margin debt reversal

As I mentioned in the previous interim report, an accurate count of margin debt, or,  levels of borrowed money at all brokerage firms for the month of May, was carefully watched by the financial media.  It’s this combination of a) margin debt, b) Fed money loaned to investment banks (declining), and c) stock buybacks by corporations (declining) that have provided a vast majority of the power to the markets for much of the past 5 years. The result of the May margin debt figure is shown in the following chart, for comparison to all months of the past 3.5 years.

MarginDebt052014

Even though the May level was slightly higher, I measured the 12-month moving average (red line) above and subtracted the monthly levels from the average to derive the black line below, for the trend. Historically, there is significance in the level crossing the 12-month moving average, and, not just whether the level is higher or lower than the previous month. In fact, this current level compared to the 12-month moving average is very similar to the same point in 2011 before the market significantly weakened.

Still, this represents 2 out of the past 3 monthly declines in the level of margin debt continues to confirm, for only the third time in 14 years, that the market has met a significant top or ceiling, in preparation for a downturn for the next 18-36 months, and, therefore, has no further ‘fuel’ for anything other than extremely high risk exposure.  The previous two times that margin debt was in this current flattening/declining pattern, in 2000 and 2007, market losses were over 40% from the 2000 top to the 2003 bottom and over 50% from the 2007 top to the 2009 bottom. I annotated a flattening in May that is very similar to the flattening that occurred after a peak in 2011. The 2011 pause (red dots on the left), similar to the May pause (red dots on the right), was followed by an abrupt decline in all of the stock indexes. This is not a guarantee of a similar impact. This is a statement that conditions exist for even more risky conditions for any exposed positions in C, I or S funds. F fund will be used as a refuge for funds leaving stock positions.

With much of the major markets combining between negative, near unchanged, to slightly positive through much of May, the bulk of recently added upside in market levels is primarily due to central bank related events in June, the first from the European Central Bank (ECB), led by Mario Draghi, (June 5th) and the second from the Federal Reserve Bank Open Market Committee, (June 16th) led by Janet Yellen. These meetings are always full of language that can be interpreted either as boosts, drags, or contrary to positions already in place by traders.

REMEMBER – traders exiting/closing downward bets actually make the market move up!!!

Why?

They ‘sell’ (collect premium) to enter the position, then, they ‘buy’ to exit the position. Their hope is to buy back at cheaper levels than where they sold!! Don’t be fooled by rising markets, by assuming that rising prices automatically equal positive momentum.

GDP Shock

The final estimate of 1st quarter GDP came in at -2.9%. This is a fairly shocking number; this is recession territory. In defiance of reality, some experts still maintain that we will grow 3% 2nd quarter. That would give us a flat 1st half. If you continue that growth at 3%, that would be 1.5% for the year; that would be the worst since 2001. This 1st quarter was the worst since the depths of the great recession in 2009. This is not a great economy. This is not a good economy. Consumer spending is not picking up. ⅔ of new jobs created are part-time jobs.

And, in contrast to those ‘experts’, OECD sees growth at 2.5% this year, 3.5% next year. That optimistic level would be the strongest growth since 2004 (what were they saying last year). The World Bank recently cut 2014 global economic growth estimate to 2.8% from 3.2%; they predict US growth at 2.1% versus the prior estimate of 2.8%. It seems to appear, repeatedly, that future estimates are always overshooting the actual performance, year after year.

Funds YTD

Here are the relative positions of the respective funds so far this year.

S Fund                      I Fund                        C Fund                  F Fund

Early March        Early March            Early March        Early March

+4.43%                      +1.66%                       +2.04%               +2.38%

7/16                               7/16                          7/16                     7/16 

+2.74%                        +4.18%                    +7.17%                +4.41%

It has taken every bit of Fed stimulus, hype, optimism and blind faith for holders of equity funds to match the much safer returns/lower risks, in the F Fund, so far this year. Even the gap between the F and the C fund fails to account for the riskier environment, while, clearly, the under-performance of S and I funds shows both higher risk and relative weakness, compared to the safety of less manipulated segments, like the bond market. These so-called ‘record highs’ and ‘all-time highs’ are stretching the very limits of all of these ‘support mechanisms’. Some reward; monumental risk.

ALL-TIME HIGHS/RECORD HIGHS

Speaking of ‘record highs/all-time highs’…the financial media is not bound to present accurate or legally binding statements. By comparison, your labeling on consumer products, such as food items, etc., is bound by legal requirements prescribed by the Federal Trade Commission (FTC), or, the Food & Drug Administration (FDA). While the Securities and Exchange Commission (SEC) monitors and warrants statements presented to investors, through prospectuses, the SEC does NOT offer guarantees in media reporting.

Here are the two presentations, one as presented by the media (1), and one corrected for inflation (not reported by media) (2), of the current price levels of the S&P500, NASDAQ and Dow 30, since 2000. Notice the absence of a true ‘all-time high’ in the S&P500. Also, notice the impact of Fed policy contributing to the last 5 years bounce, from the 12-year low!!!

(1)

(2)

S&P500 is DOWN -6.8%, and the NASDAQ is DOWN -36.3% since 2000. The DOW is up 4.4% since 2000. You can ignore inflation, if you wish. You’ll see it again when you try to use your gains from ‘record highs’ to make purchases of goods and services whose prices have CHANGED since the 2000 and 2007 peaks.

Here is a similar perspective, taken from NPR.ORG seven years ago, near the most recent previous peak.

What Does the Rise of the Dow Really Mean?

http://www.npr.org/templates/story/story.php?storyId=12118801

However, to continue the deception, profits have doubled on the S&P since that 2009 bottom. So, why has the index tripled???

Negative Interest Rates

On June 5th, world markets reacted to the European Central Banks’s announcement that it has now cut the deposit rate from zero to minus 0.1%, the percentage that the banks will sacrifice if they ask the ECB to hold money for them, rather than lending the money. This is, theoretically, an incentive for banks to lend money, rather than holding it in central banks. (It’s an experiment and has never been done by a central bank!) Markets reacted with upward momentum, which is the norm for both the combination of whose seeking an opportunity to add to positions (minor factor), and, the closing of positions that rely on a negative bias for profits (called, ‘short’ positions, as described above under REMEMBER). To reiterate, closing of short positions limits and/or reduces the risk of further holding these positions, in which the buyers were expecting a decline, leading to profits. Like most central bank actions, this is to suggest actions, not force actions, onto the member banks, who can chose whether to enact the policies desired by the central bank, or not. There is considerable debate, but not history, on what impact the final outcome of this policy will have. The ECB is desperately trying to hold off a threat of deflation, similar to what has kept Japan in stimulative mode, over-saving and under-consuming, for the past two decades.

Then, on June 18th, the Fed completed it’s 5th round of tapering, reducing by $10 billion per month, the availability of purchases of securities under it’s QE3 program, designed to stimulate financial, mortgage and employment.  So far, the positive results are debatable, but, certainly, less than originally promised or planned.

Market Technical Positions

Back in 2001 Warren Buffett said in an interview with Fortune Magazine that “the single best measure” of stock market valuation is by taking the total market cap (TMC) and dividing it by the total gross domestic product (GDP). Today TMC is equal to 114.5% of total GDP.


At the market top in 2007, just prior to a -54% crash in stocks, TMC was equal to 104.9%. According to Buffett’s “favorite” market timing indicator stocks are more overvalued today than in 2007.

The US market is not alone. London (FTSE 100) and France (CAC 40) broke steep support lines back in 2000-2001 and 2007 and proceeded to fall hard. The FTSE is back at the 2000 & 2007 levels at this time and the CAC 40 is weaker, creating so far, lower highs in 2007 and now, compared with the high in 2000. Both are testing steep support lines.

FTSE

 

 

 

 

 

 

 

 

 

 

 

CAC

Are European banks in trouble? If so, could weakness in the Europeanfinancialsector spill over intostock markets around the world?

European Financial ETF EUFNhas formed a bearish rising wedge over the past few months and a few days ago broke below support in the chart below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Could this put downward pressure on risk assets and push up metals? So far today, this spread between stocks and metals is skyrocketing!

 

Gold/Gold Stocks

In times of crises, many turn to gold, seeking its safe-haven attributes. However, with a 28% price drop in 2013, followed by a 12% gain in the first ten weeks of 2014, can we really continue to label gold a safe haven?

No investment is “safe.” Gold is no exception, of course, given that our daily expenses are generally not priced in gold, but in a currency that fluctuates relative to the price of gold. However, we believe gold continues to play an important role as part of a diversified portfolio. We would go so far as to say that gold belongs in every portfolio.

Despite its recent slide, gold has an enviable long-term performance record:

GLD

 

 

 

 

 

 

 

 

 

 

 

The results have shown that big declines in the broader stock market do not always see gold drop as well. In fact, gold fell in only five of the S&P’s 16 declines of 10% or more, four of which occurred either during an existing bear market in precious metals or after the blow-off top in 1980. Gold rose in the 11 other episodes.

This outcome makes sense. A big drop in the stock market usually reflects trouble in some part of the economy or the world, which is good for gold, as a “safe haven” asset. This suggests that a decline in the stock market is not necessarily something to fear.

Gold stocks are a different story; they tend to follow steep downtrends in the equity markets. Of the 16 declines in the S&P, gold stocks tagged along in 11 of them. However, in smaller declines or flat markets, gold stocks were more likely to follow gold.

In a surprise move after months of subdued trade, the gold price jumped more than $48, nearly 4%, on Thursday, its best trading performance since September last year. (6/23)

Gold’s positive momentum sparked heavy buying of the Market Vectors Gold Miners ETF (GDX), which holds stocks in the world’s top gold miners, soaring 5.4% to bring its YTD gains to 23.5%.

The bellwether for the industry for decades, the Philadelphia Gold & Silver Index (XAU), gained 5% and is back to levels last seen in March when gold hit a 2014 high of $1,379 an ounce.

It looks like many investors are choosing to ignore the advice of investment bank Citigroup, which last month warned not to buy gold stocks no matter how tempting valuations had become. (Heh, heh…)

Unlike equities, bonds, and currencies, gold is not a liability of any government or corporation. Governments and institutional buyers invest in gold directly, and they’ve been doing so for decades. For centuries, people have turned to gold during times of economic uncertainty.

And what about both gold and silver?  When the investment world finally realizes that the unorthodox accommodative monetary policies of its central banks do not lead to sustainable economic growth, but only boom and bust asset-inflation cycles, gold and silver will be poised to resume their momentum.  After over 5 years of these historic near-zero interest rate policies (devaluing paper currencies), and a host of quantitative easing (QE) attempts, sustained economic growth is still elusive (1st quarter GDP FELL2.9%, recession territory).  The investment community is starting to see this now, as the low in gold on June 28, 2013 continues to hold.

 

Market Complacency/Record Low Volatility

The Chicago Board Options Exchange Market Volatility Index (“VIX”) is a popular measure of S&P 500 index options’ implied volatility. By measuring options rather than equity, the index predicts future volatility over the next 30-day period rather than the current volatility within the index. Many financial professionals refer to the index as the “fear index” or “fear gauge” as a result.

VIX

This index is now at 7-year lows. These lows have led to very narrow movements in many indexes, beyond the S&P500.

The June 23rd intra-day range (high to low) in the S&P was the 3rd lowest in the past 20 yrs.

About 1.8 billion shares traded each day in S&P 500 companies last month, the fewest since 2008,

As of July 15th, it has been 62 days since the S&P500 had a 1% or better gain, or loss. This is the longest stretch since 2006. Only on July 16th did the S&P500 break this streak of weakness, appearing as strength, by falling more than 1%.

Over the past five years through April 30, the S&P 500 returned a sizzling 19.1% annualized. But from December 31, 1999, through April 30, the index returned only 3.7% annualized.

Complacency in the markets always leads to shocks. Calm markets do not go on forever. At some point, shocks will occur to ‘reset’ portfolios.

This is additional confirmation that rewards are declining even while risks remain high.

So, why the restraint, given nominal (not actual) ‘all-time highs’?

Oil

Oil

This 5-year chart of oil clearly shows the uncertainty that connect a stagnating economy, world-wide, against a steadily creeping S&P500. A healthy and rising market, based upon solid fundamentals, should also reflect rising oil prices, to reflect consumption. However, this is just another ‘divergence’ between the perception of a strong financial market and real economic performance. Notice how prior to 2013, dips in the S&P were correlated to dips in oil prices. However, since the last round of QE by the fed, this relationship is weakening. Something is not connecting here.

With Libya returning to exporting oil and Iraq finally making gains against the ISIS insurgents the next topic for energy investors is Iran.

However, with U.S. production growing and Libyan production coming back online they are losing their bargaining chip. Libya could be exporting an extra 560,000 bpd within a couple weeks and Iraqi oil fields are not in danger at the present time. The new Kurdish pipeline into Turkey will double exports to 250,000 bpd and up to 400,000 bpd by year-end.

Oil prices continued to fall recently as Iraq fear exits the market and Libyan oil ports prepare to reopen. The insurgent uprising in Iraq has yet to have an impact on Iraqi oil production or supply which is allowing the fear premium to subside while at the same time the stand off in Libya which has had oil shipping ports shut down for over a year is near an end. Rebels and officials have reached some agreement which could lead to ports reopening in the near future. If so Libyan supply could more than double to nearly 1.5 million barrels per day. This has been on the table before and failed to come to fruit so there is still risk up to and until the ports are actually opened. In the meantime the Oil Index also traded down today, losing about three quarters of a percent. The index remains above long term support along the 1650-1675 level. The indicators are bearish at this time, in line with the current pull back from the recent all time high, but not to troubling at this time so long as support holds. The prolonged run of high oil prices this spring should convert into higher revenue and potential earnings for the big oil companies, the bulk of which will report earnings in the first week of next month. Until then watch support levels and developments in Iraq and Libya.

Let’s connect the rising cost of oil to debt. As we all know, oil matters because it’s the foundation of our economy, and the cost of oil is built into virtually every sector in some way. For example, look at how the the cost of food rises and declines in lockstep with the cost of oil:


Despite the substitution of cheaper natural gas for oil, we use a lot of oil.



While the recent increase of 3+ million barrels a day in domestic production is welcome on many fronts (more jobs, more money kept at home, reduced dependence on foreign suppliers, etc.), the U.S. still needs to import crude oil.

U.S. Imports by Country of Origin (U.S. Energy Information Administration)

The rising cost of oil acts as an economy-wide tax. Everything that uses oil in its production or transport rises in price without offering consumers any more value than it did at much lower prices.

Look at the impact on food prices as oil rose from $20/barrel in 2002 to $140/barrel in 2008. While government statisticians adjust the consumer price index (CPI) based on hedonics (as the quality of things goes up, the price is adjusted accordingly) and substitution (people buy chicken instead of steak, etc.), the reality is, as a once heckler put it, “We don’t eat iPads:” that is, all the stuff that is hedonically adjusted (tech goodies, etc.) is non-essential.

The long-term answer is to avoid the pursuit of ever dwindling supplies of oil, a finite resource, and to avoid the yoke of oil to everything we do. Alternatively, we must seek as many alternatives as possible to reduce the dependence on oil, foreign or domestic. The sun, wind and ocean waves are infinite sources of natural energy production. This would dramatically transform future energy needs, and, employment growth and stability!

Real Estate

RealEstate

A year ago, rising rates took the life out of new construction, existing home purchases and refinancing. In spite of continuing rate weakness, with 3% serving as a ceiling on 10-year treasury note rates for over a year, home buying has continued to lag, due to tighter lending requirements and weak incomes.

Just a minimal rise in rates sent volume tumbling 9.2 percent, according to the Mortgage Bankers Association (MBA).

During one recent week, applications to refinance a loan fell 13 percent versus one year ago, while applications to purchase a home fell 5 percent for that week, and are now 15 percent below the volume seen a year ago.

Even so, in a few markets, the gaps have been filled by institutional buying, actual home purchases by US based funds as investments, and, foreign buyers flush with cash from their better performing economies, relative to the US economy. This is the source of the bulk of upward price pressure. This has even worked to keep some potential US buyers out of the markets, from competitively higher pricing pressures.

Foreign clients made up about 7 percent of transactions in the $1.2 trillion US real estate market.

Chinese buyers, looking for their own piece of the ‘American Dream,’ paid on average $523,148 per property. By comparison, Americans paid an average price of $199,575, according to NAR’s statistics.

Foreign buyers of US residential real estate surged 35 percent last year, with Chinese buyers, searching for moderately priced, safe investments in a sea of economic and political uncertainty, outspending the rest of the world.

Chinese buyers spent $22 billion on US homes in the 12-month period ending in March, or about 24 percent of total foreign sales by dollar value, according to a study released Tuesday by the National Association of Realtors (NAR). That’s up from $12.8 billion, or 19 percent, on the previous year.

Total international purchases of American homes jumped to $92.2 billion, according to the NAR, an increase of $68.2 billion on the year before and $82.5 billion for the year ending in March 2012.

Thanks to a surging economy that has seen China rival the United States as the world’s economic superpower, newly affluent Chinese customers are the silver lining in the US real estate market, which is slowly rebounding following the 2008 financial crisis.

Sixteen percent of sales went to Chinese buyers, and is the fastest growing sector, behind Canada at 19 percent, down from 23 percent the year before. Mexico ranked third with 9 percent of sales and India and the UK both accounted for 5 percent

 

Advertisements

Comments»

No comments yet — be the first.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: