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04222017 April 22, 2017

Posted by easterntiger in economic history, economy, financial, markets, stocks.
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Current Positions  (No Changes)

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

F(bonds) – up to 100%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 04/21/17

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

-11.3, -3.43, -6.54, -1.94

Partial recap of my interim report of 4/19 – Stocks have given up much of their gains built on the ‘hopes’ of health care reform, tax reform, relief in regulations, or, any of the political promises that fueled one more fluff-filled rally.  Optimism was enough to create this last opportunity.  It is not enough to sustain, or, incur any reasonable risk.

Four days later, from CNBC – Stocks surged as talk out of Washington pointed to the potential for some action on health care, which is viewed as a precursor to any move forward on tax reform. Treasury Secretary Steve Mnuchin also said Thursday that progress is being made on tax reform. President Donald Trump said he was hopeful there would be a vote on health care next week and also to fund the government.

With virtually no gains for over 2 months, rhetoric such as the above keeps markets stuck in a perpetual, dream-filled loop to nowhere.

The chart below shows the wasted motion currently underway.

That MSCI World Index is a broad global equity benchmark that represents large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85% of the free float-adjusted market capitalization in each country and MSCI World benchmark does not offer exposure to emerging markets.

Otherwise, and with all due respect to the advances from Election Day into February, it’s worthy to note that pre-Election Day price levels were flat to down for most of the previous 18 months; from March ‘15 to November ‘16, C Fund 44 to 45, F Fund 51 to 49, I Fund 61 to 56. Early in February, several days of the bulk of February gains resulted from comments from administration officials giving hints of a tax cut.

Any news on (1) health care reform, or (2) tax reform, or (3) tax cut, or (4) infrastructure = automatic stock rally; a rally that might or might not remain several weeks later. (‘tax cut’ in the news on 4/21 – index prices moved slightly upward immediately, though, it reversed within minutes. There were two such occasions in early February that created the same ‘sugar high’ for the markets.)

Billionaire investor Paul Tudor Jones has a message for Janet Yellen and investors: Be very afraid.
The legendary macro trader says that years of low interest rates have bloated stock valuations to a level not seen since 2000, right before the Nasdaq tumbled 75 percent over two-plus years. That measure — the value of the stock market relative to the size of the economy — should be “terrifying” to a central banker, Jones said earlier this month at a closed-door Goldman Sachs Asset Management conference, according to people who heard him.

This chart shows the S&P 500 with respect to the size of total economic activity, GDP.

The market is expensive!  A week ago, I mentioned the 28.8 price-to-earnings ratio, which is 73% higher than the 100 year average. This expense projects a future return in the very low single digits over the next ten years.

The 500 companies in the S&P500 can be divided into 11 sectors.

Each sector contains different number of companies.

Within this current 29.1 P/E, as of 4/21, the individual S&P sectors are shown as follows:

Sector                            Number of Stocks        Shiller P/E        Regular P/E

Energy                                35                                 17.40           -41.80**

Consumer Defensive          41                                  23.30            19.20

Financial Services               70                                 23.70            16.00

Industrials                          70                                 23.90             21.50

Utilities                              28                                  25.00            34.20

Healthcare                         59                                  27.40            20.60

Basic Materials                   23                                  27.70            35.60

Consumer Cyclical             85                                   28.20            21.90

Technology                       60                                   30.80            24.10

Communication Services   9                                     31.20            20.80

Real Estate                        24                                   47.80            22.70

S&P 500                           500                                  29.10            26.40

** – negative price-to-earnings in the energy sector are due to significant losses in coal, oil & gas exploration, integrated oil & gas, gas & oil storage, as a result of oil prices remaining below the break-even points for many companies in the sector.  This is also evidence of the flaws in ‘regular’ p/e ratios, versus the Shiller p/e’s.

Meanwhile….a short-term underlying technical picture is absolutely unchanged through this week, and is decidedly negative. For eight days in a row, many major averages have hovered UNDER a line of resistance, a ceiling, at the 50 day moving average.

Friday’s S&P500 level is actually 15 points lower than the February 21st level of 2366!

Last September, the C fund lost 4% within 7 weeks after breaking below the 50 day moving average.

Similar patterns show up in the F and I funds.

S fund’s 50 day moving average is 57.08.

I fund’s 20 day moving average is 62.03, as it nears the 50 day average at 61.36.

The more consecutive closes below these key averages, the more negative the near-term technical picture.

F fund performance relative to C fund

F fund performance relative to S fund

F fund performance relative to I fund

The F fund is poised to outperform C, S and I funds, with (1) the topping of the equity markets in early March, corresponding to (2) the topping in interest rates early in the year, a perfect, normally correlated occurrence.

On the liquidity front, this month the Fed added $23.4 billion in cash to Primary Dealer Trading Accounts in the period April 12-20. This is slightly more than the March addition of $21.9 billion, the smallest add since January 2016. It was a sharp decline from February’s $41.6 billion.  These levels are far below the QE levels of a few years ago.  What’s different this time? That QE support, that ended in 2014, was NOT withdrawn the next month, as is the support from mortgage backed securities!!!!

In the past 18 months, there have been several periods that tied or exceeded 20-30 year records in the number of days where major stock averages did not exceed 1% up or down for a number of days in a row.  This shows a lack of conviction on the part of both buyers, AND sellers.  Potential buyers are waiting on lower prices.  Potential sellers are waiting on higher prices.  In either case, no one wants to be first, to get in OR out. The latest report on borrowing to buy stocks (margin debt) has just hit another high.  Those borrowers might believe that it’s a good idea.  They won’t believe so later, if their gains don’t meet their expectations, forcing them to sell sooner than expected, and, possibly, under pressure to do so.  If this happens, you’ll know!!

So, as you thought that the Fed ended QE in late 2014, and it did, the Fed has continued to add cash to the financial markets every month. It does so via the purchases of mortgage backed securities (MBS). It calls them “replacement purchases.” The Fed is the bank for the banks, i.e. the central bank. It has resolved since 2009 to force trillions in excess cash into the banking system and making sure that that, somehow, some additional money flows through the system. It has also resolved to make sure that the amount of the cash in the system does not shrink. It does that each month via its program of MBS replacement purchases. The Primary Dealers* are selected by the Fed for the privilege of trading directly with the Fed in the execution of monetary policy. This is essentially the only means by which monetary policy is transmitted directly to the securities markets, and then indirectly into the US and world economies. The only means which the Fed uses in the transmission and execution of monetary policy is via securities trades with the Primary Dealers.  Yes! The Fed is still providing some degree of artificial support to the markets.  It’s just not to the same degree as before the expiration of quantitative easing (QE).

  • List of current primary dealersBank of Nova Scotia, New York Agency, BMO Capital Markets Corp., BNP Paribas Securities Corp., Barclays Capital Inc., Cantor Fitzgerald & Co., Citigroup Global Markets Inc.,Credit Suisse Securities (USA) LLC , Daiwa Capital Markets America Inc., Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc., Jefferies LLC, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Mizuho Securities USA LLC, Morgan Stanley & Co. LLC, Nomura Securities International, Inc., RBC Capital Markets, LLC, RBS Securities Inc., Societe Generale, New York Branch, TD Securities (USA) LLC, UBS Securities LLC., Wells Fargo Securities, LLC

When the Fed buys MBS to replace those paid down from its balance sheet, it does so via trades with Primary Dealers. It buys MBS via forward purchase contracts which are typically settled in the next month or the following month. The Fed is only keeping the amount of its assets level. But it pumps billions in cash into the accounts of Primary Dealers each month as part of that process.

The dealers are in the business making markets in a broad spectrum of securities, including MBS. Their biggest customer is the Fed. When the Fed cashes out the dealers by purchasing MBS from them, the dealers can both leverage and redeploy that cash to not only buy more MBS, but to purchase whatever other securities it wants to. Stocks are a favored vehicle. The Fed cashes out the dealers when it settles the MBS purchases around the third week of the month each month. Even though the amount of cash in the system is roughly static, the Fed is still pumping cash into Primary Dealer accounts each month. That has an impact on the stock market. It’s obviously not the only impact, but it’s still part of the central bank game of rigging the market.

This chart of the combination of all of the Fed feeding since 2009, and even beyond the quantitative easing (QE), although it ended in 2014, continues, in reduced effect, through monthly purchasing of mortgage backed securities, providing trading revenues to participating banks.

Notice that from the end of QE, in late 2014, and on to late 2016, market levels were insignificantly higher overall. This ‘juicing’, only within the past 5 months (post-election) was on the ‘hopes’ I mentioned in the interim report, based upon prospects for health care reform, tax reform, etc., that, realistically, won’t have the market impact that is was already anticipated. Almost none of these elements are going to address the ‘greed’ factor that’s already been cranked into markets over the past few years, to get them to current levels.

With mortgage rates coming off the highs, there could be a slight increase in refi activity. That causes an increase in MBS paydowns, which the Fed will replace in the next month. Then it takes another month or two for those purchases to settle. There is a lag of 5-6 months between the drop in mortgage rates and the increase in the settlement of the Fed’s replacement purchases. By then the Fed may have begun to implement its proposed policy of “normalizing” the balance sheet. That’s a nice way of saying “shrinking” the balance sheet. To do that the Fed is proposing to allow its Treasury holdings to mature and not be rolled over. It’s also proposing not replacing MBS as they are paid down. So instead of a small addition to the Fed’s MBS purchases from the Primary Dealers a few months down the road, the Fed will indirectly withdraw money from the banking system and the markets. By doing it slowly over several years, the Fed may be able to avoid crashing the market. I use the word “may” purposely. Any shrinkage of the Fed’s assets will increase the odds of an accident. Slow and steady tightening will act like the drip, drip, of the old Chinese water torture. It will promulgate a bear market in stocks. Accidents do tend to happen in bear markets. The drip, drip, drip eventually turns into a cascade.

Most interesting, the Fed minutes last week also showed that Fed officials were discussing what to do with the central bank’s massive $4.5-trillion balance sheet, which was quadrupled during the financial crisis and its aftermath as the Fed engaged in three rounds of bond purchases as a way to depress long-term interest rates and give the stock market a boost. The minutes said that Fed officials agreed “a change in the committee’s reinvestment policy would likely be appropriate later this year.” Currently, the Fed has been keeping the level of the balance sheet steady at $4.5 trillion, by re-investing 100% of maturing debt.

It has been held for years that we’ll know the Fed is serious about tightening when it starts shrinking the balance sheet. Right now they are in the signaling stage. They’re talking about it. When the Fed talks about an idea, it eventually gets around to doing it. The Street is already telling you it will be no big deal. Don’t believe it. It’s time to ‘sell’ the stock rallies.  Not everyone will get the message in time.

Will the Fed Burst the Bubble in 2017?

The Fed has engineered the second longest Bull market in Wall Street’s history. It’s been dubbed the “Least Loved” Bull, because the US-economy’s recovery from the Great Recession has been the weakest since the 1930’s averaging only +2% growth per year. Still, the rising market for US-stocks, turned eight years old on March 9th, and might have finally silenced the critics in the “Doom and Gloom” business, who doubted its staying power. From a statistical perspective, this market’s no slouch. It has posted big enough returns to rank #4 all-time in terms of performance, with the mega-Bull run from the 1990’s taking top honors with a gain of +417%, according to S&P Dow Jones Indices. The current market can’t be faulted for a lack of endurance, either, as only one Bull has lasted longer. It has also generated more than $21-trillion in new stock market wealth.  ALWAYS keep in mind that these ‘returns’, always measured from the March ‘09 bottom, are measured from a point of a 12-year low, where all of the gains from 1997 to 2009 were wiped out.  Any triple-digit gains for the past 8 years also apply from 1997 to today.  That places averages for this 20-year period right back in the range of long-term norms.  There are no free lunches.  You only get returns with time, or, with higher than average risk, in the absence of sufficient time.

The best-performing group for the past eight years was the consumer discretionary sector, which includes home improvement retailer Home Depot, coffee shop Starbucks and athletic apparel and sneaker giant Nike, has benefited from an improving economy and people’s willingness to buy things not deemed necessities. The S&P-500 index has rallied +250% since hitting a closing low of 676.53 on March 9th, 2009. The gains since, uninterrupted by a decline of -20% or more, rank this bull market as the second longest ever. The S&P continued to rally through a five quarter long recession in corporate earnings through most of 2016, supported in part by historically low interest rates which made stocks comparatively cheaper and more rewarding than high grade bond yields. The “Least Loved” Bull market is nearly three years older than the average Bull, and is more than a year shorter than the longest one: the rally from October 11th, 1990 to March 24th, 2000.

However, this Bull market isn’t only the second oldest, it’s also the second-most expensive. On a trailing 12-month basis, using Q’4 2016 GAAP earnings per share, the S&P 500’s price-to-earnings ratio stands at 25x, -second only to the 30-times earnings multiple recorded at the end of the tech bubble in 2000. (The range was also into the high 20’s surrounding the Great Crash of 1929.  We’ve left that out, since it predates everyone reading this.) Investors, however, are encouraged by a projected +11% rise in 2017 operating-earnings per share and think the growth could be even stronger if the Trump administration successfully delivers on promised tax cuts and increased infrastructure spending. Others see the potential for a final “melt-up” that could mark the top. Share prices could shoot up sharply if retail investors get jazzed about stocks again and start “pouring” money into the market. The melt-up may have already started, or finished on March 1st (the current high), on expectations that Trump’s tax reform will significantly cut taxes for both corporations and individuals. The stock index hasn’t suffered a drop of -20% since the Great Recession Bear, which ended on March 9, 2009. But the broad market gauge is up more than +250% since. There is no doubt that when the SPX is up +250%, with mid-single-digit sales growth, that it is a liquidity driven market. Then again, liquidity is one of the five cornerstones of the investing process, along with valuations, fundamentals, technicals and fund flows. This is clearly not going to last indefinitely, but the conditions for a Bear market – a decline of -20%, are only in place WHEN the Fed drains liquidity to the extent that it causes an economic recession (more on that below). Whether we like the interventions or not, for markets, the Fed matters. It has always mattered.

Indeed, if one left it at that, the answer would not be exactly wrong. However, there is one more factor which is rarely discussed, and which – according to Deutsche Bank – virtually the entire equity rally of the past four years is the result of plunging bond yields, which as a reminder, is the direct pathway by which central banks operate. As Deutsche Bank’s analysts warn, “various Fed officials have raised the issue of financial stability in the context of the reach for yield and riskier products to make up for low rates. This is part of financial repression. The logic might be that once the Fed has normalized, elements of that reach for yield and risk would be unwound and this could lead to disruptive financial market volatility.” Put in the simplest possible word, this means the Fed is worried that once rates go up as a result of renormalization and the lack of a central bank to front-run, stocks will crash. As it turns out the Fed has ample reason to be worried. Because QE and the Fed’s Zero Interest Rate Policy or financial repression is responsible for 92% of the S&P-500 rally since it launched QE-2 in Nov 2012, or just over +800-points, that would suggest that the Fed super-easy money policies are directly responsible for approximately 25% of the “value” in the market, and any moves to undo this support could result in crash. In retrospect, it becomes obvious why the Fed is petrified about even the smallest, +25-bps rate hike. The problem is an irredeemably flawed monetary doctrine that tracks every tick in the S&P-500 index, and uses financial repression, or artificially low interest rates and bond yields were the principal mechanism whereby wealth is transferred from savers to the US-government and shareholders in the US-stock markets.

Stock traders have been under the spell of monetary easing” to the point where negative news such as downbeat US jobs data in March did not stop stock prices from going up. Traders shrugged off uncertainty because they expect any bad news to be followed by continued low interest rates or bond purchases that increase the supply of money in the economy. Yet again, massive credit-fueled capital misallocation simply papers over short-term cracks and extends the life of the economy’s expansion cycle, but leaves a bigger more damaging hangover of credit defaults in its wake, unless just a little more credit fueled zombification will help. Many traders don’t expect the Fed to normalize its interest rates or reduce the size of its bond portfolio in any meaningful way, and the feeling is that we’re OK for a while, and everyone thinks they’re smart enough to know when the music is going to stop.

Many investors are bullish on stocks in the ninth year of a rally. Earnings will improve with future tax cuts and the liquidity spigot is still wide open, so it’s like a giant game of musical chairs. The attitude on the part of most investors is that they have to play while the Fed got the music going.

The Fed’s bombshell announcement; “a change in reinvestment policy would likely be appropriate later this year,” from the minutes of the Fed’s discussion at their March Meeting released Wednesday, showed near-unanimous support for the +25-bps rate hike to 0.875%, the second rate hike in three months. The group decided to keep signaling that future rate hikes would be gradual, and futures traders are giving 60% odds of a +25-bps rate hike to 1.125% at the June meeting. Traders are split on the likelihood of a rate hike to 1.375% by year’s end, with the Dec ’17 contract priced at an implied yield of 1.25%, or a 50% chance. The Fed has a major credibility flaw and traders are skeptical of their hawkish rhetoric.

Not so coincidentally, as the Fed Fund rate has been increasing, mortgage rates are falling. Why is that?  While increasing the Fed Funds rate makes it more expensive for the banks to borrow from the Fed, mortgage rates are based on the 10-year Treasury Note, which has been weakening since it’s peak in December and March. The 10-year Treasury Note is more responsive to changes in the dollar, and to global rate concerns.

Final Note

There’s always a possibility of unexpected, but, related, outside negative influence that can always act to disrupt even the most carefully positioned scenarios.

The Shanghai index has been locked in a tight range, also pretending to project a stable financial environment.  This has been accomplished with some degree of force, using involuntary means to prevent selling. It has even been illegal to sell stocks under some conditions.

In the event that the support range currently in play doesn’t hold, it could result in a wave of forced selling that could destabilize our markets as well.  I’ll be watching for any echoes that come in our direction.

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Weather Report – Interim – 04162017 April 15, 2017

Posted by easterntiger in economic history, economy, markets, stocks.
Tags: , , , , , , ,
add a comment

Current Positions  (Changes)

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

F(bonds) – up to 100%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 04/14/17

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

-3.43, -6.54, -1.94, -13.7

The absence in creating or changing positions since the election can be summed up by these two headlines, nearly five months apart.

November 9, 2016

There’s hope for the market under Trump

…..hope….

March 21, 2017

Stocks Plunge, Trump Trade Dies, Fed ‘Doesn’t Care’

….back to reality….

Technically, bonds are regaining strength, reversing the previous trends in interest rates.

Stocks have given up much of their gains built on the ‘hopes’ of healthcare reform, tax reform, relief in regulations, or, any of the political promises that fueled one more fluff-filled rally.  Optimism was enough to create this last opportunity.  It is not enough to sustain, or, incur any reasonable risk.

We know the prices, and the returns.  How do we evaluate the risks that come with appreciation?

Prof. Robert Shiller of Yale University invented the Schiller P/E to measure the market’s valuation. The Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. This is similar to market valuation based on the ratio of total market cap over GDP, where the variation of profit margins does not play a role either.

At the market peak on March 1st, the S&P500 reached 2400.  At that point, this ratio was at 29.5.  The S&P500 is now at 2328.95, as of the close on Thursday, April 13th.  This places the current ratio at 28.8, or 71% higher than the historical mean of 16.8.  We are in the third most expensive market of the past 100 years!!!

There is simply no way to justify holding comfortable positions in U.S. equities at this point.

I will elaborate on these points in the next few days.

All of the pieces are in place for what appears to be a ‘final top’, or, at the very least, an extended, risk-filled churn to an insignificant new high, with an equal chance for measurable losses in the near-to-medium term.

10112016 October 11, 2016

Posted by easterntiger in economic history, economy, financial, markets, stocks.
Tags: , , , , , , , , , , , , ,
add a comment

Current Positions  (No Changes)

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

F(bonds) – up to 75%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 10/11/16

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

-5.35, +19.83, +8.88, -5.06

Some markets are designed to test the patience and limits of investors, with no gains, no losses, and more guessing and wondering.

For 14 weeks, since the date of the last report, dozens of markets worldwide have moved only slightly from their previous levels.

Tom Fitzpatrick is a top strategist at Citi and studies charts of trading patterns to forecast changes in the stock market.

When he and his team overlaid the current chart of the benchmark S&P 500 with the index in 1987 — right before the crash — they got “the chills.”

marketchartoftheday

  • There’s heightened concern about Europe and its banks. The UK has set a March 2017 date for when it will begin legal proceedings to exit the European Union, and Deutsche Bank failed to reach a swift deal that would lower its $14 billion fine with US authorities.
  • We’re in “the most polarizing US presidential election in modern times.”
  • More reports are circulating about central banks in Japan and Europe removing some of the economic stimulus they’ve provided by tapering their bond purchases. This is raising concerns about the efficacy of central bank policy around the world, Fitzpatrick said.
  • And finally, some peculiar market moves: a 16% move in oil prices within a week; a 20-basis-point shift in US 10-year yields in five days; and a $90 move in gold prices in nine days. The Chinese yuan and British pound have made massive moves in a short period of time, too.

The MSCI World Index is a broad global equity benchmark that represents large and mid-cap equity performance across 23 developed markets countries. It covers approximately 85% of the free float-adjusted market capitalization in each country.  This single index covers issues in the following countries: United States, Canada, Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, Australia, Hong Kong, Japan, New Zealand, and Singapore.mcsi

On July 18, the last Weather Report date, the MSCI World Index was at 1703.93.  It closed on 10/10 at 1715.22, for a net change in nearly 3 months of  0.066%.

The dependence on Fed announcements, meetings, expectations, press events has become extreme.  This ‘screams’ to the absence of a market actually moving on fundamentals of either good or bad data.  Good data encourages.  Bad data implicates more Fed action and dependence.  This is the ‘no-win/no-loss’ short-term cycle, waiting on some major, unexpected event to finally ‘pop’ the complacency; the bubble.

Over the past several months the markets have consistently drifted from one Fed or Central Bank meeting to the next. Yet, with each meeting, the questions of stronger economic growth, rate hikes, and financial stability are passed off until the next meeting. So, we wait….until the next meeting…..and the next meeting…..and the next meeting.

Business channels are already starting their ‘countdown clocks’, now at 22 days, for the next meeting.  BIG YAWN!

Equity Markets – Long Term

The chart below shows the historic ‘topping’ patterns now in place.  What has in the past been a 1-2 year process of ‘topping’, followed by a severe correction, is now a 2-3(?) year process.  The lack of a downdraft, if you ignore the 8-10% pullbacks on October of ‘14, August ‘15, and January ‘16, have created a sense of calm by many who perceive little risk. Nothing could be further from the truth.  In each case, upside has still been limited to a level that is far smaller than the travel downward.  These are tests.  Those who fall asleep fully invested will find themselves rushing for the door a few days too late.

S&P500 July 18th: 2166.89; October 10th: 2163.66; Net Change:-3.23

sptop(We’ve been in this circle on the right for TWO YEARS!!)

In normal times, the S&P 500 Index should compound at 5.7% real return; so, the past five years have delivered roughly double what is normal. Getting double what you deserve (in isolation) should always make you nervous. Deceptively, these returns have only happened because of the combination of FED intervention, increasing margin debt, and stock buybacks, or, in summary, historic levels of financial engineering and borrowed money, from individuals, companies, and central banks.  This money must be repaid.

Market Fundamentals/Economy

medicorefundamentals

(***click chart for better view, press back button to return***)

 

Something smells funny.

That smell is what we call price/earnings (P/E) ratio multiple expansion. Rather than waiting for actual growth in earnings, the marketplace, over the past five years, has simply decided to pay more for earnings. Paying more for the same dollar of earnings is rarely wise and often foolish.

The chart below covers stock price to earnings ratios over the past 75 years.  One thing is clear; bull markets neither sustain themselves nor continue from these levels.

When you hear that ‘stocks are cheaper than they’ve been in 10 years’, keep this picture below in mind.  It most certainly is not true.

schillerratio

We’ve returned, once again, to the most expensive market levels in several generations. Markets are within a fraction of the valuations last seen before the last peak in late 2007. Even if some are willing, for no good reason, to chase prices higher, it doesn’t mean that they won’t be left holding the bag by those who choose not to do so.

The latest data from FactSet shows that S&P 500 companies spent $125.1 billion on share buybacks during the second quarter of 2016, the lowest figure in nearly three years:

sharebuybacks

Share buybacks have been one of the biggest drivers of US equity markets since the end of the financial crisis.

Between 2012 and 2015, US companies bought $1.7 trillion of their own stock, according to Goldman Sachs. Without these big purchases, US equity flows would have actually been negative by over $1 trillion during that period. Low interest rates have encouraged companies to take on debt, and much of it was used to buy back shares rather than investing in their underlying businesses.

Whether the latest cooling in share buybacks will continue or the larger trend will resume is unclear. If it’s the latter, I’d expect equity market volatility to increase in coming quarters.

Shorter term, the stock market appears to be stuck in neutral since July-August and the trading range is narrowing.  Some indexes show a coiling in a sideways triangle pattern, which says we’re going to get a strong move soon.

The month-to-month indecision shows a conflict between obvious central bank purchases for temporary support, and the reality of declining earnings, decreases in major asset purchases by the Fed (ended Oct. ’14),  European Central Bank (ending in Mar. ’17), and the Bank of Japan. (decreases not yet announced, but, expected)

Overall, more than $20 TRILLION dollars worldwide have created artificial buoyancy to world markets in the past 7 years.  It can’t go on forever, because the pace, methods and impact of ‘unwinding’ are not predictable.

These charts show different levels of resistance for different reasons.  Primarily, trend lines for each chart extend back into last year, and possibly before.

EuroStoxx 50 July 18th: 2949.17; October 10th: 3035.76; Net Change: +86.59

eurostoxx

 

 

 

 

 

 

 

Nikkei 225  July 19th: 16723.31; October 10th: 16860; Net Change:+136.78

nikkei

 

 

 

 

 

 

 

 

DJIA July 18th: 18533; October 10th: 18329; Net Change:-204

– Dow Industrials –  resistance at 18531, reflecting the May 2015 high.

djia

 

 

 

 

 

 

 

S&P500 July 18th: 2166.89; October 10th: 2163.66; Net Change:-3.23

– S&P500 – support at the May 2015 high of 2134, but, resistance at this year’s high of 2188

spx

 

 

 

 

 

 

 

Nasdaq 100 July 18th: 4619.78; October 10th: 4893.77; Net Change:+273.99

– Nasdaq 100 – resistance at 4887, stretching back to a line drawn from July & November 2015 highs

 

nasdaq100

 

 

 

 

 

 

 

Russell 2000 July 18th: 1208; October 10th: 1251; Net Change:+43

– Russell 2000 – resistance between 1264 and 1294, against a rising trend line due to a rising channel

r2000

 

 

 

 

 

 

 

– AGG (F Fund) – support near today’s low, longer support from the previous February 2016 high; more support just below at the September 9th low; reversal up possible

agg

 

 

 

 

 

EFA (I Fund) – range-bound, and with negative momentum

efaPrior to the most recent dip of about 2.5% on September 9th, the markets had traded in the 4th tightest range since 1928 for over 40 days, with no move on any day more than +/- 1% over the previous day.  That rather dramatic, all-day, September 9th sell-off was generated by Fed governor’s strong suggestions of a September rate hike, which ultimately did not happen.  With only one rate hike in the past 9 years(!), done last December, it is most irrational, thinking that a quarter point increase is nothing more than a mosquito bite in the long term scenario. This comes from decades of fearing a recession brought on by Fed rate hikes. The Fed has a gun with only 1 bullet, from last December’s rate hike. We are going to see a recession at some point in the next 18-24 months and the Fed is desperate to reload by adding some rate hikes to their arsenal. The higher the interest rate when we reach the next recession, the more times they will be able to cut to slow those recessionary forces. They only have one bullet today and it is scaring them because they see the long-term outlook.

The challenge is figuring out which way it is likely to break and then get in front of the move. The deception of a balance between an eventual breakout (up), and a breakdown (down) might find clues with this table.  It shows over 60% of these U.S. and European indices having more than a month since their last high, and/or, currently riding BELOW their 50 day averages.

The next table shows how a majority of market levels in the U. S. and Europe are, once again, looking backward from today at their highest levels.

The 50DMA represents the average of the last 50 days on a moving average basis.

They are in order from the oldest date of hitting their recent highest level.

50DMA Last High
Above Below 3 months ago
Dow Utilities x 7/7/16
Dow Composite x 7/11/16
Previous Weather Report 7/18/16
2 months ago
S&P500 x 8/9/16
Dow Industrials x 8/15/16
Russell 1000 x 8/15/16
S&P100 x 8/15/16
DAX – Berlin x 8/15/16
Russell 3000 x 8/23/16
1 month ago
S&P400 x 9/6/16
S&P600 x 9/6/16
American Comp x 9/6/16
Wilshire 5000 x 9/6/16
NY Composite x 9/7/16
CAC – Paris 9/8/16
Toronto x 9/11/16
Canadian Venture x 9/11/16
Nasdaq x 9/22/16
Nasdaq 100 x 9/22/16
Russell 2000 x 9/22/16
Dow Transportation x 10/3/16
FTSE (London) x 10/4/16

The longer the passage of time, the lower the likelihood of a continuation to higher levels, and the greater likelihood of stagnation, higher risk, and/or weakness/losses.

BREXIT Plus 90 Days

The initial market snap back in late June that accompanied the referendum was just a bit of ‘kicking the can’, given the reaction to the initial shock, leading to the long process involved from the vote to the execution.  Now, after the resignation of David Cameron, and the installation of Theresa May, it’s now time to get to work.

Now, the question is whether there will be a ‘soft’ (best case), or a ‘hard’ (worst case) BREXIT scenario!  There are too many variables involved for anyone to accurately project.

“It is in everyone’s interests for there to be a positive outcome to the negotiations that is mutually beneficial for the U.K. and the EU, causes minimum disruption to the industry and benefits customers,” said Miles Celic, chief executive officer of lobby group TheCityUK.

Adam Marshall, acting director general at the British Chambers of Commerce, said “in a period of historic change, business communities all across the U.K. need to feel supported, not alienated.”

May’s strategy amounts to a bet that voters’ opposition to immigration outweighs all else and that the economy will find support from easier fiscal policy, new trade deals emerge and banks don’t flee London, said Simon Tilford, deputy director at the Center for European Reform. The political payoff could be more support for her Conservatives at a time when the opposition Labour Party is in disarray.

“May wants to give the people what they want and thinks that the people voted for a hard Brexit and that the economic costs are exaggerated,” said Tilford. “A lot of this has to do with Conservative Party unity and she has a better chance of unifying the party going for a hard Brexit.”

Meanwhile, despite “Brexit,” weakening economic growth, declining profitability, terror attacks, Presidential election antics, and Deutsche Bank, the markets continue to cling to its bullish trend. Investors, like “Pavlov’s dogs,” have now been trained the Fed will always be there to bail out the markets. But then again, why shouldn’t they? The chart below shows this most clearly.  (***click chart for better view, then, press back button to return***)

feedclutter

Recession Indications

Several measures of the probability of a recession have recently appeared.

Existing home sales in August totaled 5.33mm, 120k less than expected and down from 5.38mm in July. This is the slowest pace of closings since February.

Unemployment – September’s jobs report contained a sign that investors should be on alert for a U.S. recession, judging by bond guru Jeff Gundlach’s favorite warning signs. (***click chart for better view, press back button to return***)gundlachrecession

During a panel discussion at the New York Historical Society back in May, the Doubleline Capital LP chief executive officer revealed that one of his top three recession indicators was when the unemployment rate breaches its 12-month moving average.

Over the past year, the trend in the unemployment rate has flipped from improving to deteriorating.

“This indicator is a necessary, but not sufficient, sign of a coming recession,” wrote Gundlach in an email to Bloomberg. “It is worth factoring into economic analysis but not a reason for sudden alarm.”
Auto Sales – The first is that while the ‘annualized’ reported sales number was near the highest in 10-years, the historical average of cars sold is still at levels below both previous peaks.  Secondly, and more importantly, is both previous peaks in total auto sales were preceded by a decline in the annual percentage change of cars sold.

autosales

In September, US commercial bankruptcy filings soared 38% from a year ago to 3,072, the 11th month in a row of year-over-year increases, according to the American Bankruptcy Institute.

Commercial bankruptcy filings skyrocketed during the Financial Crisis and peaked in March 2010 at 9,004. Then they fell on a year-over-year basis. In March 2013, the year-over-year decline in filings reached 1,577. Filings continued to fall, but at a slower and slower pace, until November 2015, when for the first time since March 2010, bankruptcy filings rose year-over-year. That was the turning point. Note that there is no ‘plateauing’:”

bankruptcy

 

07182016 July 18, 2016

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Current Positions  (No Changes)

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

F(bonds) – up to 75%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 7/18/16

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

+42.11, +69.03, +26.59, +0.78

======================================================

(Today from 2 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)

TSP Fund Proxies One Year Returns, as of 7/15/16

F fund/+5.77% YTD,  I fund/-10.00% YTD

S fund/-3.36% YTD,  C fund/+3.57% YTD

 

So, while everyone is expected to say ‘…wow – another new all-time-high…’, right after they just said, ‘…that BREXIT thing wasn’t so bad after all…’.  You should already know that the reality isn’t quite that simple.

Reality check – One Year Return – S&P500 +1.99%, Dow Industrials +2.33%

Events like BREXIT are not measured in their direct effects. They’re measured in all the varied knock-offs – such as the weaker Pound, destabilized Euro and the stronger Dollar, and how those flow through economies.

Italy Eyes $40bn Euro Bank Rescue As First BREXIT Domino Falls

An Italian government task force is watching events hour by hour pledging all steps necessary to ensure the stability of the banks. “Italy will do everything necessary to reassure people”, said Premier Matteo Renzi.

“This is the moment of truth that we’ve all been waiting for for a long time.  We just did not know that it would be BREXIT to let the elephant loose”, said a top Italian banker.

The index for Italian banks has fallen -30% since the British EU referendum on June 23, and is -61% lower than a year ago.

Failure of the Italian banking sector is not so threatening to our positions, or, for our direct interests. It’s the potential impact of the failure of Italy’s banking sector on the rest of the Italian economy that could act in a ripple effect fashion, from that banking crisis, which could, in turn, push Italy back into recession and, in a doomsday scenario, generate a Greek-type meltdown that Europe would find almost impossible to contain.

“The UK referendum hit an already vulnerable banking system in the eurozone. Italian banks are on the front burner, but the temperature is rising in Portugal,” Marc Chandler, the global head of currency strategy at Brown Brothers Harriman, wrote in a Monday note to clients.

Things aren’t looking super great going forward, amid higher oil prices and the overall sense of uncertainty in post-BREXIT Europe.

Barclays forecasts that growth will fall below 1% in 2016, while a Citi Research team led by Ronit Ghose noted that the negative growth effects from the BREXIT were likely to hit periphery countries — i.e. Portugal, Spain, Italy, and Greece — harder.

Where are the ‘all-time highs? Unfortunately, only in selected places where we can profit….

These are the percentage increases above the previous highs, with each ‘Y’.

Those with ‘N’ are indexes that are NOT at all-time highs!!!

Screen Shot 2016-07-17 at 11.19.45 PM

 

New All-Time Highs

S&P500, Dow Industrials, S&P MidCaps,

Russell 1000, S&P600 Small Caps, S&P400 MidCap Exchange Traded Fund

No New All-Time Highs

NASDAQ, New York Stock Exchange, Russell 2000 Small Caps,

London Financial Times Index, Wilshire 5000, Down Transportation Index,

American Exchange

New All-Time Low

10-Year Treasury Note, 30-Year Treasury Bond

F Fund – Two Years

AGG

 

C Fund – Two Years (higher YTD, but, with significant downside risk)

PEOPX

 

 

I Fund – Two Years

EFA

S Fund – Two Years (Also, higher YTD, but, with significant downside risk)

FSEMX

 

Lance Roberts of ‘Real Investment Advice’ points out some inconvenient facts.

“It is worth reminding you, that while the markets are moving higher and pushing new highs currently, it is doing so against a backdrop of weak fundamentals, high valuations, and deteriorating earnings.”

Of the current price levels, Blackrock CEO Larry Fink says, “If we don’t see better-than-anticipated corporate earnings I think the rally will be short-lived,” he added.

Considering that on a GAAP (accounting) basis, the S&P500 is currently generating about 90* in earnings, or equivalent to a 24x P/E multiple, it is hard to see how one can justify the move “fundamentally.”

* – currently at 86.44, and, that’s down from 105.96 last year at the peak.

Fink said extraordinary central bank asset purchases has been inflating stocks prices. “I don’t think we should be at new [stock] highs,” he said. “All the stock repurchases, you’re seeing this reduction in investable assets.”

Artificially boosting stock prices through convoluted liquidity schemes, devious machinations, backroom central banker deals, sending Bernanke to Japan, and helicopter money dropped on Wall Street only, has just exacerbated the wealth inequality permeating the world. The anger over this blatant pillaging by the .1% who rule the world is reflected in the chaos across Europe and the brewing civil war here in the U.S.

No wealth is being created because no productive investments are being made.

Here is a chart of earnings levels, clearly showing a quarter-over-quarter decline that began over a year ago.

Screen Shot 2016-07-17 at 10.01.32 PM

Let’s assess the progression closely…

  •   The Fed kept rates at ZERO for seven years.
  •   The Fed raised rates just ONCE in the last 10 years.
  •   The Fed spent over $3 trillion in QE.
  •   Total central bank printing totaled $20 trillion since 2008.

Let’s assess the most recent headlines…

The three largest banks in the US—Bank of America, JPMorgan Chase, and Wells Fargo—disclosed that the number of delinquent corporate loans increased by 67% in Q1.

  • JPMorgan’s delinquent corporate loans increased by 50% to $2.21 billion
  • Bank of America’s delinquent loans increased 32% to $1.6 billion
  • Wells Fargo’s delinquent loans increased by 64%, to $3.97 billion

US Industrial Production Declines For 10th Straight Month – Longest Non-Recessionary Streak In History

 

Retail Sales Jump On Downward Revisions, Hover At Recessionary Ledge

 

Empire Fed Unexpectedly Drops As New Orders Tumble, Labor Conditions Deteriorate

Don’t get caught up in the hype of a minor upward price advantage.

The memories of losses nearing 10%, twice in the past year, have faded from the presses.

These minor single-digit YTD gains will also fade quickly once the weight of the fundamentals begins to take it’s toll.

06232016 June 23, 2016

Posted by easterntiger in economy, financial, markets, stocks.
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Current Positions  (No Changes)

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

F(bonds) – up to 75%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 6/23/16

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

-1.89, -13.58, 16.45, +19.5

======================================================

(Today from 2 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)

TSP Fund Proxies Year-To-Date

Top left – F fund/+4.04% YTD, Top right – I fund/+1.46% YTD

Bottom left – S fund/+2.87% YTD, Bottom right – C fund/+4.15% YTD

(press any image to expand – press ‘x’ button at top left to return)

From the Weekly Momentum Indicator on the S&P100, notice the TWO POINT difference in price from today from NINE DAYS ago!

‘The market is up/The market is down’ virtually means nothing when the market is crossing back and forth in the same area for weeks and months at a time.

The high’s made in May/June of 2015 have still not been broken. Year-to-date is still fluctuating between single-digit plus or minus gains or losses.

Today, as all week, the entire financial world is hovering around the outcome of the referendum on whether the United Kingdom will ‘BREXIT’ or ‘BREMAIN’ in the European Union.   The results are expected sometime tonight with an immediate reaction in the world equity/currency/bond markets tomorrow.  The immediate impact is expected to be fairly ‘huge’ given recent narrow ranges.  A ‘BREMAIN’ will be seen as a stabilizing influence on the Eurozone, resulting in a positive direction on many, if not all, markets worldwide.  A ‘BREXIT’ will be seen as a very negative signal.  Prices would then expected to show immediate and possibly substantial penetration into the RED zones, reflecting the instability that an exit from the European Union by the United Kingdom would mean.

While the UK only represents 3% of world GDP, the economic impact of an exit has been summarized by legendary investor/trader George Soros, as a consequence of a devaluation of the British Pound – “Too many believe that a vote to leave the EU will have no effect on their personal financial position,” he adds. “This is wishful thinking. It would have at least one very clear and immediate effect that will touch every household.”

Soros cites data from the Bank of England, the International Monetary Fund, and the Institute for Fiscal Studies stating that if Britain leaves the EU, the average U.K. household will lose £3,000 to £5,000 annually.

Underneath the surface, in the bigger picture ‘beyond the BREXIT’, and regardless of the short-term momentum after the vote, by next week, expectations are for some downward pressure on all the equity indexes.   Following the indications from the Federal Reserve over the past two weeks, of a plan to delay raising rates based upon conflicting data, the F fund has surged relative to a two-year low in benchmark (10-year treasury note) interest rates last week.  As a side note, these low interest rates have not translated to an increase in housing demand.  This is a significant sign of other dragging factors at work, possibly tightening consumer credit conditions, income stagnation, or consumer risk aversion. OTHER SIGNS OF ECONOMIC WEAKNESS are beginning to emerge.  Consumer spending and U. S. GDP is expected to lag in the lower end of recent ranges into next year.  Equity prices, already losing momentum from the loss of (1) Fed-sponsored Quantitative Easing (QE) since October ’14, (2) the peaking of New York Stock Exchange (NYSE) margin debt over a year ago (May ’15) and, finally, (3) the recent estimate of stock buybacks, from  JP Morgan Quant Marko Kolanovic, who announced that buybacks have dropped 40% ($250 billion) on a 12-month trailing basis. Share buybacks take approximately 6 quarters to execute so the recent drop will translate into roughly $40 billion less equity demand per quarter. In the chart below, notice how the S&P500/C Fund has remained in an upper range, IN SPITE OF the decline in buybacks.  This WILL be reconciled in the coming quarters.  The three elements are/were the primary sources of U. S. equity strength for the past 7 years.  Many other world indexes are already off in to negative ranges for the year.

us_buybacks

Risk continues to rise, even as prices appear to be unfazed.

 

05232016 May 23, 2016

Posted by easterntiger in economy, financial, gold, markets, oil, silver, stocks.
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Current Positions  (No Changes)

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

F(bonds) – up to 75%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 5/20/16

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

-6.62, -20.76, -11.11, +6.71

======================================================

(Friday 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)

TSP

As the calendar flips to May, the U.S. stock market enters what is historically its worst six months of the year, in which it typically under-performs the November-April time frame.

This is a well-documented seasonal trend with solid historical numbers behind it. It begs the question: Should investors follow the old Wall Street adage to “sell in May and go away?”

The numbers back it up. Looking at stock market history back to 1950, most of the market’s gains have been made from November to April and the market has generally gone sideways from May to October, says Jeffrey A. Hirsch, editor in chief at Stock Trader’s Almanac.

The November-April period produced an average gain in the Dow Jones industrial average of 7.5 percent since 1950 compared to an average gain of just 0.4 percent from May to October, Hirsch says.

This is just one more reason why I will maintain high allocations to our F Fund, as I have for much of the past 3 years, due to increasing risk and subsequent under-performance of C, I and F funds as compared to the F Fund.  The attractiveness of the F fund has mirrored the lack of increases in interest rates, relatively speaking, from multi-decade, near zero lows.  This lull in rate pressure is in spite of continuous Fed rhetoric projecting rate increases, since the end of Quantitative Easing (QE) in the 4th quarter of 2014.  A continued threat to raise rates is simply a ‘bluff’ tactic, meant to broadcast confidence to the rest of the world of our economic condition.  This is meant to continue to competitively attract capital from other world markets into our U. S. markets.  It is a very risky proposition, given the threat that higher interest rates, even from these generational low levels, can impact on our equally fragile and debt-ridden consumer, government and business purses.

For the following charts, imagine that you had half in F and half in the other fund.  When it rises, the other fund beat the F; when it fell, the F fund beat the other half.

Screen Shot 2016-05-22 at 7.30.31 PM

S&P 500/C Fund Performance compared to AGG/F Fund Over the Past Two Years

Screen Shot 2016-05-22 at 7.34.06 PM

S&P 500/C Fund Performance compared to AGG/F Fund Over the past 5 Years

Screen Shot 2016-05-22 at 7.31.26 PM

Small Cap/S Fund Performance compared to AGG/F Fund Over the past 2 Years

Screen Shot 2016-05-22 at 7.33.25 PM

Small Cap/S Fund Performance compared to AGG/F Fund Over the past 5 Years

Screen Shot 2016-05-22 at 7.31.58 PM

International/I Fund Performance compared to AGG/F Fund Over the past 2 Years

Screen Shot 2016-05-22 at 7.32.53 PM

International/I Fund Performance compared to AGG/F Fund Over the past 5 Years

Stocks

Fed officials have been preparing the groundwork for a rate hike for more than a month, having issued about a dozen warnings through the media.  Problem is, the Fed’s credibility is so badly shattered, that few traders actually believe what Fed officials are saying these days.

On April 28th, more than 80 economists polled by Reuters said that they were expecting two rate increases this year, with the first hike coming as early as June. “The Fed’s next interest rate hike will surely cause market pain, but the Fed should just get it over with as soon as possible,” former Dallas Fed chief Fisher warned on April 28th. “I would be prepared when they move, and I hope they move in June — there’ll be a settling in of the market place. There will be a correction. Suck it up. Deal with it. That’s reality,” he told listeners of the television station, -CNBC.

The weekly chart of the S&P 500 Index (SPX) is labeled as a bearish Elliot Wave 5. This fifth wave typically takes the chart subject down to a new low, after it has completed 4 waves with lower highs and lower lows.

How many bull markets have spent an entire year without making new highs? The answer is just thirteen since the 1940’s.

How many eventually did achieve new highs? Just two.

That is out of thirteen times bull markets did not reach new highs in the last sixty years.

What happened to the other eleven times stocks did not reach new highs for a year in a bull market?

You guessed it. Those eleven times ended in bear markets. So history tells us there is an 11/13 chance we are headed for a bear market. That is 85% for those with calculators.

Sounds simple, but the current market conditions are difficult. One day we are up and the next down. Rallies feel solid but never break out. Declines look like the end has arrived, but then they bounce back.

Smart investors have noted that the S&P 500 just staged a very dangerous looking move.

That move was when S&P 500’s 50-week moving average broke below its 100-week moving average. You can see this in the green circle below. We cannot rule out the high probability of a ‘waterfall decline, similar to the 4-day 12% plunge of last August.

Screen Shot 2016-05-22 at 7.45.01 PM

This move is called a “Death Cross” and for good reason. The last time it happened was in 2008, right before the entire market CRASHED. This is another case of a ‘waterfall’ decline.

The time before that was right before the Tech Bubble burst, crashing stocks.

Screen Shot 2016-05-22 at 7.45.30 PM

In short, going back over 16 years, this Death Cross formation has only hit TWICE before. Both times were when major bubbles burst and stocks Crashed.

Margin Debt

A primary fuel for market progress, margin debt, continues to show a peak over a year ago, a month before market prices also peaked.  The last SEVEN consecutive months have been below the 12-month moving average.  This is the first time since 2011 that this has happened.  That period coincides with a 20% decline in market prices around that point.

Screen Shot 2016-05-22 at 10.09.08 PM

Bonds

Notice the actual declining trend in interest rates over the past 20 years, and even in view of the so-called ‘economic recovery’ of the past decade. There is something more involved at work than these short-term ‘bullish’ economic aspects, much of it under the increasing Fed-funded burden of higher debt levels on Fed balance sheets (over $4 trillion in the past 7 years alone).  Long-term economic strength is fuel for higher rates, not lower rates.

Screen Shot 2016-05-22 at 8.19.21 PM

I’ve placed my bets on lower interest rates for the past 13 years, and, I’ve only been proven wrong for very, very short periods of time.

Precious Metals

The demand for Gold surged +21% in Q’1 of 2016, – the fastest pace on record, according to a May 12th-World Gold Council <WGC> report. WGC officials attributed the rise to 4 principal factors: 1- negative interest rates in Japan and Europe; 2- the chance of a devaluation of China’s Yuan; 3- the likelihood of a slower trajectory of Fed rate hikes – than suggested by the Fed’s “Dots Plot,” and 4- expectations of a weaker US$.

A quote from legendary trader and investor W. D. Gann sets the stage for the current state of the gold/silver/platinum/palladium markets.

“Anytime a market exceeds the largest percentage decline or the largest time period of the corrections on the way down in a bear market, it is showing that the momentum is shifting and that buying pressure is finally overcoming selling pressure.”

Screen Shot 2016-05-22 at 10.46.42 PM

Marshaling the evidence, in the gold there has never been a bear market rally which has exceeded the preceding bear market rally highs on the way down. Our advance has exceeded the previous two.

Only the 48% bear market rally in 1980 in the aftermath of the greatest bull market in history and the 27% advance in 2008 in the midst of the financial crisis have been greater in percentage terms than our 25% advance. Our DNA doesn’t match these two at all. The only conclusion we can draw is that we have a 1st leg up in a new bull market and not a bear market rally.

Screen Shot 2016-05-22 at 10.48.11 PM

Silver hit record demand in 2015, but had its third successive annual deficit, which was 60% larger than 2014. These were just a few of the findings of this year’s report. However, the report is backward looking and the silver market is much different today than it was towards the end of last year.  Erica Rannestad, precious metals demand senior analyst for Thomson Reuters GFMS, agreed in that interest for silver has shifted, which is helping to support prices this year. “First off, in the past 2-3 years, you’ve seen bargain buying. This year, you’ve seen a lot more safe-haven buying, which has been pushing prices higher,” she explained.

Oil

Screen Shot 2016-05-22 at 8.49.13 PM.png

There are a lot of tankers sitting off the coast of Singapore waiting for a price increase and refinery availability to dump their cargo (http://www.zerohedge.com/news/2016-05-20/something-stunning-taking-place-coast-singapore ). South American suppliers are trying to sell every drop to have available funds to ensure the population is fed, staving off utter collapse and revolution. India is even trading drugs for oil now. Middle Eastern suppliers are holding supply steady in an attempt to make enough money to support their lifestyles and basic requirements. International refineries are working as fast as they can to turn over supply in hopes of being able to pay their bills. All of this will have a short term cap on prices.

Longer term, as players go bankrupt and governments are overthrown, then supply will be limited into a market of relatively stable world demand. This will drive prices higher, but it is a couple of years away, at least.

In the short term, expect that every approach of WTI Crude Oil near the 50 level will be sold off.

02082016 February 8, 2016

Posted by easterntiger in economic history, economy, financial, markets, oil, stocks.
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Current Positions  (Changes)

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

F(bonds) – up to 75%; G (money market) – remainder

======================================================

Weekly Momentum Indicator (WMI) last 4 weeks, thru 2/8/16

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

-2.98, +7.92, -62.99, -77.25

======================================================

(Friday 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)

****The majority of this report was completed before the nearly 2% decline of today****

TSP

Here are images of where the respective TSP funds have positioned themselves, for the past year, with respect to the emerging appeal of ‘flight to safety’ of bond funds, and, in our case, the F fund.  Notice the rapidly rising risk of losses in any/all of the equity funds since the middle of last year (as I repeatedly used the high risk/low reward aspect).

S fund to F fund (small caps to bond fund)

FSEMX-AGG

You should only expect these aspects to remain as they are here for at least the next 4-10 quarters.   There will be no substantial, or long-term, impact from changes in Fed policy, as in the past.

I fund to F fund (international funds to bond fund)

EFA

Those techniques have run their course.  They have created a $4 trillion liability, known as the Fed balance sheet.  Even larger liabilities are either underway or already put in place in Europe and Japan.  These ‘freebie’ policies have short-term benefits and very long term consequences, which must be ‘unwound’ in some fashion that has yet to be determined.

C fund to F fund (S&P 500 to bond fund)

PEOPX-AGG

F fund proxy, AGG for comparison

AGGYEAR END SUMMARY

When the whistle blew at the close of trading Thursday, New Year’s Eve, the stock market finished a disappointing week and year, with both posting a nearly 1% loss. In light of the optimism that rang in 2015, there was little joy on Wall Street.

The annual drop was the first since 2008.  So much, too, for the traditional Santa Claus rally: Stocks fell 1.8% in December. In quiet, holiday-shortened trading in the final week, equities moved in lockstep with oil prices. Oil ended the year at $37.04 a barrel, down 3% in the final week, and off 31% for the year, not far from seven-year lows.  It’s now almost $6 per barrel lower after 6 weeks, or, -18.5% year to date, near twelve-year lows.

This is where major asset classes wound up at the end of December, end of the year, end of three years (annualized), and end of five years (annualized).

TotalReturns2015

For the week, the S&P 500 took its largest dive in a month, as investors blanched at weak economic data out of the U.S., including an uninspiring jobs report Friday. The S&P 500 tumbled 1.8% on Friday, with technology stocks leading the way down.

“The market is reacting to what it sees as rising recessionary risks,” said Jason Pride, the director of investment strategy at Glenmede.

Last week, the Dow Jones Industrial Average fell 261 points, or 1.6%, to 16,204.97, and the Standard & Poor’s 500 index dropped 60 points, or 3.1% to 1880.05. The Nasdaq tanked 251 points, or 5.4%, to 4363.14. LinkedIn (ticker: LNKD) led the index down, dropping 44% after releasing weak 2016 guidance.

Energy was “the” story in 2015, according to Jonathan Golub, chief equity strategist at RBC Capital Markets. The price of oil “significantly affected both its own sector and the rest of the market.” It’s no coincidence, he adds, that the market’s poor 2015 performance reflected weak growth in the S&P 500 index’s earnings per share.

OIL/COMMODITIES/DOLLAR/ECONOMY

We hear every day that low oil prices are good for the economy. U.S. consumers are saving billions from low gasoline prices. We also hear that low interest rates are great for the economy because it reduces borrowing costs for consumers and businesses. We have both low oil prices and low interest rates but the economy grew at only +0.7% in Q4 and jobs appear to be slowing. Why? Enquiring minds want to know.  You know the Fed is going crazy trying to figure out the answer.

Ironically, the world economy badly needs higher oil prices. The problem is that the world’s economy relies far more today on ’emerging’ countries that rely on oil sales, than 15 or 25 years ago – the last periods of ultra-low oil prices.  Most big emerging countries are heavily dependent on oil and other commodities, such as copper and iron ore. (Brazilian iron-ore miner Vale SA <VALE5.SA> said it will no longer pay a dividend to shareholders). Such economies now account for 42% of the world’s economic output, about double their share in 1990.  From Russia to Saudi Arabia, Nigeria to Brazil, economic growth is slowing down to a crawl and, in many cases, is contracting.

Citi helped spread some doom and gloom on Friday when strategist Jonathan Stubbs said the global economy seems trapped in a ‘death spiral’ that could lead to further weakness in oil prices, recession and a serious equity bear market.  He is definitely going for the scary headlines in this note.

He said the stronger dollar, weaker oil/commodity prices, weaker world trade, petrodollar liquidity, weaker emerging markets and global growth, etc, could lead to “Oilmageddon,” a significant and “synchronized” global recession and modern-day bear market.

He did say that some analysts at Citi predicted the dollar would weaken in 2016 and oil prices would likely bottom. “The death spiral is in nobody’s interest. Rational behavior, most likely will prevail.”

So, release the report with scary headlines and then end it with “rational behavior, most likely will prevail.”  Hmmmm….

He did have one point right. The lack of a world economy floating on petrodollars is a very scary place. When oil was $100 every producing country was flush with dollars and they spent that money all around the world. This kept the global economy lubricated. With global producers now living on 30% of what they received two years ago, an entirely new dynamic is in place. These countries are broke and they are being forced to cancel/remove subsidies that kept their populations happy.

Gasoline for 20 cents a gallon is now 2-3 times that. Utility subsidies that kept electricity, gas and water flowing to poor citizens have been cancelled or reduced significantly. Government wages are being slashed, jobs cut, infrastructure projects cancelled, road maintenance postponed, etc. All of this is due to the 70% decline in oil prices. Hundreds of millions of people are living in countries where the current revenue can no longer support them in the manner in which they were accustomed.

It is no surprise that the global economy is slowing. There is a shortage of petrodollars to keep it lubricated.

This is not likely to change in the near future. Oil prices will rise in Q3/Q4 but it could be years before they return to a level where governments will be able to subsidize/support the population and economic activity like they did in the past.

Occidental Petroleum (OXY) reported last week that the all in cost for oil production in the Permian Basin in Texas was $22-$23 a barrel. Producers in that area can still make a few bucks on new production. However, that is the only area of the country that is profitable. Wood Mackenzie said 3.4 mbpd of global production was cash negative at $35 per Brent barrel. That means they actually lose money on every barrel produced.

Wood Mackenzie said not to expect many producers to actually shut in production. After factoring in the cost to shut off production, the cost to restart, the lost cash flow, negative or not and the danger to future production, prices would have to go a lot lower before producers would bite the bullet and shutdown the wells. When a well is shutdown, things happen underground. Producers spend millions of dollars to get oil to flow towards the pipe so it can be extracted. As long as that oil is flowing, it remains liquid. If production stops that oil can thicken and clog up the pores in the rock and when production is restarted, it may only be a fraction of what it was when it was halted. Wells need to continue running even if they are turned down to a very low rate just to keep the flows moving.

What the stock market is fighting is more evidence of a slowing economy, and not just in the U.S.  The global economy is slowing in unison (some faster than others) and this is the first time for this to occur since the 1930s.  This, of course, fits the general thesis that says we’ve been in a secular bear market since 2000 (since 1998 by measures other than price) and that the next cyclical bear within the secular bear could be a very painful move for those who hold long positions.

Further evidence of a global slowdown in the economy is what we see happening in the currency markets. Everyone is in a race to devalue their currencies in hopes of making their products cheaper for other countries to import. But with everyone doing it the only thing that’s been accomplished is a race to the bottom and a global devaluing of fiat currencies, which has created a deflationary cycle. That of course is what the central banks are trying to fight with their quantitative easing (QE) and zero interest rate policies (ZIRP)/negative interest rate policies (NIRP ) but each is negating the efforts of the other. In the past, as in the 1930s, this currency war tends to lead to very bad things between countries.

The Chairman of the OECD’s Review Committee, William White, wrote “We’re seeing true currency wars and everybody is doing it, and I have no idea where this is going to end. The global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20% of GDP higher today. We are holding a tiger by the tail.” We all know what happens when the tiger gets tired of us yanking on his tail.

The economic slowdown obviously affects businesses and we’re seeing that show up in the slowdown in earnings, which is making it more difficult to service the massive debts that they’ve taken on. Some of the debt has been for the development of new energy sources, such as the fracking. Think that debt might be in trouble. Much of the debt has been from companies borrowing heavily to buy back stock in an effort to boost earnings per share and hide the fact that actual earnings have been slowing. Again, a slowdown is now making it more difficult for those companies to service their debt and the slowdown is going to cause a double whammy to earnings.

STOCKS

020816Snapshot(Major indexes through last week)

The Fed keeps pinning their hopes on the employment picture but that picture is a lot dimmer than their simple observations of how people are employed (it’s part of their flawed economic models). The chart below is hard to read because I had to squish it to fit but basically it’s showing the inflation-adjusted price of SPX (on top) vs. the ratio of non-farm employment to part time employment. Each time the ratio has been in decline (meaning part time employment is becoming larger than non-farm (full) employment) we’ve been in a secular bear market. (Two-thirds of the jobs announced in last Friday’s jobs report were minimum wage jobs.) The dates of the first secular bear (pink band) is 1966-1982 and the second secular bear (pink band on the right) is from 1999. You can clearly see how the employment ratio has declined from its 1999 peak and since the 2009 low it hasn’t even recovered to the 2002 low. In other words, the employment picture remains weak but the

Fed feels it was strong enough to warrant a rate increase in December.

SPXAdj55-15

The chart above shows why it can’t be used as a timing tool but it does support why we’ve been in a secular bear, regardless of the new (non-inflation adjusted) price highs for the stock market in both 2007 and 2015. And if we’re still in the secular bear, as I’ve contended for many years, the new price highs into 2015 merely made the stock market more vulnerable to a market crash. Have we started that crash? It’s too early to tell but yes, I do believe we’ve started the next (and should be final) leg of the secular bear. But for those who think it’s a good idea to just sit tight and let the market recover after the decline, I think the recovery will be far slower than the one off the 2009 low. It could take a generation before prices recover back to the December highs.

MARGIN DEBT

A primary fuel for market progress, margin debt, now shows a peak in April, a month before market prices also peaked.  The last FOUR months have been below the 12-month moving average.  This is the first time since 2011 that this has happened.  That period coincides with a 20% decline in market prices around that point.

MarginDebtDec

12152015 December 15, 2015

Posted by easterntiger in economic history, financial, markets, oil, stocks.
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Current Positions  (CHANGES)

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

F(bonds) – no more than 25%; G (money market) – remainder

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Weekly Momentum Indicator (WMI) last 4 weeks, thru 12/15/15

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

-11.06, -34.86, 30.94-4.57

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(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)

MajorStockIndexes

(Click to enlarge – press back button to return to this page)

Year-to-date, most of the indexes are still underwater.  Recall that the ‘all-time high’ announcements are fading further and further into memory, most of which happened in May and June.  More than 2/3 of the NYSE stocks are below their 200-day moving averages.  Market breadth, the number of advances compared to the number of declines, continues to deteriorate.

A primary fuel for market progress, margin debt, now shows a peak in April, a month before market prices also peaked.  The last three months have been below the 12-month moving average.  This is the first time since 2011 that this has happened.  That period coincides with a 20% decline in market prices around that point.

Margindebt

Anticipation for Wednesday’s FOMC meeting and wild swings in oil prices drove recent sessions. The indices, like oil, experienced some large swings as traders position for a possible rate hike on Wednesday and expiration of options and futures on Friday.  The relentless upward pressure of ‘pretending’ to raise rates for over a year has had a flattening effect on our F fund.  The impression of market calm and lack of a need for the safety of bonds is patently false, even if the perception of low risk is delayed, and deliberately deceptive.  I am reducing my F fund allocation, in anticipation of tomorrow’s reaction of the rate increase, if it happens, and the follow-on ramp up, known affectionately as the ‘Christmas rally’ into the end of the year.  Last weeks’ reduction of price levels sets the stage to a make-believe ‘rally’ for the next two weeks.  Everyone wants the shoppers in a good mood to spend during the last few weeks of December, so, depressions or declines in stock levels are mostly off the table until January, even if just for psychological reasons.

The event most important to the market is the FOMC meeting on Wednesday. They are largely expected to raise rates for the first time since the financial crisis and likely spark some market movement. Along with policy, indications of future increases will be very important.  I would not recommend any holdings in the equity funds, since the volatility surrounding the Fed announcement increases risk this week.  The expiration of futures and options this week also creates an atmosphere of avoidance this week for many traders.  Remember – this is a trading environment, not an investing environment.

SPXS&P 500 – C fund proxy – Year to date

 

The global markets saw some indecision but did not have an overly large impact on our market. In Asia, Japanese and Hong Kong markets were down in the range of -1% while the mainland Shanghai index rose more than 2.5% in a day of trading that saw intra-day losses greater than -5%. European indices began the day with gains but the plunge in oil sparked a sell-off that carried down by roughly -2% by days end.

 

 

EFAEFA – I fund proxy – Year to date

 

 

So, November began with the S&P500 at 2100. Six weeks later, it hit 2000. The US Treasury withdrew $310 billion from the market in November, as it sold immense amounts of new debt to replenish its cash coffers after running them down to near zero while bumping against the debt ceiling. That had an impact.  It sucked cash out of dealer and institutional investor accounts as they paid for the new paper, and simultaneously bought enough in the market to keep prices elevated for a while.

But then they had to rebuild their cash levels. Perhaps the dealer and institutional liquidation to rebuild cash has run its course, but while in progress prices took big hits in other markets as the reliquefication spread to junk debt, commodities, and emerging market equities. That triggered margin calls, obliterating lots of trading capital. We can’t quantify that until well after the fact, if at all. But we see the news stories of runs on hedge funds and mutual funds and resulting shutdowns.  All of this stuff can suddenly snowball. This is how crashes begin, with the sudden need to shift a fixed supply of money into too many places at once.

 

IWMIWM – S fund proxy – Year to date

 

The 4th quarter is normally a period of strength for small cap stocks.  So far, this has not materialized.  Some of the reasons include the anticipation of the Fed meeting/rate increase, and that impact on companies that do a substantial share of their business with overseas clients.  A rate increase should put upward pressure on the dollar, making our goods more expensive for foreign purchasers.  Obviously, this rate chase/avoidance has had negative pressure on the S fund all year.

11132015 November 13, 2015

Posted by easterntiger in economic history, economy, financial, markets, stocks.
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Current Positions  (No Changes)

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

F(bonds) – up to 75%; G (money market) – remainder

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Weekly Momentum Indicator (WMI) last 4 weeks, thru 11/13/15

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

-18.07, 36.28, 36.12, 62.48

=================================================================

(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)

In 2001, the trend turned bearish, by falling through the 9 quarter moving average, stocks rallied 20% in 32 days, then fell 29% in the next 90 days. Stocks fell 44% within 7 quarters.

In 2007, the trend turned bearish, by falling through the 9 quarter moving average, stocks rallied 12% in 40 days, then fell 23% in 3 months. Stocks fell a total of 53% within 4 quarters.

Now, in 2015, the trend turned bearish in August, by breaking the 9 quarter moving average, then rallied 11.44% in 51 days into November 3rd.  We have now fallen 4% in 8 days. The pieces are falling into place for a decline of 20% or more within 90 days, and up to 50% within the next 6 or so quarters.

“History never repeats itself,  but it often rhymes”

A lot of attention was given in the past two months to the ‘bounce’ from one-year lows, following a 4-day, 11%, waterfall decline in August.  After taking two tries, over seven weeks, to rebound just over 5%, beyond 2020 on the S&P500, it was only through a sequence of Fed (rate softness) , European Central Bank (extending Quantitative Easing), and Bank of China (surprise rate cut) announcements in mid-to-late October to create a ‘bullish’ impression.  The truth was told at the end, when the November 3rd high failed, by 1%, to match the previous high, established in May.

Even after the recent 8% rebound from the August collapse and the one-year low, S&P price levels were only 1% higher than they were a year ago, even as S&P earnings are DOWN 6% from a year ago. That current S&P price level was still 2% BELOW the highest levels of almost 6 months ago. (This is called a ‘trading range’, no matter what the level of dramatics that occur in between.) The justifications for these zig-zagging price levels are simply to confuse, return only what has already been taken away, and, to continue to offer little reward for great risk. Earnings on the Dow Industrials peaked last May, along with the ‘all-time highs’, and have declined, by 10%(!), ever since.  This is another factor that weighs heavily on anyone’s suggestion for continuation of the bounce.  Earnings drive price levels.

Short-Range

Here is a day-by-day trend of how the major S&P sectors are performing this week.  To get to the main point, or, the bottom line, notice the fading trend on the bottom two rows.

S&PSectors

How has holding F Fund positions compared to positions in the C, I, and S funds this year, given the higher levels of risk?

These three charts tell the story.

Use the ‘0’ line, in the middle, from left to right, as a guide for the plus or minus, advantage/disadvantage from holding in F funds this year, as compared to the other funds.

(click each chart to zoom in, then, back button to return to the page)

PEOPX-AGG

The C fund, most like the S&P500, has carried an average upside of about +1-2%, an average downside risk of -1-2%, a high of +4.53%, at one very, short point, and a downside risk of -6.1%.  It now only has a 0.65% advantage, which even now appears to be eroding today.

EFA-AGG

The I fund, most like the EFA International fund, has carried an average upside of about +2-4%, an average downside risk of -1%, a high of +7.22%, at one very, short point, and a downside risk of -8.24%.  It now only has a -4.84% disadvantage, which even now also appears to be eroding today.

RUT-AGG

The S fund, most like the small cap funds, has carried an average upside of about +3-5%, an average downside risk of -1%, a high of +8.98%, at one very, short point, and a downside risk of -7.23%.  It now only has a -2.86% disadvantage, which even now also appears to be eroding today.

This should make it clear that we are unable to declare any advantage for this year in equity funds, even if the returns in the F fund, and bond funds in general, have been both low-risk, and, of low appreciation.

Medium-Range

Longer term indicators are on the cusp and could go either way from here, either confirming an early stage bear market down phase (most likely) or signaling that longer term cycles have turned back up (most unlikely). Given the underlying adverse liquidity (tightening credit and falling demand worldwide) conditions, that seems a less likely alternative; but, if the indications did turn to the upside, it is suspected that the up phase would manifest itself as little more than a broad trading range that has wide swings in both directions with little upside progress overall. This week has offered a window into this next probability, and, is now unfavorable. As I said in September, fund managers love a ‘Santa Claus’ rally, to fatten up their New Year’s bonuses.  Therefore, one more rally back to recent highs is not out of the question.  It would be very quick and very limited on return.  Don’t try to chase it if you’re already standing aside.  You’re likely to either be in, with risk, or, miss it, IF it comes, and not miss much.

Interest Rates

The shell game with the Federal Reserve continues, now with the December meeting supposedly holding the next key to whether or not rates will rise from the floor.  We’ve heard this before – next meeting….next meeting….next meeting.  So, how does this impact us?

Every threat to raise rates puts downward pressure on our F fund, and upward pressure on interest rates. Each realization of a weakening economy puts upward pressure on our F fund and downward pressure on interest rates.  This tug-of-war seems never ending.  The likelihood of a truly, major positive event signaling economic health is simply a pipe dream.  The further denial, and never-ending, but unfounded hope that the worst is behind us, only serves to stall the inevitable – that the Fed is bluffing on raising rates, since they are hinting at strong economic growth that simply cannot be sustained.  Recently, a ‘strong’ jobs report raised talk last week and this week of raising rates in December.  That report is only an estimate.  Averaging that report into the last 2 previous reports only creates an average jobs trend and outlook.  I mentioned earnings earlier.  We are in an earnings recession; declining earnings, year-over-year.  The Federal Reserve has NEVER raised rates during an earnings recession.  That rate decision requires a broader view than one employment report can contain, no matter what, or who, can tell us how certain they are that rates will rise.  Even if they do so in December, it is only by a small amount, and, that has more psychological impact than anything else.  Raising rates will also give them room to lower them again, once the true nature of the unsustainable levels of the current economic condition is revealed in the next few quarters.  We are talking about raising rates, while Europe, Japan and China are in rate cut cycles!! This F Fund strength, relative to the other funds, is already telling you that worldwide rate pressure is low, and, that F Fund prices are performing relatively well. That’s your cue.  Don’t worry about rising rates!!!

09252015 September 25, 2015

Posted by easterntiger in economy, financial, markets, stocks.
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Current Positions  (Changes)

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

F(bonds) – up to 75%; G (money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 09/24/15

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

4.88, -17.54,  -1.76, -72.95

(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)

It’s now a month after the largest decline in 4 years. The dust has cleared.  Any doubts about the very first Fed action after the first correction in 4 years are now in the books.

In the chart below, the biggest question, before and after last week’s Fed meeting, is which way the ‘ascending wedge’ formation would resolve – breaking upward or downward.

Bulls were certain that this was a bullish ‘consolidation’. And, with no rate increase last week, they were confident of a rebound.  That confidence proved to be incorrect.

S&P50009242015

(click for a closeup, then, back button to return)

Also leading into last week’s Fed meeting, the ‘exposure index’ from the National Association of Active Investment Managers hovered in the range near one-year lows.  Since the Fed meeting, that exposure level is now lower than in the previous two weeks, and, is now at the low for the year.  Investment managers are not interested in increasing their exposure to stocks at this time.  Prices should continue to weaken near term. HOWEVER – prices in this upcoming quarter characteristically rise from August/September/October lows and into late November to mid-December highs.  This all-too-often phony ‘advance’ back to old highs meets the needs of fund managers who do not want a negative return in their portfolios for the year.  That justifies a bonus for them in January.  Don’t count on these advances holding up into the next quarter.  Any rise that does not exceed the highs for the year, established in May and June, depending on the index, should simply be classified as ‘noise’.  Only an advance that exceeds those May/June highs should be taken seriously.  That stronger advance, past highs of the year, is highly unlikely.

In the past week, a measurement of buying interest in the various S&P components/indexes has indicated a similar pattern of low and declining buying interest, if not, outright selling interest.

S&P-PBIThe only sector with any increase in buying interest is the S&P Utility sector.  This is a bearish indication, one of a search for safety, protection and avoidance of risk.  This is a reiteration of the expectation for a further decline, or increasing risk, in stock indexes.

On Wednesday, stocks worldwide began the morning with another beating after a scandal at Volkswagen (deliberately altering emissions results on up to 11 million cars).  The impact of this scandal is far-reaching, threatening the company itself, the health of German economy, and, with ripple effects to all of Volkswagen’s inter-connected supply chains world-wide.

The expected increase in the ‘flight to quality’ trade, of increasing interest in bonds, did not fully materialize, even as stocks broke down last month.  The one obstacle to the increases that should have occurred in our F fund positions were due to the flooding of the bond market of our bonds, previously purchased from us, by the Chinese central banks, at the very time that the demand for our bonds increased, and, during the times of highest overall risk.  These high risk conditions are normally the times when bond prices rise fastest.  You can’t blame them for adding their supplies to the market (dumping!) when they knew that the demand was also present.  Everyone has to strike while the iron is hot.  If not for that event, our F fund would have received a higher rate of increase, due to the rush of money out of stocks.

TreasuryNote(click for a closeup, then, back button to return)

Therefore, I am increasing my stake in the F fund, until this bond price trend reaches a peak, or, until stocks manage to bottom or regain their footing, due to increases in exposure by investment managers, or, the strengthening in the S&P sectors buying interest.

In the grander scheme, I noticed the emergence of a pattern that has only occurred 3 other times in the past 15 years.   In the previous 3 instances, stocks continued to decline by (1) 40% from the 2000 highs, (2) 53% from the 2007 highs, and (3) 20% from the 2011 highs.  So far, we have only declined by 10%.  It is highly likely that we are only halfway, or less, down to our eventual bottom, toward -20%, or more, from the highs of the year.

$SPXQtrly(click for a closeup, then, back button to return)

Additionally, a momentum measure called ‘relative strength index’ has fallen below a critical level, one that has only been reached, on a decline, for now only the 3rd time in 15 years.  If the current decline continues into October, we will be into our 6th quarter, moving beyond 20 months, within a narrow, ‘topping’ range.  This will increase the likelihood of this meeting the classification of a major top, and increasing the likelihood of a significant decline within the next 6-8 quarters.