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07262017 July 26, 2017

Posted by easterntiger in economic history, economy, financial, markets, oil, 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 07/26/17

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

-13.07, +2.39, +18.35, +26.39

With the very slow market action of the past few months, I like to begin each report with a memory refresher to the environment that was in place at the previous report.  Let’s look at the TRUE reflection of change since late April, and further.

The S&P500 was UP on it’s open on the 24th, but, only a half-point below Friday’s high.  So, why is there so much talk about UP for the year, yet, so little movement in general, and, often for many days at a time?

Here is a chart of the average change, in points for the S&P on top…. .  Notice that through all of March, April & May, there was a net negative from March 1st.  Total change from March 1st to July 6th was 1%!!

 

 

and, for the Russell 2000/S Fund since March 1st.

 

Even with an S&P500 all-new ‘all-time high’ early Tuesday, the change since March 1represents an average of 1/2 point/day.

 

 

 

 

The small caps are averaging less than 1/4 point per day…since early DECEMBER!!

And, likewise on the Dow Jones Industrials with SEVEN new all -time highs since June 19th.  Yet, averaging the difference between the June 19th all-time high and the July 25th, the latest all-time high, is only 3.25 points per day.  So, be very careful of reading too much into the repetitive ‘all-time high’ hype in the financial news. These half-point per day increases won’t compensate you in an average correction, or, after years of just normal inflation adjustments, and, particularly in view of the RISKS that are presented to your portfolios as you WAIT on the next few points.

Screen Shot 2017-07-25 at 11.42.18 PM

With this reflection on how ‘easy’ it is, supposedly, to make money in the first half of 2017, it appears that the Wall Street Journal recently noticed something is different this time. Three major stock-market benchmarks in Asia, Europe and the US have avoided pullbacks this year, commonly defined as -5% declines from recent highs.

The last time the S&P500 <SPX> slumped at least 5% was in the aftermath of the June 2016 BREXIT vote — marking a 273-day streak that’s the longest since 1996, according to data compiled by Bloomberg. The last time equity markets went this deep into the year without all three of the global benchmark indexes suffering at least -5% pullbacks was nearly a quarter-century ago, in 1993.

Never in at least the past 30 years have all three indexes – the S&P500, MSCI Europe and MSCI Asia-Pacific ex-Japan–gone a calendar year without falling at some point by at least -5%.  In good years and bad, markets tend to fluctuate wildly, with stock indexes often falling by double-digit percentages before bouncing back. That hasn’t been the case this year, another reflection of the historically low volatility that has gripped the world.

 

The CBOE Volatility Index, or VIX, finished Friday at it’s lowest since 1993. The chart above shows that this years average is the LOWEST IN HISTORY.

It has hit ALL-TIME LOWS every day this week, including a level of 8.84 on Wednesday, 7/26. Extremely low volatility conditions tend to produce very high levels of complacency, and unknown risk, into market participants, who aren’t prepared for the ‘what happened’ moments that approach. Fluctuations in trading volumes are nothing new on Wall Street, but the levels of volatility are the lowest in history.  You can view low volatility directly in terms of the 1/4 and 1/2 point average gains on major indexes.  You must view extremely low volatility as the ‘calm before the storm’, rather than to greet it with a feeling of comfort or complacency, particularly when they accompany all-time price highs.

How are the market gurus dealing with this challenging environment?

Legendary investor Carl Icahn is 150% net short of the market. The net short position means Icahn’s firm is betting against 1.3 shares for every one share it’s betting on. In other words, Icahn’s investment portfolio will generally gain value when prices decline, and vice versa.

86-year-old former Quantum Fund manager George Soros, who retired from fund management in 2011, has come out of retirement, sensing a critical opportunity approaching for major stock declines.

Seth Klaman is CEO & Portfolio Manager of one of the largest hedge funds, the $30b Baupost Group in Boston. He believes that “investors are underestimating risk and the insufficient margin of safety.” His book ‘Margin of Safety’ is a favorite of Wall Street investors. http://www.safalniveshak.com/wp-content/uploads/2013/05/30-Ideas-from-Margin-of-Safety.pdf

Quite clearly, there is substantial risk during these long periods of time, regardless of the overall measure from the election, or, from year-to-date.  It is this measure of more risk to reward that keeps me away from equity markets under these conditions.  I’ve seen an image of your being given just enough UP, over long periods of time, with the appearance of little downside risk, to guarantee ‘complacency’ in these risky market conditions.  DO NOT FALL ASLEEP!

How are institutional investors preparing for their futures during these deceptively calm waters?

First, institutional cash levels are at multi-year lows.  There just isn’t much cash left to put back into the markets to drive them higher.

 

Secondly, institutional buying is largely offset by proportional selling to lock in profits from share appreciation over the past 6-7 years.

Buying/Holding/Selling on S&P500

SPXGuruTrades

 

 

 

 

 

 

 

 

Buying/Holding/Selling on NASDAQ 100QQQGuruTrades

 

 

 

 

 

Note the prevalence of more selling in the major stocks, last year, with scant buying.  They are anticipating lower prices. Most of the buying, driving positive earnings, is as a result of financial engineering accomplished through  the result of stock buybacks, since earnings are derived based upon a smaller base of remaining shares outstanding, after the buybacks.


And in what few areas where this momentum is taking place, the appearance of true buying is also deceptive.  INSIDERS include corporate officers, executives, board members, etc.

Why are they selling so many more shares than they’re buying????

Apple

Net Insider Selling;  P/E Ratio of 17.92 (P/E ratio is share price divided by earnings per share, or by market cap divided by net income; market cap is value of all of the shares totaled together)

Apple has 3 BIG concerns (1) declining gross margins, (2) declining operating margins, and, (3) asset growth is faster than revenue growth.

AAPLInsiderSellsBuys

Warren Buffett/Berkshire Hathaway appears to be supporting the market all by themselves. They’re holding 186,716,758 AAPL shares. The next 10 holders only have another 65,617,772 shares, total. Everyone else is reducing, making small buys, or, already sold out. Apple is the #1 company in market cap, over 3 times Visa, or, WalMart, or GE, or, Bank of America.

Amazon.com

Net Insider Selling; Shiller P/E Ratio of 197.65!!!

Amazon is also getting less efficient, with asset growth moving faster than revenue growth.

AMZNInsiderSellsBuys

Google

Net Insider Selling; Shiller P/E Ratio of 34.23

GOOGInsiderSellsBuys

The tech sector has been virtually tilted upward by the flooding of a handful of big-name stocks, which are also represented in the S&P500 to a lesser degree.

According to a FactSet analysis, while there have been massive inflows into ETFs in 2017, the bulk of that money has gone into a vanishingly small part of the industry. The vast majority of funds have been left to essentially fight over the scraps.

The most popular ETF this year, in terms of flows, has been the iShares Core S&P 500 ETF IVV, +0.23% which has taken in $18.51 billion. Two other iShares equity products—the iShares Core MSCI EAFE ETF IEFA, +0.13%  and the iShares Core MSCI Emerging Markets ETF IEMG, -0.25% —rounded out the top three, amassing $13.1 billion and $11.3 billion in inflows, respectively.

This trend also held on the fixed-income side, as the iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, -0.59%  and the iShares Core U.S. Aggregate Bond ETF AGG, -0.36% topped the list for inflows, taking in a combined $15.1 billion.

It has been widely documented that exchange-traded funds (ETFs) set a torrid asset-gathering pace in the first six months of 2017, with U.S.-listed ETFs hauling in $245 billion in new assets. Fixed income and international equity ETFs were primary drivers of the avalanche of new assets flowing to ETFs.

Year to date, three bond ETFs are among the top 10 asset-gathering ETFs. Those funds are the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the iShares Core U.S. Aggregate Bond ETF (AGG) (a valid proxy for the F fund) and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT). As highlighted by the massive inflows to LQD and VCIT, investors have been searching for higher-yielding though still conservative options for U.S. government debt.

Another prominent theme has been investors’ thirst for ex-U.S. equity funds, which has been stoked in large part by the notion that, with the bull market in U.S. stocks aging by the day, domestic equities are richly valued. “Investors deposited over $20 billion into international ETFs in June and over $80 billion through the first six months of the year – marking the best start to a year ever for international funds,” said SSgA.  The roughly 10% surge in the I fund between February and June is reflective of this short-term event.  This parallels  the +3.29%/+5.25%/+6.6%/8.2% increases in the French CAC, British FTSE, German DAX, and Swiss market indexes, respectively, year-to-date.

How else do we reconcile so much of the bullish news on ‘strong earnings’ on the S&P500?

First, almost half of the earnings for the S&P500 come from just one sector, energy!!

While the S&P 500 earnings outlook looks impressive mainly due to a bounced-back energy sector, technology and financial services look impressive as well. But they depend on energy, too.

If oil prices fall enough to hurt the energy sector, some producers will miss loan payments. That would be bad news for the lenders in the financial-services sector.

Likewise, energy companies won’t buy as much hardware and software if they have to cut back on drilling activity. Not good for some technology companies.

Bottom line: the bull market in US stocks will be on even shakier ground if oil prices dip below $40 again. In any case, earnings growth probably won’t continue at current rates unless oil prices climb higher.

The FED

Fed Chair Janet Yellen said just this month that the Fed will be kicking the dollar ($USD) off a cliff.

 

 

 

 

 

 

 

She didn’t use those words, but the words she did use weren’t all that different.

But first a little context…

The fact is that the $USD has been falling steadily throughout 2017. At this time of this writing, it was down nearly 8.5% year to date. (The dollar should be ‘strengthening’ during rate increases, not falling. There is no confidence in the Fed’s moves to tighten monetary policy.)

The International Monetary Fund (IMF) just issued a warning, reflecting the weakness of the dollar to other currencies.  The IMF also noted that “the U.S. Dollar has depreciated by around 3½ percent in real effective terms since March,” while the Euro was strengthened. Countries such as Germany, France, Italy and Spain all saw growth projections increase. China’s growth was expected to stay at 6.7%. They also placed uncertainty in U. S. political leadership as one of their criteria for their warning.

“The major factor behind the growth revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes.”

The four largest central banks now have a total of THIRTEEN TRILLION dollars on their balance sheets, nearly TRIPLE their balances from the bottoms of the last financial crisis in 2009.  Anyone who has believed during the past 8 years that our markets are on strong financial footing, worthy of full confidence and bullish appetites, is sadly out of touch with the reality of the TEMPORARY magic of electronically created money.

THERE IS NO FREE LUNCH!

THE PARTY IS NEARLY OVER!!

IT CARRIES INTEREST PENALTIES!!!

IT RESTRAINS GROWTH!!!!

THIS MONEY MUST BE WITHDRAWN!!!!!

In a Fed statement in early July, the following stunning statement  was issued.

In the assessment of a few participants, equity prices were high when judged against standard valuation measures.

That is an incredible statement.

It tells us:

1)   The Fed is openly discussing stocks prices.

2)   The Fed is openly discussing whether stocks are in a bubble (when prices are high against standard valuations).

3)   MORE THAN ONE Fed member believes that stocks ARE in a bubble.

On June 27th, ECB President Mario Draghi raised the possibility of reducing their 2-year quantitative easing support, totaling €60 billion/month, before the end of the year. An Q2 annualized 3% growth rate in the Eurozone gives Draghi the room to take his foot off the pedal.  This was the fastest pace in a decade. Of the €4.25 billion on the ECB balance sheet, €2.25 billion have been added since March ’15.  Most of this liquidity was channeled into the high-flying NASDAQ, led by Facebook, Apple(!), Amazon, Netflix, Google, and Microsoft, as well as Alibaba and Tencent pushing the Hang Seng index to a recent 2-year high, and pushing Samsung in Korea. With this combination from the ECB, the Japan Central Bank, as well as the Swiss National Bank, the NASDAQ has doubled in value from the post-Brexit lows in June ’15, in the face of 3 Fed rate hikes, and threats to reduce the access to liquidity by reducing the $4.5 trillion balance sheet.  A clearer signal on the ECB’s plans will emerge when Draghi addresses the Jackson Hole, Wyoming financial summit in late August.

Central Bankers are absolutely terrified.

In the last month, both Fed President Janet Yellen and ECB President Mario Draghi have issued somewhat hawkish statements, only to turn around within 48 hours and walk back their comments.

Where has this nearly decade-long Fed support to the market left Main Street?

image1(1)

Study shows 1/3 of Americans not recovered from Great Recession. ? Still ok. After all, equity averages up > 3 times since March 2009.

However, even Main Street is exhausted.

Notice how this chart shows market peaks, shown by the S&P 500 index on the right, at nearly the same times that household percentage of ownership reaches historical peaks, shown on the left.  We are now at 30%, slightly higher than the previous market top in 2007, and just about 6% under the tech bubble peak in 1999/2000.

Stocks look expensive by multiple measures, and they have for a while now. But that hasn’t stopped major indices from achieving new highs as market fundamentals have looked more than capable of withstanding higher prices.

That all could change as the stock market swells to a size rarely seen outside of 2000 and 2008, just before the two most recent stock market crashes, says Deutsche Bank.

Rather than assessing the stock market using more traditional methods such as price-to-earnings ratio, Deutsche is instead looking at equity market cap as a percentage of gross domestic product (GDP). And it attributes the recent rise in historical highs to a shift in monetary policy.

While global markets benefited from a “long period of post-global financial crisis accommodation,” that’s changing as central banks like the Federal Reserve move to tighten.

It’s also important to note that Deutsche’s measure of market cap as a percentage of GDP also spiked to current levels in 2015, yet the market didn’t become embroiled in a crisis. This is because the Fed didn’t tighten to the degree that was expected, waiting until December of that year to increase rates, and then waiting another full year to hike again.

The situation showed that swift central bank tightening is a key component to unwinding an equity bull market. And this time around, stock bulls may not be so fortunate, with the Fed signaling a clear path of rate increase after already hiking multiple times.

THE CURRENT US TOTAL MARKET/GBP RATIO is 135.3%.  This is closer to the historical maximum than in any other industrialized nation right now.


This projects future returns that among the lowest in the world.

And it’s not just US stocks seeing their market cap swell as a percentage of GDP — Japan and the UK are getting in on the action, showing its a worldwide phenomenon.

 

This is a very uncomfortable global picture.  It’s similar to that of a number of pressure cookers all running at once, all inter-connected.  They must all function properly, or, they’ll all ripple their problems from one to the other.

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

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

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

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.