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10112016 October 11, 2016

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 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

 

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

08212015 Alert August 21, 2015

Posted by easterntiger in economic history, economy, financial, markets, stocks.
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NO CHANGES FROM PREVIOUS ALLOCATION ANNOUNCEMENTS

This is the worst one week decline in the equity indexes since June of 2011.

The S&P500 is off approximately 4.2% from last Friday’s closing level.  Most indexes are now back to September and/or October levels. All major indexes are now negative year-to-date.

SPX08212015

While the financial news is using the backdrop of under-performance of the Chinese economy as an excuse, many signs were already being ignored.

  •  The Dow Theory, which compares the level of the Dow Industrials to the Dow Transportation index, had already issued a sell signal, due to divergence between the two;
  • The ‘death cross’ moving average pattern(s), where the 50-day moving average crosses from above to below the 200-day moving average, has already emerged on numerous markets, including, Dow Jones Industrial average, New York Stock Exchange composite average, Dow Jones Transportation index, the semiconductor sector, the London FTSE indexes, and is pending on several other major indexes;
  • The Dow Jones Industrial average is under it’s 320-day moving average
  • 27 stock markets around the world are already in severe declines
  • Divergences between high prices and very low actual trading volume had reached historic levels
  • Reports of isolated bright spots in the economy failed to provide enough perspective for good decisions; example – this week’s ‘8-year high’ in housing starts ignores the fact that the last 7 years have represented the lowest 7-year levels in the past 32 years; this 8-year high brings us back to the point of the declining 2007 housing starts level, and, the rising 1993 housing starts level. (see chart below)
  • HousingStarts

As expected, demand for the safety of the bond market, our F fund, had already started to increase since early June, with prices once again approaching the highs of the year, reached in February and April .

A more detailed report will be developed and posted as soon as the dust clears from this weeks’ pivotal activity, allowing easier assessments for future recommendations.

03162015 March 16, 2015

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

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

F(bonds) – up to 50%; G (money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 03/13/15

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

-26.06, -13.71, +20.39, +49

(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)

Another better-than-expected jobs report came out last week. This time, the stock market reacted negatively. The reasoning behind the drop is that this continued string of above-expectations jobs reports (this is currently the best sustained jobs trend in 15 years) is quickly raising the odds that the Fed will begin hiking rates at the June FOMC meeting.

Therefore, investors appear to be going through with withdrawal pains ahead of the FOMC announcement next Wednesday. This is premature and unwarranted since there is very little chance the Fed is going to make a material change before June and probably September. The Fed can’t withdraw stimulus by raising rates with the dollar surging nearly 1% per day. That would send the dollar into hyper drive and S&P earnings into the cellar.

Market Statistics

YTD03132015


Margin Debt

MarginDebt01 (click chart to expand in separate window)

Repeated/updated from the four previous reports, an accurate count of margin debt, or, levels of borrowed money at all brokerage firms for each month is carefully watched by the financial media.  It’s this combination of a) margin debt, b) Fed money loaned to investment banks (finished), and c) stock buybacks by corporations (no significant increases over last year) that have provided a vast majority of the power to the markets for much of the past 6 years. The result of margin debt figure through January is shown in the chart above, for comparison to all months of the past 4 years.  (The last two dots have been recorded since the last report)

Update – Notice that the peak in debt for the year, once again, has STILL not exceeded the February ‘14 high, after which the primary indexes channeled sideways, with no price appreciation, for 12 weeks. And, for the first time since 2011, the figure is below the average of the past 12 months.  At that previous decline below the 12-month average, the markets weakened significantly, and quickly, losing nearly 20% of it’s value within 6 weeks. For the past eleven months, the debt level has stalled under $466 million.  This STILL indicates that a primary source of fuel for the market (loans and borrowed money) has stalled and is not likely to resume.  When combined with the now missing portion of Fed stimulation through Quantitative Easing (QE), which ended on October 29th, this removed the bulk of what has sustained the markets back up to the peaks above and below the peaks of 2000 and 2007, depending on the index.

Not so coincident with the weakening trend in margin debt, the S&P celebrated its six-year anniversary of a ‘bull’ market this month. It is up over 200% during that period. Remember that this increase is measured from a 2009 level that had wiped out 12 years of gains.  This 200%, repeated quite frequently in the media, represents much of the same level gained from 1997 to the previous high in 2007, with a loss of over 50% from 2007 to 2009.   And, unfortunately this is the third strongest six-year gain since 1907. The other two times were in 1929 and 1999 and neither ended well. Both resulted in major market crashes.  The biggest difference between this increase and the first two is that only this one required trillions in ‘float’ from the Federal Reserve balance sheet that still has to be repaid, at some point stretching into the next decade.

(click chart to expand in separate window)

SP500-HistoricalRallies-Nominal-030815

The current rally of 154.08% is also the 6th longest in history and very close to becoming the 5th if it surpasses the rally from 1982 through the 1987 crash of 156.62%.

This data alone doesn’t mean much in isolation. It would be relatively easy to argue, according to the charts above, that the markets could go significantly higher from current levels. However, price data must be aligned to valuations.

At 27.85x current earning the markets are currently at valuation levels where previous bull markets have ended rather than continued. Furthermore, the markets have exceeded the pre-financial crisis peak of 27.65x earnings. If earnings continue to deteriorate, market valuations could rise rapidly even if prices remain stagnant.

While stock prices can certainly be driven much higher through global Central Bank’s ongoing interventions, the inability for the economic variables to “replay the tape” of the 80’s and 90’s is not likely. This dramatically increases the potential of a rather nasty mean reversion at some point in the future. It is precisely that reversion that will likely create the “set up” necessary to start the next great secular bull market.

Funds

 (click chart to expand in separate window)

FundsJantoMar15

Fund positioning in the past two months has been difficult, at best.  Notice from the combined charts above of our primary funds, a miniscule loss on the F, to tiny gains on the C and S, to a more measurable gain on the riskiest fund at the moment, the I fund, a gain that is only attributable to the start of a quantitative easing program (QE), the same as which we have just finished last October.  Remember that the I fund and S funds were the weakest performers in the past 12-15 months. While there might be a presumption of gains or strength in the I fund, based upon this QE program initiation, the actual risk can be seen with the anticipation for the first few weeks, now followed by a corrective phase now underway that coincides with weakening in a broader cross-section of world financial markets, including ours.  The jury is still out on whether or not the QE will have a similar effect on European markets, due to their lack of singularity, as opposed to our more unified and somewhat redundant markets, where QE worked, for a while, and, diminished in impact over time.

It was a volatile week in the markets but the damage was muted. Short-term, last week’s price action was bearish. The cash S&P 500 both broke a prior week’s low and closed below the rising 20-day Moving Average for the first time in a month. This altered the bullish price structure. In addition, the market also closed well below the late December high of 2093.55 (WD Gann rule: Old price resistance, once it has been broken, becomes new price support). Despite two days out of the last six with -300 point Dow declines the Dow only gave up -197 for the week or -0.6%. That was the best performance of any large cap index. The Russell 2000 actually gained +1.2% for the week and that is the bright spot this weekend. Obviously the large cap indexes are suffering from dollar pressures where the impact of the dollar on the small caps is minimal.

For instance Hewlett Packard said they could lose $1.5 billion in 2015 because of the dollar and it has only strengthened since that warning. They could be up to a $2 billion loss before the quarter is over. Most small caps don’t even generate $2 billion in annual revenue. The difference in scale is the key. The earnings capacity of the small caps is not being harmed while the big caps are losing billions.

For instance, IBM gets 55% of its revenue overseas. Pfizer 66%, Wynn Resorts 72%, Applied Materials 78% and Phillip-Morris 99%. Even with active hedging programs a 26% increase in the dollar over the last 9 months is a dramatic difference. Companies earning money in euros, yuan or yen have seen their purchasing power drop considerably when products have to be purchased in dollars. In the case of companies like Hewlett Packard they can sell their products in foreign currencies after marking them up but then they have to convert those currencies back to dollars to bring the money home.

In theory we could just ignore the large cap stocks and concentrate only on small caps. Unfortunately the large caps control the major indexes and that is what represents the market. If someone asks you at dinner what the market did today you more than likely would not say the Russell 2000 gained 4 points. They would look at you like you said aliens visited the NYSE today. The market is represented to the public by the changes in the Dow, S&P and Nasdaq.

The S&P gave back -18 points for the week or -.86%. Given the big intra-day swings I feel fortunate it was only -18 points. The index bounced off the 100-day average at 2044 for the last four days without a breakdown. So far that support is holding and the 150-day at 2019 is untested. If you only look at the chart of the S&P it would appear that test of 2019 could come this week. However, if you look at the rebound in the Russell it suggests the S&P could rally into the FOMC meeting on expectations for no change in the post meeting statement.

When the S&P rallied on Thursday it came to a dead stop at 2065 which was resistance in January. With the three-day dip to 2040 and solid stop at 2065 that gives us our breakout targets for next week. A move outside either of those levels should give us market direction. I would not be surprised to see the 150-day average at 2019 to be tested.

Support 2019, 2040, resistance 2065, 2080.

SPX

At the low on Friday the Dow was down -265 points at 11:30. That makes the -145 at the close appear relatively tame. The Dow inexplicably rebounded off the 100-day average at 17,655 for the last three days. The Dow rarely honors any moving average but apparently somebody was watching last week and decided that was a decent place to put buy orders. Since very few people actually buy a Dow ETF that means somebody was buying Dow stocks. If we delve into this a little closer the answer appears. It was the three financial stocks, GS, AXP and JPM, that held up the Dow and kept it from falling under the 100-day. It was not that they powered the index higher but they did react positively to the banking stress test capital expenditure news and that kept the Dow from declining. United Health, Du Pont, Disney, Travelers and Verizon also contributed. They offset the obvious losers of Exxon, Chevron, GE, Visa and IBM.

When the Dow rebounded on Thursday’s short squeeze it came to an abrupt halt at 17,900 and resistance from January. This gives us our trading range for next week from 17,640 to 17,900. A move outside that range gives us market direction.

Dow

The Nasdaq lost -55 points or -1.1%. A funny thing happened on the Nasdaq. The decline came to a dead stop at old uptrend resistance at 4850. The index held up remarkably well and I think it could follow the Russell 2000 higher if the small caps continue their rebound next week. The Nasdaq chart is still in much better shape than the Dow and S&P and could be poised to return to the highs if the Fed makes no changes.

Apple quit going down and that was a major factor in the Nasdaq minimizing its losses. The other big caps were still bleeding points as you can see in the table below but Apple is the 800 pound gorilla and the post Apple Watch “sell the news” event knocked off $5 early in the week but remained flat the last three days.

Resistance 4900, 5000. Support 4850, 4730.

Compq

The Russell 2000 rebounded to close within 6 points of a new high on Thursday. Friday’s early decline was almost erased with only a -4 point loss to end -10 points from a new high. This is very bullish given the Dow and S&P losses on Friday. Per my comments above the lack of dollar impact on the small caps could make them the favorite of the investing class over the coming weeks. That does not mean they will soar while the rest of the indexes collapse but all things being equal if the big cap indexes are at least neutral the Russell could break out again. That could trigger buying in the bigger indexes.

Watch the Russell 200 closely next week. If the Fed does nothing the Russell could be the leading index. However, they would be hurt significantly by a change in Fed policy because they have a lot of debt and higher rates will hurt. Obviously nothing will change in the near future but a change in Fed policy will make investors more cautious well ahead of any rate hike.

Resistance 1242, support 1220, 1205.

RUT

Bonds/Interest Rates

Declining oil prices will likely continue to lower the consumer price index as well. Also known as the CPI, the inflation metric for the last two figures released on February 15th and March 13th showed a rate that is still falling under expectations. Inflation targets have been hard for the Federal Reserve to maintain and the drop in oil prices isn’t helping matters.

If inflation metrics can’t maintain high enough levels, that may force the Fed to refrain from raising interest rates later this year.

Morgan Stanley economist, Ellen Zentner, said the Fed will not raise rates until March 2016. She pointed out that for every 1% gain in the dollar it is the equivalent of a 14 basis point hike in rates because of the negative impact on the U.S. economy. The dollar is up +26.6% since May. That is the equivalent of a 3.72% hike in interest rates. While the Fed wants to raise rates the rapidly falling inflation and potential deflation risks simply point to the “data dependent” Fed being forced to wait on the sidelines. Zentner said even if the Fed does remove the word patient from the statement they are still not going to raise rates in 2015. They may remove the word just to create some volatility in the bond market and that will force real rates slightly higher without the Fed actually making a move. If they remove the word the equity market could have a tightening tantrum and the Fed has to consider that as well.

The building angst over the soaring dollar is finally translating into the equity market. With 45% of the S&P getting 50% of their earnings from overseas the dollar strength is going to be a major drag on Q1/Q2 earnings. Investors ignored this for the last several months but the daily decline in earnings estimates and the daily rise in the dollar has finally hit critical mass.

Dollar

In the ‘Art of War’, Sun Tzu said that ‘..the threat of an attack is almost as effective as the attack itself..’  The prospect of an interest rate hike in the US while the rest of the world is still easing catapulted the US cash US dollar index to a new eleven and a half year high.

At today’s high of 100.06, the 10 month and 4 day duration of the move from the 2014 low is the second-longest leg up since 1971. To match the record 11 month and 18 day run into the February 25, 1985 high, the greenback would have to post new highs on April 26.

On the monthly time-frame, the cash US dollar index has posted gains for eight-consecutive months. This is a record monthly winning streak.

Furthermore, the 27% rally from the May 8, 2014 low ties for second place as the largest leg up in history. It was bested only by the 30% advance off the March 1984 low.

The rising dollar continues to pressure oil and other commodities. The dollar index closed at 100.18 on Friday. That represents a 26.6% gain since May. This is almost unprecedented.

DollarDaily

DollarMonthly

The idiot light on investor dashboards is blinking red and warning of an impending crisis.

Market volatility has returned with back to back days of alternating three digit moves on the Dow and the 100-day average on the S&P acting like last ditch support. With 2.5 days left before the FOMC statement there was very little short covering ahead of the weekend.

Oil prices collapsed under the pressure of the dollar, rising inventories and a new U.S. production record. Falling oil prices helped drag equities lower and the $40 level for Crude could be hit next week.

Economic news did not help. The Producer Price Index (PPI) fell -0.5% for February after a -0.8% drop in the prior month. This is the fourth consecutive monthly decline. Expectations were for a +0.5% increase. For once it was not energy prices dragging down the index. Energy prices were unchanged thanks to that rebound in oil prices in February. It was a -1.6% decline in food prices that pushed the index lower. This comes after a -1.1% decline in January. How did this happen? Food prices almost never decline. You can thank the rising dollar pushing the prices of all commodities lower and slowing exports.

Core PPI, excluding food and energy, fell -0.5%. The headline PPI is now -0.7% lower than year ago levels and when compared to the +1.0% YoY in December it shows how fast prices are falling.

Not only is inflation nonexistent the risks of deflation have increased in recent months. There is almost zero chance the Fed is going to hike rates in the near future given the strong dollar and deflation risks.

Oil

LightCrude

Oil prices declined to $44.75 intraday and closing in on the January low of $43.58. Inventories rose 4.5 million barrels to another 8- year high at 448.9 million. Cushing storage rose to 51.5 million and just under the record of 51.9 million barrels. Active rigs declined another -67 to 1,125 and -806 below the September high of 1,931. Oil rigs declined -56 to 866 and -46% below the 1,609 high on October 10th. Baker Hughes is targeting a 50% decline as normal in a bear market so another -60 rigs if they are right. At the pace they are dropping I expect to be well below 800 active oil rigs. Active gas rigs declined another -11 to 257 and a new 18 year low.

Offshore rigs declined -3 to 48 and a multi-month low.

The conversation level over shrinking storage is reaching a crescendo. However, numerous energy analysts have come out over the last week saying there is 25-35% storage still available. The additional capacity is in the Houston area and in some tanks around the U.S. shale fields. That is like a driver looking for a 5 gallon gas can in Denver and having the service station attendant saying, “On the computer we have a dozen in Dallas.” If the storage is not where you need it then you still have a problem. With the futures delivery point at Cushing Oklahoma rapidly filling up the pipelines into Cushing will have to be turned off if/when capacity is reached. That means wells will have to shut down if the oil in the pipelines is not moving.

We could be 3-4 weeks away from a critical point for crude pricing. Refineries will come out of their maintenance cycle in early April and begin to produce summer blend gasoline ahead of the Memorial Day weekend that kicks off the summer driving season. Until then we should continue to see inventories build. However, imports did decline about 600,000 bpd last week to 6.79 mbpd. Refiners may also be feeling the storage crunch and will have to cut back on imports in the weeks ahead.

Analysts are expecting the January low of $43.58 to be tested and most believe we will see $40 before March is over. If Cushing does halt or curtail the inflow of oil we could see the prices decline in a hurry.

Precious Metals

Also due to pressure from the rising dollar, gold and silver prices are also being slammed. Gold declined to $1,150 and a 3-month low. Silver has fallen back to January 2010 levels at $15.50 and the 2011 spike to $50 has been completely erased. The drop in silver has been due to the dollar but in silver’s case it also represents a decline in the global economy. Like copper, silver is used in electronics manufacturing and demand has declined as fewer large devices are sold and more phones and tablets with less silver and copper. About 25% of the silver mined today is non-economic. That means they are losing money on every ounce they sell but they have to keep the mines running at a minimum level to maintain operational capability.

Gold

Silver stockpiles are shrinking as the current mine production is less than demand. Eventually prices will rise in spite of the soaring dollar but until the global economy recovers I expect copper and silver to remain weak.

Silver

Copper

Forecasts

The Bloomberg ECO Surprise Index measures the number of economic data beats and misses in the USA economic forecasts. The index has fallen to its lowest level since 2009 when we were in the middle of the Great Recession. Forecasts have been missed by the largest majority in the last six years. The only major report to beat has been the payrolls. Everything else has been routinely missing the estimates and the market has been ignoring it. Citigroup has their own chart of economic misses by country. The U.S. is at the bottom of the list on that index as well. Both charts from Bloomberg.

(click charts to expand in separate window)

Missing

Dissapointed

The Atlanta Fed’s real time GDPNow forecast fell from +1.2% growth for Q1 to only +0.6% growth after the retail sales report on March 12th. How could the FOMC raise rates in these conditions?

AtlFedWe are less than 2 months away from the 3rd longest streak of gains without a 10% correction. The last correction was in 2011. If the S&P did crater again next week all the way down to 2,000 that would still be only a garden variety -5% dip like we have seen many times before in this bull market. It is not the end of the world. The S&P could easily retest that 2,000 level soon.

SPX-W

The rebound by the Russell might give some hope for next week but the market will remain headline driven ahead of the FOMC announcement on Wednesday. What happens after that event is entirely up to the Fed.

I expected a market decline after option expiration and the last two weeks may have been just a testing phase ahead of that event. With earnings declining, GDP revisions sinking, China weakening, oil prices potentially testing $40, retail sales and consumer confidence falling and Greece threatening to exit the EU again, it would not take much of a push by the Fed to crash the market. Hopefully they understand the box they are in.

Greece

The Greek government announced it was going to use cash belonging to pension funds and other public entities for its own use. The amendment submitted in parliament said “Cash reserves of pension funds and other public entities kept in the Bank of Greece deposit accounts can be fully invested in Greek sovereign notes. Pension funds and public entities will be able to claim damages from Greek state in case of overdue repayment or partial repayment. The finance minister said pension funds are not required to transfer their reserves to the Bank of Greece. At least not yet.

The Greek Finance Minister Yanis Varoufakis said last week, “Greece is the most bankrupt country in the world and European leaders knew all along that Athens would never repay its debts.” Greek Prime Minister Tsipras said, “Greece can’t pretend its debt burden is sustainable.” Apparently the house of cards is about to crumble.

Very Important

The Debt Ceiling debate returns next week. The temporary reprieve on the $18 trillion debt ceiling expires and congress will have to deal with it in some form. Whenever this has happened in the recent past there has been numerous headlines and market volatility. With a new crop of republicans in office there is bound to be some grandstanding even if it is just temporary. President Obama is not likely to compromise since it is in his favor to have the republicans self destruct over the debt fight. There is not likely to be a Obama-GOP compromise and that means there will be some ugly headlines before the GOP caves in and extends the ceiling. This is just one more reason why other nations want to be freed from using the dollar for their trading. The uncertainty is a headache for them because they really don’t understand American politics.

This is a quadruple witching option expiration week. This happens four times a year and historically these produce bullish weeks for the Dow and S&P about 2 out of 3 times. Since 1983 the Nasdaq has posted 19 advances and 13 declines in the March week. However, the week after quadruple witching, especially in March, is typically negative.

Random Thoughts

On March 16th, 2004 the post Fed statement had the following sentences.

(Hat tip to Art Cashin)

The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters to be roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation.

In the May 4th, 2004 statement the Fed said:

The FOMC decided today to keep its target for the federal funds rate at 1%.

The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. Similarly, the risks to the goal of price stability have moved into balance. At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.

In the June 30th, 2004 statement the fed said:

The FOMC decided today to raise its target for the federal funds rate by 25 basis points to 1.25%.

Apparently the Fed reuses its prior language a lot and conditions could be shaping up for a repeat of that 2004 scenario. However, economic conditions are significantly worse than in 2004 and that should keep these statements from being repeated.

10082014 October 9, 2014

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

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

F(bonds) – up to 50%; G (money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 10/07/14

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

-31.30, -2.82, -5.09, +7.63

(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)

Imagine that it’s 4AM after a huge party. Many have gradually left (a) . All lights are still  on.  There are a couple of large groups still left, talking loudly and sipping on their final drinks. The bar is closed.  The crowds are so busy drinking and talking that they don’t notice that the band has played it’s last tune and has started packing up, all except the drummer, tapping a simple beat.  The room is being charged by the hour, so, there won’t be an announcer to tell anyone that it’s time to clear out; the meter is running.  Every 15 minutes, some guy named ‘Fed’ walks across the stage and tells everyone to hang around while he looks for another band. (It’s not coming.)  The groups cheer each time.  Outside, there are storms moving in.  Most attendees have anticipated the storm by leaving early (b). Those still there will either take their risks, driving through the storm (c), or, stay around to ‘ride it out’ (d).  In which group are you?  a, b, c or d?

Margin debt reversal

 Margin

Repeating from the previous two reports, an accurate count of margin debt, or, levels of borrowed money at all brokerage firms for each month is carefully watched by the financial media.  It’s this combination of a) margin debt, b) Fed money loaned to investment banks (declining), and c) stock buybacks by corporations (slight decline over last year) that have provided a vast majority of the power to the markets for much of the past 5 years. The result of margin debt figure through August is shown in the following chart, for comparison to all months of the past 3.5 years.


Update – Notice that the peak in debt for the year has STILL not exceeded the February high, after which the primary indexes channeled sideways, with no price appreciation, for 12 weeks. For the past nine months, the debt level has stalled under $466 million.  This STILL indicates that a primary source of fuel for the market (loans and borrowed money) has stalled and is not likely to resume.  When combined with the now diminishing portion of Fed stimulation through Quantitative Easing (QE), which ends on October 29th, this will remove the bulk of what has sustained the markets back up to the peaks above and below the peaks of 2000 and 2007, depending on the index.

Funds YTD

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

************Equity Funds**********           ******Bond Fund*******

S Fund                 I Fund          C Fund                       F Fund

YTD 7/16             7/16               7/16                       7/16

+4.12%                +4.01%        +7.17%                      +3.94%

YTD 10/7           10/7                 10/7                       10/7

-1.04%                -4.18%          +6.39%                     +5.53%

+/- F fund    +/- F fund      +/- F fund

-6.57%              -9.71%           +0.86%

In the table, consider the difference between how each fund differs from the F fund results, as what you are gaining, or losing, for the additional amount of risk that are a natural part of holding equity funds.

This weeks’ extreme volatility does nothing to mask the fact that current levels peaked several weeks ago. Most of the indexes are within a few points, high or low, of their 50 day averages.  European markets are all far below this average (they’re at a different party, one that’s already over). Today’s appearance of a reversal, (based upon that guy named ‘Fed’ walking across the stage),  of Monday’s downdraft results in the following net changes for 2 days: Dow Industrials, +3 points; S&P500, +3 points; S&P100, +1 point; Nasdaq Composite, +1 points.

Obviously, the numbers for this year are more favorable for the F fund than other funds.  Last year, the F fund trailed the other funds by a significant margin, and, for the last 3-year period. Surprisingly, the previous 3-year period saw the F fund double, triple, and more the returns of the other funds.  The equity funds promise more upside under some conditions.  The F fund has not produced a negative return in any one-year period over the past decade.  So, why is there so much more interest, each and every year, in chasing equity funds?  It’s due to the focus on the potential upside and ignorance  of the potential risk. It’s also where the majority of financial managers make their money.   Are you really getting paid enough in your returns to justify the additional risk within your personally chosen time frame? Can you afford to be wrong on the third equity peak since 2001?

Three major components of the I fund, the English FTSE, the French CAC and the German DAX, are back to the levels of their May ‘13, November ‘13, and December ‘13 levels, respectively; sideways for a year or more.

I am partially exiting the F fund temporarily.  It is now at one of it’s highest points in several years.  A simple reversal on technical measures would not be much of a surprise.  This is exactly what occurred in May of ‘13.   I will re-enter if equities continue their breakdown, forcing a run to the safety of bond assets, or, if a continuation of the uptrend strengthens.  A seasonal aspect in equities might lead to October weakness and a November/December rebound.

Less than a month from now the QE new-buying era ends, leaving the Fed bereft of the ability to convince traders it is backstopping stock markets. Harsh political realities make launching QE4 risky to the Fed’s very existence.   The imminent end of QE3 is the best catalyst we’ve seen for sparking a major correction or new bear market since QE3 was launched.  The precedent on this is crystal-clear, the ends of both QE1 and QE2.

The first major correction of this cyclical bull in mid-2010 was triggered when QE1’s buying was ending.  And the next major correction in mid-2011 erupted when QE2’s buying was ending. These once again were not trivial sell-offs, with SPY plunging 16.1% and 19.4%.  And the stock markets then were far less risky, overextended, overvalued, and complacent than they are today. QE3’s impending end is truly predictable, and ominous.

The bottom line is that stock markets rise and fall.  And thanks to the Fed’s gross distortions of psychology, today’s markets are overextended, overvalued, and epically complacent.  That means a major sell-off is long overdue to rebalance sentiment.  Best case if the bulls are right, it will be a major correction approaching 20% like at the ends of QE1 and QE2.  But far more likely is a new cyclical bear ultimately cutting stocks in half no later than 2015.

Interest Rates

U.S. 10-Year Treasury Note

15-tnx

World Markets

Major Markets Composite

 MajMktComp

This composite index combines the ten largest world markets with equal weights into one index.

Australia, Brazil, Canada, China, France, Germany, India, Japan, UK and US

Individual markets around the world, including many of those in the Major Markets Composite Index, and several other key indexes, are shown individually on the next few pages. Each bar is a week, to smooth out daily ‘noise’.  Also note ‘rate of change’ on the black, wavy line at the top of each chart, indicating positive or negative momentum, above or below the horizontal line.

Europe

FTSE

9-ftseCAC

8-cac

DAX7-dax

US

 Russell 20005-rut

Dow Industrials1-indu

Nasdaq Composite4-compq  S&P 500 2-spx

Wilshire 50003-wlsh

ASIA

Shanghai Composite11-ssec

Singapore Straits13-stiHang Seng  12-hsi

SOUTH AMERICA

Bovespa

14-bvsp

Insider Selling

With Form 144, required by the Securities and Exchange Commission (SEC), investors get clues to a corporate insider’s pattern of selling securities and pressure to sell. It’s a notice of the intent to sell restricted stock, typically acquired by corporate insiders or affiliates in a transaction not involving a public offering. These filings are shown daily on a Wall Street Journal blog.

As of this past Friday, the ratio of intended sales compared to intended purchases is at 51:1.  That’s 51 times as many intended sales as intended purchases.  Just about a month ago, that ratio was 47:1.  This filing also shows an additional ‘planned sales’ category.  When this category is combined with sales and then compared to purchases, the ratio of sales plus planned sales then compared to purchases more than triples to 173:1.  The technology category, for example, shows intended purchases at $81,161, with intended sales at $54,500,780, and planned sales at $139,310,116, which is 2,387:1.  This is a much greater ratio than the mixture of 10 major market sectors. Obviously, those with the connections have no intention of holding on to their large shares of stocks at these price levels.  This is definitely not the kind of ‘bull market’ that some of us are led to believe by the financial media.  Speaking of the financial media, apparently the word is getting around that these talking heads aren’t to be trusted.  The viewership ratings are now at 21-year lows.  This speaks directly to the degree of confidence that the general public has of these programs and their prospects for guiding retail investors toward their investment goals.

All-Time Highs

It’s taken just over a week to erase the significance of so many all-time highs, with market levels now back to where they were in early June.

In hindsight, with these highs now erased and now insignificant, how often does a headline, or, a news story telling you that there was another all-time high make you certain that you’re ‘missing out’?

But wait!  Let’s get one thing straight.

1 – http://www.forbes.com/sites/timworstall/2014/07/23/apologies-but-the-sp-500-is-not-at-an-all-time-high/

2  – Will Hausman, an economics professor at the College of William and Mary, calculates that the S&P 500 hit its true high — its inflation-adjusted high — of 2,120 on January 14, 1999.

To put that another way, the market still needs to rise about 150 more points — nearly 8% — to be on par with where it was in the late 1990s.

But, back to the non-story, there were at least 7 ‘so-called’, all-time closing highs since the last report.

S&P 500 inches to new high … but not 2,000 By Ben Rooney  @ben_rooney July 24, 2014: 4:25 PM ET

S&P 500 MAKES NEW ALL-TIME HIGH By Myles Udland August 21, 2014 4:00 PM

S&P 500 sets all-time high in intraday trading  Associated Press and IBJ Staff August 25, 2014

S&P 500 MAKES A NEW ALL-TIME HIGH Aug. 29, 2014, 4:00 PM

S&P 500 Ends Week at Another Record High with Gains for Fifth Week in a Row By Jeffrey Strain, September 6th, 2014AllTimeHighs

In this chart, the bar on the far right represents the average daily range of the S&P 500, from high to low, for the 3 month time frame of July 3rd to October 3rd.  The 7 bars to the left represent the increment of each new ‘all-time high’ in this same period, over the previous ‘all-time high’. Clearly, the new high was of such insignificance that it takes almost all of the 7 highs together to equal one daily high to low range.  The ‘good news’ about these highs was all ‘fluff’.  Now, they’re all gone.

What is never apparent in the news is just how much each high is above the previous high.  Is it a point?  Two points?  Or, is it twenty?  Waiting 4,5,6 weeks for another couple of points?  Is it wise?  It’s important, because with both the completion of Fed tapering (lower liquidity), and, the flattening of margin debt (lower cash sources) each week of additional equity exposure for the potential gain is also more exposure to the risk of losing it, and, quite often, losing it more quickly than it was gained.

Case in point – a 2% drop on Sept 29th and 30th was the equivalent of losing 25% of the entire gain for the year.

Case in point – Friday’s closing high, even after a relatively strong bounce for that day, was still LOWER than the lows of the 4 of the last 5 weeks, and. lower than the highs of, 9, 10, 11, 12, 13 and 15 weeks ago.

On the equities side, we’re going sideways on the strongest chart (C fund), and, drifting downward on the weakest charts (S and I).  The S fund is lower than the previous peaks in  March, June and early September.  The I fund is back to where it was in early February.

A final point on the ‘all-time high’ myth.  To go along with (1) the Forbes article, and (2) the quote from the William and Mary economics professor above, here is the inflation adjusted chart, using August 2014 ‘constant’ dollars, of the S&P500, from 1877.  Notice the current position, still below the 2000 high.

RealS&P

Source: http://www.multpl.com/s-p-500-price/

Dollar

 DollarThe U.S. Federal Reserve is nearing the end of its most recent period of quantitative easing, or QE (that is, rapid expansion of the money supply). By purchasing U.S. Treasury bonds and mortgage-backed securities, the Federal Reserve has spent the past several years expanding its balance sheet dramatically.

Now, as the current round of QE ends, the Federal Reserve is nearing the end of its unprecedented bond-buying spree. All other things being equal, this would mean decreased demand for Treasuries, and higher interest rates. Clearly, the U.S. government wants to keep its borrowing costs low. So with the Fed withdrawing from QE, how else could the U.S. government encourage demand for its bonds?

Other nations and currency blocs are still on the QE path. Japan’s vigorous QE is ongoing, and may increase. The European Central Bank (ECB) has so far been prevented from implementing outright QE by the resistance of Germany; but it is likely that Germany will eventually relent and the ECB will start QE as well.

All of the money created by the world’s central banks is looking for a home where it will earn a return — without being eroded by inflation. And right now, its best option is to buy assets denominated in U.S. Dollars. To some extent, this will be U.S. stocks, especially large-cap, high-quality companies. However, much of this money will flow into U.S. Treasury bonds.

A U.S. Dollar that is increasing in value may draw global financial flows into the U.S., support the demand for U.S. Treasuries, and help keep the U.S. government’s borrowing costs low.

The recent downside action in stocks may have begun with a German economic report.   The German Industrial Production declined 4 % while their Factory Orders had a 5.7 % decline as well. The International Monetary Fund topped it off with a lower projection of global economic growth from 4.0 % to 3.8 % next year.  The IMF further had concern about the geopolitical tensions translating into the stock market reaching “frothy” levels.  Contagion fears haunt the market with sentiment that the European Central Bank will not be able to add enough stimulus to increase inflation and stir the economic growth.   Their falling Euro FX should prompt better exports and a boost to their economy next to the stronger US Dollar.

Of course, a rising Dollar will also likely have negative effects if the dollar stays too strong for too long. These would take some time to manifest.

A higher Dollar relative to other currencies will make U.S. exports more expensive to customers abroad, and will hurt U.S. corporate profits — the more business a company does abroad, the more it will hurt. Ultimately, over the next few quarters, a Dollar that is appreciating strongly against other currencies such as the Pound, Euro, and Yen would be a modest drag on U.S. growth. Foreign goods would be cheaper, and the U.S. trade balance would deteriorate.

Oil

 Oil

Many globally traded commodities, especially oil, are denominated in Dollars. A stronger Dollar against other currencies therefore has the effect of making those commodities more expensive for non-U.S. customers, and leads to a decline in demand. We are seeing this play out in the price of crude oil.

Also, in the bigger oil picture, true supply and demand does not lie. Strong, vibrant, well-distributed world-wide growth would not produce an oil chart such as the one above.  Oil prices are range-bound since 2011.  Relatively stable oil prices have simply not served as enough of a catalyst for either economic stability or strong growth.  Notice how even the lowest curve, at the bottom of the green area, appears to project even more price weakness/lower prices.

Precious Metals

Precious metals in the form of gold and silver have appreciated by as much as 493% and 607% respectively at their peaks in 2011/12 from their lows in 1998. They are still up over 225% and 300%, respectively, as of today from that time. They are still favored by many who believe that higher intrinsic value will be further realized over the next 10 years. This is due to the combination of continued stress on paper assets, such as stocks and real estate, as well as consequences of escalating central bank expansion of fiat currencies.  This puts higher value on investments that are of limited supply and universal acceptance.  Look for more information on the significance of precious metals under my ‘About’ tab, under the long-wave economic theory.

Gold

 Gold

The soaring US dollar and the prospect of rising interest rates in the US have crushed the metals –both precious and industrial- to the lowest prices they have seen in several months. So far, there is no price action to suggest that this has ended.

A drop to either side of $1,180/oz. fol-lowed by a reversal could create a triple bottom on the weekly and monthly time frames. This could provide a base for a substantial rebound.

Conversely, a clean break below last year’s low and a close below the rising monthly rising 100-bar MA for the first time in a dozen years would be a very bearish event. IF that happens, gold could be doomed to hit the psychological $1,000/oz. mark for the first time in five years. I said several years ago that gold would be a screaming buy at that point.  At it’s peak, it nearly doubled from that point.

Silver

 SilverSilver slumped to a new four-year low of $16.85 this week. Based on a technical wave count, technical support could manifest somewhere around $16/oz. At this price, the decline from the July peak would be 1.618 the size of the decline from the February peak to the May low.

Failure to reverse or even slow down near the sixteen dollar level could indicate that silver is on track for the 2010 low of $14.65.

If the 2010 low is breached, silver may drop another dollar and try for the rising 200-bar Moving Average on the monthly time frame around $13.515.

A sustained close above the 2013 lows could cause a short-covering rally and run the December silver up to the Fibonacci .618 retracement of the decline from the July peak. Currently, this Fibonacci resistance line is located at $19.91.

Four decades of price history indicates that silver has a strong downward bias in the month of October.

As pointed out earlier, dollar strength is responsible for depressing prices of many commodities.  These lower prices are somewhat deceptive for that reason.

According to a report produced for the Silver Institute and created by Thomson Reuters GFMS, in 2013, the silver supply fell to 985.1 million ounces, down from 1,005.3 million ounces a year earlier—a two-percent drop in production. (Source: The Silver Institute web site, last accessed October 1, 2014.) But demand for silver was increasing over the same period. This continuation of falling supplies and steady demand points toward higher prices over the long term. A return by gold to it’s recent high would offer a gain of 60%.  A return by silver to it’s recent high would offer a return of 194%.

04172014 April 17, 2014

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Weather Report 04172014

Current Positions  (No Changes)

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

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

Weekly Momentum Indicator (WMI) last 4 weeks, thru 4/11/14

-2.72, -19.48, +12.67, -5.41, (S&P100 compared to exactly 3 weeks before***)

(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 the U.S. the yield on the ten-year closed at 2.62% and right at support. The rapid decline from 2.81% to 2.62% in only a week suggests a lot of money is rotating out of equities towards the safety of treasuries given the global uncertainties.  This desire for safety has kept the F fund as the place to be since the start of the year, as it has outperformed all of the other funds.  It should continue to do so until such time as when the rewards for stock ownership outweigh the risks of loss to stock portfolios.

Regarding this Weekly Momentum Indicator, which was designed to measure recent momentum, or the lack of momentum, it’s value is a reference to the range of the S&P100.  

For the past 26 weeks, it has been range bound between 785 and 826 on a closing basis. There have been some slight penetrations higher, intra-day, but on those days, it closed lower than these highs.  The S&P100, which closed at 824 today, has crossed back and forth across 824 20 times in the past 6 weeks.  One broad market mutual fund, the Vantagepoint Broad Market Fund, with top 10 components of Apple, Exxon, S&P500 Emini contracts, Microsoft, Johnson & Johnson, Chevron, GE, Proctor & Gamble, IBM and AT&T, is also expressing a similar pattern

.

This next chart below shows the number of stocks in the S&P500 that have confirmed ‘buy’ signals. Keep in mind that as you look at the peaks and valleys in the chart, the ‘sell’ signals appear every 2-6 months.  These are not long-term buy signals.  They represent the short-term trading signals that correspond to the fundamental financial picture, such as, earnings announcements, Fed policy changes, currency fluctuations, global news that impacts multi-nationals, government actions (or inactions).  The relationship between the flattening of the S&P100, above, the VantagePoint Fund and the lower peaks in the index below are very clear.

Analysis –  This is no longer an uptrend.  This has every appearance of a multi-year top, with the highest risk to reward ratio in at least 7 years, and one of the four highest risk profiles of the past 85 years, with 1929, 2000, and 2007 being the other three. (see next chart)

Based upon patterns in the past, I will not rule out one more attempt to establish another short round of ‘record highs’.  This next round would correspond historically as the ‘right shoulder’ in a ‘head and shoulders top’ pattern, and would signal a final opportunity to take refuge from the imminent reversion to mean values.  Stocks are presently 66% overvalued, according to an average of four, well-established methods that have been in use to measure over 100-years of stock averages. (see below-‘right click/view image’ on chart to expand for a better view)

QE Infinity has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or, what conditions of the economy and financial system would be, in the absence of Fed bond-buying.

-Paul Singer, Elliott Management, October 2013

This past week saw the biggest spread so far this year in the weekly performance of the top and bottom indexes on this watch list. The Shanghai Composite turned in the best gain for the week, up 3.48% while Japan’s Nikkei suffered a dramatic 7.33% selloff. The general skew was downward. Five of the eight indexes posted losses ranging from the -2.00% of the FTSE 100 to the aforementioned Nikkei plunge.

It takes a wider view in time, and, of several major markets at once in order to correctly filter the relative value of where we stand, particularly in view of this looking very much like the peak for the next 4+ years.  Over the past 14 years, only one market, the BSE Sensex in India, has provided gains in excess of long-term market averages.  All the rest are in the single digit range, per year, including four markets with negative returns for the period.

Within the last week, the Japanese Nikkei plunged -340 points to close under the 14,000 level and the lowest point since October. The Japanese economy is struggling and as a consuming economy it is closely related to the health of China’s economy. With Chinese exports declining it suggests further weakness in Japan.

The decline in the Nikkei suggests global equities may have peaked. The yen carry trade, when currency traders borrow yen at a low interest rate and invest it in a currency with a high interest rate, is on the verge of coming unglued with the yen rising to four-week highs. A rising yen depresses equities. The Nikkei appears to be headed for a “death cross” where the 50-day crosses over the 200-day moving average. That is typically a sell signal. At this point even a sharp rally could not prevent the cross of the averages.

The Fed is playing a very dangerous game and they need to stop. …this is bad, this is heroine addiction…and now they are printing more money than the deficit……all my friends who are money managers..are much closer to the sell button than they ever were before..everyone’s holding cash since if they start to get nervous, volatility will come back instantly…you known when this ends, it’s gonna get ugly.”

Barry Sterlicht, CEO Starwood Group

Still another filter to clarify the gains over the past 4 decades is this comparison (above) of the nominal’ S&P500, which is the chart most used in the media, that, unfortunately, does not take into account the effect of inflation.  We all know that, back in the real world,  inflation impacts everything that comes into and out of our purses and wallets.  The ‘real’ S&P500, in black,  is the one that shows us what has really happened, apart from that which is overly/optimistically portrayed in the media, in red.  Keeping us believing in the ‘pie in the sky’ is what the media’s role is all about. It’s up to us to adjust the hype with doses of reality.  If you believe the red line, then, you believe that you can buy an average NEW house for under $85,000, or, an average NEW car for under $5,500, as you could in 1980.

This chart above uses the starting year of the last 11 economic expansions as a basis for the amount of growth that occurs during that expansion.  It’s easy to see two things.  (1) The current expansion is the weakest in the entire post-World War 2 era.  (2) Each expansion since the early 1970’s has been weaker than the one before it. Yet, there are those who would lead you to believe that market all-time highs are totally justified, and, that this current expansion, now the longest on record, in terms of time, (thanks to the equivalent of 25 years worth of Fed stimulus compressed into each of the past 5 years), has a solid foundation for even more growth.  Given the conditions in points (1) and (2), you would have to believe otherwise.

On the issue of market valuation levels/stock price levels, some find it amusing when the stock market “cheerleaders” on mainstream business news grab their pom poms and cry out “all-time highs, record earnings.”  Others prefer time tested ratios over rhetoric, and in the opinions of some, probably the most reliable of them is the Market Capitalization divided by Total Revenue indicator, or simply MC/TR.  A MC/TR ratio greater than 1 indicates total market capitalization has grown at an inflated rate that is not supported by total revenues.  A MC/TR ratio that is less than 1 indicates total market capitalization is lagging behind the total revenues of the market.   Between 1979 and 2008, the capitalization-to-revenue ratio averaged 1.12. The ratio is 1.05 when calculating the index data back to 1968.  

Data supports the assertion that market forces are constantly seeking a natural equilibrium between total market capitalization and total revenue.  Investors that can identify the points where a market has strayed too far below 1 can buy stock index futures before total market capitalization catches up to total revenue, and vice versa.  Past performance validates this assumption. When the cap-to-rev ratio was less than 1, the S&P 500 returned nearly 10% more than in periods when the cap-to-rev ratio was greater than 1.

S&P 500 Futures – Monthly Continuation

Chart from QST

Before the 2008 market crash, the cap-to-rev ratio was 1.39 and indicated an overvalued stock market.  Where are we now?  Based on the current market capitalization, total revenue and the MC/TR ratios on the popular Dow 30 stocks we have come to some very interesting conclusions. The average MC/TR ratio for the Dow 30 is currently 2.34. WOW!!!! When we recognize a fundamentally severely overvalued stock market, we should ACT on any technical sell signal with built in risk parameters, because you never know until after the fact, that this could be the big one!

An article written by Fran Hawthorne for The New York Times on March 2, 2011 sums up the scare potential built into retirement plan options:

“When the markets tumbled in 2008, many investors who had hoped to retire in the next few years were shocked to learn that at a number of funds, far more of their money than expected — typically half of the assets — was in stocks. Rather than being a haven, the average 2010 fund — aimed at people expecting to retire around 2010 — fell 24.6 percent in the downslide.”

So, just where is the fuel for these lofty valuations?  

(Hint -we’ve been here before.)

(‘Right click-view image’ for a larger view)

On the ‘street’ side, we are currently in record territory with the use of credit used in stock purchases, that is, borrowed money, known as ‘margin’.  As soon as this rising black line slows down and falls down below it’s own 12-month average, it means that borrowing for stocks has slowed and the power behind rising prices is weakening dramatically. On the ‘stimulus’ side, there’s the never before seen (at least before March ’09) $85b/$75b/$65b per month from the Fed(QE), used in purchases of bonds and other assets from banks. So, it’s not so much that the Federal reserve is buying stocks.  The banks are using the money received from these bond purchases to purchase other assets, including stocks.  Without this fresh daily supply of new money, the banks would certainly not be purchasing stocks, mostly for a quick sale.  The banks are not ‘buying and holding’ stocks.  They are ‘buying and selling’, or, trading stocks to raise their own revenues.  So, it’s no wonder that the banks appear to be so healthy under the current conditions, being so heavily supported by trading revenues.

Unfortunately, for all that quantitative easing has done for the financial sector, the impact on the ‘man on the street’, or, so-called, ‘Main Street’, can be typified by the chart below.

As you can see in the chart, there are now 63% of eligible workers who are actually on the employment rolls.  This is a level not seen since a time when many households included only one working parent.

The Fed has now removed their QE targeting as it was originally pegged, with the original goal of lowering the unemployment rate.  Since it wasn’t working, there’s no point in having it as a point of measurement.  The original plan was to ‘stimulate the economy’ with the new lending that the banks were expected to provide to the business sector, which was to then stimulate hiring, employment, etc. Instead of lending to businesses, the banks have used the money for their own health, using methods that they were better able to control, stock trading.

We’ve entered the calendar period, that window from May to October of  each year, that for the past 60 years, has resulted in some of the weakest market returns.  With the highest returns, in 2013, than we’ve seen since 1997, this year, and this weak part of the year ahead, it statistically represents a period of extraordinary risk as compared to the potential for reward.

03042014 March 4, 2014

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Weather Report 03042014

Current Positions  (Changes)

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

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

Weekly Momentum Indicator (WMI) last 4 weeks, thru 3/3/14

+16.14, +17.75, +23.21+10.29 (S&P100 compared to exactly 3 weeks before***)

(4 Friday’s ago/3 Friday’s ago/2 Friday’s ago/today from 3 weeks ago)

Some of the longer term topics not included in the last report, to control report length, are continued here for their long-term impacts.  One additional short-term topic has offered new insight since last month.

*******************SHORTER TERM*******************

Today’s S&P100 is now floating at 1/2 point lower than the ‘highs’ of January 15th, after 30 market days.  Today’s new ‘record high’ on the S&P is 2 points higher than the ‘record high’ from Friday(!) (I find it amazing how these indexes can rise, then stop, as if hitting the white line at a stop light; these are billions and billions of dollars of securities that are manipulated like sports cars.  Hmmm…) Placed in between those two highs was a dramatic, one-day plunge, supposedly reacting to the Russian invasion on Ukraine.  Similarly, the lack of a real threat, as if such a serious threat could resolve in one day, is the alleged impetus for today’s reversal.  This is a good example of one of the many games being played to keep potential sellers on the sidelines, while offering them increasingly marginal gains, and increasingly high risks.

Many indicators point to other, more relevant risks that have nothing to do with events in the Ukraine.

Regardless, since the first of the year, bond prices, like our F fund, have outperformed equity indexes, which have struggled just to break even for the year.  This means that the trend toward an upper limit on interest rates which began last summer has continued, with falling rates this year, and rising F fund prices.  The current stability in interest rates is now several times longer than the temporary panic when rates increased from their record low of 1.63% in April to near 3.0% in June, and September, and January.  Rates have now fallen back in the 2.6% range, and without the accompanying panic and drama from the fear permeated by the media of ‘higher rates’.  Both 2.6% AND 3.0% are lower than the lowest rates of just 4 years ago.  The long-term trend is still down. Therefore, the trend in the F fund is up, at low risk.  The higher upside to equities can be attractive, if it fits your time horizon, but, only if you consider the extreme risks due to events, Fed decisions, volatility, and the potential for fast losses to go along with the slow gains.

Does this mean that the ‘flight to quality’ normally associated with peaking stock markets and shifting into bonds has been established?  It’s likely, and, is also likely to further confirm in the months to come, regardless of the Fed’s position to continue or pause the pace of tapering that is already underway.

Two data points revealed Monday fuel this case.  For the first time in many months, the probability of a recession, as measured by the leading economic indicators, (LEI), is over 20%.  The LEI itself shows a downward trend in the past 6 months growth rate, and showing two consecutive monthly declines.  This does not look like an economy that is stabilizing or one that has shown an ability to stand on it’s own, even with record levels of assistance.

An additional case for going to cash or bonds in the near future is shown in the chart below. Returns are calculated for the annual returns (capital appreciation only) using monthly data for the S&P 500 for the past 115 years. Then, just the first year in which a 30% or greater increase in the S&P 500 is used as a reference toward the subsequent years following that 30% gain.

Each bar above the horizontal dashed line represents a year of 30% or above returns.  Notice how years following the 30% years, such as last year, represented a high point, followed by declining returns, if not, recession. Prior to last year, the most recent years were 1998 & 1996.S&P-500-30Percent-Years-112513

Here are the statistics:

  • Number of years the market gained 30% or more:  10

  • Average return of 10 markets:  36%

  • Average return following a 30% year:  6.12%

Notice here that each 30% return year was also the beginning of a period of both declining rates of annualized returns and typically sideways markets.  It is also important to notice that some of the biggest negative annual returns eventually followed 30% up years.  With the markets rising to just under 1850 at the end of 2013, since managers were chasing performance, it marked the 11th time in history the markets have attained that goal.

While it is entirely possible that the markets could “melt up” another 30% from current levels due to the ongoing monetary interventions; history suggests that forward returns not only tend toward decline, but bad things have eventually happened.

It’s important to add that among all 30% years, last year is the FIRST that was supported by record stimulus from the Federal Reserve bank, loans that must not only be reduced, through tapering, but, eventually withdrawn, as they draw a threat of a heavy interest burden with any increase in rates, until they are dissolved sometime around 2025.  This is a huge risk.  This is as if you use all your credit capacity to get you through a crisis.  You can’t have another similar crisis before you pay off your debt, without creating a brand new crisis; a new crisis on top of the debt from your old one.  Only now, you have to find another way out, since you’ve ‘charged up’.

TODAY’S MARKET LEVELS ARE SUPPORTED BY CREATING A BUILT-IN RISK FOR THE NEXT 10 YEARS!

This is what the past 20 weeks of the S&P 100 look like visually, between yesterday and today.

<-Yesterday

OEXWkly2

<-Today

Clearly, there is much more risk in the market at this point than reward.

(Now, mentally place this chart above into the red box below for an overall perspective.)

*******************LONGER TERM*******************

AREN’T STOCKS CHEAP?

You’re likely to hear this from those who are using a relatively short time frame (a decade or so), to try to convince you that things are fine, your money is safe, and that you’ll lose if you don’t hang around.

How useful is a 10-12 year time frame in a market that typically takes about 80 years to make three major peaks (1929/1966/2000)? It’s not.

The following chart covers over 130 years of market results. The red box covers the current period.  It shows the 10-year adjusted price/earnings ratio, the best 10-year measure of whether or not stocks are cheap.  Only when measured against the most expensive stocks ever, our last two peaks in 2001 and 2007, do current stocks appear cheap.  More correctly, this is the 4th most expensive stock picture in the past 100 years. The facts that indicate more interest and more participants in history does not make any ‘stocks are cheap’ announcement more accurate.

The median price-to-earnings ratio on the S&P 500 has reached an all-time record high, and margin debt at the New York Stock Exchange has reached a level that we have never seen before.  In other words, stocks are massively overpriced and people have been borrowing huge amounts of money to buy stocks.  These are behaviors that we also saw just before the last two stock market bubbles burst.

Currently, the GAAP (generally accepted accounting principle) P/E for the S&P 500 is 19.11 (as of 12/31/13). But the problem is we can’t really tell whether this is high, low or indifferent, short-term, due to the wild swings seen over the past 20 years.

From 1925 through 1995, the average GAAP P/E was somewhere around 14. The average for the full period is about 17. The average for the last 50 years is 19.2. And the average over the last 25-years is nearly 25 – a level that was never once hit only once prior to 1990!  The averages have skewed higher due to the overvaluations of the past quarter century.  Any measure within the past quarter century is bound to be inaccurate.

Technically, a p/e ratio of 25 implies that you are paying $25 dollars for every dollar of earnings.  Obviously, lower, not higher, is better.

BUT WHAT ABOUT THE RECOVERY?

Housing

Just as stocks are valued according to earnings, housing has to be valued according to income.  Housing values, rising or not, must be tied to incomes.  (What’s the first requirement to qualify you on your mortgage application?)

Real median household income peaked right near the last two equity price peaks.  It’s quite interesting that there is no corresponding increase in incomes along with the current peak in equity market prices.

Income

As with housing and income, a direct relationship must also be established to the number of people actually working, without which no positive income influence can take place.

Current levels of people actually working, officially called the labor force participation rate, are at levels not seen since the mid 1980’s. Unfortunately, this already includes people working multiple part-time jobs to make ends meet, people who are in no financial condition to provide momentum to power a stronger market of any kind, particularly housing.

What’s left?

Credit

For decades, rising consumer credit was effective in closing the gap between lower savings and the income levels needed to drive consumption, which represents 2/3 of our economic activity.

http://stawealth.com/images/stories/1dailyxchange/Household-Debt-Deleveraging-021914.PNG

Since the peak of the shaded area in 2009, the beneficial effects of deleveraging, or reduction in debts, must transfer into spending capacity.  Much of this decrease of consumer credit was forced upon consumers by lenders during the financial crisis of 2008, through involuntary cancellations or reductions of lines of credit.  Credit deleveraging has been a net withdrawal on spending and consumption rather than a positive influence on spending and consumption.

The brown and blue jagged lines clearly show gradual declines in personal income, savings rates and overall gross domestic product

What about the $4 trillion in Quantitative Easing in the past 5 years?

The Fed’s original intent to increase the amount of credit available to businesses and consumers, as well as target the level of unemployment, at least in theory, has largely failed.

First, the falling levels of unemployment are mostly due to the decline in people giving up looking for work, or, as officials call it, a falling labor force participation rate.

But, two things are obvious from the next chart.  One, the historic growth in the Fed’s balance sheet, used to stimulate the asset markets and to shore up the balance sheets of the financial sector, are also known as that artificial creation of stimulus over this period that must ultimately be withdrawn from the market as certainly as it was added. Two, the amount of wordsmithing that has been necessary in the Fed statements to cover their tracks is also monitored and noted.  

So, who really benefited since the first QE was launched? There is a great deal of debate on the topic, but here are a couple of facts. Financial asset valuations, particularly in the corporate sector have seen sharp increases. For example the S&P500 index total return (including dividends) has delivered 144% over the 5-year period. Those who had the resources to stay with stock investments were rewarded handsomely. (As a reminder, this bottom 5 years ago had the markets at a 1997 level!!!  All gains for 12 years had been wiped out.  This 144%, therefore, should be spread over the period since 1997, or 17 years, to fairly evaluate the 144%.  You won’t hear this on the business channels.)

Therefore, it shouldn’t be a surprise that the three rounds of quantitative easing over the past five years rewarded those who had the wherewithal to hold substantial equity investments. Everyone else on the other hand – which is the majority – was not as fortunate.

Perhaps the best illustration of these distributional effects is in the chart below. It shows the relative performance of luxury goods shares with wealthier clients vs. retail outfits that target the middle class. The benefits of QE are clearly not felt equally by the two groups.

In addition to the luxury goods story shown above, an even bigger story here is that luxury auto sales also rose in 2013, while the lesser under-brands lagged, and this includes a reduction in December YoY sales at GM, Ford, Chrysler, Honda, Toyota, Hyundai, VW, Kia, Subaru, and Mitsu. Light truck sales fell YoY at GM, Ford, Toyota, Honda, Kia, Sabaru, BMW, Hyunda, Mitsu and VW. Nissan was an exception with higher auto and light truck numbers. This is a clear reflection of who benefited from Ben Bernanke’s helicopter barrage of free money, that is, for those who are actually benefiting from the ‘wealth effect’, as opposed to those who are just pretending, as in those waving their 401k statements, which are still filled with ‘unrealized’ paper gains that you can’t actually spend, without penalties, age-restrictions, red-tape. This is a delusion of prosperity, spelled out in who can buy, and who can wish and pretend.

To make matters worse, these declining sales of non-luxury brands were all in the face of increasing incentives/rebates, some incentives increasing by double digits from December ‘12 to December ‘13, by Ford, Honda, Hyundai/Kia, and lesser incentives by Nissan, VW, GM and Toyota.  Only Chrysler had a reduction in incentives in the period.  The results were higher incentives and falling sales, at least among those outside of the luxury bracket.

Based upon measures of housing, income, credit and the impact of QE on the breadth of households, it should be clear that the appearances of a current recovery are an illusion for the bulk of the population, including savers, working people, retirees, people with workforce instability, and, that viewing last years 30% measurement in the growth of the stock sector demonstrates a massive disconnect between how the economy appears and how it actually is.

01222014 January 22, 2014

Posted by easterntiger in economic history, economy, financial, markets, stocks.
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Weather Report 01222014

Current Positions  (No Changes)

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

F(bonds) – up to 70%; G (money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 1/21/14

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

+22.33, +6.01, -3.61, -4.8

(3 Friday’s ago/2 Friday’s ago/last Friday/today from 3 weeks ago)

Investopedia explains ‘Unrealized Gain’

A position with an unrealized gain may eventually turn into a position with an unrealized loss, as the market fluctuates and vice versa. An unrealized gain occurs when the current price of a security is higher than the price that the investor paid for the security. Many investors calculate the current value of their investment portfolios based on unrealized values. In general, capital gains are taxed only when they become realized.

How does an investor honestly reconcile the comfort and enthusiasm of results on a paper statement with the reality of the fact that, until sold, the gain will remain‘unrealized’? With full disclosure from regular Fed notes, it’s no secret that the Fed is ‘supporting the markets’ with daily cash injections.  The source of these injections are, simply put, electronically created LOANS that, for accounting purposes, are listed on the Fed’s balance sheet as items to be restored at some future point in time.  Therefore, the ‘gains’ in the current markets aren’t to be confused with cash to be distributed.  This is a loan that must be paid back.  The question is, who will get to cash in their ‘unrealized gains’, and who will pay the price for the current appearance, or deception, that everyone will be paid? Ask yourself – will I sell before the Fed withdraws from the market?

Since 2009, the correlation between S&P500 trends and Fed injections has increased from 53% to 100%.  This means that 100% of positive market movement is related to Fed injections.

Put another way, there is no other significant body participating in the markets presently outside of the Fed.  Selling by insiders remains a hundred or more shares times the number of buyers.  http://online.wsj.com/mdc/public/page/2_3024-insider1.html?mod=mdc_uss_pglnk  So -called ‘smart money’ has refused to commit money for other than short periods of time, or, has ‘hedged’ their buying heavily with derivatives which pay off in a decline.  We don’t have that luxury of that kind of risk control.

Ask yourself – is the Fed factoring in our withdrawal plans into their actions?

Here are the 2013 returns from some key major markets around the world.

The S&P 500 finished the year at 1848.36, for a return of 32.4%, an incredible return for one year by any standard.  The impact of a gain of that magnitude can easily be demonstrated by the absolute miss that I made for last year’s projection, even knowing in the fall of 2012 that Fed injections would begin.  So, from my own proprietary studies and tables, my day-to-day tracking for the year showed these patterns, now, of course, with perfect hindsight.  (Remember – these ‘returns’ must always be adjusted for (1) comparison to the ‘risk-free’ rate of treasury bonds, similar to our F fund, roughly 3-5%, and (2) inflation, at 2-3%, which NEVER show up in price charts, or, in quoted prices compared to other prices. So, these stated returns are never as high as they seem, regardless of the hype and emotion that’s associated with them.)

Positive/Neutral/Negative signals for the year, number of days

Positive     Neutral    Negative

  91

    59

    97

36.8%

23.8%

 39.2%

By all appearances, during the year, the markets never appeared particularly ‘healthy’.  Further, I found that for most of the year, the number of positive weeks in a row never matched the number of neutral or negative weeks in a row until the final 10-12 weeks of the year, which coincided with the Fed’s final, contradictory, ‘no taper’ announcement.   My suggestions for ‘entry’ or ‘exit’ signals during the year would have had to take nearly full advantage of our two moves per month allowed in our funds.

Therefore, I did not feel fully confident with the ‘risk’ side of the picture ahead of the potential reward.

So, how did my ‘miss’ compare with  early ’13 projections of the financial professionals?

Firm / S&P 500 Target / Missed it by this much (%, as of 12.10.2013)

  • Wells Fargo / 1,390 / 29.7%

  • UBS / 1,425 / 26.5%

  • Morgan Stanley / 1,434 / 25.7%

  • Deutsche Bank / 1,500 / 20.2%

  • Barclays / 1,525 / 18.2%

  • Credit Suisse / 1,550 / 16.3%

  • HSBC / 1,560 / 15.6%

  • Jefferies / 1,565 / 15.2%

  • Goldman Sachs / 1,575 / 14.5%

  • BMO Capital / 1,575 / 14.5%

  • JP Morgan / 1,580 / 14.1%

  • Oppenheimer / 1,585 / 13.8%

  • BofA Merrill Lynch / 1,600 / 12.7%

  • Citi / 1,615 / 11.6%

  • AVERAGE / 1,534 / 17.5%

  • MEDIAN / 1,560 / 15.6%

Like me, NONE of this long list of professional financial firms pictured anywhere near the advances that we saw last year.   I rest my case.  If they were all this far off, I could only be guilty of following the same signals of those with millions of dollars of staff and resources at their disposal.

As usual, the enthusiasm for continued market participation goes on non-stop. The normal focus in the mainstream media is to emphasize ‘number of weeks positive’, ‘percent gain YTD, ‘all-time high’, and so on.  What the media fails to do is to measure the ‘risk’ of the existing price levels.

The red line in the chart below is an inflation-adjusted measure of the S&P 500.  Your dollars do not buy what they bought in 2000 or 2007, so, why does the media compare today’s prices with the prices of 2000 or 2007?  The blue line measures the amount of margin debt, which is essentially the borrowed money used to buy stocks.  Notice how the peaks in margin debt correspond directly with the eventual peaks in the market.  The only difference this time are the $4 trillion dollars that have been ‘loaned’ to the mortgage and equity markets, from Fed keyboards, just since the last dip in 2009. Does this appear to be a low-risk period for stocks?

How long can this irrational state of affairs continue?  Stocks seem to go up no matter what happens.  If there is good news, stocks go up.  If there is bad news, stocks go up.  If there is no news, stocks go up.  That is, until they go sideways, for weeks at a time. On the Thursday after Christmas, the Dow was up another 122 points to another new all-time record high.  In fact, the Dow has had an astonishing 50 record high closes this year.  This reminds me of the kind of euphoria that we witnessed during the peak of the housing bubble.  At the time, housing prices just kept going higher and higher and everyone rushed to buy before they were “priced out of the market”.

But we all know how that ended, and this stock market bubble is headed for a similar ending.

The most significant factors in the change of market character for the year revolved around the Fed’s policy announcements in May, first to promise to taper after September, followed by the reversals in October, to postpone until after the change in leadership from Ben Bernanke to Janet Yellen. Also, there was virtually no gain from May to October, followed by the surge into the holiday season. This is the risky, news-driven aspect of market action that amounts to a virtual Vegas-style, dice roll; if the Fed is in, stay in.  If the Fed is out, get out.  I do my best to avoid situations such as these altogether, since, the Fed doesn’t exactly ‘have my back’.

Throughout, the safety position I took in the F fund early in the year, as a guard against mid-year stock sluggishness, narrowed much of the loss by the end of the year, the loss that was incurred by the May interest rate rise.  Bonds have held on to their ‘safety’ status and have strengthened since the first of the year as the ‘Santa rally’ in stocks has been erased. Characteristically, interest rates peak, and bond prices bottom (F fund) just as stock prices reach their peaks. This current action also appears to fit that historical pattern.

Two big events are occurring in the next ten days that could impact current trends in several world markets. One, the next Fed meeting occurs on the 29-30th, where a new and currently unknown tapering level is expected. Whether this means less support for the markets, or, no change/reversal with even greater support, is anyone’s guess.  Second, on January 31st, the first ever default of a Chinese ‘wealth management product’ will occur, in the range of half a billion US dollars.  This could ripple into other debt and loan offerings, given it’s rather unprecedented nature.  Asian markets will have to respond with strength or weakness to this event. There will be an obvious impact on many of the traditional lending policies in the Chinese financial industry. In the fall, I sought to avoid making allocation decisions that appeared to be based upon short-term events, or news, including Fed news, or Fed ‘noise’ as it’s also been called.  And, because of the abnormal time length between this report and the last report in October, there is simply too much material to update in one report.  So, I will end this as ‘Part 1’, and continue with parts 2 & 3 over the next few weeks.

Be careful.  Be safe.

10152013 October 15, 2013

Posted by easterntiger in economic history, economy, financial, gold, markets, silver, stocks.
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Weather Report 10152013

Current Positions  (Changes)

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

F(bonds) – up to 70%; G (money market) – remainder

Weekly Momentum Indicator (WMI) last 4 weeks, thru 10/15/13

+10.74, –4.37, -4.78, +6.25 (S&P100 compared to exactly 3 weeks before***)

(3 Friday’s ago/2 Friday’s ago/Friday – 1 week/today)

Patterns are what I constantly observe.  Beneficial patterns are what I seek to use for my advantage.  Hazardous patterns are what I seek to avoid. Indecisive patterns are treated as hazardous patterns.

Recent patterns have tended toward uncertainty. Here is some proof.

Friday, once again, headlines read this weeks ‘market rally’ as great news, in anticipation of a ‘deal’ on the ‘hill’.  Last month, it ‘rallied’ on the peaceful solution to a Syrian crisis, followed by ‘rallying’ again on the continuation of QE/failure to taper from the Fed.

So many ‘rallies’!!!  What is the net result of all of these ‘rallies’ over time?

I deliberately paused from updates due to the succession of intervening news events, both positive and negative.  Very little has changed. As proof, here were the following measures of key indexes one month after the last report in June and the net change as of Friday.

Index                July 29th            Oct  9th              Friday               Changes

                               1                           2                      3            1to2      1to3

Dow Industrials    15521.97    14802.98     15237.11           -4.63%     -1.84%

S&P100                     756.60         737.29        757.73           -2.55%    +0.15%

S&P500                   1691.65      1656.40      1703.20             -2.08%    +0.68%

Russell 2000          1040.66       1043.46     1084.31            +0.27%    +4.19%

Wilshire 5000            18187.97    17688.15  17871.47         -2.75%     -1.74%

10-year treasury note 2.585%     2.65%        2.682%             +2.51%    +3.75%

The S&P100 is just 9 points higher than it was 5 months ago, at the time of a new ‘all-time high’.

The risk remains higher than the potential reward, in spite of $2-4 billion per day in Fed feeding.

It took above average increases in the past 3 days just to bring several key indexes beyond their levels of July 29th; virtually nowhere in the past 11 weeks.  Even further, the S&P100 was near 547 during an earlier high in mid-May, only 11 points below today’s high.  We are now sitting around 9 points below the highs of the year.

This lack of progress is intentional.  This pattern has every appearance of the year-long ‘tops’ that occurred in 2000 and 2007 before the start of major corrections that resulted in 40% losses in a manner of less than a year.

When you examine the 2000 and 2007 tops (and most market peaks outside of the “V-top” ones like 1987) you’ll notice the churn both before and after what turned out in hindsight to be the final peak. The S&P 500 experienced a correction of more than 10% in Jul-Oct 1999 that was then fully recovered, another 10% correction in Jan-Feb 2000 that was then fully recovered, another 10% correction in March-May 2000 that was fully recovered, and a final high in September after which the S&P 500 was cut in half. Likewise in 2007, a 10% correction in Jul-Aug was fully recovered by the October 9, 2007 peak, and the first 10% correction off the peak was followed by a 7% recovery into December before the market began to decline in earnest. Even then, once the market had lost 20% in March 2008, it mounted a nearly 12% advance by May 2008, as a further loss of more than 50% lay ahead.

https://i1.wp.com/www.prometheusmi.com/images/pages/commentary/images/daily/2013/07/29/sp500_high_risk_periods.png

It was this sort of rolling top, with intermittent corrections being followed by recoveries to yet further marginal highs, that prompted this quote from Barron’s magazine just before the 1969-1970 bear market plunge:

“The failure of the general market to decline during the past year despite its obvious vulnerability, as well as the emergence of new investment characteristics, has caused investors to believe that the U.S. has entered a new investment era to which the old guidelines no longer apply. Many have now come to believe that market risk is no longer a realistic consideration, while the risk of being underinvested or in cash and missing opportunities exceeds any other.”

Investors lose a full-cycle perspective during these periods of enthusiasm. But remember the regularity, worse in the 2008-2009 bear, but consistent throughout history, for typical bear markets to wipe out more than half of the gains from the previous bull market advance (and closer to 85% of the prior gains during “secular” bear phases). Somehow this outcome will be just as great a surprise to investors when the present cycle completes as it has repeatedly been in market cycles throughout history.

Gold

Someone, somewhere is trying to keep the price of gold low.  On Tuesday, October 1st at 2:00 AM EST, it was reported that someone put in an order to sell 800,000 ounces, or about $1 billion worth of gold. The price plunged from $1332/oz to $1293/oz.  Then, on Wednesday, October 9th at 8:40 AM EST, an equally large “market sell” order of 600,000 ounces of gold – valued at $786 million was made.  Then, finally on Thursday, October 10th, again at 8:40 AM EST, with ZERO news other than the poor JPM and WFC earnings, and less progress in the government shutdown/debt ceiling talks than expected – a whopping TWO MILLION OUNCE “market sell” order hit the COMEX, valued at a ridiculous $2.6 BILLION. This suspicious sequence could only have been deliberate deception to create the false impression that other assets are more preferred than gold, in the same way as stock prices have been supported for the past 4 years by the Federal Reserve to make stocks appear to be a preferred asset, in spite of stock prices returning less than 4% of that over the past 14 years of gold/silver returns.  Why would someone want to steer you away from the least promoted, but, best asset class of the past decade, precious metals, while also attempt to encourage you to stay invested in one of the most publicized, but, weakest class, stocks?  After all, gold and silver are real, but, stocks are paper.

Interest Rates

My over-weighting of the F fund is to anticipate the ‘flight to safety’ that normally occurs during periods of stock weakness and surrounding periods of financial stress.  The threat of either a credit downgrade, a debt ceiling fight, or default all play into the hands of a desire for a reduction in risk, and a desire for protection that higher bond prices offer.  The false expectation of a summer stock swoon was the purpose for weighting in F earlier in the year.  The Fed’s May pre-announcement of expected tapering in September offset that expectation and drove bond prices and the F fun to a slightly lower bottom.  That bottom has firmed over the past 4 months, along with the corresponding ceiling on interest rates.  In spite of the hysteria and anxiety of higher rate expectations, rates today are no higher than they were almost 4  months ago.

Near panic continued to rule the interest rate picture since that premature, ‘pre-taper’ announcement from the Fed in May. Rates on the 10-year Treasury note ultimately rose from a low of 1.6% on April 16th, completing practically 90% of it’s final rise within 9 weeks.  Nevertheless, the media flooded the air with scare stories about rapidly rising interest rates, when not viewing the context that the highs of this year were lower the lows of 4 & 5 years ago.  Rates actually rose only a average of 0.00106 points per day between June 24th and September 25th.  Between August 19th and September 16th, this rate rose less than 3% of the rate from the April low to the ultimate high of 2.984% on September 6th.  Overall, rates continue to rise and fall within a declining channel, just as they have for the past 30 years.  Much of the concern in the past few months on rate increases appeared to be psychological.

The de-emphasis of tapering, reducing the $85 billion purchase of mortgages backed securities by the Fed,has extended the impression of downward Fed pressure on rates.  This reversed much of the losses incurred in the F fund during the mini-rate ‘panic’ of May/June.

However, within the past week, world reaction has responded to the stalemate in Washington, by moving from short term treasuries, such as this 1-month note, and into longer term notes, given the increases in risk associated with the now increasing probability of a debt payment being missed, if there is no prompt action on the debt ceiling.  News stories or politicians who suggest a lower level of concern on the debt ceiling, citing the $250 billion dollars in collections versus $20 billion dollars in payment due, fail to account for the rest of the balances planned against the collections, spread through thousands of obligations worldwide.

Simply ‘prioritizing’ these obligations within the current limit would immediately create an actual elevated risk, removing the universally accepted ‘risk-free’ aspect of US government debt, and immediately raise interest rates. The impact would ripple instantly through any interest rate sensitive activities, such as housing, construction, real estate, lending, leveraged instruments, etc., and further into retail, travel, and on.  The fragile state of economic stability would rattle any buffer that currently exists between the current state and an actual recession, as measured by lower levels of economic output and/or growth.  Already, the costs of insuring U. S. government bonds has risen to levels not seen in five years.  This insurance is a premium paid against the probability of default.  We might not believe that a default will occur, but, this doesn’t stop others around the world from preparing for the unlikely event anyway.

This short-term rate increase is only one of several signs that threaten to undermine this fragile stability, already supported only by heavy subsidies by the Fed from QE.  This indicates fear in the short-term borrowing markets that even the hint of a default will cause too much demand for overnight funds than the supply at a given price will allow.

06282013 Alert June 28, 2013

Posted by easterntiger in economic history, economy, financial, markets, stocks.
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The S&P500 has been below 1620 for 27 out of the past 36 days.  To translate this into Dow Industrials terms, the Dow has been below its corresponding level of 15040 for 29 out of the past 37 days.

The significance of 15040 for the Dow Industrials and 1620 for the S&P500 are that these are the points where, today, the 20 day moving averages are falling and meeting the 50 day moving averages.  This is the first time that this has occurred this year.  It also happened in November and May of last year and in early August of 2011.  Each time of those times, the major indexes lost 5 or more percent of their value within 2-3 weeks.  More significantly, with the recent all-time highs coming just a month ago, this is more like the events where these same events occurred in 2007, and less like those events in 2011 and 2012.  (click the image for a zoom-in view)

ToppingPattern

In the three times that it occurred in 2007 from all-time highs, the S&P lost at least 100 points on the first two occasions, then, lost over 200 points on the third occasion that this ‘crossover’ occurred.

For a 2nd opinion, I took this observation yesterday and forwarded a chart to one of my paid advisers to ask his opinion.  This person does this full-time and is well-paid for his advice.

His response was  ‘..yes, it’s a lagging confirmation of a major top..’.  This is his way of saying that the delay of a decline (lagging) is no comfort in the fact that this long-term topping pattern (major top) is certain/inevitable.

Therefore, the ‘flight to safety’ into bonds that had occurred earlier in the year is more likely to resume, raising bond prices and the F fund, while lowering interest rates.  This verysame process had been underway for much of the year, right up until the panic and ripple effect of the Japanese yen reversal and surge raised their interest rates dramatically in May, forcing  our own rates higher here, in spite of the lack of confirmation from inflation or growth patterns to match.  Unfortunately, the recent decline in bond prices has caused a rush to the exits by people exiting bonds, some of the same people who had been piling in earlier in the year.

In spite of FED stimulus, bullishness, euphoria and the usual focus on the best of short-term events and statistics, Hoisington Hunt of Hoistington Investment Management notes that the recent tax increase, while well-intentioned, will put a significant drag on U.S. GDP at the same time that household income has dropped to its lowest point in 20 years.  He also notes that since 2000, the U.S. economy has had its second lowest GDP growth rate of any decade since 1790.