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Weather Report – Interim – 04162017 April 15, 2017

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

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

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

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

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

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

-3.43, -6.54, -1.94, -13.7

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

November 9, 2016

There’s hope for the market under Trump

…..hope….

March 21, 2017

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

….back to reality….

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

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

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

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

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

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

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

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

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%.

03042014 March 4, 2014

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

02282013 February 28, 2013

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Weather Report 02282013

Current Positions  (Slight Changes)
I(Intl) – exit; S(Small Cap) – exit; C(S&P) –exit

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

Weekly Momentum Indicator (WMI) last 4 weeks, thru 02/27/13
+11.23, +6.38, +1.88, +0.62   (S&P100 compared to exactly 3 weeks before***)
(3wks ago/2wks ago/1 wk ago/today)

Please direct your attention to the ‘0.62’ in the Weekly Momentum Indicator above.  For clarification, this means that the S&P100 is now at
less than ONE POINT above the level of where it was THREE WEEKS AGO!!  Therefore, the 1.88 says that last Friday’s S&P100 level was less than TWO POINTS above the level of FOUR WEEKS AGO!!

(from the January 10th  post) – One key measure that I follow, a gauge of buying strength between stocks (risk) and bonds (safety), has signaled market turn zones 4 times in the past 2 years, at 0.3549 (2/11), 0.3532 (5/11), 0.3516 (4/12) and 0.3568 (9/12). This measure is now at 0.3555 after hitting 0.3566 last Friday.

(from the January 30th  post) This measure now stands at 0.3688. This is almost an imperceptible level from 3 weeks ago. This denotes decreasing reward and increasing risks in holding equities (S, I and C funds) and decreased risk in the F fund and related L funds.

Ratio update – At yesterday’s close, this ratio is at 0.37.  It was as low as 0.363 at Monday’s close following that day’s selloff.  Further downside momentum is much more likely given this ‘resistance’ near this 0.37 level.  This is also a very good gauge to measure the potential of an advance in the F fund, which got the biggest one-day jump upward since August on the Monday selloff.  This is an indication of the so-called ‘flight to safety’, and away from risk of equities.

Each of the previous ratio peaks in 2011 & 2012 represented multi-month stock price highs.

Similarly, interest rates have once again peaked and reversed from multi-month highs, positioning our F fund in a multi-month buying position.

The Euro has reversed from a one-and-a-half year high and reversed downward.  As usual, this is a mirror image of our dollar, hitting a low and reversing upward from a one-and-a-half year low.  A strengthening/rising dollar is often associated with a weakening US stock market.

Interestingly, even in the midst of the rebounds on Tuesday and Wednesday, there has been no reasonable reversal in this flight to safety since Monday.  Further, neither currency markets nor bond markets, as reflected by the above gauge or ratio, did any ‘confirming’ of the stock move back up.  This means that there was practically no money returning from the bond market from Monday’s run up.  It also shows that the currency markets also did not confirm the Tuesday and Wednesday stock rebound.  Both the currency and bond markets are larger than the stock market.  The stock market needs withdrawals from other markets to sustain momentum. The stock market can’t survive on just retail investors and Fed feeding.  It also needs institutional investors for support and strength.

Extremes or unusual moves in sentiment are in focus, though currently many indicators are twisting around and not giving a consistent picture.  Every day for the past six sessions, the Up Volume Ratio on the NYSE has been above 70% or below 30%.  This is reflecting rising volatility.

Due to that, we’ve touched on market breadth more than usual lately, and it remains curious (other data sources may vary a bit).

That kind of extreme chop from one extreme to the other is indicative of uncertainty.

Since 1975, on the two occasions when the S&P 500 had extreme volatility following the hitting of a 52-week high, as it did this month, it has been down 1 week, 2 weeks and 1 month afterward, by between 1.5% and 6.0%.  Further, under similar conditions, it has been up in only 1 out of 4 similar situations going back to 1951.

The only actual variable that was not in place during these other situations was the factor of direct Federal Reserve Bank stimulation, which in this case would refer to ‘quantitative easing’.  The obvious question would be whether the level of QE is sufficient to maintain market stability, accounting for other factors both positive and negative, in the general, world market dynamic. We don’t know the answer to that question.

Do not confuse ‘volatility’ with ‘price action’.

Example – For the entire month of February, in spite of the recent 1+% up and down ranges, it took yesterday’s rally to erase a negative return for the month on the major US indexes, (including the S&P100, S&P500, NASDAQ Composite, Russell 2000).  The total change for the month hovers between 0.017% per day on the S&P500 to 0.06% per day on the upper end for the Russell 2000 Small Caps.

These marginal gains are not worth the risks associated with them.

Markets that continue to wait or move from one report, conference, meeting or news event to the next are reflections of questionable value, limited returns and higher than average risk.

 

 

01102013 January 10, 2013

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Weather Report 01102013

Current Positions  (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 01/10/13
+3.93, -3.84, +26.75, +23.08   (S&P100 compared to exactly 3 weeks before***)
(3wks ago/2wks ago/1 wk ago/today)

This 3+ year rebound from the most recent market bottom of March 2009 to current levels is #8 in terms of time (3y6m8d) and #10 out of 29 in %age advance (121) out of 30 bull markets in history.

Similar Advances

1942-5 – up 158% (4y1m1d)  — 1962-6 – up 80% (3y7m14d) — 1896-9– up 173% (3y0m28d)

In each case, a very dramatic decline occurred, all similar to levels near the 40-50% levels, close to the lows of 2011.  This could unfold by the end of 2013.

One key measure that I follow is a gauge of buying strength between stocks (risk) and bonds (safety) has signaled market turn zones 4 times in the past 2 years, at 0.3549 (2/11), 0.3532 (5/11), 0.3516 (4/12) and 0.3568 (9/12).  This measure is now at 0.3555 after hitting 0.3566 last Friday.

Before you become impressed with a 121% return in 3-4 years, recall that your timing would have had to have been perfect at the bottom (this never happens), you would have had to be all cash in order to make that purchase, and, unless you met those two conditions, you would have either incurred losses from the decline into that point, or, more likely, you would have found yourself joining that party quite some time after March 2009, when you felt comfortable with the market environment, which was surely looking quite negative in terms of outlook at that bottom.   That March 2009 bottom was also a TWELVE-YEAR LOW!!  So, technically, this 121% should be averaged over the 15-16 years from where it truly began, not just from 3 years.  7.5 to 8%% per year….near where the long-term averages suggest.  But, hold on.  We will correct this for one other factor later after we look at the performance of world markets for 2012.

Hint – all that glitters isn’t gold.

Recent touches this week at 5-year highs are portrayed as good news for market watchers.  The news fails to acknowledge that these 5-year highs are coming at about one point per day over the past week, due to lower volatility, lower volume, no real buying, and simple complacency to the risks.  This is the ideal environment for what is called ‘distribution’.  Distribution is the process where ‘strong hands’ are distributing (selling, unloading) stocks at high prices to ‘weak hands’, usually retail and individual investors in a very slow, deliberate and methodical manner. This also means that with the exception of retracing the moves down, all we done is go nowhere in 5 years.  Similarly, year-end reports of a low double digit gain overall in 2012 in some indexes don’t account for the fact that these double digit gains are back to single-digit gains, when averaged for the previous two years, which were slightly negative (2011) and slightly positive (2010).  Single-digit gains over three years when accounting for the current significant risk of equity positions puts those gains into a reasonable perspective.  Further, markets that continue to bounce off old highs without going through, and without regular pullbacks for low-risk buying opportunities, are often referred to as ‘overbought’ and represent high-risk buying zones.  Buying in overbought conditions invites a higher probability of loss than for gain.

Here is a broader picture of 2012 performance among a wider number of asset classes.

TotReturn

PLEASE CLICK THE TABLE TO ENLARGE

Here is a table of local currency, US$, British pound, EURO and gold measured market 2012 returns.

Local USD GBP EUR Gold
1 FTSE/Thailand 35.7% 40.8% 36.4% 37.1% 32.0%
2 DAX 29.1% 31.2% 27.2% 27.8% 23.1%
3 Hong-Kong 22.9% 23.2% 19.4% 20.0% 15.6%
4 Bombay SE 25.7% 21.1% 17.4% 18.0% 13.6%
5 Korea Exchange 9.3% 18.7% 15.0% 15.6% 11.3%
6 Stockholm 12.0% 18.7% 15.0% 15.6% 11.3%
7 Swiss MI 14.9% 18.0% 14.4% 15.0% 10.7%
8 All Ordinaries 13.5% 16.8% 13.2% 13.7% 9.5%
9 Euronext100 14.8% 16.7% 13.2% 13.7% 9.5%
10 Nasdaq 15.9% 15.9% 12.3% 12.9% 8.7%
11 Russia TSI 10.5% 15.6% 12.1% 12.6% 8.4%
12 S&P500 13.4% 13.4% 9.9% 10.5% 6.4%
13 FTSE 100 5.8% 11.8% 8.3% 8.9% 4.8%
14 Nikkei 225 22.9% 10.1% 6.7% 7.2% 3.3%
15 Toronto SE 4.0% 6.9% 3.6% 4.1% 0.3%
16 Shanghai 3.2% 4.5% 1.3% 1.8% -2.0%
17 Shenzen 1.7% 3.0% -0.2% 0.3% -3.4%
18 FTSE/JSE 4.8% 0.9% -2.2% -1.7% -5.3%
19 Bovespa 7.4% -2.1% -5.1% -4.7% -8.2%
20 Madrid -7.2% -5.7% -8.6% -8.2% -11.6%

When corrected for the decline of our currency value of the US dollar in terms of the growth in value of gold, we’ve actually had, on the S&P500, only a 6.4% gain for the year, rather than 13.4%.  The US dollar declined in value by 6.5% in 2012.  Recall that you must also view this in terms of the past 3 years (two flat years before) and the risks of exposure to downside threats.

Based upon recent weeks performances, this rebound is clearly showing signs of what can be termed, without exaggeration, exhaustion.

Total changes over the past week, the net change since the day of the announcement of the fiscal cliff deal are as follows:

Current 1/2/13 High Total Change Daily Change
COMPQ

3121.76

3118.18

3.58

0.716

Dow Indus

13471.51

13412.71

58.8

11.76

S&P500

1472.12

1462.43

9.69

1.938

S&P100

667.59

663.87

3.72

0.744

Wilshire

15520.17

15380.61

139.56

27.912

$RUT

883.19

873.99

9.2

1.84

EFA

57.92

57.78

0.14

0.028

One additional measure of market activity is the volatility index, or the VIX.  The VIX is a gauge on the movements of major investors, as they hedge their portfolios against risk.  Following the removal of the fiscal cliff uncertainty, hedges, or bets against high risk, were unwound at an extremely high rate, declining the VIX by 37% in five days.  While this might point to a feeling of reduced risk on one hand, it is also a significant rise in complacency on the other hand.

As per The Wall Street Journal’s MarketBeat column, the 37% hit was the biggest five-day drop since 1990. And, according to the same column, it doesn’t bode well going forward:

In the nine previous instances in which the VIX fell by 30% or more over a five-day span, stocks have lagged their customary returns, Bespoke Investment Group says.

The S&P 500 has averaged a 1.5% decline over the next week, Bespoke also says. The index also averages a drop in the ensuing month and three-month time horizons.

Further, using this gauge, over the next six months, the S&P 500 has averaged a 3% gain, below a 3.9% average return for all six-month periods since 1990.

“The results are not attractive,” says Paul Hickey, co-founder at Bespoke.

For one corresponding downside target, if the NASDAQ breaks 2435 (June 4th low and July 26, 2011 high), it is likely to show a continuation of excessive weakness.

Bill Gross is the manager of Pimco’s Total Return Instl (MUTF:PTTRX), and was named Morningstar’s Fixed Income Fund Manager of the Decade in 2010.  Earlier this week, Gross discussed his economic outlook for 2013. Originally the result of two tweets via the Pimco Twitter account, the fund manager mentioned that “stocks in 2013 depend on two primary things […] one: real economic growth, which we see at 2% or less, and second of all, the Fed […] Ben Bernanke isn’t Rumpelstiltskin,” adding that “he can only spin straw into gold for so long.”

Gold ($1655.70) and silver ($29.97) are undergoing minor corrections, well within the normal ranges in terms of time and price, from their highs on Oct 5th (gold) and Oct 1st (silver).  In terms all corrections measured back to the beginning of futures trading for gold, as of Jan. 5th, 84% of all corrections of this type have been complete within this time frame, likely leading to another rise in price.  In another 30 days, 95% of all corrections were complete in gold. While in silver, 82% of all corrections were complete within 90 days (Jan. 1st) and 85% were complete within another 30 days.

Bill Gross also chimed in on his perspective on gold by simply Tweeting, ’gold goes up…’.

Obviously, Gross’s general bullishness on gold is a result of the Fed’s continuous monetary easing, but it’s worth noting that he doesn’t have a specific target.  On the subject, he had this to say:

“We think gold will move higher, as well commodities; it’s hard to say exactly how much. Gold, to my way of thinking, is a function of real interest rates. To the extent that real interest rates have continued low […] ultimately it’s an asset that depends on inflation, to the extent that the Fed and other central banks can re-flate the economy […] a 10-20% return from gold […] is a thing of the past as well.”

Even more interestingly, Gross admitted that, in his opinion, “all asset markets are in this period […] in which less than double-digit returns are going to be the order of the day.”

On the contrary to Gross projection, in dollar terms, gold is on a 12 year win streak that is difficult to match as an asset class.

We’ll see if Gross is right as the future unfolds, or, if gold will continue to be the standout investment for the next decade.

Caution – as shown earlier, these ‘double-digit returns’ are also influenced by dollar erosion!!

11302012 – Interim November 30, 2012

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Interim Weather Report 11302012

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

F(bonds) – up to 30%

G(money market) – remainder

Weekly Momentum Indicator (WMI***) last 4 weeks, thru 11/30
-26.36, -27.34, -4.44, +14.93
(3wks ago/2wks ago/ 1 wk ago/today)

Positions taken since the previous full report are up about 2% in just under 9 days, with minimal risk.

These positions took full advantage of the optimism over the latest extension of Greek debt support and initial White House/Congressional negotiations on the US fiscal cliff, bringing about a ‘risk-on’ scenario.

The German DAX index has just closed at a level that matches three previous highs since September.  Each close at this level resulted in pullbacks ranging from 2.5% to 10% within weeks.

The standard proxy for the I fund has returned to the same upper bound for 3 months in a row, this current level.  The previous two times, a 3% to 9% pullback followed within 2-3 weeks.  This should again be expected between now and the end of December, practically regardless of other events.

The standard proxy for the S fund could only manage a lower level this month as compared to earlier highs in September, April, March and February.  The current level is lower than all of those prior highs and appears to be running out of steam.  The standard proxy for the C fund is performing similarly to the S fund proxy.  Both are under-performing the I fund proxy.   I use a trending indicator that, after showing strength in mid-month on a weekly basis, now shows another ‘topping’ pattern.  This is in spite of these earlier appearances of strengthening, even through this current week.  This strength could be an illusion, as in a classic example of ‘…past performance is no guarantee of future results…’.

With regrets for the increasing frequency of the need to monitor and adjust positions, the patterns in the past two years have, to use my earlier analogy, acted in the manner of a helium balloon, bouncing on the ceiling.  This provides us with no opportunity to buy at truly low levels, without such extreme risk as in the 2011 European debt crisis. Instead, our opportunity is more like riding an entry from a modest pullback before riding the balloon back to the ceiling again.  We bought at lower than average ‘weekly’ levels, and now we’re selling at higher than average ‘weekly’ levels.  Opportunities to buy and sell near lower than normal annual or monthly levels are not available to us at present.

This ‘ceiling’ is very near the highs of this past March, and practically matches a level below the highs of 2007, and equal to the highs from 2008, and which, so far, are levels that are still much higher than the entire years of 2009, 2010 and 2011.  We are trapped near the upper levels of a five-year high sandwich(!).

Until we have more than a modest pullback, an intermediate or major retrace to much lower levels, our only opportunity is to take advantage of  these short-term moves.  Otherwise, we can take advantage of… nothing.

Also, it does not seem that the Fed’s QE3 intervention is having the expected impact,  at least, so far.   If this response begins to show other evidence in the near term, and without the holding on to the risk in current positions, a new month ahead will offer us with a new allocation of moves that we can use to reenter a favorable position in one or more equity categories.

06272012 June 28, 2012

Posted by easterntiger in economic history, economy, financial, gold, markets, oil, silver, stocks.
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Current Positions  (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***see 110111 for reference)

Last 4 weeks, thru 6/27

+12.61, +14.59, +27.84, +5.92

(3 wks ago/2 wks ago/1 wk ago/today)

Measured from the early May YTD high price levels, US stock indexes have had six intermediate changes in direction in the past two months, ultimately resulting in net losses since April 25th of nearly 5% on the S&P100, 5.6% on the S&P500, 6% on the Wilshire 5000, 6.2% on the Russell 2000, 6.41% on the NASDAQ 100 and 6.5% on the NASDAQ Composite.

The Russell 2000 (small cap index) has now ended 52 of the past 86 weeks within a distinct 100 point range, between 750 and 850 (today at 776). This is very similar to a period between 2006 and 2008 where it traded in this SAME RANGE for over 60 of 128 weeks, shortly before the infamous financial crisis and Crash of 2008.  This reference is not made to project a similar crash.  It is only to emphasize the lack of upward progress in over 5 years and to suggest the higher probability of more downside potential, as in 2007, than upside  potential for the foreseeable future, as in, years.

As an ongoing measure, I maintain a marker of closing prices of the S&P100 over many weeks, (I now have over 15 years of day-to-day price history) just to show how little overall market movement that has actually taken place this year.  This narrow range is in spite of headlines and unrelenting bullish comments from those who are always ready to convince you that better times are just ahead, if you just don’t bother wasting time to protect your investments. If you do, you’ll miss the ‘next’ rally.

Current/recent price levels for the S&P100, also known as the OEX

Today

6/12/2012

6/7/2012

5/28/2012

5/14/2012

4/29/2012

4/8/2012

610.80

605.72

605.62

605.65

605.32

635.45

629.45

This overall ranging aspect is also referred to as ‘congestion’.  Congestion is not necessarily abnormal.  As a matter of fact, markets normally spend up to 2/3 of the time in congestion, and only 1/3 actually ‘trending’, either higher or lower.  However, the time-extended, narrow nature of this current congestion, along with low buying interest and heavy selling at/near peaks, strongly implies overall QUESTIONABLE EQUITY VALUE and A HIGHER THAN AVERAGE RISK/REWARD RATIO.

This risk can be no better described numerically than the TOTAL (not annual average) 10-year return in the S&P500, which now stands at 5.17%, through end of the day on June 26th!!!  Returns at this level over such long periods of time simply do not compensate us for the exposure to daily risks.  These risks are often found, after the fact, on a sudden Monday morning headline from somewhere around the world, at least a couple of times a year. Similar returns exist on the Dow 30, at 5.87%, and 7.16% on the NASDAQ. In the meantime, gold and silver returns are above 400% for the past ten years and are projected to go higher within the next decade. This shift to stock under-performance, present since 1999, is a predictable, cyclical phenomenon.  Following decades of expansion/over-expansion of paper assets, including real estate and stocks, only precious metals and hard assets/other commodities manage to find their true value, as paper assets ‘deflate’ to find their true value. Commodities more closely follow the rules of supply & demand in finding their appropriate pricing and are much less prone to speculative bubbles as are stocks or real estate. (As a personal aside, although I had temporarily suspended my purchases of metals, I am now resuming some selected purchasing at these 2-year lows.)

Just as dramatic as the differences between equity returns and commodity (metals) returns are the corresponding layoffs in many financial management and brokerage firms, such as J P Morgan in March and coming soon to Deutsche Bank, Goldman Sachs, and UBS, clearly favoring the disposal of equity research and equity sales organizations (they don’t expect their revenues to sufficiently overcome their costs for years to come).  They are instead focusing on commodities, i.e., oil, gold, silver, grains, etc.

Even though our TSP holdings aren’t diverse enough to follow the larger trends, don’t be the last to understand/recognize that the ‘lights have been going out’ on equities/stocks as a source of appreciation, already for a decade.  Stock gains aren’t impossible, but, they’re significantly harder to locate, acquire, and, most importantly, to sell at the right time.  If you miss the boat, by not diversifying your other assets away from TSP holdings alone, you may suddenly find yourself ten years older, wondering what happened.  This is why I prefer regular opportunities and the relative safety of large F fund allocations, when the trend is right, as I mostly avoid the rather choppy, risky, small returns on equities, outside of low-risk scenarios.  Unfortunately, the best opportunities for C, I and S funds occur when the risks are the absolute highest, as in, when the world financial condition appears at its worst, when selling has reached multi-year lows and when ‘buying in’ is presented with the least evidence of likely positive return.

In a way similar to a trapeze artist swinging from one support to another, the current market only appears to move in response/reaction to regular reports (monthly jobs reports, monthly GDP reports-coming this Thursday morning at 8:30, monthly consumer confidence, weekly jobless claims, monthly supply managers surveys, monthly purchasing indexes, etc.), or, to the latest utterance, official or ‘otherwise’, from key G20 members, the European Central Bank or the US Fed chief.  These utterances are often virtual repeats of earlier, meaningless announcements regarding their ‘stepping in if necessary’, regardless of earlier ineffectiveness, or such as Ben Bernanke pledging commitment to low interest rates, as he has done at EVERY Fed meeting since 2008.

The fact still remains that many of the recent rallies were used as selling opportunities by those who hold large portfolios, such as mutual fund and money managers, hedge funds, etc.  Keeping the markets at these net, ‘no-return’ levels still accomplishes two things.  One, it consumes the risk premiums from speculators betting on downward momentum, when that downward push can be otherwise prevented.  Second, it keeps hope alive for those with ‘long’ or upwardly biased positions, even if reasonable returns are not achieved relative to the constant risks involved in the chase.

There is a dichotomy between technology stocks and the broader market attempts to deceptively disguise the true underlying weakness.

For example, today’s market ‘up day’ ignores the fact that today’s highs are, in most cases, below both (1) the highs of the week, and (2) last week’s highs.  The most likely suspect is so-called, end of the month ‘window dressing’. After booking two consecutive losing months, it’s now time for fund managers, money managers, portfolio managers to pretend to buy (as opposed to the actual ‘trading’), in order to improve their quarterly results as much as possible, only to come back to reality by selling these same shares within the next few days/weeks, to settle their positions and reduce their longer term risk.  As usual, the cue to this masquerade lies in the lack of motion in the bond markets, from where any funds being used for stock purchases would originate.  Since there is no corresponding decrease today in bond prices, from bond selling, you can be assured that the measure of money actually being used this week for stock purchases is negligible, if not non-existent.  Today, the 20-year treasury note price is actually up .20 cents from yesterday, and also up .14 cents from the closing price of 2 Friday’s ago, indicating no selling for stock purchases.

And, quite possibly due to the strength/lack of selling volume in Apple, which composes almost 12% of the NASDAQ market cap, techs appear to be stronger than they actually are.  However, numbers, as it’s said, don’t lie.  Since the early May peak in price levels, the trading days with technology stocks making ‘new low’ prices have beat the  days with ‘new highs’ by a ratio of about 3:1.

Also since May 2nd, all commodity prices, particularly oil, gold, silver (which is actually down over 20% since early March), and copper appear to be in the process of seeking bottoms.  Also seeking a bottom is the heavily burdened Euro currency, due to increased threats to its solvency. Regarding oil prices, unfortunately, the silver lining we see in lower oil prices (lower gas prices) is not large enough to overcome the dark cloud, threats of decreased demand, projected from falling economic activity in major areas of consumption, like China, India, Russia and the US.  This spells recession in many of these same areas where growth is needed to offset weakness elsewhere, such as the US, Europe and China. Several European, North/South American, and Asian markets also remain mired in ranges close to their lows of the year.  The Japanese Nikkei bounced off of a 27-year low earlier this month.

05042012 – Alert May 4, 2012

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

I(Intl) – exit

S(Small Cap) – exit

C(S&P) – exit

F(bonds) – up to 60%

G(money market) – remainder

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

Weekly Momentum Indicator (WMI***see 110111 for reference)

Last 4 weeks, thru 5/4

-12.96, -14.58, +2.25, -0.81

(3 wks ago/2 wks ago/1 wk ago/this week)

In the past month,

* there are back-to-back, weaker than expected non-farm payrolls (jobs) reports for the US,

* UK has entered a double dip recession, joining Spain, Italy and the Netherlands, who’ve all had lower than expected services sector strength reports. The services sector is already the lowest paying sector of the economy, so, this does not bode well for the broader economies of each.

* Spain received a two-notch downgrade in it’s credit rating by Standard & Poor’s,

* Australia lowered their key interest rate, reflecting slowing conditions,

* interest rates have pushed to multi-month lows, once again, reflecting upon the low confidence in the long term economic stability, and keeping the F fund near recent high levels,

* oil has blasted back to levels not seen since December under the prospect of less hiring and it’s implications.

From a structural standpoint on the stock sector, this week’s weakness shows that there is no way to suppress this same underlying weakness, even underneath the masks of a new 4-year high in the Dow Industrials index this week, or from promises of more artificial support from Federal Reserve, as in, hints of central planning and temporary support to very narrow areas of the economy (finance, banking, etc.).

More signs of this weakness can only be delayed for so long before they show up in the daily measurements.

From a risk/reward perspective, the past two months have become all risk and absolutely no reward.  But, oh, you say ‘so, why haven’t I lost any money?’

Here’s why.

Here are some recent closing prices on the S&P100, S&P500 (our C fund) and Russell 2000(small caps, our S fund)
3/13, 633; 1396; 831
3/14, 633; 1394; 823
3/22, 634; 1393; 821
3/23, 635; 1397; 830
4/4, 636; 1399; 820
4/5, 635; 1398; 818
4/12, 631; 1387; 808
4/17, 632; 1390; 810
4/25, 633; 1391; 812
4/27, 637; 1403; 825
4/30, 635; 1398; 816
5/1, 639; 1405; 815
5/2, 637; 1402; 818

Are you getting this yet?

If the current 2-month ‘trading range’ near the highs of the year do not hold, a substantial correction back toward November or October lows could be in the cards.

The F fund is still the safe and profitable place to be, as has been the case for much of the year.

04152012 May 4, 2012

Posted by easterntiger in 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 60%

G(money market) – remainder

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

Weekly Momentum Indicator (WMI***see 110111 for reference)

Last 4 weeks, thru 4/13

+13.95, +19.45, +2.0, -12.96

(3 wks ago/2 wks ago/1 wks ago/last week)

On 2/27, I wrote that the markets were due to weaken within weeks.  From March 2nd to March 7th, it took the deepest negative reversal of the year back to early February levels.  This was followed shortly thereafter by another upward reversal, mostly on two separate ‘news’ events, including, (1) the latest Greek scare being averted ($100 billion dollar loan guarantee), and, (2) the Fed chairman hinting that a new round of quantitative easing might be on the table (QE3?), under certain conditions.   At this point of narrowly focused optimism, the moderate level allocated to the F fund was forced to absorb a mild and manageable, negative turn.  This was to be corrected with reality within days.

I also mentioned the DJ Total Stock Market index (DWC), which was once the Wilshire 5000 index.  The target at that time was around 14,500.  Although it continued to rise beyond that target, closing twice above 14,900, it is now just under that earlier projected target and closed at 14398 on Friday.

To emphasize this same point, the Russell 2000 small caps, like our S fund, has spent almost ½ of the past 13 months in the 800 to 850 range, including the past 10 weeks and all but 3 weeks of the period from February to August of 2011. The only time out of this range came with the descent below these levels, into last years crash, and up from the bottom reversal in early October leading back into the range in early February, and back down under 800 today

That early March downturn has turned out to be essentially a dry-run for the current weakness that began from the April 2nd  peak.  Current levels are between 3 & 4% lower from that peak, by index.  The wake-up call this time around are the return of European concerns, specifically, rising Italian and Spanish bond rates, which raise the prospect of bank instability, as well as a decidedly different hint from the Fed chairman, that quantitative easing might NOT be counted upon to support the markets.  This second peak created a one-month ‘double top’ pattern, reversing downward to even lower, late January levels.  Overall, the internal market mechanisms have now weakened back to levels not seen since the debt and European issues of late November and are unlikely to recover back to recent levels for a minimum of 4-6 weeks, if not much longer.

Helping to accelerate the negativity on Spain last week was news that Spanish banks borrowed 316 billion euros from the  European Central Bank (ECB) in March. That was 50% more than in February. The current worry is not that Spain is about to default on sovereign debt but that Spain’s banks are in serious trouble and the banking system could be in for some negative surprises. Spanish banks have been seeing large outflows of cash as the economic situation worsened. The run on the banks is similar to the one on Greek banks over the last two years. The end result for Spain is going to be the same. They are too big to fail and too big to save but the European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) are sure to try and it will cause market problems worse than we saw with Greece.

The current U. S. markets are very much skewed in the direction of a small number of stocks, while the broader markets are mostly mired in ranges that go back to last years peak levels, making no progress.  Lots of attention has been paid to Apple and it’s impact on the market, for good reason.  With the weighting of individual stocks in the Nasdaq, Apple alone represents 15% of the entire value of the NASDAQ 100.  So,  just two companies, Apple and Google make up over 20% of the entire index of 100 companies.

This upcoming week, the focus will be on the next round of economic reports, and, most significantly, the level of interest on Thursday in the next Spanish bond auction.  A lack of appetite for new Spanish debt is likely to have negative impact on European markets that would then ripple into our markets on Friday.  Otherwise, more earnings reports that might appear encouraging, as they are normally presented, but, not fully masking other details.

Projections for 1st quarter earnings are running as low as 0.5%, according to Standard & Poors/Capital IQ. And that’s after a mediocre 4th quarter 2011, indicating the end of big earnings improvements that followed the depths of the 2008 financial crisis.

Investors are skeptic and have been all year.  Just over half the total money invested in new funds has had two destinations: the iShares Barclays U.S. Treasury Bond Fund (symbol GOVT, with $297 million in flows) and Pimco’s Total Return ETF (symbol TRXT, with $267 million in flows). The standout new equity funds of 2012 in terms of flows are all iShares products – Global Gold Miners (symbol: RING), India Index (symbol: INDA) and World Index (symbol: URTH). Bottom line: even with the continuous innovations of the exchange traded fund (ETF) space, investors are still targeting international and fixed income exposure, a continuation of last year’s risk-averse trends and while ‘ETFs destabilize markets’ might be the prevailing group-think, this quarter’s money flows into newly launched exchange traded products reveals a strong ‘Risk Off’ investment bias.

 

I’ll go back one last time to the F fund.  The largest drop in 4 months on the ‘good’ news in early March has been followed by the largest rise in 5 months, after the latest dousing by the Fed chairman, dismissing QE3.  Clearly, from this move, and from the trend of purchases made by investors in the 1st quarter, the safety of the bond prices/falling interest rates still offer the safe bets once the weakness in equity prices accelerates in the coming weeks.

 

02272012 February 27, 2012

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

I(Intl) – exit

S(Small Cap) – exit

C(S&P) – exit

F(bonds) – up to 40%

G(money market) – remainder

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

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 2/24

+21.75, +11.14, +19.51, +10.67

(3 wks ago/2 wks ago/1 wks ago/last week)

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

Current positioning in the F fund has fluctuated between slight gain and slight loss in the past month.  This positioning is set to take advantage of an expected, large move in anticipation of a sudden stock breakdown, which is due within the next few weeks.  Should this breakdown fail to occur, it’s also possible that the markets are headed for a 6-8 month extension in these upper trading ranges, bound by current 1-4 year highs.

Stock market participants playing for more upside continue to ‘whistle past the graveyard’, thumbing their noses at the thought of risk and buying every dip.  There are far too many who are simply hoping that we don’t wake up one morning to a calamity in the markets.

Here is an idea of just how rabidly bullish some small investors are: the Rydex Nasdaq non-leveraged funds indicates that there is now $80 invested in the bull funds for every $1 invested in the bear funds (!). This is a record extreme, and it illustrates that a ridiculous number of investors are betting on the bullish side of the trade.

Read more: http://www.minyanville.com/businessmarkets/articles/elliott-wave-elliott-wave-theory-technical/2/15/2012/id/39415#ixzz1mlGSoult

There are two possible scenarios behind us, starting from the October 3rd low.  Either the rise since that one-year bottom is a ‘correction’ from the deep May-to-October downtrend with a continuation of the downtrend to follow, or, that low forms a basis for more upside and further highs.  I suspect that the first scenario is appropriate.

The DJ Total Stock Market index (DWC), was once the Wilshire 5000 index. The rise from October has now stalled at a point that has acted as support in the past (and also acted as resistance in early 2009 and mid 2010).

For the move up from October,  two equal ‘legs up projects’ to 14483, about 150 points above today’s (Monday) opening. A rising ‘wedge’ pattern shows price is getting pinched.  Wedge patterns are often bearish, pointing toward lower prices.  Assuming the market will start at least a pullback soon (unless they’ve been completely outlawed) we’ll then have to wait for further evidence as to whether it will be the start of the next major decline or just a pullback before pressing higher again in March.

Failing to break through this ceiling/resistance makes the current rise from October much more likely to be part of a larger corrective pattern, and NOT the often overused ‘rally’ as indicated through most media financial media since that time. –  A correction indicates a near-term end to the current trend, with a deeper downside pattern that will exceed last year’s May-October downtrend..

The S&P500 looks very similar and like the DWC has only been able to get above its May 2011 high by 2 points.  There is an expectation for a minor poke above that high (1370.58) to reach the projection at 1376.55 for two equal legs up from October. But if it first drops below 1340 it will tell us the high is already in. From there we’ll have to see what kind of pattern develops for the decline as a way to help determine whether or not we’re going to get another rally leg in March. A break below the mid-January levels, near 1297, would be very bearish. (At 21 points from 1376 on today’s opening levels, and at the current rate of progress, the markets could very well move lethargically for another TWO WEEKS to get to this 1376 level, IF the progress of the past two weeks is a reasonable measure, and IF this mornings pullback does not continue.)

There can be no overemphasis of an image of high risk against tiny rewards during the current environment.  Being unaware of this high risk will play into the ‘strong’ hands of those who are in position to move rapidly to protect positions when necessary, unlike most retail investors, or those with retirement plans at risk.  The picture of holiday-like overall volume in the current equity space can be dramatized in the following table of tiny movements during the past few weeks.  This table presents a rather remarkable sequence of just how little the market is moving.

………………………2/24/12 Close — 2/9/12—15 day change—Change per wk

S&P500 1365.74 1354.32 (high) 11.42 points 5.329  (0.39%)
S&P100 617.67 612.39 (high) 5.28 points 2.464 (0.39%)
Nasdaq 2963.75 2930.68 (high) 33.07 points 15.43 (0.52%)
Banking Index 44.7 45.47 (high) -0.77 points -0.36 (-0.8%)
Dow Transportation 5139.14 5328.96 (high) -192.82 points -89.98 (-1.75%

With so little upside, risk of sudden and significant downside risk is all that remains.

The S&P closed at 1365.74 on Friday, after trading as high as 1368.92. The high close in April of 2011 was 1363.61

The Dow traded over 13,000 several times last week, for the first time May 20th 2008, but, so far, cannot hold the gains. Some consider the Dow to be in breakout mode in spite of the failure to close over 13,000. I do not agree with the ‘breakout gang’.

If upside continues, the next major psychological level for the Nasdaq is 3,000. The last time the Nasdaq saw that level was November 2000 and it closed Friday only 52 points lower. The Nasdaq is at 11-year highs after a +25% rebound from October.

The Russell 2000, like our S fund, is telegraphing increased concerns with the inability to break higher, flattening the past two weeks. The three month uptrend support is in danger of being broken on any further declines.

The Dow Transports failed to confirm the Dow Industrials gains again, (the Dow Theory), but this was a reaction to rising oil prices rather than a sudden urge to sell transport stocks. There was a clear reason since high oil prices mean lower profits for the sector. The airlines were the primary reason for the decline.

Through the Dow Theory, there are bearish implications of a rising Dow Industrials and a falling Dow Transportation index.  This directly indicates weakness in one significant sector of the economy, movement of goods, that cannot continue to diverge from other sectors, such as production.  Although this is partly due to airline stocks reacting to higher oil prices, other factors can’t be ruled out as contributors.

The bluster out of Iran along with the Greek bailout approval helped to push the dollar lower and oil prices to new nine month highs.

Cash is close to trash and fixed income is not far behind. The yield on the 30-year bond is very close to breaking higher from four month highs despite the Fed’s buying.  If the U.S. economy continues to improve and equities do move over Dow 13,000, and S&P 1365, we could see some serious flight from fixed income assets.

Reports from around the globe show some slowing in economic activity.  A report from Europe shows the eurozone’s private sector growth climbed slightly in February, but the manufacturing index came in at 49.5 and remains in contraction territory (below 50).  Italy may be leading the way into a recession but the rest are not far behind.  Even Germany, which has remained relatively strong (but dependent on exports), came in at 50.1 vs. expectations for 51.5.  Chinese manufacturing activity also slowed and while their index climbed slightly to 49.7, it is still below 50 and has been below 50 for four consecutive months now.  Many believe the U.S. will avoid a recession even if the rest of the world slips back into one.  I think that’s a bit of wishful thinking

As for the continued impact from the Eurozone, the terms of the bailout agreement are onerous at best for Greece. Not only does it not help them pay for ongoing costs (for which they’ve been borrowing more money each month) but they also lose control over how they get to spend their money.  A large team of German tax collectors is on the way to Greece to help get German banks their proper share of uncollected taxes.

In January, Italy was downgraded to A- from A+; Spain was downgraded to A from AA-.

Fitch, the smallest of the three rating agencies after Moody’s and S&P, says two-notch downgrade reflects re-assessment of potential financing and monetary shocks from diverging economic and credit conditions in the eurozone.  Belgium, Slovenia & Cyprus were downgraded one notch.

****For reference, here are the broad categories of credit grading****

AAA-AA-A – AAA to AAa is top level;

BBB-BB-B – BBB through Baa3 is still considered safe;  BB or Ba1  and below are not so safe

CCC-CC-C – speculative, junk

D – worse than junk.

Each single notch downgrade raises interest costs by 1/2 of a percent.

Greece made a formal offer to creditors to swap their Greek government bonds for new ones, another step toward knocking $142 billion off its debts. The swap is part of a deal to prevent Greece from defaulting on a debt payment due next month.

The European Central Bank (ECB) has declared itself as immune to many of the risks of a Greek default.  The last time the ECB pulled this stunt, by demanding private investors take a large loss on their investments (making it a “voluntary” loss) they later admitted that it was not the right thing to do since it makes it more difficult to get private investors to take on the risk of buying a financially weak country’s bonds.

So, if the ECB has declared itself immune from loss, who’s actually going to take the loss?

Other than actually paying down all the debt, the only viable plan is for Greece to default and force the banks to fail (as Iceland did a few years ago).

And, by the way, don’t fall for the rhetoric calling the US the ‘next Greece’.   You should believe this only if you believe that US output will fall dramatically over the next decade (Greece has a negative growth rate),  AND that the other dozen countries ranked in between the US and Greece, such as, Canada, Germany, UK, Austria, France, etc. will not give us some warning, since each of them is closer to being the ‘next Greece’ than the US.

Countries with debt-to-GDP ratios above 90% find themselves in a lot of trouble. Once it becomes too expensive to pay the interest on the debt the country’s politicians are forced to raise taxes and cut government spending. Heard any of that lately?

The U.S. public debt is currently running over 60% of GDP, but, not counting future obligations, such as Social Security payments.  By comparison, Greece is hoping to get their level DOWN to 121% by 2020, IF planned austerity measures are successful. (bring your optimism on that one). So, again, no comparisons here make sense.

Also in January, the Fed once again committed to keeping rates low until 2014.  This continues commitments going back to 2008 where the Fed has committed to keeping rates low, but, normally he only commits to only a couple of quarters at a time.  This is practically an admission of an expectation of a fragile environment now and forward.  Solid F fund returns are still in the cards for the foreseeable future.