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07262017 July 26, 2017

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

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

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

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

Weekly Momentum Indicator (WMI) last 4 weeks, thru 07/26/17

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

-13.07, +2.39, +18.35, +26.39

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

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

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

 

 

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

 

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

 

 

 

 

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

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

Screen Shot 2017-07-25 at 11.42.18 PM

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

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

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

 

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

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

How are the market gurus dealing with this challenging environment?

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

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

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

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

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

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

 

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

Buying/Holding/Selling on S&P500

SPXGuruTrades

 

 

 

 

 

 

 

 

Buying/Holding/Selling on NASDAQ 100QQQGuruTrades

 

 

 

 

 

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


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

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

Apple

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

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

AAPLInsiderSellsBuys

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

Amazon.com

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

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

AMZNInsiderSellsBuys

Google

Net Insider Selling; Shiller P/E Ratio of 34.23

GOOGInsiderSellsBuys

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

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

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

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

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

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

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

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

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

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

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

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

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

The FED

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

 

 

 

 

 

 

 

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

But first a little context…

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

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

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

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

THERE IS NO FREE LUNCH!

THE PARTY IS NEARLY OVER!!

IT CARRIES INTEREST PENALTIES!!!

IT RESTRAINS GROWTH!!!!

THIS MONEY MUST BE WITHDRAWN!!!!!

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

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

That is an incredible statement.

It tells us:

1)   The Fed is openly discussing stocks prices.

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

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

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

Central Bankers are absolutely terrified.

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

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

image1(1)

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

However, even Main Street is exhausted.

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

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

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

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

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

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

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

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


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

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

 

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

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10112016 October 11, 2016

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

Current Positions  (No Changes)

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

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

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

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

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

-5.35, +19.83, +8.88, -5.06

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

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

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

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

marketchartoftheday

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

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

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

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

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

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

Equity Markets – Long Term

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

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

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

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

Market Fundamentals/Economy

medicorefundamentals

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

 

Something smells funny.

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

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

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

schillerratio

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

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

sharebuybacks

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

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

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

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

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

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

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

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

eurostoxx

 

 

 

 

 

 

 

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

nikkei

 

 

 

 

 

 

 

 

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

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

djia

 

 

 

 

 

 

 

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

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

spx

 

 

 

 

 

 

 

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

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

 

nasdaq100

 

 

 

 

 

 

 

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

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

r2000

 

 

 

 

 

 

 

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

agg

 

 

 

 

 

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

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

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

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

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

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

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

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

BREXIT Plus 90 Days

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

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

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

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

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

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

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

feedclutter

Recession Indications

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

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

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

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

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

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

autosales

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

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

bankruptcy

 

06302015 June 30, 2015

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

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

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

Weekly Momentum Indicator (WMI) last 4 weeks, thru 06/30/15

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

-13.64, 5.33, 2.13, -12.8

(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 1993 movie ‘Groundhog Day’, the character played by Bill Murray is a local TV newscaster who finds himself reliving the same day repeatedly, until he finds a way to make some improvements in his character.

Increasingly in the past three months, and for much of the past few years, the news finds itself rotating around the same two issues – (1) that which surrounds the probability of a Greek default and exit from the Eurozone/impact on the remaining Eurozone economies, and, (2) the prospect of the ‘lift-off’ from zero level interest rates by the Federal Reserve Board of Governors, and what impact that slight(!) rise in short-term rates might have on the psychology of the markets.  Both of these issues have created an ever increasing amount of lowered opportunity and higher risk for our TSP assets.  None of the categories in the TSP funds have created decent opportunities this year, without an abundance of risk to go along with any opportunity. There have been thousands of stories and articles on these two topics in the last few years.  These two topics will continue to dominate our news and market reactions, due to their broad reaching impacts and the fact that neither of these issues will be settled until many larger underlying issues are restructured, or, until the inescapable nature of world-wide debt obligations, and the impact of that debt on assets, is eventually resolved.

stats

(click to enlarge)

Equity markets around the world fell Monday on Greece’s apparent imminent default. Asian indices fell nearly -3% in a volatile day of trading, led by the Shanghai Composite. European indices fared no better; the DAX closed with a loss greater than -3.5% after hitting a low greater than -6% in intra-day action.  The Shanghai Composite is already in a heavily corrected mode, down as much as 20% from it’s June 11th high.

Our markets were not immune, with futures trading indicated an opening near -1% lower than last week’s closing prices and that did not moderate into the open. There was little data and few earnings reports to influence early morning action leaving the indices trading lower once the opening bell sounded. The early low was hit soon after the open, followed by a small bounce and then another intra-day low around 11:30. The morning low did not find support, selling continued throughout the day with the market hitting new lows more than once and leaving the indices at the lows at the end of the day.

After the -2.4% move on the NASDAQ, the S&P 500 made the next largest move and perhaps the one with the most notable visual impact. Monday’s action carried the index down -2.09% and created the largest one day drop for at least the last 12 months. Price action broke support levels at the short term moving average, 2090, 2080 and 2060 coming to rest just above 2050. Closing this week below 2060 could indicate a return to true bear market conditions. The indicators have rolled into a bearish territory and are pointing to lower prices so a test the 2050 level is likely. A break below this level, 2050, could carry the index down to the long term trend line near the 2000 level for a total correction near 7%. One thing hasn’t changed – ‘…stairs up….elevator down…’

SPX(click to enlarge)

From the last report in March, and into much of April, the S&P 500 had made no progress in a span of 70 days, in the area of 2090. For that first 70 days, the index closed at 2091.18, basically the exact same place it was on December 29, 2014. Since April, from 2090, the index has ranged from about 30 points higher, to about 30 points lower.  Today, it is at 2063. This is just the sixth time since the March 2009 bottom that Large Caps have stalled for a seventy-day period. Over the last 1,533 seventy-day periods, the average change was 4.35%.   In the chart below, it’s easy to see that the ranges from highs to lows is growing narrower over time, and has been for several years.

 

70-day

 

In the rotation index below, it can be seen that the trend favoring equities is getting weaker, for about a year, showing bursts of life for increasingly shorter periods.

 

Rotation

 

Below is the MSCI World index,  a stock market index of 1,631[1] ‘world’ stocks. It is maintained by MSCI Inc., formerly Morgan Stanley Capital International, and is used as a common benchmark for ‘world’ or ‘global’ stock funds. It has the strongest parallels to the C and I funds.

MCSI4Mo

Below is the same world index over the past 24 months

 

 

 

 

 

MCSI2Yr

Here is a year-to-date performance of the major US indexes, as of Monday, June 29th close.

(click to enlarge)

 

YTD

Greece has, again, dominated the news and the world markets lately, particularly this week, as it will next week.

Effectively, a June 30th due date for  a payment of under $2 billion is not going to be met.  The Greek prime minister backed away from negotiations last week, saying that the conditions before him would place too many burdens on the Greek population.  Capital controls for banks were announced during the Sunday overnight hours and sparked another round of protests. The news, not unexpected, comes on the eve of an apparent to default (the $1.7B) to the IMF.  There is also an additional $8.3 billion due to the EU and the ECB in July and August.  If Greece can’t pay $1.7B now, there is no need in ignoring the $8.3B that they can’t pay in July and August. Controls will keep banks closed for the next few days, limit the amount of ATM withdrawals by Greek citizens to 60 euros, prevent the transfer of money out of the country and large transactions to electronic means only.

Early Monday afternoon S&P lowered Greece’s credit rating to CCC- with negative outlook. They say a Greek exit from the Euro stands at 50% and that without changes a default is inevitable, likely to occur within the next 6 months. Later in the day Fitch downgraded the Greek banks to restricted default. Greece, or PM Tsipras at an rate, continues to snub creditors and is urging the people to vote no on a referendum to accept terms.  Over the last five years the Greek debt has been restructured to where the IMF, EU and ECB own 90% of it. The equivalent of a Greek bankruptcy should be relatively contained and not impact the rest of Europe. Draghi will dump several hundred billion euros of QE into the market and the Greek impact will only be a blip on the chart.  Here are the likely paths over the next month, in a nutshell. (click to enlarge)

Greek

 

Puerto Rico added a little downdraft to Monday’s sell-off. The governor of the heavily indebted island territory announced today, of all day’s, that the debt load was unpayable. The island needs debt restructuring and reforms, long overdue, and is not expecting to receive aid from the federal government.

 

Bonds

Our F-fund has taken a minor whipping most of the year.  This has been for issues that are out of the ordinary.  The demand has fallen for our bonds, along with a heavy increase in demand for German bonds, ever since European Central Bank President Mario Draghi announced his intention, late last year, to commence U.S.-style quantitative easing, a debt-buying program aimed at keeping yields low and goosing the financial markets with liquidity.   Our bond prices have fallen, from sellers moving out of our 10-year bonds, and this reduces the prices of the F-fund (iShares Barclays Aggregate Bond Fund), as it also increases the interest rates of related U.S. debt instruments, like the 10-year treasury note.  The iShares have lost 3.6% since the high point of the year in early February.  I do not expect this condition to continue as the negative pressure continues to build in equities.  There has yet to be a ‘flight to safety’ into bonds, which benefits the F-fund, since the price pressures on equities/stocks has not yet reached a pressure point.  The additional pressure on bond yields in the Eurozone, tied to the Greek debt problems, has been an additional upward pressure on interest rates, in Europe and here in the U.S.  This will reach a tipping point and a quick reversal, as usual.

AGG

Even this ‘whipping’ has only amounted to about -3.6%.  This is why I don’t move in and out of bonds rapidly/frequently to avoid what are normally minor losses – losses that generally reverse within months under conditions of greater bond price stability/weakening fundamental economic conditions, conditions that never actually go away except over the very long term; we are in a chronically weak economic condition overall, with only brief glimmers of daylight.

07182014 July 18, 2014

Posted by easterntiger in economic history, economy, financial, gold, markets, oil, silver, stocks.
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Weather Report 07182014

Current Positions  (No Changes)

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

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

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

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

-2.7,-0.5, +14.7, +4.87

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

Margin debt reversal

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

MarginDebt052014

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

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

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

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

Why?

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

GDP Shock

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

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

Funds YTD

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

S Fund                      I Fund                        C Fund                  F Fund

Early March        Early March            Early March        Early March

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

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

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

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

ALL-TIME HIGHS/RECORD HIGHS

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

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

(1)

(2)

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

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

What Does the Rise of the Dow Really Mean?

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

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

Negative Interest Rates

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

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

Market Technical Positions

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


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

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

FTSE

 

 

 

 

 

 

 

 

 

 

 

CAC

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Gold/Gold Stocks

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

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

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

GLD

 

 

 

 

 

 

 

 

 

 

 

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

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

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

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

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

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

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

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

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

 

Market Complacency/Record Low Volatility

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

VIX

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

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

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

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

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

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

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

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

Oil

Oil

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

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

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

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

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


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



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

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

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

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

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

Real Estate

RealEstate

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

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

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

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

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

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

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

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

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

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

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

 

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.

10152013 October 15, 2013

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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.

06242013 June 24, 2013

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Weather Report 06212013

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) last 4 weeks, thru 06/21/13

+0.59, -7.61, -12.09,20.02 (S&P100 compared to exactly 3 weeks before***)

(3 Friday’s ago/2 Friday’s ago/1 Friday ago/this past Friday)

My previous intention to follow-up the last report with just a gold/silver update, due to their importance, was interrupted by the fast moving events in stock and bond markets, plus, the additional unexpected events in gold and silver since the last report.

S&P500 had it’s worst week of the year.  

5 year treasury note interest rates had their fastest climb in 50 years. The rise in the 10-year note from 1.6% on May 2nd to 2.51% on Friday was a 52% rise.  This is the largest rise on record for that time frame since records have been kept. But, since interest rates are tied closely to economic growth and inflation, either proof of economic strength, or, proof of inflation to a similar extent will be necessary to maintain rates at these levels.  (May year-over-year inflation rate is at 1.36%, dramatically below the 3.91% average since the end of the Second World War and over a full percent lower than its 10-year moving average.)  Neither are likely, meaning rates will re-adjust from this panic spike.

This time, rates on the 10-year note moved from 1.6 to the current 2.5.  In 2010, they moved from 2.3 to 3.7 before stopping.  In 2008/9, the moved from 2.0 to 4.0 before stopping.  So, notice that the ‘high’ rate peaks have dropped from 4%, to 3.7%, and now to 2.5%.  Until something else changes, the trend is still down, just as it’s been for over 32 years.

With rising rates and falling stocks, there is nowhere to go in the TSP, except to the G.  This rarely happens except for short periods of time.  Normally, rates fall when stocks fall, showing the shift from risk to safety, or, from safety back to risk.  Bonds lose their safe status temporarily when the Fed is not emphatically indicating intentions to keep rates low.  Their interpretations of economic strength are not well-founded, as proven by the rapid reaction to rising rates weakening housing demand, even at these low rate levels. China’s manufacturing purchasing manager’s index is in a contraction phase.  Plus, a cash crunch is getting a hand’s off signal from their central bank.  Neither of these are good for the rest of the world’s dreams for stability or growth. The rising rates on this chart go opposite from the F fund.  This chart is updated more frequently than the F fund chart.  I’m holding position, due to the enormous spread between rates and inflation, which will correct, without a large ‘drawdown’ occurring.

Two normally diverse markets breaking down at once could be a very bad sign, just as it was at the stock peak in 2007.  Even routinely defensive stock sectors, such as utilities, telecom, materials , consumer staples and health care were some of the worst performers.  One explanation could be that heavy selling in so many sectors is due to a response of over-leveraging; too many people with their resources spread too thinly.  Near-record margin debt levels will ultimately lead to some panic selling.

The  run down in the F fund over the past 5 weeks was deceptive, as it paused as if to stabilize 9 times since the top in mid-May.  Rapid interest rate increases in short periods of time of the type that we’ve seen in the past 5 weeks are just part of the game.  There have been 27 such occurrence just since 2007, and 4 other times in the past 18 months.  These quick, news driven bursts are nearly always followed by an equal or longer period of falling back to an average.  The 6/50 rule says that there is a 50 basis point change in interest rates at least every 6 months.  (50 basis points are equal to ½ percent). For all of the chatter about the impact of higher rates, these rates are no higher than the lows of 4 years ago.  In other words, for the past 24 months, we’ve been experiencing some of the lowest rates in over 60 years anyway.  Bouncing off of 60+ year lows is really no cause for alarm. What is alarming is that even these movements have consumers nervous enough to halt home purchases, showing up in a noticeable reduction in mortgage applications.

Gold and silver appeared to settle for almost 6 weeks following their dramatic corrections in mid-April.  I was looking for another buying opportunity.  Sensing no surprises ahead of the latest Fed meeting last week, I purchased another incremental position.  I was prompted by a ‘sale’ from my favorite purchase site, of 0.99 over the spot price of the day.  I did experience another minor drop in the price of silver after my purchase.

Regardless, these large moves in both directions are classic commodity movements and are no cause for alarm.  Traders do not simply ‘buy and hold’ as retail investors are predisposed to be, or, are led to believe is the right behavior.   Traders ‘trade’ to get the most out of short-term movements, to pocket profits, then, to reposition for the next move.

Statistically, gold and silver are flashing ‘buy’ signals, being further below the mean than at any time since 2003.   Here are some important notes.

* Silver is ‘oversold’, requiring a 147% advance to return to it’s 2011 high.

* Silver rose 428% from 2001 to 2008.  It declined by 60% from that high.

* It then advanced 493% to it’s 2011 high.   It has now declined by 61% from that high as of this past Friday’s prices.

* Of 41 bear markets since 1879 in gold & silver, this 2-year decline from the last significant high is #7 in time and #10 in the percentage decline.

* Of  26 silver bear markets since 1858, this one is #14 in terms of time and #6 in percentage decline.

* A cyclical low is due in the precious metals before September of this year.

Heavy buying at this dip is occurring in both India and China, traditional heavy gold consumption areas. Historically, gold has regained at least 80 percent from each bottom within 3 years.  And, even that would be an under-performance of expectations, since banks have now gone into very strong buying positions.  Even if silver and gold drop further, I plan to buy silver at each additional $2/oz drop in anticipation of regaining profitable positions within 1-2 years.

All indications are that the highs in May, around May 22nd/23rd, are the highest stock prices we will see until a measurable, if not substantial correction is complete.  The 23% advance to 1687.18 on the S&P500, from November 16th  to May 22nd, at 4 months and 22 days is #44 out of 135 advances of this type since 1886, and #56 in terms of percentages since that time.  Because the average advance is 26% in 6 months and 6 days, probabilities are very strong that no further upside can be expected.  We can expect to fall about 10% from that high, and, where 56% of the corrections are completed in just under 2 months., 80% are complete within 3 months, and, 90% within 4 months.  Similar corrections last year lost about 11% each time, and with each pullback being complete in just under 2 months.

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.

 

 

11192012 November 20, 2012

Posted by easterntiger in economy, financial, gold, markets, oil, silver, stocks.
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Weather Report 11192012

Current Positions  (Changes)
I(Intl) – up to 5%*; S(Small Cap) – up to 5%*; C(S&P) –up to 5%* ; F(bonds) – up to 20%; G(money market) – remainder

Weekly Momentum Indicator (WMI***) last 4 weeks, thru 11/19
-9.38, -26.36, -27.34, -15.02
(3wks ago/2wks ago/1 wk ago/today)

****search the blog for a detailed description of this personal indicator

Markets alternate between periods of fear and hope.  Hope for an agreement to avoid the automatic mechanisms of the fiscal cliff at the end of the year have taken to the stage, while fear of failure and, to some extent, the European debt crisis have moved slightly away from focus.

As a part of recent fears, Apple had fallen $175/share, or 25% from its’ record high at $705.  As it represents a larger portion of both the NASDAQ and the S&P100 than any other individual stock, Apple and the NASDAQ led the indexes up earlier this year,  and both led all indexes down over two months.  It’s not likely that a solid reversal will occur here without Apple and the NASDAQ.  Another cue to a reversal would be the emergence of a bond interest rate low/bond price high, with volume significant enough to drive money from the safety of bonds to the an attractive risk in equities. With some momentum, a light holiday week rally is almost a guarantee.

Before today’s advance, the S&P500 (SPX) had fallen 8.1% since the high on October 8th.  It had reversed 62% of it’s gain into that October 8th high as measured from the last low on June 4th.  This 62% reversal from a peak is often seen by market technicians as a key point to gather strength for a reversal back up, not necessarily AT this level, but, from NEAR these levels. This level is seen as major support for the Russell 2000 small caps.  Further, light volume tends to favor upward reversals during holiday weeks, at least barring any additional fundamentally bad news from the remainder of the financial markets, internationally or domestically.  I would recommend higher allocations of equities if I did not believe that a slightly ‘lower low’ might be in the cards before the next higher and more significant advance takes place.  If there is another low within the next two weeks or so, I will suggest another 5% increment in equities toward an expected year-end, QE3 induced/supported, fiscal cliff optimism rally.   Based upon the S&P500, S&P100 and Wilshire 5000 composite all returning back above their key 200-day moving averages today (after spending 3 days below), this is a positive signal for the short-term, favoring upside.  Potential upside movement is approximately 4 times the potential downside movement, over the short to intermediate term.

In my previous full post, the recommendation to hold a half allocation* of equities based upon the prospect of an advance was hinged upon the fact that the Dow Industrials had not experienced a 1% decline the entire quarter. Historically, this bode extremely well for the prospects for a higher advance.  However, on October 10th, I suggested an exit from equities based upon two days in which the Dow Industrials exceeded this 1% decline.  There have been 4 other days since the October 10th exit recommendation where this decline has also exceeded 1%.   Prior to today, there had been only 2 positive days exceeding 1% since October 10th.

In spite of any upward reversals between now and the end of the year, we could see a 35-50% or more drop in the S&P within the next 12-24 months, simply on the basis of long-term projections, which would refer to recent levels as likely 4-year highs.

Charlie Minter and Marty Weiner of Comstock Partners have the following to say in a brief last week….” the factors that have sparked the stock market in the last few years have come to an end.  In our view, this is readily apparent in the change in trend since the peak on September 14th.  We think that date will turn out to be the top for some time to come.”  However, shorter term, Doug Kass, founder and President of Seabreeze Partners Management, Inc suggests, “…the elements of a fiscal cliff compromise are in place and that the market is exaggerating the chance of failure. …Stocks should follow to the upside.”  These are not necessarily conflicting views, as the Comstock view takes the next few years into account, while the Seabreeze view focuses more on the shorter term. From these two views, there appears to be some upside at this point. However, it does appear to be limited.

Some casual observers attributed the sharp (2.4%) post-election sell-off in US equities to President Obama’s re-election.  However, within hours after the election results, the major causes were developing elsewhere; and they remind investors of pre-existing concerns that, unfortunately, won’t go away quickly.

One key observer was on a trade floor when US equities started heading south on that morning following the election.  It was a little after 7 A.M. on the east coast.  The trigger was a speech by Mario Draghi, the President of the European Central Bank. The result was an immediate sharp fall in European shares and in US futures.

Draghi echoed a theme highlighted elsewhere: the slowing of the German economy, Europe’s largest.  Together with TV scenes of violence on the streets of Athens, this reminded investors that Europe’s crisis is far from over.

Draghi’s remarks were amplified by investors’ legitimate concerns on how or whether the new Congress and President Obama would both work faithfully to resolve the fiscal cliff – a self-inflicted problem that, if poorly handled, would push the US into recession.  And this relates to a deeper and important question; and one that we need to monitor carefully in the months ahead. There is some serious soul searching ahead for our two political parties.

The issues that challenge both political parties will be in play as politicians struggle to deal with the fiscal cliff. They will be even more visible as politicians seeks to do in this term what eluded them earlier –mobilize sufficient congressional support to maintain policies that sustain high growth, create meaningful jobs, and improve medium-term financial sustainability.  Positive rumors on Friday on the progress of negotiations on the fiscal cliff resulted in a strong reversal off earlier lows of the day.

In addition to the fiscal cliff headlines, but, never far away from the bigger picture, Greek parliamentarians recently took the final major step needed to unlock a fresh injection of cash into their imploding economy.  Now the focus shifts to external creditors.  Expect them to also come through in the next few days. Yet none of this high drama meaningfully changes the awful outlook facing the country’s struggling citizens.

There remain at least three huge problems – with the approach being pursued by Greece and its European neighbors. And they are interconnected in a manner that aggravates the country’s outlook.

First, the design of the program is still flawed. If fully implemented, it does very little to counter the forces of economic contraction; and it does not meaningfully improve medium-term fiscal solvency. And this is even before you focus on the underlying operational assumptions which are, once again, way too optimistic.

Second, external creditors are providing too little support – not only via new cash but, as important, in terms of debt reduction. The former is needed to deal with mounting domestic payments arrears and upcoming obligations. The latter is required to overcome the “debt overhang” that undermines the inflow of capital that is so critical to private sector activity, investment and employment; and this needs to include debt reduction on official loans.

Third, the again-revised program will not crowd into productive investments. Companies clearly see the problems. Much more importantly, Greek citizens are losing the little trust they still have—which isn’t much – in their institutions of government and in the solidarity of their European neighbors.

At best, this latest iteration of yet another Greek bailout will buy a little more time. It will do nothing to meaningfully improve the prospects for the country and its besieged citizens. For that, Greece and Europe need a meaningful reset of their operational and institutional approaches.

Light crude oil is back at $89/barrel, near a level that has held declines going all the way back to late 2009.  There is little or no expectation of further declines below this support level in the absence of significant unfavorable economic news around the world. Similarly, unleaded gasoline is also in a range where price support has existed all this year.  Therefore, no further decline in gasoline prices should be expected under normal conditions.

Interest in gold is just off of a two-month low.

Interest in silver is at a nineteen-month high as traders moved in to ‘buy the dip’ near $32.50.

09242012 September 24, 2012

Posted by easterntiger in economic history, economy, financial, gold, markets, oil, stocks.
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Weather Report 09242012

Current Positions  (Changes)
I(Intl) – up to 5*%; S(Small Cap) – up to 5*%; C(S&P) –up to 5*% ; F(bonds) – up to 30%; G(money market) – remainder

*-these I, S & C entries are ½ positions; a round of selling/profit taking is possible, but not guaranteed, within the next few weeks after the end of the quarter ‘window dressing’. Positions will be doubled with the initial ½ position on that dip.  If a correction exceeds projections, I will notify of my exit at -5%, which will result in a loss of 0.75% of the total TSP balance versus a possible upside of about 6% between now and the end of the year.  This is a reward/risk ratio of 8:1.  When the DJIA reaches an entire quarter (63 trading days) without a 1% decline, while recently trading at a 52-week high, and since 1900, there were 16 such cases,  over the next six months, the Dow was positive all 16 times, with a median return of +6.0%.  The maximum decline during those periods averaged -3.5% versus a maximum gain that averaged +8.0%.

Weekly Momentum Indicator (WMI***) last 4 weeks, thru 9/21
-1.16, +7.77, +22.73, +25.13
(3wks ago/2wks ago/ 1 wk ago/this week)

Amid continuing concerns about the US economy and fiscal policy (taxation/spending), the European debt crisis, and the slowing growth in China, financial markets have been subject to a higher level of uncertainty.  The slate of factors that are bearish for equities at this point is significant. One economic bright spot revolves around the iPhone5, which is projected to add as much as 0.3 to the quarterly GDP.  That’s impressive.

From a technical standpoint, the recent Fed announcement to continue another extended round of asset inflation through QE3 occurs at recent market highs, unlike in the past when QE was initiated nearer to market lows.  This move was in anticipation, or fear, of recent rounds of unusually weak data around the world. Given this open-ended, artificial support by the Fed combined with the traditional fall rally into the end of the year (money and fund managers like to show results into year-end to justify higher bonuses), there is probably a short 2-4 month window where stock indexes should continue an advance, albeit a likely weak one, into December.  Net outflows from equity markets are still expected to maintain their negative trend, as has been the case since mid-2008. Bond inflows have maintained strength.

At +16% in just over three months, the current leg up in the cash S&P 500 ranks as only the 88th longest and 50th greatest (of 134), in percentage terms, since the advent of daily stock-price averages in 1886. A median leg would lift the index 3.2% higher in just under 5 months, so this market can’t yet be considered overbought. Gains over the past two months must be taken into proper context.  The bulk of any increases since the start of August occurred over TWO days, following the announcements of European Central Bank Stimulus and the U.S. Fed announcement of quantitative easing.  Overall volume levels continues to indicate very little interest in continuing a strong and reliable trend.

The next substantial overhead resistance comes in at the March 24, 2000 top of 1,552.87, followed by the slightly higher October 11, 2007 record peak at 1,576.09.  This is unlikely to occur quickly. This index closed at 1460 on Friday.

For much of the past seven weeks, world markets have traded around a combination of market data and a series of meetings and announcements from every corner, summarized here, by date.

8/30 – Eurozone retail sales decline for 15th straight month
8/31- Fed Chair Bernanke makes no major announcement at the ‘Changing Monetary Policy’ speech at Jackson Hole, Wyoming, after the market stood basically still for the month of August in waiting as if he would; Japan Manufacturing index falls to 16 month low, still in contraction mode; Spain’s budget deficit already exceeds the forecast for the entire year
9/3 – China New Export orders drop most since 3/09
9/6 – US Services index rises, showing divergence between services economy and manufacturing economy; European Central Bank initiates bond buying program (stimulus)
9/7 German drop in construction new business, services new business and manufacturing new business; China announces stimulus program
9/9 Japan’s revised GDP growth cut in half; German manufacturing declines to 37-month low
9/11 – Canadian exports including energy, autos, agriculture, forest products and machinery/equipment collapsed in the latest report
9/12 – Fed Meeting and announcement of QE3/QE ‘Infinity’, $40B/month purchases of mortgage-backed securities, duration undefined ‘until the labor market/unemployment improves’ (stimulus)
9/13 – Lakshman Achuthan of Economic Cycle Research Institute (ERCI) says the US is in recession now, since June
9/17 – Oil plunges in delayed reaction to new Fed QE policy, sensing major disruptions underway to world-wide economic trends
9/19 – FedEx profit down 1.1%, FedEx shipments, down 5% yr over yr. FedEx shipments are highly correlated to GDP trends; UPS cut it’s earnings outlook; Japan will increase the size and duration of it’s bond-buying program (stimulus)
9/21 – Dow transportation index ends at lowest level since June, showing conflict between current and future trends; (the Dow Theory holds that stocks cannot advance strongly if transportation stocks are indicating weakness.)

Opinions on the current round of quantitative easing, round 3, have been strong and mostly non-supportive.

Paul Volcker, Fed Chairman under Presidents Carter & Reagan
“I think people think the quantitative easing helps pep up the stock market and may reduce long-term interest rates a little bit. But I don’t think it does enough to make a really significant difference in the basic outlook, which remains one of limited job creation in the private sector, but not really enough to reduce the unemployment rate at all rapidly. There is slow progress toward de-leveraging and that’s the outlook. And the Fed action doesn’t remove the need for tough fiscal policy in a medium-term horizon.

From the unofficial transcript of an interview with Dallas Federal Reserve President Richard Fisher today, Tuesday, September 18th, at 7AM ET on CNBC “Squawk Box.”
“…and I feel strongly about this. Our job is not to provide Ritalin to the traders…our job is to do what’s in the long-term interests of the American people.  The stock market provides what economists refer to as the ‘wealth effect…”

Nigeria’s Central Bank Governor Sanusi put it quite bluntly: The European Central Bank and US quantitative easing driving oil price.

How is QE3 supposed to lead to job growth?
1.    Increasing the supply of – securities should raise market liquidity, sending investors to the rising prices of riskier assets and overall wealth and to push down mortgage rates
2.    Stimulating the housing market, raising housing prices, raising consumer confidence and consumption
3.    Stimulating job growth

Record unemployment in the Euro area and a jobless rate stuck at more than eight per cent in the U.S. may crimp an export rebound, while slumping corporate earnings, bad debts at banks and property curbs are restraining investment in China.

Global purchasing managers indices represent the state of manufacturing in countries around the world.  Right now they indicate slowing manufacturing growth world-wide.  This suggests falling demand in the global economy.

One of the biggest concerns surrounding Europe’s future is the impact another recession would have on it’s debt crisis.  Right now it’s telling us Europe may be headed for a deeper recession than many analysts may be anticipating.  This could wreak havoc on deficits and debt reduction plans, leading to an even deeper crisis elsewhere.

In China, the Purchasing Managers Index fell to 49.2 in August from 50.1 in July, the National Bureau of Statistics and China Federation of Logistics and Purchasing said from Beijing.  50 is the line between expansion and contraction.

China’s manufacturing unexpectedly shrank for the first time in nine months as new orders contracted and output rose at a slower pace, signaling the slowdown in the world’s second-biggest economy is deepening.

  • Manufacturing sector operating conditions worsened at the sharpest rate in 41 months
  • Renewed decline in factory output is signaled
  • New export orders fell to the greatest extent since March 2009
  • Average input costs down at steepest rate in 41 months
  • New export orders contracted at the fastest pace since March 2009, this, combined with a record high in stocks of finished goods sub-index
  • China’s exporters are facing increasing difficulties amid stronger global headwinds

Australia & New Zealand Banking Group Ltd cut its estimate for China’s full-year growth after the report.

In spite of QE’s expected positive impact on gold and silver, both of which are expected to significantly advance over the next two years, the outlook for oil is still negative, against conventional QE wisdom of raising commodity prices by pressuring the dollar. Oil is expected to continue to react to the falling usage figures, continued slow decline in GDP and the heightened concerns of a return of full recessionary conditions.