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04222017 April 22, 2017

Posted by easterntiger in economic history, economy, financial, markets, 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 04/21/17

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

-11.3, -3.43, -6.54, -1.94

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

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

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

The chart below shows the wasted motion currently underway.

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

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

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

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

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

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

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

Each sector contains different number of companies.

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

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

Energy                                35                                 17.40           -41.80**

Consumer Defensive          41                                  23.30            19.20

Financial Services               70                                 23.70            16.00

Industrials                          70                                 23.90             21.50

Utilities                              28                                  25.00            34.20

Healthcare                         59                                  27.40            20.60

Basic Materials                   23                                  27.70            35.60

Consumer Cyclical             85                                   28.20            21.90

Technology                       60                                   30.80            24.10

Communication Services   9                                     31.20            20.80

Real Estate                        24                                   47.80            22.70

S&P 500                           500                                  29.10            26.40

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

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

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

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

Similar patterns show up in the F and I funds.

S fund’s 50 day moving average is 57.08.

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

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

F fund performance relative to C fund

F fund performance relative to S fund

F fund performance relative to I fund

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

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

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

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

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

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

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

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

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

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

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

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

Will the Fed Burst the Bubble in 2017?

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

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

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

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

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

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

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

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

Final Note

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

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

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

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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

 

11192012 November 20, 2012

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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.

05212012 – Interim May 21, 2012

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

I(Intl) – exit

S(Small Cap) – exit

C(S&P) – exit

F(bonds) – up to 30%

G(money market) – remainder

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

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

Last 4 weeks, thru 5/21

+0.19, -10.26, -45.33, -25.81

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

It’s time to recover some of the profits gained from the steady climb in the F fund levels that match a combination of (1) record high bond prices, (2) record lows on the 10 year treasury bond, and, (3) the longest streak of rising prices/falling rates since the debt crisis of 1998, at least in terms of time. (the ‘crash’ in 2008 represented a larger change in falling rates/rising prices compressed into a shorter period of time.)

Having used none of my moves this month, I’ll protect my gains in cash (G fund), as I await on either (1) the resumption of the trend toward still higher prices/lower bond yields, or, (2) a reversal downward in price for any hint of some pause in the piling on of weak data from around the world.

As for the data from past weeks, U.S. growth rates are starting to fade, China is slowing more than expected, and much of Europe is in or close to recession.  Further, there’s more Greek debt turmoil (a threat to leave the European union and a suggestion to totally back out of the loan program), weakening Spanish banks (almost 2 dozen banks were downgraded), and, the start of ‘bank runs’ in Greece over the past several weeks, plus there are hints that the same could happen in Italy, Portugal or Spain.  If this happens, a dangerous spiral of fear, tightening capital flows, etc. will lead to still lower rates and another downward slide in prices of the euro, oil, metals prices and stocks can be assured. In the past week, every major investment category fell, except gold,, from 2 to 9%.  Gold only rose 0.75%, but, that was only back to levels from 2 weeks ago, and still barely back to break even for the year.

And, as expected, stock prices are falling much more quickly than they rose, (typical in bear markets) with prices having fallen back to levels from early January, from the peaks of the year reached just 3 weeks ago.  These current levels are also back to the upper levels reached in 2011.  Deja vu. Same place, different year.

If the European crisis gains momentum, every investment category will continue to suffer, except bonds, as more selling of assets across the board will be forced to cover shortages on other investments (margin calls) by major investors, while bonds will be seen as the haven for safety, drawing much of the money coming out of other areas.  That would be more good news for the F fund.

01152012 January 15, 2012

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

I(Intl) – exit

S(Small Cap) – exit

C(S&P) – exit

F(bonds) – up to 40%

G(money market) – remainder

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

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 1/13

+12.17, +2.68, +27.25, -10.61

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

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

For a broad view of the financial markets, I want to start with several facts.  First, the markets are bouncing off of half-year highs.  Second, these highs are LOWER than 3 bounces off of 2011 highs. Third, 2011 highs were LOWER than the highs of 2007.  Therefore, unless you KNOW that you are buying at lows, this is NOT the time to fall for the ‘stocks always come back’ mantra, because you can lose for years before they finally do return you to profit.

You would think that with all of the encouraging news over job growth and other positive year-end highlights, that stocks could do better for 2011 than just barely finishing below or just above zero, depending on the index.  Well, many factors were at play, and, other markets world-wide performed much worse.

Here are some sample results from 2011.

Dow Industrials +5.33%/S&P500 -0.04%/Nasdaq -1.80%/Russell 2000 -5.45%/Banking Index -25%/Biotech Index -15.89%/Broker Index -31.7%/Health Care Index +10.20%/Crude Oil +8.38%/Silver -10.57%/Gold +10.2%

Ireland +0.6%/New Zealand -1%/ Mexico -3%/ UK -6%/ Korea -11%/ Australia -15%/ Germany -15%/ France -17%/ Singapore -17%/ Japan Nikkei -17%/ Brazil -18%/ Hong Kong -20%/ Shanghai -22%/Russia -22%/ Italy -25%/ Greece -52%

As you can see here from other world market performance, there is one thing that can I can repeat, as I have many times before – IT IS BETTER TO BE CONCERNED WITH YOUR STABLE AND RISING BALANCE, ALBEIT A SLOW RISE, THAN TO LOSE MONEY THAT YOU MUST RECOVER LATER FROM OVER-REACHING YOUR RISK LEVEL  during these very risky times.

Here are the changes to TSP levels and major indexes since last report, first from 12/9 to year end. (negligible changes). The 2nd table compares current performance year-to-date.

(Last End Of
Report) Year 12/9 to

12/9/11

12/30/11

12/30 Change
C Fund

15.48

15.53

0.32%

S Fund

20.63

20.53

-0.48%

I Fund

17.94

17.64

-1.67%

F Fund

15.23

15.35

0.79%

S&P500

1255.19

1257.6

0.19%

S&P100

568.17

570.69

0.44%

Nasdaq

2646.85

2605.15

-1.58%

FTSE(UK)

5529.21

5572.28

0.78%

CAC(FR)

3172.35

3159.81

-0.40%

DAX(GE)

5986.71

5898.35

-1.48%

 Average     -0.31%
A majority of the total changes over the past month have
occurred on just two days, after European markets reacted
positively to more plans for resolving their debt crisis.
Gains this small over such long periods of time are, of course,
high risk, subject to loss within hours or days under the current
conditions and should be ‘chased’ with extreme caution.
12/9 to 12/30 to
12/30 Change

1/13/12

1/13 Change
C Fund

0.32%

15.93

2.91%

S Fund

-0.48%

21.28

3.15%

I Fund

-1.67%

17.68

-1.45%

F Fund

0.79%

15.41

1.18%

S&P500

0.19%

1289.09

2.70%

S&P100

0.44%

584.28

2.84%

Nasdaq

1.58%

2710.67

2.41%

FTSE(UK)

0.78%

5636.64

1.94%

CAC(FR)

-0.40%

3196.49

0.76%

DAX(GE)

-1.48%

6143.08

2.61%

 Average  -0.31%       1.91%

(Note – for the benefit of those long-time list readers who might wonder about my lengthy reports, and, for those relatively new readers, seeking an introduction, I include much detail whenever possible for this very simple reason – TSP management is not a simple process, and it is EXTREMELY important to all of us, as it represents a critical asset!!!  These additional details are included just to attempt to provide you with the causes of many of the events that AFFECT our funds, some directly, most indirectly.  My goal is to ‘jump the headline’.  It’s usually too late by the time news reaches the wires.  We have to know what’s probably ‘going’ to happen, not what’s already happened. If you’d like to know more about some of my numerous sources, both free and paid, just contact me.)

If the markets do not get past this current set of issues in some positively efficient fashion, which is unlikely, we could see the start of another dramatic turn downward in prices within the next few weeks, no later than April.  This next downward trend would likely continue through much of 2014-15 (next bottom), and could shave another 40-50% off of market price levels by then.

Last month, I identified three upcoming December debt obligations for Greece.  All three obligations were met without apparent difficulty, or so it appeared.  BUT – within a matter of days after the 3rd payment on December 31st, Greece officially announced that they would need a 2nd bailout prior to meeting any future obligations!

If that is the case, aren’t they, technically, re-borrowing some of the 2.864 billion Euros as an offset to what they paid in December? Some would insist that they were already in default as soon as the ‘package’ to relieve them in October was delivered (some are already calling it a ‘soft default’), since it erased 50% off of all of their existing obligations; and whose surrounding false optimism fueled much of the one-month, world-wide stock market rally. Interestingly, the yield on the 1-year Greek bond was 50% in August.  It is now over 400%!! Sounds like a great deal, until you ponder that they AREN’T PAYING the note holders all they’re promising already. Greece is a Ponzi scheme!

You can count this as the first major threat to the 2012 financial market.   As such, it didn’t take long for the Standard & Poor’s rating agency very long to recognize the impact on another Greek bailout by following through late Friday on earlier warnings to downgrade the credit quality of a number of Eurozone and other nations., including full downgrades by two levels for Portugal, Italy, and Spain, and a downgrade of one level of France and Austria.  (A downgrade of Japan is also being discussed today.) They all must cut costs, be prepared for higher risks in further lending & borrowing, will be hurt worse by recessions, and, will suffer competitively with other countries who are in better financial condition.  With these downgrades, Greece’s ability to gain an upper hand on their current requests, so, their ‘official’ default (beyond the ‘rearrangement’ of last month that was already, technically’, a default,) is virtually assured to occur in a matter of weeks.  This would be ‘hard’ default.  This will ripple into the rest of Europe and to us in some very measurable ways within a very short time.

Here are some additional, key issues concerning the European debt crisis that cannot be ignored.

* European bank borrowing from the European Central Bank has more than tripled since the summer

* GDP growth for Portugal & Greece is negative, or, recession levels; Spain is under 2%.

* Unemployment is over 15% in Spain and Greece.

* Bank of Portugal says GDP to shrink more than forecast in 2012 and forecasts GDP contraction of 3.1% in 2012; risks to their forecasts are clearly focused on downside risks.

* Italy must sell more than 10 times the debt in the next two years than they sold in 2011.

But, what does all of this have to do with us?

CAPACITY!

Obviously, financial resources aren’t infinite.  Therefore, whenever resources are committed to those who are over-obligated, those resources used for their relief are now unavailable to be used elsewhere.  You won’t here this admitted to by our people in charge here, but, we are already allowing foreign banks temporary use of available short-term funds, many of which are bank-to-bank, overnight loans.  Since this debt crisis, these relatively normal overnight loans have increased in both amount and frequency.  This is assistance that can only be in one place at once, so, if our own banks need assistance, they can’t get it.  As they say, the squeaky wheel gets the grease.

There is also inadequate protection in the US banking system against the kinds of negative impacts that these issues can have on the European banking system.  They all are connected, unfortunately, through the web of international commerce.

One of the biggest fears at this point is the concern that consumers will react to any signs of trouble with a flood of withdrawals, otherwise known as a ‘bank run’, such as what has occurred frequently in the past during other financial panics, including the Asian crisis of 1998. Several U. S. banks closed in 2008 following bank runs, including the IndyMacBank, a mortgage lender.  Later in 2008, Washington Mutual failed to survive a bank run and was forcefully acquired by Chase.  It took 10 days for customers to withdraw over $16 billion dollars.

The two biggest threats for European bank runs are (1) the natural reduction in fair value of financial liabilities, such as, the equity that has been destroyed by 50% write-offs, referred to as ‘haircuts’, recently handed to Greek liability holders, or (2) failure in responding to retail banking customers to their requests for withdrawals of their funds on deposit, such as, overdrawing the TEN PERCENT of the total balances, which is all that banks are required to keep on deposit to cover all of the depositor accounts. In fairness, (2) is unlikely to happen suddenly, however, this is also a bank run threat if customer demands occur over a period of weeks or months.

Our funds – through all of this, as you can see above, the equity indexes have only managed to squeeze a small degree upward, on much more than two days action over the past 30 or so days.  This is small gain/high risk.

We hear stories about how our economic picture is improving, so this should bring us confidence, right?

Let’s take a look at one example I just saw of our ‘strength’ that reads like this.

‘Las Vegas had record home sales in 2011’. Hidden in the details???  Over 74% of these homes were sold under distressed conditions, including short-sales and purchases from bank real-estate-owned (REO) categories.  Face it.  Money was lost by many previous buyers, current sellers and in-between lien holders or guarantors in order to create these ‘record sales’.

Therefore, watch out when someone gives you ‘good’ economic news.  Ask to what they’re comparing it. Even ‘better than expected’ news can actually mean ‘was expected to be much worse, so, the next one just might be worse’.

Meanwhile, our bond fund, the F, should have reacted with weakness, with falling bond prices, IF the suggestions heard in the media of our improving economic picture was to be believed. However, these bond prices have NOT weakened.   I am believing that bond prices, and the F fund, will head higher when the next round of stock declines kicks in within a few weeks.  Scared money will run for the relative security of the ‘warm spot’, and that spot has been bond prices through each of our recent ‘scared into safety’ runs. Continued record low interest rates will also be the result here in the U. S., in spite of rising rates in indebted Eurozone economies.

12092011 December 10, 2011

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

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) – exit G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 12/09

-29.43, -39.7, -5.93 +20.38

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

This is how I began the previous post – “…At today’s close, markets are back to where they were 7-8 weeks ago…”

So, other than lots of ‘rallies’ and ‘selloffs’, what’s changed in 5 weeks?

11/1/2011 12/8/2011 Percent Change
S&P500 – C Fund Proxy 1218 1234 1.31% Moderate Risk
S&P100 547 559 2.19% Moderate Risk
Dow Industrials 11657 11997 2.92% Moderate Risk
Nasdaq 2606 2596 -0.38% Moderate Risk
EFA – I Fund Proxy 50.74 49.8 -1.85% High Risk
AGG F Fund Proxy 109.68 109.45 -0.21% Low Risk

As the table shows, the net result of this hyper-sensitivity to market-related news is essentially minimal over periods of weeks, or months, and, due to high volatility, subject to quick changes in positive or negative posture without notice.

Reliable views of how the markets are performing cannot be gained by simply witnessing price action. For example, in spite of the appearance of relatively active but flat markets this week, so-called money flow indicators show that there was more selling than buying on 4 out of 5 days this week.

On the one hand, news and headlines trumpeted October as producing the best October gains since 1987.  Never mind the fact that it began from one year lows and was fueled by optimism and speculation since found to be falsely justified.  In contrast, November ended with the worst Thanksgiving week performance in 79 years.  The normal ‘Thanksgiving week rally’ failed to show for only the 2nd time in ten years.

November began with the remnants of optimism for minimizing the impacts or reverberations from a potential Greek default (more later on this very near potential event).  Later in November, increased pessimism from two primary areas emerged – the decision to place another round of ‘stress’ tests on major banks between now and January 9th, more extreme than tests of 1 and 2 years ago (this time, to simulate high unemployment and high rates of loan failure, called ‘global market shock’) and, one week later, failure of  the Congressional Super Committee to trim our own future debt.  And, so, with these events behind us, December begins with the larger realization that adding the day-to-day posture of Italian and French interest rates to Greek sovereign debt concerns, good news on the fundamental front was mostly ignored.

Essentially, the normal bags of fundamental data, employment expectations, moderating inflation, manufacturing base data, decent retail sales, etc., have all taken a back seat.  Even good news in any of these areas is quickly pushed aside, in favor of the next announcement, rumor, rumor denial or next plan from Europe.

And, it’s not that all of the fundamental data has been good.

For one example, even though the recent unemployment rate fell, it was mostly due to hundreds of thousands leaving the rolls of those being counted, due to failed expectations and tight job markets, therefore, no longer reflecting them in the numbers; this is a key fallacy of the employment data, since it only counts those ‘actively seeking work’.  Also, even with the growth of 1.8 million jobs in the past 20 months, or about 90,000 jobs per month, this is less than 1/4 the rate that is necessary to account for needs through immigration and work force growth, just to get us back to ‘full employment’ and lower unemployment levels, over the next EIGHT or so years.

Our markets are held hostage to the movements of the dollar and the euro.  Euro strength has indicated stability, from optimistic scenarios, while euro weakness has shown up with each pessimistic scenario.  There is little incentive to take risks in positions, with the uncertainty of the next day always looming large.

Two terms have emerged that help to understand the day-to-day nature of what is seen and heard in the press.

The first term, ‘risk-on‘ follows the ‘optimistic’ or ‘hopeful’ side of news and the market reaction.  If you hear of a 100, 200, 300, or even 400 point rise in the Dow Jones, due to some positive news event perception, that means ‘risk-on’, at least for the time being.

In addition to optimistic news, upside/risk-on appears to be mostly related to desires for financial professionals to improve their year-end results, to buy or position themselves for gains.  With each new European story pointing to optimism, risk-on takes the stage.

The opposite term, ‘risk-off‘, reverses the optimism to ‘fear’, as in, fear of failure, fear of higher interest rates, fear of defaults, fear of collapse, fear of a crash, fear of new debt, fear of not knowing what to do next.  One dominant risk-off posture has been the threats to/about/against/from Iran, resulting in constantly boosting oil prices to near $100/barrel, from the low 80’s just a few months ago.

So, the markets have oscillated between these two terms, every few days, for all of the past 4 months.

And speaking of risk-off, a triple dose of Euro phobia arrives, starting next week, with the revealing of whether or not Greece can (1) pay 1.172 billion euros on a 3-year bond due Monday, Dec.19, (2) 978 million euros on a zero-coupon bond due Dec. 22, and, finally, (3) 714 million euros for one-year paper maturing Dec. 30.

Rocky and jittery markets are with us for the remainder of the year, thanks to Greece.

Through all of this, some of us have expressed impatience or fear of not making money in this environment.  You’re not alone.

The average of the top 20 hedge funds is +14.69% year to date.  The average of the bottom 20 hedge funds is -28.09%.  This is not normal.  In recent years, the top 20 funds have performed significantly better at the same time that the bottom 20 funds weren’t performing as badly as this year.

One thing is certain.  The current environment, as before, presents more risk than reward, not just for us, but, for everyone.

Bond interest rates normally rise in early December, reflecting optimism and risk-on.  This year has started out differently with rates continuing to weaken since before Thanksgiving, based upon the need for safety, as part of the risk-off trade, or the safety trade.  This does not bode well for the prospects of a Christmas season rally, though it’s still possible for a short duration.  With end-of-year numbers fulfilled, the 1st quarter will quickly return to ‘risk-off’.

Also, probabilities of a ‘crash’ scenario have not been totally eliminated, in light of the fuzziness of details from this week’s debt summit in Europe (the 14th such summit), and the divisions between the countries involved. IF we could remove European debt issues from the picture, we could significantly reduce the probabilities of world financial stress.  But, that’s not an option, and this threat is not diminishing anytime soon.

Rather than yearning for growth in your portfolios, it is still best to focus on limiting exposure to large potential losses from these recent 3-year highs, and simply wait patiently, and safely, for less treacherous circumstances.

11012011 November 2, 2011

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

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) exit;  G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 11/01

46.15, 45.33, 54.22, -6.34

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

At today’s close, markets are back to where they were 7-8 weeks ago.

For reference to September, here are a couple of quotes from the 091211 report –

…what appears to be an inevitable next round of declines likely to begin by the end of the week and continuing further possibly into October.  The market is still in search of an ultimate short-term bottom level…

A little over two weeks after my statement above, the indexes broke down to a one-year low on October 4th.  Within hours of this one-year low, markets reversed by almost 3%, following a well-timed announcement from German Chancellor Angela Merkel and French President Nicholas Sarkozy.  In an effort to show unity for the euro currency and European financial integrity, they announced a ‘plan’ for ‘capitalizing Greek banks’ to help forestall a debt default.  This ‘plan’ had no details.  The ‘plan’ was placed on a schedule for announcement on 10/23.   In no less than 3 other announcements, this was repeated over the next 10 days, using basically the same language, and still, with no details.  World markets appeared to strengthen with each repeat announcement, in true ‘Groundhog Day’ fashion.

Based specifically on the ‘hopes’ for the outcome of this announcement, the casual observer would see that from that one-year low, the market would display a strong advance upward, until finally, the indexes broke through the upper bounds of a range that had confined it for over two months.  Market ‘bull’s could then claim that the trend of market weakness was over.  All of the historical reasons for 4th quarter market gains were reintroduced, including (1) the presidential cycle (where markets typically advance in the year before a presidential election as a result of market-friendly policy decisions), (2) increased mutual fund buying to improve year-end results, (3) resumption of the bull-market, and even, (4) the approaching European ‘deal’ was seen as proof that the reasons for the weakness since August were all behind us.

All this combined with the some indexes climbing back above their key 50-day and, for a short time, 200-day moving averages.  Market bulls were staking their victorious claims on the start of the traditional year-end rally.

The deal, when it was finally released, included European leaders agreeing to boost the European Financial Stability Facility’s firepower to 1 trillion euros ($1.4 trillion), set aside 100 billion euros for Greece and provide 30 billion euros in collateral for a debt swap that will give Greece’s investors new, lower-risk bonds at 50% of the existing bonds’ face value.

While appearing legitimate in form, some of these so-called details were seriously lacking in substance.  For example, the $1.4 trillion dollar facility was actually composed of less than $350 billion euros, subtracted by some funds already used for other purposes, then,  leveraged through a clause that only promised lenders a return of 20% of their contribution, in the event of fund failure.  In it’s essence, that would mean that you could claim your net worth is 500% of the actual value, by guaranteeing your creditors only 20% of what you owe them.  Secondly, participation by lenders was officially termed ‘voluntary’, or essentially, non-binding.

Nevertheless, the ‘euro-phoria’ fueled rally appeared to crown itself last Thursday with the overdue announcement, sending markets to levels not seen since August, and capping the largest October advance in over 20 years.  Few noticed that this speculative advance over 3 weeks (1) began from a one year low, (2) was fueled by more emotion than substance, and (3) resulted in numerous rounds of thousands of ‘short-covering’ transactions throughout the month, which are actually closing of bearish ‘selling’ transactions, by those who are anticipating lower prices. On price indexes, closing of these ‘bearish’ bets looks exactly like buying.

No one appeared to notice that other markets that confirm healthy stock markets, such as rising interest rates, or weakening safety trades in gold and silver, failed to materialize with the announcement.

With the end of a month of short-covering advances, finally, most of those ‘shorting’ the market are out. Fuel for the rally diminishes.  It’s at this point that real ‘buyers’ have to take over to continue the advance.  This has failed to happen.

This morning, the markets were shaken back to reality with the announcement by Greek Prime Minister George Papandreou that he plans to put the plan before a referendum for approval by Greek voters. European markets were briefly down as much as 5-6% overnight, while US markets were down as much as 3% for today.

Combined declines of yesterday and today have reversed all of the euphoric gains from the announcement and returned the indexes to within the nearly three-month trading range.  The absence of buyers or a return of sellers at this level threaten to return prices to the one-year lows from where they began on October 4th.

The safety trade sent bond prices soaring today, sending interest rates on the 30-year treasury bond back down below 2%, a level that affirms the viability of a concern for protection of capital, rather than one of capital appreciation.

***The Weekly Momentum Indicator is a strength measure of the S&P100, the largest 100 stocks in the U. S., in terms of market capitalization (share price of each of the 100 stocks times the number of shares available to the public).  The WMI is the difference in the S&P100 average opening price for each of the past three Monday mornings and the average closing price for each of the past three Friday afternoons.  This detects upward, sideways or downward movement of the overall market, since the markets generally move in synch from one index to another, and correlates very well with identifying opportunities for reward/gain and for situations for risk/loss in all equity indexes.  Rising numbers from the prior week are positive opportunities, while falling numbers from the prior week are avoidance opportunities.  I have a weekly, fourteen-year history for this indicator at the time of update in this report (11/01/2011).***

09122011 Interim September 12, 2011

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) exit;  G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 9/12

-14.63, -3.45, +9.57, -8.04

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

Aside from all of the news and media hype surrounding the very volatile market action over the past month, it can largely be classified under the technical category of  ‘consolidation’.  This is a term that describes the market moving back and forth in a sideways channel, with highs and lows in a range.  Unfortunately, the range, with an upward slope, also falls into a technical category known as a ‘bear flag’, in the sense that the upward slope is deception, as the tendency of the market after these patterns is to continue the downward move.  I expect this move downward to continue within days.

Over the weekend, fear of a pending, major European default, specifically in Greek sovereign debt tending to a possible bankruptcy, combined with newer fears of a downgrade of French banks might contribute too much resistance for the world markets to overcome.  Even a slight rebound rally this upcoming week, which is typical ahead of the next Fed meeting and a light news week, would only delay what appears to be an inevitable next round of declines likely to begin by the end of the week and continuing further possibly into October.  The market is still in search of an ultimate short-term bottom level.

Markets world-wide are down YTD by anywhere from 10% to 30%.  This includes U.S.and Asian markets being down around 13%, while European markets are down around 16%.

In the 0822 report, I said that this current downtrend has every appearance to the downtrend in 2007 from the all-time highs in the S&P500, the Dow Industrials, and several other indexes. That initial drop began with a 6 week decline, (down 14% at that point), a 2-week pause,  (we’re about here right now), then another 3-week resumption of the decline for an additional 3-4% loss, totaling about 11 weeks before a more significant pause and subsequent, 9-week counter-trend rally occurred, retracing about half of the overall decline. Coincidence?  In both cases, the S&P100 has broken the now-declining, 40-week moving average in each of these declines.  Mutual fund managers look for similarities and repeating patterns in making their buy/hold/sell decisions.

In the 0906 post, I mentioned some findings on the general state of the world markets along with the possibility for projections for the next few years.  It is not encouraging.  Keep in mind that these long term averages don’t turn on a dime under any circumstances.  These trends take years to develop and will take years to turn positively.

The French market is already approaching the levels near the March 2009 low.

Since these markets are just now leaving 3-4 year highs, the next ‘trip down’ is likely to test the lows of 2009, hopefully successfully, and will need another 3 or more years to regain these recent levels, and even more time to recover above the moving averages listed here.   We should look for significantly healthier markets no sooner than 2016-20.

100 Week Avg 200 Week Avg 400 Week Avg
S&P500 below at below
UK FTSE below below below
Japan NIKK below below below
Hong Kong Hang Seng below below above
French CAC below below below
German DAX below below below

05102011 May 10, 2011

Posted by easterntiger in economic history, economy, gold, markets, oil, silver, stocks.
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This is getting old.

You might have noticed that I have gradually reduced the frequency of reporting, due to the ‘sameness’ of the results and the lack of low risk opportunity from month to month.

Here are some numbers on the technical side to ponder just in case you have any doubts about what you might be missing.

U.S. stocks – both upside and downside remain minimal; little day-to-day risk, little week-to-week reward.

(1) The S&P 500 55 day moving average is at 1320.  Two months ago, or about 60 calendar days, this same average was at 1312, or a change of just over 0.5%; not enough of a gain to offset the risk of uncertainty in economic reports, currency stability, social, political or geo-political influences.

(2) The S&P 100 5 week moving average is virtually flat since late March. Over the past year, the average of all of the 3-week changes in this index sits at 1.387 points.  In other words, every three week average change over the past year, 52 of them, amounts to a  whopping 1.387 point change, over THREE WEEK periods back-to-back for  a year.

(3) The New York Stock Exchange Composite Index has pulled back into the same range that it occupied between mid-February and mid-April.

(4) Although the Nasdaq reached highs not seen since 2001, it is well-known that as a cap-weighted average, it is heavily influenced by a small number of high growth elements, such as the recent market cap Goliath, Apple.  Another way of reporting the 10-year high is to say that the Nasdaq has not been very high at all since it’s catastrophic plunge off of it’s all-time high at 5132.5, to the current level of about 300 points above ONE HALF of that record level.   Just over half way………ten years…….

Foreign stocks – London’s FTSE and France’s CAC are no better or worse than any measure already achieved during or since January.  Hong Kong’s Hang Seng is stuck in a range that goes back to last October.  As you might expect, Japan’s Nikkei is still struggling for stability after the impacts of the early April natural catastrophe.  Neither the Brazil Bovespa, Argentinian Merval, Netherlands AEX, Russian MICX or Swiss SMI are anywhere near their earlier highs of the year.

Bonds – Just as I last recorded, the multi-month rise in interest rates has reached and turned away from another climax.  The trend is, once again, returning in the direction toward this continuing downward phase of the 200 year cycle, swinging toward lower rates.  This is the 9th peak and turn downward since 2004. Many of the previous peaks have been near peak market optimism, while, contrastly and understandably, the interest rate bottoms have been near periods of maximum pessimism and market turmoil.

Upside this time around appears to have directly intersected a downward curving 200 day moving average, at least on the benchmark 10-year treasury note.

I have continuously and successfully argued (since it is now historical fact and no longer a theory) that a properly configured variable rate mortgage (ARM) instrument purchased at the proper time will outperform almost any fixed rate mortgage, unless that fixed rate mortgage is converted to a lower rate at some opportune time near a low rate swing.   This has been the case for much of the past 30 years and I expect that this will remain so for another 5 to 10 years, in spite of budget, debt and currency pressures.  (make reference to the long term charts in the January 27th report, of the 30-year and 10-year treasury notes, both downtrending since the peak in 1980, albeit with some upward reversals) Fear doesn’t save you money, but, knowledge does.  The people who suggest to you that you make your decisions based upon fear of higher interest rates are the same people who receive lower payments, and therefore, lower revenues when you lock in lower interest rates.

For our purposes, these peaking and falling interest rates have benefited my heavy allocations to the F fund, particularly since early April, as the current interest rate returns to the middle and lower end of the range established after the crisis of 2008.

Silver – in spite of reaching multi-decade highs just over a week ago, with the commodity sell-off of last week, it shaved off 9 weeks of gains in only 5 days, down 33% in less than a week, it’s biggest weekly drop since 1980.  I have been waiting on a good purchase window for about a year to avoid getting caught in these ‘flush out the weak hands’ sell-offs. Luckily, these recently lower prices are still higher than the prices where I bought last year.  (Manipulation a factor? Of course.  It always is.)

Gold – although the sell-off wasn’t as severe, the current level is now only 5% higher than levels already reached before the end of last year.

Oil – crude oil fell last week by it’s biggest weekly drop ever.

It should be added that these drops aren’t actually in the value of the commodities by themselves, but, also due to adjustments to a rapid, upward turn in the dollar, itself influenced by a large negative move in the Euro, which responded to news last week that Greece was considering a plan to remove itself from the European Union.  This would have an obviously riskier profile to the Euro currency, making the dollar appear to be a safer haven.

I will withhold any further changes in recommendations until some focus or direction emerges from the approaching discussions on the debt ceiling/continuing budget.  Volatile markets are likely as the political parties play another chapter in the game of ‘chicken’ to test each other’s resolve, since each side has a point to prove.  This will put a scare on all those others with true ‘skin in the game’, such as foreign central banks, foreign governments, major foreign investors, foreign and domestic stockholders, foreign and domestic bondholders, state government  officials and their budgets, federal employees, unions, major government contractors, Wall Street capital managers, commodity markets, currency markets, etc.
With so many players involved, a sneeze in one part of the group could turn into a panic elsewhere, at least temporarily.