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07182016 July 18, 2016

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

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

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

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

Weekly Momentum Indicator (WMI) last 4 weeks, thru 7/18/16

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

+42.11, +69.03, +26.59, +0.78

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

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

TSP Fund Proxies One Year Returns, as of 7/15/16

F fund/+5.77% YTD,  I fund/-10.00% YTD

S fund/-3.36% YTD,  C fund/+3.57% YTD

 

So, while everyone is expected to say ‘…wow – another new all-time-high…’, right after they just said, ‘…that BREXIT thing wasn’t so bad after all…’.  You should already know that the reality isn’t quite that simple.

Reality check – One Year Return – S&P500 +1.99%, Dow Industrials +2.33%

Events like BREXIT are not measured in their direct effects. They’re measured in all the varied knock-offs – such as the weaker Pound, destabilized Euro and the stronger Dollar, and how those flow through economies.

Italy Eyes $40bn Euro Bank Rescue As First BREXIT Domino Falls

An Italian government task force is watching events hour by hour pledging all steps necessary to ensure the stability of the banks. “Italy will do everything necessary to reassure people”, said Premier Matteo Renzi.

“This is the moment of truth that we’ve all been waiting for for a long time.  We just did not know that it would be BREXIT to let the elephant loose”, said a top Italian banker.

The index for Italian banks has fallen -30% since the British EU referendum on June 23, and is -61% lower than a year ago.

Failure of the Italian banking sector is not so threatening to our positions, or, for our direct interests. It’s the potential impact of the failure of Italy’s banking sector on the rest of the Italian economy that could act in a ripple effect fashion, from that banking crisis, which could, in turn, push Italy back into recession and, in a doomsday scenario, generate a Greek-type meltdown that Europe would find almost impossible to contain.

“The UK referendum hit an already vulnerable banking system in the eurozone. Italian banks are on the front burner, but the temperature is rising in Portugal,” Marc Chandler, the global head of currency strategy at Brown Brothers Harriman, wrote in a Monday note to clients.

Things aren’t looking super great going forward, amid higher oil prices and the overall sense of uncertainty in post-BREXIT Europe.

Barclays forecasts that growth will fall below 1% in 2016, while a Citi Research team led by Ronit Ghose noted that the negative growth effects from the BREXIT were likely to hit periphery countries — i.e. Portugal, Spain, Italy, and Greece — harder.

Where are the ‘all-time highs? Unfortunately, only in selected places where we can profit….

These are the percentage increases above the previous highs, with each ‘Y’.

Those with ‘N’ are indexes that are NOT at all-time highs!!!

Screen Shot 2016-07-17 at 11.19.45 PM

 

New All-Time Highs

S&P500, Dow Industrials, S&P MidCaps,

Russell 1000, S&P600 Small Caps, S&P400 MidCap Exchange Traded Fund

No New All-Time Highs

NASDAQ, New York Stock Exchange, Russell 2000 Small Caps,

London Financial Times Index, Wilshire 5000, Down Transportation Index,

American Exchange

New All-Time Low

10-Year Treasury Note, 30-Year Treasury Bond

F Fund – Two Years

AGG

 

C Fund – Two Years (higher YTD, but, with significant downside risk)

PEOPX

 

 

I Fund – Two Years

EFA

S Fund – Two Years (Also, higher YTD, but, with significant downside risk)

FSEMX

 

Lance Roberts of ‘Real Investment Advice’ points out some inconvenient facts.

“It is worth reminding you, that while the markets are moving higher and pushing new highs currently, it is doing so against a backdrop of weak fundamentals, high valuations, and deteriorating earnings.”

Of the current price levels, Blackrock CEO Larry Fink says, “If we don’t see better-than-anticipated corporate earnings I think the rally will be short-lived,” he added.

Considering that on a GAAP (accounting) basis, the S&P500 is currently generating about 90* in earnings, or equivalent to a 24x P/E multiple, it is hard to see how one can justify the move “fundamentally.”

* – currently at 86.44, and, that’s down from 105.96 last year at the peak.

Fink said extraordinary central bank asset purchases has been inflating stocks prices. “I don’t think we should be at new [stock] highs,” he said. “All the stock repurchases, you’re seeing this reduction in investable assets.”

Artificially boosting stock prices through convoluted liquidity schemes, devious machinations, backroom central banker deals, sending Bernanke to Japan, and helicopter money dropped on Wall Street only, has just exacerbated the wealth inequality permeating the world. The anger over this blatant pillaging by the .1% who rule the world is reflected in the chaos across Europe and the brewing civil war here in the U.S.

No wealth is being created because no productive investments are being made.

Here is a chart of earnings levels, clearly showing a quarter-over-quarter decline that began over a year ago.

Screen Shot 2016-07-17 at 10.01.32 PM

Let’s assess the progression closely…

  •   The Fed kept rates at ZERO for seven years.
  •   The Fed raised rates just ONCE in the last 10 years.
  •   The Fed spent over $3 trillion in QE.
  •   Total central bank printing totaled $20 trillion since 2008.

Let’s assess the most recent headlines…

The three largest banks in the US—Bank of America, JPMorgan Chase, and Wells Fargo—disclosed that the number of delinquent corporate loans increased by 67% in Q1.

  • JPMorgan’s delinquent corporate loans increased by 50% to $2.21 billion
  • Bank of America’s delinquent loans increased 32% to $1.6 billion
  • Wells Fargo’s delinquent loans increased by 64%, to $3.97 billion

US Industrial Production Declines For 10th Straight Month – Longest Non-Recessionary Streak In History

 

Retail Sales Jump On Downward Revisions, Hover At Recessionary Ledge

 

Empire Fed Unexpectedly Drops As New Orders Tumble, Labor Conditions Deteriorate

Don’t get caught up in the hype of a minor upward price advantage.

The memories of losses nearing 10%, twice in the past year, have faded from the presses.

These minor single-digit YTD gains will also fade quickly once the weight of the fundamentals begins to take it’s toll.

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10082014 October 9, 2014

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

Current Positions  (Slight Changes)

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

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

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

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

-31.30, -2.82, -5.09, +7.63

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

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

Margin debt reversal

 Margin

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


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

Funds YTD

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

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

S Fund                 I Fund          C Fund                       F Fund

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

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

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

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

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

-6.57%              -9.71%           +0.86%

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

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

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

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

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

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

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

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

Interest Rates

U.S. 10-Year Treasury Note

15-tnx

World Markets

Major Markets Composite

 MajMktComp

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

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

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

Europe

FTSE

9-ftseCAC

8-cac

DAX7-dax

US

 Russell 20005-rut

Dow Industrials1-indu

Nasdaq Composite4-compq  S&P 500 2-spx

Wilshire 50003-wlsh

ASIA

Shanghai Composite11-ssec

Singapore Straits13-stiHang Seng  12-hsi

SOUTH AMERICA

Bovespa

14-bvsp

Insider Selling

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

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

All-Time Highs

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

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

But wait!  Let’s get one thing straight.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RealS&P

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

Dollar

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

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

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

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

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

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

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

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

Oil

 Oil

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

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

Precious Metals

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

Gold

 Gold

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

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

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

Silver

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

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

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

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

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

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

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

07182014 July 18, 2014

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

Weather Report 07182014

Current Positions  (No Changes)

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

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

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

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

-2.7,-0.5, +14.7, +4.87

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

Margin debt reversal

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

MarginDebt052014

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

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

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

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

Why?

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

GDP Shock

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

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

Funds YTD

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

S Fund                      I Fund                        C Fund                  F Fund

Early March        Early March            Early March        Early March

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

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

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

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

ALL-TIME HIGHS/RECORD HIGHS

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

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

(1)

(2)

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

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

What Does the Rise of the Dow Really Mean?

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

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

Negative Interest Rates

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

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

Market Technical Positions

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


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

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

FTSE

 

 

 

 

 

 

 

 

 

 

 

CAC

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Gold/Gold Stocks

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

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

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

GLD

 

 

 

 

 

 

 

 

 

 

 

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

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

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

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

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

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

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

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

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

 

Market Complacency/Record Low Volatility

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

VIX

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

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

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

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

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

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

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

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

Oil

Oil

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

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

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

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

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


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



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

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

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

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

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

Real Estate

RealEstate

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

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

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

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

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

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

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

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

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

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

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

 

10152013 October 15, 2013

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

Current Positions  (Changes)

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

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

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

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

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

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

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

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

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

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

Index                July 29th            Oct  9th              Friday               Changes

                               1                           2                      3            1to2      1to3

Dow Industrials    15521.97    14802.98     15237.11           -4.63%     -1.84%

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

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

Russell 2000          1040.66       1043.46     1084.31            +0.27%    +4.19%

Wilshire 5000            18187.97    17688.15  17871.47         -2.75%     -1.74%

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

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

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

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

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

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

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

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

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

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

Gold

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

Interest Rates

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

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

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

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

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

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

11192012 November 20, 2012

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

04152012 May 4, 2012

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

I(Intl) – exit

S(Small Cap) – exit

C(S&P) – exit

F(bonds) – up to 60%

G(money market) – remainder

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

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

Last 4 weeks, thru 4/13

+13.95, +19.45, +2.0, -12.96

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

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

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

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

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

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

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

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

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

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

 

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