HAPPY NEW YEARS!
I just had to move Uncle Jay up top for the spirit of the evening...
Uncle Jay Explains: Year-end!
Come on, you have to smile, that's good stuff there!
The Weighted Average Cost Of Capital
5 hours ago
Wednesday, December 31, 2008
End of Day/ End of Year Update
For the day, the DOW finished up 109 points, the S&P finished up 1.4% (after reaching 910 for the day’s high), the NDX closed the day up .9%, and the RUT led again, gaining 3.4%.
I note that the indices fell back finally right at the close and that the futures only 15 minutes after the close are already off by more than the entire gain of the day, the DOW futures are down 120 points from the close already, and the /ES has already fallen to the 890 area.
My rough calculations for the YEAR/(from last year’s PEAK) are as follows respectively: The DOW finished down 34% (38.2%), the S&P finished down 39% (42.7%), the NDX finished down 42.2% (45.9%), and the RUT lost 35% (41.7%). Remember, those figures are AFTER bouncing considerably off the November bottoms. Also remember that the average investor’s performance was worse than those numbers.
Here’s a good one… for the year, of the 500 companies in the S&P 500, there were only 22 advancers and 478 decliners (and that’s with substitution bias higher and a year end rally).
I note that end of day transactions pushed today’s volume above yesterday’s, thus creating a higher close on higher volume.
Have a Happy New Years!
Nate
I note that the indices fell back finally right at the close and that the futures only 15 minutes after the close are already off by more than the entire gain of the day, the DOW futures are down 120 points from the close already, and the /ES has already fallen to the 890 area.
My rough calculations for the YEAR/(from last year’s PEAK) are as follows respectively: The DOW finished down 34% (38.2%), the S&P finished down 39% (42.7%), the NDX finished down 42.2% (45.9%), and the RUT lost 35% (41.7%). Remember, those figures are AFTER bouncing considerably off the November bottoms. Also remember that the average investor’s performance was worse than those numbers.
Here’s a good one… for the year, of the 500 companies in the S&P 500, there were only 22 advancers and 478 decliners (and that’s with substitution bias higher and a year end rally).
I note that end of day transactions pushed today’s volume above yesterday’s, thus creating a higher close on higher volume.
Have a Happy New Years!
Nate
Update Going into the Close/Bonds
The indices have been relentlessly higher for most of the day with the short term oscillators remaining in deep overbought territory. The S&P has managed to get to the 905 area and may be preparing a late day assault on the 912 level. If it does without pulling back prior to the close, those oscillators will remain very overbought over the holiday tomorrow.
Gold is threatening to break out higher, but has yet to do so. Geopolitical news could be the catalyst for it to do so over the weekend. I don’t like the risk/reward on that play here, but others might.
The bond market is finally reacting with the long bond futures breaking under support, and TLT (20 year) has finally poked its nose under support as well, as you can see on the 3 month chart below. You can also see how today’s action has rolled the stochastic out of overbought.
This same pattern is seen on the TNX (10 year), but keep in mind that it’s showing yields and thus is inverse of TLT. That’s a very large candlestick, moves that size in bonds are rare. Note that candlestick engulfs the past two weeks:
I’m going to leave you with a one month DOW daily chart. Note the low volume, the fresh new buy signal on the daily stochastic (all the indices have this), and the fact that the upper Bollinger is now moving up to create room for rising prices.
The RUT (small caps) has been leading the advance and is very near to running into its upper Bollinger already. It’s also bullish that the indices were able to advance further above their respective 50 day moving averages, but we’re already running into that strong resistance area of 920ish on the S&P.
I have to run to pick up my children at the airport and so any end of day report will be later than usual today, and I may not put one out unless there are large changes from this position. I’ll be making more posts over the holiday, so check back when you can.
Nate
Gold is threatening to break out higher, but has yet to do so. Geopolitical news could be the catalyst for it to do so over the weekend. I don’t like the risk/reward on that play here, but others might.
The bond market is finally reacting with the long bond futures breaking under support, and TLT (20 year) has finally poked its nose under support as well, as you can see on the 3 month chart below. You can also see how today’s action has rolled the stochastic out of overbought.
This same pattern is seen on the TNX (10 year), but keep in mind that it’s showing yields and thus is inverse of TLT. That’s a very large candlestick, moves that size in bonds are rare. Note that candlestick engulfs the past two weeks:
I’m going to leave you with a one month DOW daily chart. Note the low volume, the fresh new buy signal on the daily stochastic (all the indices have this), and the fact that the upper Bollinger is now moving up to create room for rising prices.
The RUT (small caps) has been leading the advance and is very near to running into its upper Bollinger already. It’s also bullish that the indices were able to advance further above their respective 50 day moving averages, but we’re already running into that strong resistance area of 920ish on the S&P.
I have to run to pick up my children at the airport and so any end of day report will be later than usual today, and I may not put one out unless there are large changes from this position. I’ll be making more posts over the holiday, so check back when you can.
Nate
Update
Well, we took a run at the 900 area on the S&P, but the short term stochastic is deeply overbought.
Here’s a 20 minute chart of the DOW, you can see that a sell signal is about to be triggered on the stochastic. You can also see that we’re coming to the apex of the purple lined triangle soon and that we just made a nice little 3 wave move into and are now coming back down.
I’m thinking we’ll get just enough of a pullback to bring the oscillators down and then we can resume rally mode if we’re going to. You can see that if the pullback here makes it to the 8,600 area of the chart, it might present a decent long entry point if you don’t mind riding out the games that you know have yet to be played in the 920 area.
BTW, gold reversed course sharply from last night and is now higher. If GLD breaks above 87, that would be bullish in the short run, but keep those overbought indications in mind...
Also keep in mind that the markets are closed tomorrow for New Year’s Day.
Here’s a 20 minute chart of the DOW, you can see that a sell signal is about to be triggered on the stochastic. You can also see that we’re coming to the apex of the purple lined triangle soon and that we just made a nice little 3 wave move into and are now coming back down.
I’m thinking we’ll get just enough of a pullback to bring the oscillators down and then we can resume rally mode if we’re going to. You can see that if the pullback here makes it to the 8,600 area of the chart, it might present a decent long entry point if you don’t mind riding out the games that you know have yet to be played in the 920 area.
BTW, gold reversed course sharply from last night and is now higher. If GLD breaks above 87, that would be bullish in the short run, but keep those overbought indications in mind...
Also keep in mind that the markets are closed tomorrow for New Year’s Day.
Tremors in California…
Look out, the big one may follow…
California sits on the verge of bankruptcy, now their Comptroller warns that instead of tax refund payments, Californians may instead receive I.O.U.’s! The end of Ponzi finance is truly near if he actually implements such an idea.
MSNBC – Calif. Taxpayers Due Refunds May NOT Get Cash
Now, if you think that is bad, wait until you get a load of how some of the local municipalities inside of California are Ponzi financing their debts. Here’s a story in today’s LA Times Business Section: Creative borrowing catches up with California cities.
What a mess! I wouldn’t want to be living in California right now, I wouldn’t want to be buying municipal bonds, and frankly, I think this is just the tip of the iceberg. Wait until people fully realize how much debt there is throughout all levels of government. It’s overwhelming, there’s been no adult supervision for more than a decade – probably more like 3 decades.
California sits on the verge of bankruptcy, now their Comptroller warns that instead of tax refund payments, Californians may instead receive I.O.U.’s! The end of Ponzi finance is truly near if he actually implements such an idea.
MSNBC – Calif. Taxpayers Due Refunds May NOT Get Cash
Calif. Taxpayers Due Refunds May NOT Get Cash
By Patrick Healy
If you expect you'll be getting a refund from California when you file your 2008 state income tax return, be prepared: you may instead receive a "registered warrant." Translation: an IOU.
California is rapidly running out of money. Blame it on the state budget deficit that continues to bleed billions of dollars from California's reserves. Facing inadequate credit to make up the difference, California's Controller John Chiang warns that by the end of February, the nation's most populous state may not be able to pay some of its debts, and instead be reduced to issuing those creditors IOUs.
"My office has projected that, in approximately 60 days, there will be insufficient cash available to meet all expenditures reflected in the 2008-09 Budget Act," stated a Tuesday letter from Controller Chiang to the directors of all state agencies. "To ensure that the State can meet its obligations to schools, debt service, and others entitled to payment under the State Constitution, federal law, or court order. California may begin, as early as February 1, 2009, issuing registered warrants...commonly referred to as IOUs...to individuals and entities in lieu of regular payments."
California has not resorted to IOUs since the 1992 budget crisis when Pete Wilson was governor. Back then, some 100,000 state employees got IOUs instead of paychecks for two months until the state approved a budget. The 1992 crisis came during summer, well past the tax season, but at least 12,000 tax refunds were also issued as IOUs, according to a contemporaneous report in the Los Angeles Times.
State workers filed a lawsuit, arguing the IOUs violated the federal Fair Labor Standards Act. They were awarded damages. In this current cash crisis, The Controller's office expects that hourly state employees would continue to receive paychecks. But IOUs could be issued to elected state officials, including legislators and judges, and their appointed staff, some 1700 in all, "as well as tax refunds owed to individuals and businesses," according to Chaing aide Hallye Jordan.
The Controller himself remains in a Texas hospital where he was taken after falling ill during a visit with family. Chiang has remained in communication with his staff by phone, Jordan told NBC Los Angeles Tuesday evening.
The Controller's office will not take the emergency steps outlined in the letter to state agencies, Jordan said, if California can resolve its budget crisis in the next few weeks. But no new budget package has been proposed since the one presented by Democratic lawmakers was rejected by Governor Arnold Schwarzenegger as inadequate. "We've made very little progress the past couple of weeks," said Aaron McClear, an aide to Gov. Schwarzenegger, while the Governor was away from the capital on a holiday vacation.
Even without a deficit resolution, issuing IOUs is not the only option for tax refunds. The state could simply delay payment. Under the law, it has until May 30, Jordan said.
In 1992, banks honored the state's IOUs, cashing them on demand, and then receiving an additional 5% from the state when it made good on the obligations. In effect, the IOUs served the state as unsecured bridge loans from banks. But this time around, with credit tight and banks still feeling the impact of the fall meltdown in the financial services industry, it is not yet clear how banks will respond.
"Nobody's making any decision whether 'Bank X' will take the IOUs as money or not," said Brian Tobin, a Culver City based tax preparer. At the request of NBC Los Angeles, Tobin reviewed a copy of Chiang's letter. Tobin noted that in past years, California's Franchise Tax Board has processed electronic refunds in as short a period as a week. This raises the possibility that taxpayers with simple returns who file as soon as possible after New Year's may be able to receive refunds before the proposed February start date for issuing IOUs.
Those who could be most affected are taxpayers who routinely plan for large refunds as a means of saving for anticipated expenses, such as property taxes which are also due in April. But with notice coming at year's end, there is not time for those taxpayers to adjust their withholding or take other steps to try to capture their return in advance from the state's coffers. "They've got their money taken out of your paycheck. That's it," Tobin said.
One final irony, Tobin sees: electronic deposit refunds are inexpensive to do. Instead sending out IOUs is a more costly procedure for a state looking to save money.
Now, if you think that is bad, wait until you get a load of how some of the local municipalities inside of California are Ponzi financing their debts. Here’s a story in today’s LA Times Business Section: Creative borrowing catches up with California cities.
Creative borrowing catches up with California cities
Financing schemes that sidestepped voter approval have put local governments deeper in hock.
By William Heisel
December 31, 2008
Brian Vander Brug / Los Angeles Times
“They’re circumventing the intent of the law,” says Larry Stein, an Oxnard accountant and longtime activist, of the city's sale and lease-back of its streets. “They’re indebting the taxpayers using future revenue streams that may or may not pan out in the long run. But the taxpayers have no say.”
Oxnard was in a bind, facing a $150-million bill to fix cracking and crumbling streets and no way to pay for the work without cutting other services.
The city had tried, and failed, to get voters to approve a bond measure for street repair. And it had borrowed money against almost all of its public property, including a soccer stadium, three fire stations and its library -- even the Police Department's evidence-storage building.
With virtually nothing left to hock, the city came up with an ingenious way to take on more debt: It borrowed against future revenue by "selling" its streets to a city-controlled financing authority.
"We had way too much construction work to do and way too little money," said Ken Ortega, Oxnard's public works director. "We really pulled every creative financing string we could to come up with the money."
Desperate for cash in a sputtering economy, local governments throughout California are digging themselves deeper into debt, and many are doing so through exotic financing schemes designed to sidestep the need for voter approval.
California cities, counties and other agencies borrowed $54 billion last year, nearly twice as much as in 2000, and governments are straining under the load.
Statewide, 24 cities and public agencies missed scheduled debt payments this year or were forced to tap reserves or credit lines to stay current, records show. That's up from nine in 2006, according to the bond industry's self-regulatory agency.
The city of Vallejo, burdened with huge debt obligations, in May became the largest city in California history to file for bankruptcy protection. Chula Vista, Orange County and Palmdale are among the other cities and counties staring at red ink.
Much of this borrowing binge was made possible by complex financial schemes such as the one Oxnard used. These nontraditional debt vehicles cost more over the long run because they are considered riskier than general-obligation bonds, which governments stand fully behind. Investors therefore demand higher interest rates.
"There are many cities and counties engaging in complex financial deals that they don't really understand," said Michael Greenberger, former head of the trading division of the Commodity Futures Trading Commission. "And now it's starting to catch up with them."
What a mess! I wouldn’t want to be living in California right now, I wouldn’t want to be buying municipal bonds, and frankly, I think this is just the tip of the iceberg. Wait until people fully realize how much debt there is throughout all levels of government. It’s overwhelming, there’s been no adult supervision for more than a decade – probably more like 3 decades.
Phantom Bonds... Article by Susane Trimbath
This is an excellent and interesting article that I have posted in its entirety. You can find the original here: Phantom Bonds, it is dated 11/26/08.
This way of doing “business” is making a mockery of our entire financial system, which is clearly Ponzi in its entirety. What’s happening now in the bond market is going to eventually end in much pain and suffering, it’s only a matter of when. I believe it will begin on some triggering event, most likely related to foreign capital flows.
This way of doing “business” is making a mockery of our entire financial system, which is clearly Ponzi in its entirety. What’s happening now in the bond market is going to eventually end in much pain and suffering, it’s only a matter of when. I believe it will begin on some triggering event, most likely related to foreign capital flows.
BLAME WALL STREET'S PHANTOM BONDS FOR THE CREDIT CRISIS
The “credit crisis” is largely a Wall Street disaster of its own making. From the sale of stocks and bonds that are never delivered, to the purchase of default insurance worth more than the buyer’s assets, we no longer have investment strategies, but rather investment schemes. As long as everyone was making money, no one complained. But like any Ponzi Scheme, eventually the pyramid begins to collapse.
For the last couple of months trillions of dollars worth of US Treasury bonds have been sold but undelivered. Trades that go unsettled have become an event so common that the industry has an acronym for it: FTD, or fail to deliver.
What’s the result? For the federal government, it’s an unnecessarily high rate of interest to finance the national debt. For states, it’s a massive loss of potential tax revenue. And for the bond buyers, brokerage houses, and banks, it’s yet another crash-and-burn to come.
First, a primer: The Federal Government issues as many bonds as Congress authorizes (the total value is an amount that basically covers the national debt). Many are purchased by brokers and investors, who then re-sell them in “secondary” trades. The way the system is supposed to work is that the broker takes your bond order today and tomorrow takes the cash from your account and ‘delivers’ the bonds to you. The bonds remain in your broker’s name (or the name of a central depository, if he uses one). If there is interest, the Treasury pays the interest to your broker and he credits your account for the amount.
What is happening today that strays from this model? Because the financial regulators do not require that the actual bonds be delivered to the buyer, your broker credits you with an electronic IOU for them, and, eventually, with the interest payments as well. But the so-called “bonds” that you receive as an electronic IOU, called an “entitlement”, are phantoms: there aren’t any bonds delivered by your broker to you, or by the government to your broker, or by anyone.
The significant result of the IOU system is that brokers are able to sell many more bonds than the Congress has authorized. The transactions are called ‘settlement failures’ or ‘failed to deliver’ events, since the broker reported bond purchases beyond what the sellers delivered. Since all of this happens after the US Treasury originally issues the bonds, the broker’s bookkeeping is separate from US Treasury records. That means there is no limit on the number of IOUs the broker can hand out...and there are usually more IOUs in circulation than there are bonds.
The ramifications are far reaching for the national budget. Wall Street, by selling bonds that it cannot deliver to the buyer — in selling more bonds than the government has issued — has been allowed to artificially inflate supply, thereby forcing bond prices down. These undelivered Treasuries represent unfulfilled demand by investors willing to lend money to the US government. That money — the payment for the bonds — has been intercepted by the selling broker-dealers. The subsequently artificially low bond prices are forcing the US government to pay a higher rate of interest than it should in order to finance the national debt.
The market for US Treasury bonds has been in serious disarray since the days immediately following September 11, 2001. Despite reports, reviews, examinations, committee meetings, speeches, and advisory groups formed by the US Treasury, the Federal Reserve, and broker-dealer associations, massive failures to deliver recur and persist. Somehow, government, regulators and industry specialists alike believe that it’s OK to sell more bonds than the government has issued. It shouldn’t take a PhD-trained economist to tell you that prices are set where supply equals demand. If a dealer can sell an infinite supply of bonds (or stocks or anything else for that matter), then the price is, technically-speaking, baloney. And the resulting field of play cannot be called a “market”.
If regulators and the central clearing corporation would only enforce delivery of Treasury bonds for trade settlement — payment — at something approaching the promised, stated, contracted and agreed upon T+1 (one day after the trade), there would be an immediate surge in the price of US Treasury securities. As the prices of bonds rise, the yield falls. This falling yield then translates into a lower interest rate that the US government has to pay in order to borrow the money it needs to fund the budget deficit and to refinance the existing national debt.
This week’s drop in the yield on US Treasuries was accompanied by a spike in bond prices. The data won’t be released until next week, but you can expect to see that a precipitous drop in fails-to-deliver occurred at the same time. Don’t get your hopes up, though. One look at the chart above will tell you that the good news won’t last until real changes are made to the system.
As a bonus insult to government, consider the $270 million in lost tax revenues to the states. This is because investors (unknowingly) report the phony interest payments made to them by their brokers as tax exempt; interest earned on US Treasury bonds is not taxed by the states.
For the bond buyer, the situation poses other problems and risks. As an ordinary investor, you’re not notified that the bonds were not delivered to you or to your broker. Of course, your broker knows, but doesn’t share the information with you because he or she plans to make good on the trade only at some point in the future when you order the bond to be sold.
The electronic IOU you received can only be redeemed at your brokerage house, and no one knows what will happen if it goes under, although I suspect we’ll find out in the coming quarters as more financial institutions get into deeper trouble. You’re probably not aware that, in order to cash in that IOU when you’re ready to sell, you depend not on the full faith and credit of the US government, but on your broker being in business next month (or next year) to make good on the trade. In other words, you’re taking Lehman Brothers risk, and receiving only US Government risk-free rates of return on your investment.
Your broker, meanwhile, enjoys the advantages of commission charges for the trade, maybe an account maintenance fee and – more importantly – they use your money for other purposes. Wall Street is not sharing any of this extra investment income with you. In my analysis of Trade Settlement Failures in US Bond Markets, I calculate this “loss of use of funds” to investors at $7 billion per year, conservatively.
Despite this, rather than require that sold bonds be delivered to the buyer, the Treasury Market Practices Group at the Federal Reserve Bank of New York merely points out FTDs as “examples of strategies to avoid.”
Now for the really bad news. The tolerance for unsettled trades and complete disregard for the effect of supply on setting true-market prices is also responsible for the "sub-prime crisis," which everyone seems to agree on as the root of the current global financial turmoil. You see, there are more credit default swaps — CDS — traded on mortgage bonds than there are mortgage bonds outstanding. A CDS is like insurance. The buyer of a mortgage bond pays a premium, and if the mortgage defaults then the CDS seller makes them whole. CDS are sold in multiples of the underlying assets.
A conservative estimate is that $9 worth of CDS “insurance” has been sold for every $1 in mortgage bond. Therefore, someone stands to gain $9 if the homeowner defaults, but only $1 if they pay. The economic incentives favor foreclosure, not mortgage work-outs or Main Street bailouts.
In the same process that is multiplying Treasury bonds, sellers are permitted to “deliver” CDS that were not created to correspond with actual mortgages; call them “phantom CDS”. According to October 31, 2008 data on CDS registered in the Depository Trust & Clearing Corporation’s (DTCC) Trade Information Warehouse, about $7 billion more CDS insurance was bought on Countrywide Home Loans than Countrywide sold in mortgage bonds. That provides a terrific incentive to foreclose on mortgages.
Countrywide is the game’s major player: The gross CDS contracts on Countrywide of $84.6 billion are equivalent to 82% of the $103.3 billion CDS sold on all mortgage-backed securities (including commercial mortgages) and 90% of the total $94.4 billion CDS registered at DTCC sold on residential mortgage-backed securities.
General Electric Capital Corporation is the fifth largest single name entity with more CDS bought on it than it what it has sold; someone is in a position to benefit by $12 billion more from consumer default than from helping consumers to pay off their debt. Only Italy, Spain, Brazil and Deutsche Bank have more phantom CDS than GECC, according to the DTCC’s data.
The US auto manufacturers also have net phantom CDS in circulation: $11 billion for Ford, $4 billion for General Motors, and $3.3 billion for DaimlerChrysler (plus an additional $3.5 billion at the parent Daimler). Of course, these numbers change from week to week and only represent CDS voluntarily registered with the DTCC, so the real numbers could be much greater.
Who stands to gain? There is no transparency for CDS trades, which means that we don’t know who these buyers are. But in order to get paid on these CDS, the buyer must be a DTCC Participant… and that brings us to Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley – all Participants at DTCC and instrumental in designing and developing CDS trading around the world. By the way, these firms are also in the group that reports FTDs in US Treasuries; the top four firms represent more than 50% of all trades. You can do the math from there.
The US government and regulators are in the best position to end these fiascos, turn us away from casino capitalism, and return our financial industry back into a market. It won’t require any new rules, laws or regulations to fix the situation. If someone takes your money and doesn’t give you what you bought, that’s just plain stealin’, and we already have laws against that.
Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets .
VIX Analysis…
Today the VIX is down another 4%, and has broken down out of its latest consolidation range. This is further confirmation of a bullish trend in stocks for now.
The VIX is a derivative that measures certain option buying activities (a good site to learn more about the VIX is: VIX and More, start by looking at their top 10 articles of the year post). It measures “volatility” and is indirectly a measurement of fear (the VIX is only 1 volatility measurement, there are many such as the VXO, VXN. Plus, there are many other fear gauges as well).
I use the VIX/VXO as one gauge to help me decide where the market is psychologically. There are three components which must be considered in any market; fundamentals, technicals, and psychological.
Since the VIX is a derivative (it indirectly measures an underlying), some believe that technical analysis (TA) on the VIX is utter nonsense. I say they are mistaken big time. I’ve used TA on the VIX for years and have seen it work consistently. But yes, you do have to keep how it works in mind and give it a little more leeway than you would TA on a direct asset.
Let’s start with a 20 day, 20 minute chart. Note that today’s action just broke down out of a sideways consolidation channel. Also note that the stochastic is oversold in the short run, but if you look back a few days you can see that it can stay in oversold for quite some time.
Next, let’s look at a 3 month daily. Here you can see that we broke down out of the large triangle and are printing a red candlestick under that channel. Here, too, we are deeply oversold on the daily stochastic (also oversold on the weekly). We are approaching the lower Bollinger band again, and also the 200 day moving average which is in the 34 region. That would be my guess for the next area of support as it also coincides with support areas further back in time. Also note that the target on that large triangle would be 45 from the triangle break at 55, which would equal a target of just 10! Will we get there? I don’t think so, but there’s another target producer that says we’re going to 20…
That 20 target comes from this computer generated Point & Figure chart (courtesy of stockcharts.com). In order for us to reach that target, the VIX will first have to break pretty strong support in the mid 30’s.
Now let’s look at a 60 day, 60 minute chart and apply a little basic Elliott Wave analysis. From the peak at 90, you see a precipitous 50% decline all the way to 45 that I am labeling as wave 1 down. Next is a very large retrace back up to more than 80. Deep retraces are a hallmark of wave 2’s, and that’s how I have labeled that move. Next you can see a decline to my smaller red number 1, and if you count the movement inside of that move, you will find 5 smaller waves. Then a nearly perfect 50% Fibonacci retrace to the red #2, followed by a wave 3 movement down, which again contains a very clean 5 wave pattern inside that.
From that red #3, we moved sideways over the past few days which is typical of a wave 4 movement and it now looks as if wave 5 down is underway. When wave 5 down finishes, that will finish the larger wave 3 down, and I’ll bet it ends in the mid 30’s.
If this is a 5 wave movement, I would then expect sideways consolidation in the mid 30’s to produce a larger wave 4, which would be followed by a 5th wave to the eventual low. It’s also possible that this is not a 5 wave move and is only a 3 wave A-B-C… don’t know.
What does this analysis tell us? That it would appear lower volatility is going to be with us for a while and that portends interim higher prices for equities. That is consistent with Elliott Wave work in the equity indices which place us in the larger wave ‘B’ up/sideways which should be followed by the very destructive wave ‘C’ down to the eventual bear market lows.
This also coincides with Martin Armstrong’s work in waves which calls for a rally through about March of 2009. I’m not certain of that timing, I’ll be looking for other technical indicators to decide when wave ‘B’ is ending.
Remember that if you are using options, the volatility is a large component of the intrinsic value (IV) of options. As the VIX falls the intrinsic value of all options will decline, the further out-of-the-money (otm), the larger the decline. The reason for this is simple; low volatility means that the odds of reaching targets far away go down. In a high volatility environment one expects the likelihood of reaching far away targets to be higher, thus the sellers of options want more money from the buyers as their risk is greater. That means that as the VIX moves down, the price of otm PUTS will drop dramatically, while the price of way otm CALLS will not gain in value as quickly as you might expect when the market goes up. Thus, if you are playing long with options here, my advice is to buy in-the-money calls or use another vehicle entirely like the 2x or 3x ETFs (caution: I do not consider the leveraged ETFs to be “buy & hold” instruments for any significant length of time – they are good for short term trades only).
Hope this analysis is helpful, comments are always welcome.
Nate
The VIX is a derivative that measures certain option buying activities (a good site to learn more about the VIX is: VIX and More, start by looking at their top 10 articles of the year post). It measures “volatility” and is indirectly a measurement of fear (the VIX is only 1 volatility measurement, there are many such as the VXO, VXN. Plus, there are many other fear gauges as well).
I use the VIX/VXO as one gauge to help me decide where the market is psychologically. There are three components which must be considered in any market; fundamentals, technicals, and psychological.
Since the VIX is a derivative (it indirectly measures an underlying), some believe that technical analysis (TA) on the VIX is utter nonsense. I say they are mistaken big time. I’ve used TA on the VIX for years and have seen it work consistently. But yes, you do have to keep how it works in mind and give it a little more leeway than you would TA on a direct asset.
Let’s start with a 20 day, 20 minute chart. Note that today’s action just broke down out of a sideways consolidation channel. Also note that the stochastic is oversold in the short run, but if you look back a few days you can see that it can stay in oversold for quite some time.
Next, let’s look at a 3 month daily. Here you can see that we broke down out of the large triangle and are printing a red candlestick under that channel. Here, too, we are deeply oversold on the daily stochastic (also oversold on the weekly). We are approaching the lower Bollinger band again, and also the 200 day moving average which is in the 34 region. That would be my guess for the next area of support as it also coincides with support areas further back in time. Also note that the target on that large triangle would be 45 from the triangle break at 55, which would equal a target of just 10! Will we get there? I don’t think so, but there’s another target producer that says we’re going to 20…
That 20 target comes from this computer generated Point & Figure chart (courtesy of stockcharts.com). In order for us to reach that target, the VIX will first have to break pretty strong support in the mid 30’s.
Now let’s look at a 60 day, 60 minute chart and apply a little basic Elliott Wave analysis. From the peak at 90, you see a precipitous 50% decline all the way to 45 that I am labeling as wave 1 down. Next is a very large retrace back up to more than 80. Deep retraces are a hallmark of wave 2’s, and that’s how I have labeled that move. Next you can see a decline to my smaller red number 1, and if you count the movement inside of that move, you will find 5 smaller waves. Then a nearly perfect 50% Fibonacci retrace to the red #2, followed by a wave 3 movement down, which again contains a very clean 5 wave pattern inside that.
From that red #3, we moved sideways over the past few days which is typical of a wave 4 movement and it now looks as if wave 5 down is underway. When wave 5 down finishes, that will finish the larger wave 3 down, and I’ll bet it ends in the mid 30’s.
If this is a 5 wave movement, I would then expect sideways consolidation in the mid 30’s to produce a larger wave 4, which would be followed by a 5th wave to the eventual low. It’s also possible that this is not a 5 wave move and is only a 3 wave A-B-C… don’t know.
What does this analysis tell us? That it would appear lower volatility is going to be with us for a while and that portends interim higher prices for equities. That is consistent with Elliott Wave work in the equity indices which place us in the larger wave ‘B’ up/sideways which should be followed by the very destructive wave ‘C’ down to the eventual bear market lows.
This also coincides with Martin Armstrong’s work in waves which calls for a rally through about March of 2009. I’m not certain of that timing, I’ll be looking for other technical indicators to decide when wave ‘B’ is ending.
Remember that if you are using options, the volatility is a large component of the intrinsic value (IV) of options. As the VIX falls the intrinsic value of all options will decline, the further out-of-the-money (otm), the larger the decline. The reason for this is simple; low volatility means that the odds of reaching targets far away go down. In a high volatility environment one expects the likelihood of reaching far away targets to be higher, thus the sellers of options want more money from the buyers as their risk is greater. That means that as the VIX moves down, the price of otm PUTS will drop dramatically, while the price of way otm CALLS will not gain in value as quickly as you might expect when the market goes up. Thus, if you are playing long with options here, my advice is to buy in-the-money calls or use another vehicle entirely like the 2x or 3x ETFs (caution: I do not consider the leveraged ETFs to be “buy & hold” instruments for any significant length of time – they are good for short term trades only).
Hope this analysis is helpful, comments are always welcome.
Nate
Morning Update - New Year's Eve
Good Morning,
Futures are basically flat about 45 minutes to the open.
Israel says “no” to any ceasefire and attacks on Gaza are to continue. Gold is actually down overnight. By the way, even with the pounding gold took, it’s still going to close up for the year, amazing. The same cannot be said for almost all other commodities, especially oil which is now 4 years backwards in time.
Your house? It’s anywhere from 5 to 20 years backwards in time. How will you know when home prices have come down enough to justify stepping back into the market? When ALL the expenses of owning a home and financing it CONVENTIONALLY add up to LESS that what you can receive in rents. That’s an easy exercise to run for your area, some areas are probably pretty close to that now, but many areas are not. Don’t forget that average ANYTHING (home prices, P/E ratios, etc.) are average because they spend as much time and distance below the average as they do above it! Thus, prices tend to overshoot on the downside just as they do on the upside.
Weekly unemployment claims for Christmas week were just released… ahhh, what do you think with a shortened snowy holiday week, more claims or less? Of course it’s less, so let’s all go out and buy stocks! They claim, "Difficulty adjusting for seasonal factors." Ha, ha… there was a 45 point ramp on the news that those claims fell from to a still recessionary level of 492,000 from a horrific 586,000 the week prior. Frankly, it’s amazing to me that that many people were forced to file unemployment during Christmas week. Ask those families if our country is experiencing a recession or a depression…
Hey, yesterday’s low volume 184 point hurrah was a 90% up day! That is further evidence that we have begun wave ‘c’ up of the larger wave ‘B’ up/sideways. Short term stochastic is overbought, so a little price decline today will not surprise me, it may even just be intraday before the rally resumes.
There is a pivot at SPX 912, and there is resistance at 920 to get through before any rally can get legs. Once through that level, a run up to 1,000 or a little higher is definitely on the table – IF we clear that area of resistance and it’s pretty strong. There’s a pivot point, a trendline, and the upper Bollinger now all coinciding with that area.
Yesterday the VIX closed at the bottom of the small range it’s been in. A break down from that range would be bullish for equities.
Below is a 6 month daily chart of GLD. Note that it has created an expanding ‘W’ pattern and just recently broke above that trendline and the 200 day moving average. Also note an ascending wedge (bearish) and a possible double top at 87. The stochastic is oversold on the daily and the fast is as well on the weekly. I would expect some pullback before any significant move higher, but it is possible that it could run a little higher first. This is interesting, because if equities are about to run higher, I would normally expect gold to run with them.
At any rate, my best guess for today is that at some point we’ll need to see a small pullback to satisfy the oscillators, but it looks like a run to the 912/920 area is definitely on the table in here too. There are people who are just dying to play this on the long side, I won’t be doing that myself until 920 is in the rearview mirror, and the oscillators are well out of overbought.
Have a good day,
Nate
Futures are basically flat about 45 minutes to the open.
Israel says “no” to any ceasefire and attacks on Gaza are to continue. Gold is actually down overnight. By the way, even with the pounding gold took, it’s still going to close up for the year, amazing. The same cannot be said for almost all other commodities, especially oil which is now 4 years backwards in time.
Your house? It’s anywhere from 5 to 20 years backwards in time. How will you know when home prices have come down enough to justify stepping back into the market? When ALL the expenses of owning a home and financing it CONVENTIONALLY add up to LESS that what you can receive in rents. That’s an easy exercise to run for your area, some areas are probably pretty close to that now, but many areas are not. Don’t forget that average ANYTHING (home prices, P/E ratios, etc.) are average because they spend as much time and distance below the average as they do above it! Thus, prices tend to overshoot on the downside just as they do on the upside.
Weekly unemployment claims for Christmas week were just released… ahhh, what do you think with a shortened snowy holiday week, more claims or less? Of course it’s less, so let’s all go out and buy stocks! They claim, "Difficulty adjusting for seasonal factors." Ha, ha… there was a 45 point ramp on the news that those claims fell from to a still recessionary level of 492,000 from a horrific 586,000 the week prior. Frankly, it’s amazing to me that that many people were forced to file unemployment during Christmas week. Ask those families if our country is experiencing a recession or a depression…
Hey, yesterday’s low volume 184 point hurrah was a 90% up day! That is further evidence that we have begun wave ‘c’ up of the larger wave ‘B’ up/sideways. Short term stochastic is overbought, so a little price decline today will not surprise me, it may even just be intraday before the rally resumes.
There is a pivot at SPX 912, and there is resistance at 920 to get through before any rally can get legs. Once through that level, a run up to 1,000 or a little higher is definitely on the table – IF we clear that area of resistance and it’s pretty strong. There’s a pivot point, a trendline, and the upper Bollinger now all coinciding with that area.
Yesterday the VIX closed at the bottom of the small range it’s been in. A break down from that range would be bullish for equities.
Below is a 6 month daily chart of GLD. Note that it has created an expanding ‘W’ pattern and just recently broke above that trendline and the 200 day moving average. Also note an ascending wedge (bearish) and a possible double top at 87. The stochastic is oversold on the daily and the fast is as well on the weekly. I would expect some pullback before any significant move higher, but it is possible that it could run a little higher first. This is interesting, because if equities are about to run higher, I would normally expect gold to run with them.
At any rate, my best guess for today is that at some point we’ll need to see a small pullback to satisfy the oscillators, but it looks like a run to the 912/920 area is definitely on the table in here too. There are people who are just dying to play this on the long side, I won’t be doing that myself until 920 is in the rearview mirror, and the oscillators are well out of overbought.
Have a good day,
Nate
Tuesday, December 30, 2008
A Response to a Reader About the Velocity of Money...
A reader has asked some good questions regarding the velocity of money and we have been conversing between two places. I just sat down and hammered out a response that I believe is the key to understanding the fundamental situation of our current economy. So here it is, I hope it helps make clear what's happening - comments are always welcome:
One of the problems with those in academia is that they know how to take a relatively simple matter and obscure it with formula and reasoning until it no longer appears simple (kind of a central banker trick, also). The key to passing on real knowledge is the ability to take a complex matter and make it simple and understandable.
What I mean by debt saturation is that there is so much debt that the aggregate (total) income of non-government earners is not enough to support the aggregate debt that has already been created. Of course certain individuals still have the capacity for more debt, but as a whole, the people of the United States of America do not – the people and country are bankrupt.
Before anyone starts throwing debt to GDP comparisons at me, I would ask that you first read my article “Death by Numbers” if you have not already and pay attention to what I said about debt to income versus debt to GDP (Death by Numbers). In a nutshell, the private, corporate, and governmental debts are all owed by the same 305 million people, and when those debts and obligations are added upon one another, they exceed $300,000 for every man, woman, and child. A family of four is responsible for more than $1.2 million of this, while the average family income cannot pay the interest much less feed and cloth themselves (6% interest is more than $66,000 per year – no principal). Now, you say that half of that is unfunded future liabilities and that we can end the entitlement programs and that we can reduce government and military spending? Yes, we can, but I ask will we, or will the debt continue to progress on a parabolic curve even longer? And even if you do reduce the total debt and future obligations in half, debt service combined with REAL growth is still not possible.
That’s what I mean by debt saturation. It creates the “pushing on a string” situation when yet more “stimulus” is introduced. The Fed simply cannot ram more debt into the hands of those who cannot already the support the debt they have. When new money is introduced into this environment, as soon as it reaches the hands of debtors, that money is used to either pay back the current debt or is hoarded. That’s exactly what the banks are doing now. This is what drives velocity down in THIS environment. Yes, any reason that drags aggregate demand down will drag velocity with it. And, yes, there are many reasons that demand is falling now, BUT the UNDERLYING reason is DEBT.
For growth to continue, each year’s credit creation must be larger than the last. The shadow banking system allowed so much debt creation that the numbers to recreate it at this parabolic juncture are many times larger than the numbers being tossed around now. But even if they could create that much credit, who will service it and with what income?
And that’s the root policy mistake that has been made by our government. The debt needed to be defaulted upon to make it go away permanently. Instead of forcing the debt holders to eat it, the bag is simply being transferred from one bag holder to the next. The debt did not go away, it simply changed hands. At this juncture, if you want velocity to increase, you need to clear out the debts, not make new debt.
And to take it a step further, it is our monetary system that is the root cause of the unserviceable debt that we already have. More articles are coming on this subject soon.
Nate
One of the problems with those in academia is that they know how to take a relatively simple matter and obscure it with formula and reasoning until it no longer appears simple (kind of a central banker trick, also). The key to passing on real knowledge is the ability to take a complex matter and make it simple and understandable.
What I mean by debt saturation is that there is so much debt that the aggregate (total) income of non-government earners is not enough to support the aggregate debt that has already been created. Of course certain individuals still have the capacity for more debt, but as a whole, the people of the United States of America do not – the people and country are bankrupt.
Before anyone starts throwing debt to GDP comparisons at me, I would ask that you first read my article “Death by Numbers” if you have not already and pay attention to what I said about debt to income versus debt to GDP (Death by Numbers). In a nutshell, the private, corporate, and governmental debts are all owed by the same 305 million people, and when those debts and obligations are added upon one another, they exceed $300,000 for every man, woman, and child. A family of four is responsible for more than $1.2 million of this, while the average family income cannot pay the interest much less feed and cloth themselves (6% interest is more than $66,000 per year – no principal). Now, you say that half of that is unfunded future liabilities and that we can end the entitlement programs and that we can reduce government and military spending? Yes, we can, but I ask will we, or will the debt continue to progress on a parabolic curve even longer? And even if you do reduce the total debt and future obligations in half, debt service combined with REAL growth is still not possible.
That’s what I mean by debt saturation. It creates the “pushing on a string” situation when yet more “stimulus” is introduced. The Fed simply cannot ram more debt into the hands of those who cannot already the support the debt they have. When new money is introduced into this environment, as soon as it reaches the hands of debtors, that money is used to either pay back the current debt or is hoarded. That’s exactly what the banks are doing now. This is what drives velocity down in THIS environment. Yes, any reason that drags aggregate demand down will drag velocity with it. And, yes, there are many reasons that demand is falling now, BUT the UNDERLYING reason is DEBT.
For growth to continue, each year’s credit creation must be larger than the last. The shadow banking system allowed so much debt creation that the numbers to recreate it at this parabolic juncture are many times larger than the numbers being tossed around now. But even if they could create that much credit, who will service it and with what income?
And that’s the root policy mistake that has been made by our government. The debt needed to be defaulted upon to make it go away permanently. Instead of forcing the debt holders to eat it, the bag is simply being transferred from one bag holder to the next. The debt did not go away, it simply changed hands. At this juncture, if you want velocity to increase, you need to clear out the debts, not make new debt.
And to take it a step further, it is our monetary system that is the root cause of the unserviceable debt that we already have. More articles are coming on this subject soon.
Nate
Just Add Another Half Trillion to the Tab Please…
More taxpayer money being donated by our government. Note the criminals, ooops, I mean companies named to “manage” these shit sandwiches. Unbelievable, totally corrupt bankrupt behavior. I USED to get mad when I saw this, now I simply realize that we are just being robbed and that the reset is on its way. The more of this they do, the quicker the reset comes and the sooner the pain will be over. I’m still amazed Americans haven’t gotten off the couch to actually DO something about it. “Minimal risk,” my ass – excuse me, I have to go crème de la crème in the restroom now!
Off the “wires:”
(US) FED PLANS TO BUY $500B IN AGENCY MBS BY THE END OF JUNE
(US) FED PLANS TO BUY $500B IN AGENCY MBS BY THE END OF JUNE, PURCHASES WILL BE LIMITED TO FIXED-RATE MBS
- The 4 investment managers for the purchases will be Blackrock, Goldman Sachs, PIMCO, Wellington.
From Bloomberg:
Oh, yeah... Denninger did a piece related to this to: Anyone Swear an Oath to the Constitution?
Off the “wires:”
(US) FED PLANS TO BUY $500B IN AGENCY MBS BY THE END OF JUNE
(US) FED PLANS TO BUY $500B IN AGENCY MBS BY THE END OF JUNE, PURCHASES WILL BE LIMITED TO FIXED-RATE MBS
- The 4 investment managers for the purchases will be Blackrock, Goldman Sachs, PIMCO, Wellington.
From Bloomberg:
Fed Selects Four Firms to Manage MBS Purchase Plan
By Craig Torres and Jody Shenn
Dec. 30 (Bloomberg) -- The Federal Reserve chose BlackRock Inc., Goldman Sachs Asset Management, Pacific Investment Management Co. and Wellington Management Co. to manage a $500 billion purchase of mortgage-backed securities it plans to complete by June.
“They picked the crème de la creme of the money managers,” said Art Frank, head of mortgage-bond research at Deutsche Bank AG in New York. “By doing $500 billion by June, no question they’re doing their best to try to hold down mortgage rates.”
The collapse of U.S. mortgage finance last year led to the worst credit crisis in seven decades and triggered write downs and losses at financial institutions exceeding $1 trillion. The central bank has expanded credit by $1.3 trillion over the past year through programs extending liquidity to banks, bond dealers and other financial institutions. The Fed plans to create money to purchase the bonds, boosting bank reserves.
Only fixed-rate agency mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae will be eligible for purchase, the central bank said in a statement released in Washington today. The purchases, to start early in January, will include securities with maturities of 30, 20, and 15 years, and will exclude riskier securities such as interest- only bonds, the Fed said.
The Fed’s program is intended to lower rates by reducing the supply of outstanding agency mortgage bonds, boosting their prices and thus lowering their yields. Lower yields in turn reduce the interest rates banks need to charge on new mortgages to ensure profitable sales of the securities.
‘Very Quickly’
“It looks like they’re really going to ramp this up and it’s going to be done very quickly,” said Credit Suisse analyst Mahesh Swaminathan. Thirty-year mortgage rates could fall to an average 4.75 percent, he said, and “this is going to take it down sooner rather than later.”
The average rate on a typical U.S. fixed-rate mortgage fell to 5.22 percent early yesterday, the lowest since 2005, from as high as 6.46 percent in October, according to Bankrate.com data. The Treasury also bought $49.7 billion of the companies’ home- loan securities from September through last month.
“The investment managers will be required to purchase securities frequently and to disclose the Federal Reserve as principal,” the central bank said. “Each investment manager will be required to implement ethical walls that appropriately segregate the investment management team” that implements the Fed’s purchases from advisory and proprietary trading teams, the Fed said.
‘Minimal’ Risk
The central bank said risk on the securities would be “minimal” and “mitigated by the conservative, buy-and-hold investment strategy” of the program.
Fed officials announced the program Nov. 25 and said the action was taken to “reduce the cost and increase the availability of credit for the purchase of houses.”
The government hasn’t stemmed the decline in housing even after channeling $172 billion in new capital to banks. The Fed has provided $535 billion in loans to banks as of Dec. 24. Slumping sales and tight credit helped push home prices in 20 major U.S. cities a record 18 percent lower in the 12 months to October, according to the S&P/Case-Shiller index released today.
Oh, yeah... Denninger did a piece related to this to: Anyone Swear an Oath to the Constitution?
End of Day 12/30
For the day, the DOW added 184 points (2.2%), the S&P added 2.4%, the NDX added 2.4%, and the RUT seems to lead no matter what direction (more volatile) and finished up nearly 3.6%.
I’ve been covering the fundamentals with my articles all day, and we know how that’s looking, so let’s talk technicals… I wish I had a lot to contribute here, but the truth is that we are still very much in the range we’ve been in. If this is wave ‘c’ up of wave ‘B’ up/sideways, then it will produce the final leg up before the next series of declines. To prove that we’re looking at wave ‘c’, it must break the S&P 920 area, which is another 30 points or so higher and has been very heavy overhead resistance. If it breaks 920, then we can talk about targets higher, but until then, we’re still just in a range.
In the short term, the 60, 30, and 10 minute stochastic indicators are overbought, meaning that we could see some decline in the next day or so. There’s still a little more upside room on the slow indicators, but all the fasts are there.
Let’s take a look at the one month daily SPX chart below. That’s a pretty healthy looking candlestick that lends credence to this being the start of wave ‘c’ up. You can see that it completely engulfed all of last week’s action and most importantly, it regained the 50 day moving average… barely. You can see that the 920 area has stopped all the prior advances on this chart and that now there’s a declining trendline and the upper Bollinger to contend with. Also note on this chart where the two light blue lines cross – the 29th! That’s the exact turn date, and that was a bear wedge that I drew over a month ago – technical analysis is funny when you begin to “see” the correlations.
Next chart is a one month DOW. It, too, managed to close above the 50dma. Note the low but still increasing volume and how the fast stochastic has turned up off the oversold line (still on a weekly buy signal with lots of room).
The NDX and RUT also managed to close over the 50dma – bullish.
It would appear to me that a re-test of the 920 area is the next order of business. Can it do it on low volume? Perhaps, but I’m in the “prove it to me” mode. I’m inclined to do nothing until later in the week… if this is wave ‘c’ up, I’ll want to start positioning short as it runs out of steam. I think the 920 area is probably a good spot at a short attempt, but with the low volume fun and games, I’m sure there will be sucker moves galore. I’m looking to enter into a “swing” trade, one that can last for a while on the short side, and that may not come until the S&P is over 1,000. If we break 920 on the upside, that’s probably a great place to get long if you haven’t already, as long as you’re willing to use 920 as a stop. That would be a very short term trade, in my opinion.
One last note, the DOW, S&P, and Wilshire 5,000 Point & Figure charts all did a flip-flop breaking out higher and producing new upside targets. Notice how this sideways action whipsaws these computer generated charts? Don’t let it do that to your trading, it’s expensive, I know!
S&P 500
DOW
I’ve been covering the fundamentals with my articles all day, and we know how that’s looking, so let’s talk technicals… I wish I had a lot to contribute here, but the truth is that we are still very much in the range we’ve been in. If this is wave ‘c’ up of wave ‘B’ up/sideways, then it will produce the final leg up before the next series of declines. To prove that we’re looking at wave ‘c’, it must break the S&P 920 area, which is another 30 points or so higher and has been very heavy overhead resistance. If it breaks 920, then we can talk about targets higher, but until then, we’re still just in a range.
In the short term, the 60, 30, and 10 minute stochastic indicators are overbought, meaning that we could see some decline in the next day or so. There’s still a little more upside room on the slow indicators, but all the fasts are there.
Let’s take a look at the one month daily SPX chart below. That’s a pretty healthy looking candlestick that lends credence to this being the start of wave ‘c’ up. You can see that it completely engulfed all of last week’s action and most importantly, it regained the 50 day moving average… barely. You can see that the 920 area has stopped all the prior advances on this chart and that now there’s a declining trendline and the upper Bollinger to contend with. Also note on this chart where the two light blue lines cross – the 29th! That’s the exact turn date, and that was a bear wedge that I drew over a month ago – technical analysis is funny when you begin to “see” the correlations.
Next chart is a one month DOW. It, too, managed to close above the 50dma. Note the low but still increasing volume and how the fast stochastic has turned up off the oversold line (still on a weekly buy signal with lots of room).
The NDX and RUT also managed to close over the 50dma – bullish.
It would appear to me that a re-test of the 920 area is the next order of business. Can it do it on low volume? Perhaps, but I’m in the “prove it to me” mode. I’m inclined to do nothing until later in the week… if this is wave ‘c’ up, I’ll want to start positioning short as it runs out of steam. I think the 920 area is probably a good spot at a short attempt, but with the low volume fun and games, I’m sure there will be sucker moves galore. I’m looking to enter into a “swing” trade, one that can last for a while on the short side, and that may not come until the S&P is over 1,000. If we break 920 on the upside, that’s probably a great place to get long if you haven’t already, as long as you’re willing to use 920 as a stop. That would be a very short term trade, in my opinion.
One last note, the DOW, S&P, and Wilshire 5,000 Point & Figure charts all did a flip-flop breaking out higher and producing new upside targets. Notice how this sideways action whipsaws these computer generated charts? Don’t let it do that to your trading, it’s expensive, I know!
S&P 500
DOW
The Velocity of Money…
How fast is she doing? Let’s just say that we aren’t driving a Ferrari here, okay? More like an old VW Beattle whose transmission just dropped out!
What is M1? It’s the measure of the U.S. money stock that consists of currency held by the public, travelers checks, demand deposits and other checkable deposits including NOW (negotiable order of withdrawal) and ATS (automatic transfer service) account balances. In other words, it’s what most people would consider to be readily available/ spendable cash.
Here’s a current chart of M1 courtesy of our Fed (note the newly shaded recession area they finally confessed to). Also note the dramatic upward climb as more cash is thrown at our economy in an attempt to “provide liquidity.”
M1 Money Supply:
The problem is that too little liquidity is not the problem and never has been. In fact, the problem has been, and still is, too much liquidity in the form of cheap and easy credit. Our economy has reached what I call “macro debt saturation,” that is that the income from all earnings is unable to pay principal and interest on all debts. We’re there – please read “Death by Numbers” if you haven’t already - Death by Numbers.
Debt destroys the VELOCITY of money.
Normally a dollar that enters the economic system gets spent more than once. Let’s say that you take out a loan to buy a new house and that money is given to your contractor. He then takes that money and pays the plumber, the mason, the electrician and so on – and then they in turn go out and spend that same money on down the line. That’s velocity.
Now imagine that you get a loan and the check goes to your contractor who is in massive trouble with his debts. To avoid bankruptcy, he takes that check and makes a payment on his debts, thus returning that money back to the bank before it can ripple through the economy. See? Debt brings velocity down.
So to get our economy going, what’s the Fed trying to do? They are trying to inject money in hopes to spur spending. Will it work? Let’s look at the next chart:
M1 Money Multiplier:
As you can see, the M1 Money Multiplier has fallen below 1. That means that for every dollar placed into the economy, less than a dollar makes it to the second person! Would that be good? Ahhhh, NO! It is proof positive of macro debt saturation – end of discussion.
Take a look at that chart! Normal velocities run upwards towards 3. Less than one means that the Fed has lost control with another tool. Below is a close up view of velocity over the past four months:
M1 Money Multiplier (close up):
Remember that they already lowered interest rates to zero – that gun is now empty. Now that the velocity of money is less than one, they have lost control of that gun also. What gun is left? You tell me, I don’t see it, because it doesn’t exist.
This ties into my earlier article Setser’s “The Collapse of Financial Globalization”, as the entire globe is debt saturated. The velocity of money has gone to less than one because every dollar put into the system is being used to pay back debt.
In regards to world wide capital flows, the same velocity problem is occurring. The problem is that we've been relying on foreigners to finance our debts, and that's worked as long as they are able to. That has already ended as shown by the private capital flows; it is the government capital flows that are the only thing keeping the game going.
The "experts" in teevee land believe that it doesn't matter, that we can continue to print our way out since we are the reserve currency. That is only true as long as the foreigners continue to return our worthless paper to us. That will end, too, because of macro debt saturation and because the velocity of the money they print no longer has a stimulus effect. Bet you don’t want to know what the velocity of money looks like in Zimbabwe, Iceland, or Argentina right now! Those who believe that being the reserve currency will allow us to magically escape the laws of economics are living in an Alice in Wonderland world but they will eventually awaken from their dreams to find that reality is a lot more like a nightmare.
Sorry to be negative, that’s not me, it’s the data – I’m just a messenger who would like to see a better long term system put in place so that we never have to be in this situation again.
Nate
PS – Karl Denninger did an excellent piece on this as well: Uh Oh Monetary Flat Spin
What is M1? It’s the measure of the U.S. money stock that consists of currency held by the public, travelers checks, demand deposits and other checkable deposits including NOW (negotiable order of withdrawal) and ATS (automatic transfer service) account balances. In other words, it’s what most people would consider to be readily available/ spendable cash.
Here’s a current chart of M1 courtesy of our Fed (note the newly shaded recession area they finally confessed to). Also note the dramatic upward climb as more cash is thrown at our economy in an attempt to “provide liquidity.”
M1 Money Supply:
The problem is that too little liquidity is not the problem and never has been. In fact, the problem has been, and still is, too much liquidity in the form of cheap and easy credit. Our economy has reached what I call “macro debt saturation,” that is that the income from all earnings is unable to pay principal and interest on all debts. We’re there – please read “Death by Numbers” if you haven’t already - Death by Numbers.
Debt destroys the VELOCITY of money.
Normally a dollar that enters the economic system gets spent more than once. Let’s say that you take out a loan to buy a new house and that money is given to your contractor. He then takes that money and pays the plumber, the mason, the electrician and so on – and then they in turn go out and spend that same money on down the line. That’s velocity.
Now imagine that you get a loan and the check goes to your contractor who is in massive trouble with his debts. To avoid bankruptcy, he takes that check and makes a payment on his debts, thus returning that money back to the bank before it can ripple through the economy. See? Debt brings velocity down.
So to get our economy going, what’s the Fed trying to do? They are trying to inject money in hopes to spur spending. Will it work? Let’s look at the next chart:
M1 Money Multiplier:
As you can see, the M1 Money Multiplier has fallen below 1. That means that for every dollar placed into the economy, less than a dollar makes it to the second person! Would that be good? Ahhhh, NO! It is proof positive of macro debt saturation – end of discussion.
Take a look at that chart! Normal velocities run upwards towards 3. Less than one means that the Fed has lost control with another tool. Below is a close up view of velocity over the past four months:
M1 Money Multiplier (close up):
Remember that they already lowered interest rates to zero – that gun is now empty. Now that the velocity of money is less than one, they have lost control of that gun also. What gun is left? You tell me, I don’t see it, because it doesn’t exist.
This ties into my earlier article Setser’s “The Collapse of Financial Globalization”, as the entire globe is debt saturated. The velocity of money has gone to less than one because every dollar put into the system is being used to pay back debt.
In regards to world wide capital flows, the same velocity problem is occurring. The problem is that we've been relying on foreigners to finance our debts, and that's worked as long as they are able to. That has already ended as shown by the private capital flows; it is the government capital flows that are the only thing keeping the game going.
The "experts" in teevee land believe that it doesn't matter, that we can continue to print our way out since we are the reserve currency. That is only true as long as the foreigners continue to return our worthless paper to us. That will end, too, because of macro debt saturation and because the velocity of the money they print no longer has a stimulus effect. Bet you don’t want to know what the velocity of money looks like in Zimbabwe, Iceland, or Argentina right now! Those who believe that being the reserve currency will allow us to magically escape the laws of economics are living in an Alice in Wonderland world but they will eventually awaken from their dreams to find that reality is a lot more like a nightmare.
Sorry to be negative, that’s not me, it’s the data – I’m just a messenger who would like to see a better long term system put in place so that we never have to be in this situation again.
Nate
PS – Karl Denninger did an excellent piece on this as well: Uh Oh Monetary Flat Spin
Trying to Re-inflate the GMAC Bubble...
Yet another shining example of government actions creating more and bigger purposeful misallocations…
Just what people with credit scores less than 700 need – as if they don’t already have more debt than their income can service! History will not look down on these actions in a favorable light, that’s for certain.
Does anyone reading this believe this will truly help GM or re-inflate the bubble? Not only do I not think so, again it only speeds the destructive force of math that works against you. Don't look for better, more efficient cars to come out of this process.
Just what people with credit scores less than 700 need – as if they don’t already have more debt than their income can service! History will not look down on these actions in a favorable light, that’s for certain.
Does anyone reading this believe this will truly help GM or re-inflate the bubble? Not only do I not think so, again it only speeds the destructive force of math that works against you. Don't look for better, more efficient cars to come out of this process.
GMAC Widens Lending as U.S. Injects $6 Billion to Help Save GM
By Rebecca Christie and David Mildenberg
Dec. 30 (Bloomberg) -- GMAC LLC, bolstered by a $6 billion federal bailout, resumed lending to General Motors Corp. customers with lower credit scores as the U.S. widened its effort to keep the automaker in business.
The Treasury said yesterday it will take a $5 billion stake in Detroit-based GMAC, the financing arm of GM, and lend $1 billion to the automaker so it can support GMAC. Within hours, GM was offering no-interest loans for as long as five years to counter this year’s 22 percent drop in sales, caused in part by the inability of its customers to get financing.
Reviving GM’s sales has become a priority for U.S. policymakers including the Federal Reserve because of concern that the automaker and its suppliers might go bankrupt and deepen the year-old recession by firing millions of workers. The funds for GMAC are on top of $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.
“The economy has stopped on a dime, and the Fed is looking anywhere there are large markets they can affect in big ways,” said Greg Prost, chief investment officer at Ambassador Capital Management in Detroit, which manages about $800 million. “If they are going to save the car companies, there is going to have to be financing.”
GMAC will now offer financing to vehicle buyers with credit scores of 621 or higher, compared with a previous standard of at least 700, according to a company statement. The higher threshold had excluded about 42 percent of U.S. consumers.
The company said it won’t finance “higher-risk transactions,” instead concentrating on prime customers who are more likely to repay using “responsible credit standards.” The relaxed policy “will allow us to return to more normal levels of financing volume, and should help in efforts to stabilize the U.S. auto industry,” GMAC President Bill Muir said in today’s statement.
Helping GM
The lender financed about 35 percent of GM’s retail customers and about three-quarters of dealer inventory last year. GM, which sold 51 percent of GMAC in 2006 to a group led by private equity firm Cerberus Capital Management LP, is seeking a permanent federal bailout to avert bankruptcy. Cerberus also owns Chrysler, which it acquired last year.
Terrific Article – Setser’s “The Collapse of Financial Globalization…”
I want to share an article by Brad Setser which can be found in its entirety here: The Collapse of Financial Globalization…
Below, I have assembled what I feel to be the key statements. He does a terrific job of explaining cash flows through the Shadow Banking System, and how those flows have stopped. He also demonstrates how our nation’s debts have been propped up for as long as they have and just how fragile that balance of international flows is. To me this is more evidence of our nation’s and now world’s dollar Ponzi scheme. It’s all a Madoff style house of cards where once the flow of funds gets interrupted, the entire scheme can and will come crashing down.
While you may not fully understand Setser’s work at first glance, give it some thought and that house of cards will become evident. I’m continuing my work to try to make this easily understandable – it is my contention that our banking and monetary systems are the root cause of the problems. They have combined to corporatise and corrupt every step of our political system (italics are mine for emphasis):
Below, I have assembled what I feel to be the key statements. He does a terrific job of explaining cash flows through the Shadow Banking System, and how those flows have stopped. He also demonstrates how our nation’s debts have been propped up for as long as they have and just how fragile that balance of international flows is. To me this is more evidence of our nation’s and now world’s dollar Ponzi scheme. It’s all a Madoff style house of cards where once the flow of funds gets interrupted, the entire scheme can and will come crashing down.
While you may not fully understand Setser’s work at first glance, give it some thought and that house of cards will become evident. I’m continuing my work to try to make this easily understandable – it is my contention that our banking and monetary systems are the root cause of the problems. They have combined to corporatise and corrupt every step of our political system (italics are mine for emphasis):
The collapse of financial globalization…
Posted on Monday, December 29th, 2008
By bsetser
The last six months — if not the last year — logged what felt like a decade’s worth of financial news. So perhaps it isn’t surprising that swings that normally would attract an enormous amount of attention have gone almost unnoticed. Like the near-total collapse of private capital flows.
Both private capital inflows to the US and private capital outflows from the US have fallen sharply. They have gone from a peak of around 15% of US GDP to around zero in a remarkably short period of time…
The fall in private flows over the last four quarters has been much sharper than the fall in the US current account deficit. The current account deficit continues to hover around $700 billion (5% of US GDP). Financial globalization — the growth in private cross-border flows, and associated rise in private inflows and private outflows — doesn’t seem to have been as central to the ability of the United States to sustain large current account deficits as some thought back in 2004 and 2005.
…But even if “private” Treasury purchases since mid-2007 are counted there still would have been a stunning fall in private capital flows. Direct investment flows have continued. Other financial flows though have largely gone in reverse, with investors selling what they previously bought. In the third quarter foreign investors sold about $90b of US securities (excluding Treasuries) and Americans sold about $85 billion of foreign securities. And the reversal in bank flows on both sides (as past loans have been called) has been absolutely brutal.
This sharp fall has bearing on the bigger debate over the role global capital, global savings and foreign central banks played in helping to to create the conditions that allowed US households to sustain a large deficit for so long — and whether American and other policy makers should have paid more attention to the risks that came with the surge in foreign demand for US financial assets earlier this decade.
…Think of the process this way. Suppose a US bank lends a billion dollars to a bank in London that lends that money to a hedge fund domiciled the Caribbean that buys a billion dollars of US securities. That chain results in an outflow and inflow, but the outflow just financed the inflow — it doesn’t help to finance the current account deficit. By contrast, China’s purchases of Treasuries and Agencies reflect in large part China’s current account surplus — not Chinese banks borrowing from US banks. They certainly help to finance the US current account deficit.
I think we now more or less know that the strong increase in gross capital inflows and outflows after 2004 (gross inflows and outflows basically doubled from late 2004 to mid 2007) was tied to the expansion of the shadow banking system.
It was a largely unregulated system. And it was largely offshore, at least legally. SIVs and the like were set up in London. They borrowed short-term from US banks and money market funds to buyer longer-term assets, generating a lot of cross border flows but little net financing. European banks that had a large dollar book seem to have been doing much the same thing. The growth of the shadow banking system consequently resulted in a big increase in gross private capital outflows and gross private capital inflows.
Those private flows have now disappeared, or even reversed. They actually started to disappear back in August 2007. That didn’t keep the US from continuing to run a large (5% of GDP) current account deficit. The fall in private flows has been far sharper than the fall in the current account deficit.
Why didn’t the total collapse in private flows lead financing for the US current account deficit to dry up? That, after all, is what happened in places like Iceland — and Ukraine.
My explanation is pretty straightforward.
Central banks were the main source of financing for the US deficit all along. Setting Japan aside, the big current account surplus countries were all building up their official reserves and sovereign funds — and they were the key vector providing financing to the deficit countries.
And when (net) private demand for US assets fell, official flows picked up. As I noted earlier, private purchases of Treasuries after June 2007 are almost certainly really official flows. If those purchases are added to recorded official flows, total official flows over the last four quarters of data (q4 07 to q2 08) now almost match the current account deficit.
…Central banks lent the proceeds of their swap lines with the Fed to private banks abroad, and private banks in turn repaid their maturing dollar debts — so the swap lines financed the unwinding of existing US loans to the rest of the world. Call it facilitating the unwinding of some of the legacy of the excesses of the past few year. Or call it a new wave of financial globalization, one led by the central banks…
Consumer Confidence at All Time Low…
Yet the market is marching confidently skyward this morning so far… the DOW is up 150 points as I type and it has exceeded last week’s intraday high (on DOW and S&P). That makes this move appear more likely to be wave ‘c’ up, as mentioned in this morning’s update. I’m beginning to see some small negative divergences already, so don’t be overly “confident,” bad news is in fact NOT good news, and you still cannot fly just on hope while flapping your arms rapidly up and down!
Consumer confidence index at all-time low
Conference Board's measure sinks amid dismal job market and credit crunch.
By Julianne Pepitone, CNNMoney.com contributing writer
Last Updated: December 30, 2008: 10:53 AM ET
NEW YORK (CNNMoney.com) -- A key measure of consumer confidence fell to an all-time low in December amid a dismal job market and uncertain outlook for the new year.
The Conference Board, a New York-based business research group, said Tuesday that its Consumer Confidence Index fell to 38 in December from the downwardly revised 44.7 in November.
Economists were expecting the index to increase to 45.5, according to a Briefing.com consensus survey of economists.
"The further erosion of the Consumer Confidence Index reflects the rapid and steep deterioration of economic conditions that occurred in the fourth quarter of 2008," said Lynn Franco, director of the Conference Board Consumer Research Center, in a statement.
Wachovia senior economist Mark Vitner said that assessment is "right on the money."
"It looks like the uptick in November was a knee-jerk response to the presidential election being over," he said. The "false reading in November" bumped their expectations too high, leading to disappointment this month, Vitner added.
The gloomy news came at the end of a full year of recession. The credit crunch has strained the financial system as central banks struggle to raise capital.
Latest Case-Schiller Data Points to Record Price Declines...
This is the power of deflation… the largest credit bubble in the history of mankind was created and it will require much more time to unwind than most people were thinking. I contend that despite record inventory levels, there is a glut of homeowners who would like to sell, but have yet to list. Thus the pent-up pressure is still on the sell side, not on the buy side. As these price declines get worse, more and more people will be upside down on their mortgage making refinancing more difficult if not impossible. Those sellers made a huge mistake in waiting, a mistake that many have made and will continue to make in the future.
The psychology of price declines is treacherous if you own assets that are going down. The average person does not initially believe it will be a large decline, they think it will be temporary and short lived like the ones they experienced prior. Then the declines pick up steam and they get defensive, “well, I’m just going to wait.” Prices go down some more and they may realize they should have sold awhile ago, but then they think, “how much lower can prices go?” And that is a fallacy that traps many people into riding even deeper into the declines, for prices can ALWAYS GO LOWER.
I liken this to the person who buys the $2 stock that has fallen 90% in value. They think that since it fell so much already that it can’t fall any further! Yet, that person can lose HALF their money if the stock falls by only another $1.
So, what then happens is at some point that homeowner or stock owners gives up. Of course the time they give up is the time the market turns. That’s the way it works for MOST people. It doesn’t have to work that way for YOU. Oh, if your plan is to “hold” onto your real estate thinking it’ll come around eventually, you better be prepared to hold it for a VERY long time all the while paying increasing taxes and maintenance costs…
The psychology of price declines is treacherous if you own assets that are going down. The average person does not initially believe it will be a large decline, they think it will be temporary and short lived like the ones they experienced prior. Then the declines pick up steam and they get defensive, “well, I’m just going to wait.” Prices go down some more and they may realize they should have sold awhile ago, but then they think, “how much lower can prices go?” And that is a fallacy that traps many people into riding even deeper into the declines, for prices can ALWAYS GO LOWER.
I liken this to the person who buys the $2 stock that has fallen 90% in value. They think that since it fell so much already that it can’t fall any further! Yet, that person can lose HALF their money if the stock falls by only another $1.
So, what then happens is at some point that homeowner or stock owners gives up. Of course the time they give up is the time the market turns. That’s the way it works for MOST people. It doesn’t have to work that way for YOU. Oh, if your plan is to “hold” onto your real estate thinking it’ll come around eventually, you better be prepared to hold it for a VERY long time all the while paying increasing taxes and maintenance costs…
Home prices post record 18% drop
The 20-city S&P Case-Shiller index has posted losses for a staggering 27 months in a row.
By Les Christie, CNNMoney.com staff writer
Last Updated: December 30, 2008: 10:08 AM ET
NEW YORK (CNNMoney.com) -- Home prices posted another record decline in October, falling 18% compared with a year earlier, according to a closely watched report released Tuesday.
The 20-city S&P Case-Shiller index has posted losses for a staggering 27 months in a row. In October, 14 of the 20 cities set fresh price decline records.
"The bear market continues; home prices are back to their March 2004 levels," says David Blitzer, Chairman of the Index Committee at Standard & Poor's.
Sunbelt cities suffered the most, but most of the country is watching home values fall. In Phoenix prices have plunged 32.7% since October 2007, Las Vegas home values are down 31.7% year-over-year, while San Francisco prices fell 31%. Miami, Los Angeles and San Diego recorded year-over-year declines of 29%, 27.9% and 26.7%, respectively.
"As of October 2008, the 20-City Composite is down 23.4%," said Blitzer. "In October, we also saw three new markets enter the 'double-digit' club."
Atlanta, Seattle and Portland reported annual rates of decline of 10.5%, 10.2% and 10.1%, respectively.
"While not yet experiencing as severe a contraction as in the Sunbelt, it seems the Pacific Northwest and Mid-Atlantic South is not immune to the overall demise in the housing market," Blitzer added.
Deteriorating environment
Many of the factors affecting home prices turned strongly negative this fall, according to Blitzer.
"October was really the first month to feel the full brunt of the credit crunch," he said. "Up until the Lehman Brothers [bankruptcy filing on September 15], everyone felt relatively optimistic."
Plus, in many of the free-falling cities distressed properties, such as foreclosed homes and short sales, make up a majority of real estate sales. These houses tend to sell at a steep discount to the rest of the market, and when they account for a large proportion of all sales, they can exaggerate the depth of price declines.
Of course, foreclosures continue to be a big problem as well. In October alone, nearly 85,000 people lost their homes to foreclosures, adding vacant inventory to an already overburdened market.
Home sellers should not expect prices to improve any time soon, according to Pat Newport, a real estate analyst for IHS Global Insight.
"I expect it's going to get quite a bit worse over the next couple of months," he said. "Existing home sales reports have really been bad."
And although interest rates are currently extremely low, that's doing more to help people refinancing existing mortgages than it is to help new home buyers.
"Buyers still have to have a 20% down payment," said Newport, "and, in this environment, it can be hard to meet that criteria."
Morning Update 12/30
Good Morning,
Futures are up this morning with the DOW up about 30 points.
The Treasury is using our future tax dollars (won’t be there) to give GMAC a “lifeline.” Not exactly the apple pie and Chevrolet I remember, and it’s definitely not what I would call any semblance of free enterprise anymore either. For they were singing, “BUY, BUY, Miss American pie, I drove my Chevy to the Congress, but the Congressman lied… the day America dieeeeeddddd!”
And more “good” news… home prices plunged another record amount in the month of October, and retail sales plunged more than expected last week as well.
Tensions continue to mount between Israel and Hamas, while tensions also mount between Pakistan and India. Gold, however, is actually down a little this morning.
Yesterday was a turn day and COULD have been a bottom. I’m not betting on that one yet, though. It’s clear to me that the technicals can be read both ways at this juncture, but I’m sorry, the fundamentals cannot be, despite the media’s best attempts. Therefore, I remain steadfast in my call that lower equity prices remain in our future. In the short term, it may be that we just began wave ‘c’ up of the larger correction within wave ‘B’. If so, I would expect that over the next week or two that we would work our way higher to fulfill the inverted H&S pattern up around the 1,000 S&P level. I don’t like that pattern, it’s out of proportion time wise, and my heart and mind just isn’t in this whole rally thing. I don’t see the market behaving in that manner, I see a drowning man who is desperately trying to keep his head above water, that’s what I see. Now I know that makes me a “glass half empty” kind of guy, but hey, that’s what I see while I know that others see a remarkably resilient market that despite horrendous news is doing well, a good sign right? Right? Don’t worry, Alice, the Cheshire cat will be over to visit soon!
So, once again, I’m neutral for today. I have crossed indications on the short term stochastic, we’re caught in a range and I’m not going to get too excited in this low volume environment until we break free one way or the other.
I will be paying very much attention to the bond market in the next few days. TLT and the long bond are having difficulty making further headway and could retrench here. That’s the one play that I am still monitoring right now, oh, and also REITS.
Below is a 3 month chart of TLT (20 yr bond)… am watching for a potential breakdown, note the stochastic sell signal and gap below the 119 level:
Consumer confidence numbers come out in at 10:00 eastern.
Futures are up this morning with the DOW up about 30 points.
The Treasury is using our future tax dollars (won’t be there) to give GMAC a “lifeline.” Not exactly the apple pie and Chevrolet I remember, and it’s definitely not what I would call any semblance of free enterprise anymore either. For they were singing, “BUY, BUY, Miss American pie, I drove my Chevy to the Congress, but the Congressman lied… the day America dieeeeeddddd!”
And more “good” news… home prices plunged another record amount in the month of October, and retail sales plunged more than expected last week as well.
Tensions continue to mount between Israel and Hamas, while tensions also mount between Pakistan and India. Gold, however, is actually down a little this morning.
Yesterday was a turn day and COULD have been a bottom. I’m not betting on that one yet, though. It’s clear to me that the technicals can be read both ways at this juncture, but I’m sorry, the fundamentals cannot be, despite the media’s best attempts. Therefore, I remain steadfast in my call that lower equity prices remain in our future. In the short term, it may be that we just began wave ‘c’ up of the larger correction within wave ‘B’. If so, I would expect that over the next week or two that we would work our way higher to fulfill the inverted H&S pattern up around the 1,000 S&P level. I don’t like that pattern, it’s out of proportion time wise, and my heart and mind just isn’t in this whole rally thing. I don’t see the market behaving in that manner, I see a drowning man who is desperately trying to keep his head above water, that’s what I see. Now I know that makes me a “glass half empty” kind of guy, but hey, that’s what I see while I know that others see a remarkably resilient market that despite horrendous news is doing well, a good sign right? Right? Don’t worry, Alice, the Cheshire cat will be over to visit soon!
So, once again, I’m neutral for today. I have crossed indications on the short term stochastic, we’re caught in a range and I’m not going to get too excited in this low volume environment until we break free one way or the other.
I will be paying very much attention to the bond market in the next few days. TLT and the long bond are having difficulty making further headway and could retrench here. That’s the one play that I am still monitoring right now, oh, and also REITS.
Below is a 3 month chart of TLT (20 yr bond)… am watching for a potential breakdown, note the stochastic sell signal and gap below the 119 level:
Consumer confidence numbers come out in at 10:00 eastern.
Monday, December 29, 2008
End of Day 12/29
Yet another low volume, time wasting trading session!
For the day, the DOW finished off 31 whole points, the S&P gave up a miserly .4%, the NDX was more giving with a minus 1% performance, and the RUT was the most generous, giving up a full 2.2% on the day.
And that just about sums it up. Technology and small caps stumble while the larger caps hang onto their support areas. I don’t see too much convincing either way, the internals look the same with the NDX and small caps leaning more negatively than their larger brethren.
Below is a one month daily of the DOW. Today’s down, then up, action produced a hammer on higher volume than the past two sessions, but still pretty weak overall. You can see that the fast stochastic has turned up already from the bottom, but the slow is still pointed down with room to run.
Here’s a 20 day, 20 minute chart of the SPX. Again, basically sideways action and we can’t get too far away from the 865 level before we return. We broke the double green line Head & Shoulders, then came back above. On the NDX we came right back to its neckline. The stochastic is crossed, with the fast approaching overbought, and the slow just coming out of oversold. On the 10 minute, both the fast and slow have moved back to overbought. The bottom line is that all I see is sideways movement here that’s eating up time and is also eating up accounts of people who try to trade it. The inverted H&S is looking more and more out of proportion time wise.
REITS got hit pretty hard today, the previous article about retail sales and coming bankruptcies has a lot to do with that. Below is a 3 month daily chart of IYR (commercial real estate ETF) and you can see that we broke down out of the channel on heavier volume that the prior two days and that we have a sell signal on the stochastic.
Here is a Point & Figure chart of the REIT index that shows the same breakdown is confirmed:
Below is a two month daily chart of the VIX. Note that it has created what looks like a little channel that could be a wave 4 sideways movement… if so, there should be a wave 5 down here to lower volatility levels, and that contradicts what we’re seeing in the REITS, but would be commensurate with another movement higher in equities.
Earnings will be coming up pretty soon for the 4th quarter, that’s when reality will kick in once again. But that will also be during a “hopeful” period brought about by more hopeless spending and stimulus by our new President and not so new people who surround him. The fundamentals will not have changed, they will only be made worse with more and more stimulus.
I keep reading articles that mention no “modern” President in his right mind would try to balance a budget during a recession! Ha, ha, and all I can think is how out of their minds the people who let this situation come are. The problem is debt saturation. Those trying to press more debt into the system are going to be disappointed. It is our monetary system that is the root of this debt problem – again more on that is coming.
Have a good evening,
Nate
For the day, the DOW finished off 31 whole points, the S&P gave up a miserly .4%, the NDX was more giving with a minus 1% performance, and the RUT was the most generous, giving up a full 2.2% on the day.
And that just about sums it up. Technology and small caps stumble while the larger caps hang onto their support areas. I don’t see too much convincing either way, the internals look the same with the NDX and small caps leaning more negatively than their larger brethren.
Below is a one month daily of the DOW. Today’s down, then up, action produced a hammer on higher volume than the past two sessions, but still pretty weak overall. You can see that the fast stochastic has turned up already from the bottom, but the slow is still pointed down with room to run.
Here’s a 20 day, 20 minute chart of the SPX. Again, basically sideways action and we can’t get too far away from the 865 level before we return. We broke the double green line Head & Shoulders, then came back above. On the NDX we came right back to its neckline. The stochastic is crossed, with the fast approaching overbought, and the slow just coming out of oversold. On the 10 minute, both the fast and slow have moved back to overbought. The bottom line is that all I see is sideways movement here that’s eating up time and is also eating up accounts of people who try to trade it. The inverted H&S is looking more and more out of proportion time wise.
REITS got hit pretty hard today, the previous article about retail sales and coming bankruptcies has a lot to do with that. Below is a 3 month daily chart of IYR (commercial real estate ETF) and you can see that we broke down out of the channel on heavier volume that the prior two days and that we have a sell signal on the stochastic.
Here is a Point & Figure chart of the REIT index that shows the same breakdown is confirmed:
Below is a two month daily chart of the VIX. Note that it has created what looks like a little channel that could be a wave 4 sideways movement… if so, there should be a wave 5 down here to lower volatility levels, and that contradicts what we’re seeing in the REITS, but would be commensurate with another movement higher in equities.
Earnings will be coming up pretty soon for the 4th quarter, that’s when reality will kick in once again. But that will also be during a “hopeful” period brought about by more hopeless spending and stimulus by our new President and not so new people who surround him. The fundamentals will not have changed, they will only be made worse with more and more stimulus.
I keep reading articles that mention no “modern” President in his right mind would try to balance a budget during a recession! Ha, ha, and all I can think is how out of their minds the people who let this situation come are. The problem is debt saturation. Those trying to press more debt into the system are going to be disappointed. It is our monetary system that is the root of this debt problem – again more on that is coming.
Have a good evening,
Nate
Here's what the Future of Retailing Looks Like...
Holiday Sales Drop to Force Bankruptcies, Closings
By Heather Burke
Dec. 29 (Bloomberg) -- U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.
Retailers will close 12,000 stores in 2009, according to Howard Davidowitz, chairman of retail consulting and investment- banking firm Davidowitz & Associates Inc. in New York. AnnTaylor Stores Corp., Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.
More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales. Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.
“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.”
Sales at stores open at least a year probably dropped as much as 2 percent in November and December, the International Council of Shopping Centers said last week, more than the previously projected 1 percent decline. That would be the largest drop since at least 1969, when the New York-based trade group started tracking data. Gap Inc. and Macy’s Inc. are among retailers that will report December results on Jan. 8.
Women’s Clothing, Electronics
Consumers spent at least 20 percent less on women’s clothing, electronics and jewelry during November and December, according to data from SpendingPulse.
Retail Metrics Inc.’s December comparable-store sales index will drop an estimated 1.2 percent, or 5 percent excluding Wal- Mart Stores Inc. Retailers’ fourth-quarter earnings may fall 19 percent on average, the seventh consecutive quarterly decline, according to Ken Perkins, president of Retail Metrics, a Swampscott, Massachusetts-based consulting firm.
Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said this month during a panel discussion held at Bloomberg LP’s New York offices. Only retailers with healthy balance sheets will survive the recession, according to Matthew Katz, a managing director at consulting firm AlixPartners LLP.
Store Closings
About 200,000 stores may close in 2009, compared with a record 160,000 in 2008, Flickinger said.
The entire article can be found here: Bloomberg
Update
The NDX, as you can see in the 20 minute chart below, has broken its H&S neckline. It could easily come back up to “taste” it again, but this is a very reliable pattern and the target on this one is down about 1,100.
If the tech sectors continue to under perform, they will eventually drag the other indices down beneath their necklines as well. For now, the necklines on the DOW and SPX are holding, but just barely.
Here is a link to an article that points out a bearish indicator: http://vixandmore.blogspot.com/2008/12/isee-equity-call-to-put-ratio-at.html
If the tech sectors continue to under perform, they will eventually drag the other indices down beneath their necklines as well. For now, the necklines on the DOW and SPX are holding, but just barely.
Here is a link to an article that points out a bearish indicator: http://vixandmore.blogspot.com/2008/12/isee-equity-call-to-put-ratio-at.html
Update
As the oscillators where pointing to in the short term, the DOW is now down about 65 points. I do see a couple of POTENTIAL patterns that I want to point out…
Below is a 60 minute chart of the DOW; note the new purple triangle I just drew in (hey, we’ve been in this range for so long purple is all that’s left!). The DOW just broke the lower trendline for now. This is what sideways does, however, it creates new triangles as it moves sideways as we’ve done several times now. Is this the for real breakdown?
Let’s look at the 20 minute chart… here I have drawn what is a potential H&S neckline with the double green lines. It is not verified until that neckline is broken.
And below is a 20 minute SPX chart showing the same break of the purple triangle. The H&S neckline in this case is the dark blue line, that same old bottom of the big triangle line that’s been acting like a magnet for the past 3 months. Look where we are, right on it! And also note the descending twin red lines that are the inverted H&S neckline that we still can’t get away from!
If we do break down and confirm the H&S pattern, it’s good for about 60 S&P points. Will it happen? It sure seems that we’re stuck in a low volume range to me. The VIX has jumped 4% higher, that MAY bolster the downward case, but the bottom line for me is that this area of the chart is dangerous and difficult to make money from. I need to see a clean breakdown from those necklines to get short and to get long I would need to hear some type of news to stimulate a move that has the potential to break 920 on the SPX up side. Guess what, it won’t be another rate cut that does it!
DOW is now off 80 points… on a clean break beneath 8,400, I like the odds of going down to the 7,900 area, about 500 points lower.
Below is a 60 minute chart of the DOW; note the new purple triangle I just drew in (hey, we’ve been in this range for so long purple is all that’s left!). The DOW just broke the lower trendline for now. This is what sideways does, however, it creates new triangles as it moves sideways as we’ve done several times now. Is this the for real breakdown?
Let’s look at the 20 minute chart… here I have drawn what is a potential H&S neckline with the double green lines. It is not verified until that neckline is broken.
And below is a 20 minute SPX chart showing the same break of the purple triangle. The H&S neckline in this case is the dark blue line, that same old bottom of the big triangle line that’s been acting like a magnet for the past 3 months. Look where we are, right on it! And also note the descending twin red lines that are the inverted H&S neckline that we still can’t get away from!
If we do break down and confirm the H&S pattern, it’s good for about 60 S&P points. Will it happen? It sure seems that we’re stuck in a low volume range to me. The VIX has jumped 4% higher, that MAY bolster the downward case, but the bottom line for me is that this area of the chart is dangerous and difficult to make money from. I need to see a clean breakdown from those necklines to get short and to get long I would need to hear some type of news to stimulate a move that has the potential to break 920 on the SPX up side. Guess what, it won’t be another rate cut that does it!
DOW is now off 80 points… on a clean break beneath 8,400, I like the odds of going down to the 7,900 area, about 500 points lower.
Morning Update 12/29
Good Morning,
Israel now claims that it is in “an all-out war” with Hamas. Oil and gold have responded as they always do to geopolitical crisis, they are going up.
Yesterday evening our futures were down about 100 points on the DOW, but climbed all the way back to even or a little higher this morning – but with a half hour to the open, the DOW is down slightly, and the S&P is off by about 3 points from Friday’s close.
Other news over the weekend that could impact the markets include: IndyMac Bank is supposedly close to a deal with a group of private investors who will buy it. The details are not known, but if they buy it with all its debts attached, all I can say is good luck! Most likely they are hoping to stick their snouts into the government trough – a gamble that they can offload the stinky parts on you and me. Great system we have there!
In other news, Kuwait killed a $17 billion dollar deal with Dow Chemical. Oil revenues hurting? That’s what happens in a deflationary/deleveraging environment.
Democrats are talking about adding Municipal bond tax breaks. Be careful in this arena if that happens. Municipalities will be hurting big time in the next couple of years as their tax base shrinks and their expenses climb. There are going to be several, if not many, municipal bankruptcies this coming year, count on it. That will make raising money via debt more expensive and harder for them.
On the technical front, we are still in the same old range, killing time. I expect light volume to continue this week and that should pick up by the next week. The oscillators say that we are near overbought on 60, 20, and 10 minute scales, so in the short term it’s possible for a little upside, but I would favor the downside over the next day or so. Otherwise, we still have crosscurrents with a buy signal on the weekly and sells on the dailies.
There is also a turn window that we are in at this time. The direction into it is not clear as our motion is basically sideways. There’s still a good chance that wave ‘c’ up of wave ‘B’ will come (a lot of people are still expecting “the Obama rally” – but gee, what happened to the “Santa rally?”). We’re flat because the bad news has piled high against positive seasonality and “hope.” Which of these forces will win in the short run? Flip a coin, red or black, the technicals are not telling ME which direction at this time. I think there’s NO DOUBT that we are going to see much lower prices going forward, but does it happen soon or is there more rally first? I need to see us escape this range before I can answer that with confidence, and that means that I don’t have any money riding on it in the short term. If I see a clear direction with this turn window, I’ll let you know – right now I don’t have technical targets that I like and am willing to say the odds favor.
How’s that for unequivocal equivocal? Clear as mud! If you’re new to following my market updates, you will know that there are very few times that I’m neutral or don’t offer a good read. This time is different in that regard… I could pick a direction and HOPE I’m right, but that would be gambling, and that’s not what I like to do. So, the way I see it is this; if you’re a “long term/buy and hold investor,” you are going to continue to get KILLED, as in wiped out – not just over the next year, but over the next decade. If that’s you, wave ‘B’ will be your last chance to exit the market with any semblance of your wealth in tact. If you are playing the current trend, which is still down, then you need to consider your investment vehicle and the timeframe over which you have for that vehicle to make you money. I don’t like this location here as an entry point, but again, as I see one I’ll let you know. Please stay tuned.
Have a good day,
Nate
Israel now claims that it is in “an all-out war” with Hamas. Oil and gold have responded as they always do to geopolitical crisis, they are going up.
Yesterday evening our futures were down about 100 points on the DOW, but climbed all the way back to even or a little higher this morning – but with a half hour to the open, the DOW is down slightly, and the S&P is off by about 3 points from Friday’s close.
Other news over the weekend that could impact the markets include: IndyMac Bank is supposedly close to a deal with a group of private investors who will buy it. The details are not known, but if they buy it with all its debts attached, all I can say is good luck! Most likely they are hoping to stick their snouts into the government trough – a gamble that they can offload the stinky parts on you and me. Great system we have there!
In other news, Kuwait killed a $17 billion dollar deal with Dow Chemical. Oil revenues hurting? That’s what happens in a deflationary/deleveraging environment.
Democrats are talking about adding Municipal bond tax breaks. Be careful in this arena if that happens. Municipalities will be hurting big time in the next couple of years as their tax base shrinks and their expenses climb. There are going to be several, if not many, municipal bankruptcies this coming year, count on it. That will make raising money via debt more expensive and harder for them.
On the technical front, we are still in the same old range, killing time. I expect light volume to continue this week and that should pick up by the next week. The oscillators say that we are near overbought on 60, 20, and 10 minute scales, so in the short term it’s possible for a little upside, but I would favor the downside over the next day or so. Otherwise, we still have crosscurrents with a buy signal on the weekly and sells on the dailies.
There is also a turn window that we are in at this time. The direction into it is not clear as our motion is basically sideways. There’s still a good chance that wave ‘c’ up of wave ‘B’ will come (a lot of people are still expecting “the Obama rally” – but gee, what happened to the “Santa rally?”). We’re flat because the bad news has piled high against positive seasonality and “hope.” Which of these forces will win in the short run? Flip a coin, red or black, the technicals are not telling ME which direction at this time. I think there’s NO DOUBT that we are going to see much lower prices going forward, but does it happen soon or is there more rally first? I need to see us escape this range before I can answer that with confidence, and that means that I don’t have any money riding on it in the short term. If I see a clear direction with this turn window, I’ll let you know – right now I don’t have technical targets that I like and am willing to say the odds favor.
How’s that for unequivocal equivocal? Clear as mud! If you’re new to following my market updates, you will know that there are very few times that I’m neutral or don’t offer a good read. This time is different in that regard… I could pick a direction and HOPE I’m right, but that would be gambling, and that’s not what I like to do. So, the way I see it is this; if you’re a “long term/buy and hold investor,” you are going to continue to get KILLED, as in wiped out – not just over the next year, but over the next decade. If that’s you, wave ‘B’ will be your last chance to exit the market with any semblance of your wealth in tact. If you are playing the current trend, which is still down, then you need to consider your investment vehicle and the timeframe over which you have for that vehicle to make you money. I don’t like this location here as an entry point, but again, as I see one I’ll let you know. Please stay tuned.
Have a good day,
Nate
Sunday, December 28, 2008
Prophetic Sunday Funny
It is Sunday, after all… so here’s the comic of the day, first published February 16th, 1992. Calvin & Hobbs was always one of my favorites (click to view full size):
Friday, December 26, 2008
Spend some Time with the Good Dr. Bartlett…
The Most IMPORTANT Video You'll Ever See! Arithmatic, Population, and energy...
The concept of compounding numbers, exponential growth, and exponential curves is indeed one of the keys to understanding what has happened to our economy over the past century. The way the math works is simple, yet not intuitive to most people. If we’re going to produce a SUSTAINABLE system going forward, my contention is that it does not, and should not be based on never ending growth. Growth is great when it contributes to society, but left unchecked it quickly gets out of control and then crashes. The misallocation is a waste, and the crash is devastating to those who are caught in it. I would contend that bubble, then crash is NOT the most efficient way to advance society and to ensure survival of our species.
As you view these videos, please ask yourself who is it that profits from never ending growth? Is it you? Does it benefit our nation? Is there a monetary system that is both sustainable and flexible, allowing for growth when needed?
Most people understand the limitations to growth created by being on a rigid gold standard… we were on a hybrid gold standard/fiat system between the Bretton Woods Accord (1944) and the time Nixon took us off the gold standard entirely in 1971 – that system didn’t even last 30 years. Pure fiat has now lasted 38 years, but I contend the end of the current system is near. Is there a better system? Yes, I believe there is, but that new system must separate corporate interests from our government and we must take the central banking role back into the hands of the people – the systems we have all spent our lives under is NOT the only way it can work, and after viewing this series of videos you will see why never ending inflation/growth is destined to NOT WORK!
After viewing, your thoughts or comments on that subject are appreciated.
Below are two VERY important PARABOLIC growth charts to understand and to keep in mind while viewing Dr. Barlett's video:
Part 1 (9:17):
Part 2 (9:28):
Part 3 (9:28):
Part 4 (9:28):
Part 5 (9:28):
Part 6 (9:28):
Part 7 (9:28):
Part 8 (9:28):
The concept of compounding numbers, exponential growth, and exponential curves is indeed one of the keys to understanding what has happened to our economy over the past century. The way the math works is simple, yet not intuitive to most people. If we’re going to produce a SUSTAINABLE system going forward, my contention is that it does not, and should not be based on never ending growth. Growth is great when it contributes to society, but left unchecked it quickly gets out of control and then crashes. The misallocation is a waste, and the crash is devastating to those who are caught in it. I would contend that bubble, then crash is NOT the most efficient way to advance society and to ensure survival of our species.
As you view these videos, please ask yourself who is it that profits from never ending growth? Is it you? Does it benefit our nation? Is there a monetary system that is both sustainable and flexible, allowing for growth when needed?
Most people understand the limitations to growth created by being on a rigid gold standard… we were on a hybrid gold standard/fiat system between the Bretton Woods Accord (1944) and the time Nixon took us off the gold standard entirely in 1971 – that system didn’t even last 30 years. Pure fiat has now lasted 38 years, but I contend the end of the current system is near. Is there a better system? Yes, I believe there is, but that new system must separate corporate interests from our government and we must take the central banking role back into the hands of the people – the systems we have all spent our lives under is NOT the only way it can work, and after viewing this series of videos you will see why never ending inflation/growth is destined to NOT WORK!
After viewing, your thoughts or comments on that subject are appreciated.
Below are two VERY important PARABOLIC growth charts to understand and to keep in mind while viewing Dr. Barlett's video:
Part 1 (9:17):
Part 2 (9:28):
Part 3 (9:28):
Part 4 (9:28):
Part 5 (9:28):
Part 6 (9:28):
Part 7 (9:28):
Part 8 (9:28):
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