Saturday, April 4, 2009
And someone’s going to get it in the market next week I have a feeling, is that a shooting star I see on the NDX? Possibly.
On Friday the DOW gained only 39 points but was lower most of the day and finished strong. The SPX gained 1%, the NDX gained 1.7%, and the RUT gained 1.3%. The XLF gained a strong 4.1%, and IYR led the market by gaining 9 unbelievable percent despite a rise in the CMBX index.
Internally, advancers were a little better than 2 to 1 on the NYSE with 78% of the volume on the way up and only 2 new lows. The volume was weak on the advance overall, a sign that a top is at hand or getting close. There was a small change in the McClelland Oscillator on Monday, so expect a large price move on Monday or Tuesday, direction unknown by that indicator. The Put/Call finished the week at .83:
Let’s look at the weekly charts first, here’s the past 3 months of the DOW. That is an outside hammer on the weekly. You don’t see those too often and it has pretty good odds of being a reversal indication, but if you look back over the past few years there are examples of weekly hammers not being directional change markers. Note the falling volume pattern of the past two weeks, that would tend to confirm the idea of a top or getting close to a top. McHugh, btw, has a Fibonacci turn date window that begins next week and is what he calls a strong one:
Here is the Major Market index weekly and here too is an outside hammer for this broad market index:
So, we have weekly candles with outside hammers and we also have a bunch of daily candles that are outside hammers – outside hammers inside of outside hammers, if you catch my drift! Here’s a one month daily of the SPX. Friday it failed to rise above the intraday high on Thursday and closed just a few points beneath the 848 pivot and very close to the downtrend line from Nov/Jan. It’s actually just inside the line as presented on TOS. Note that the daily stochastic is overbought again and it did close above the 100dma (light blue line):
The DOW daily also produced an outside hammer. This configuration is often a top indicator, but again needs to be verified by a fall in prices on Monday. Note how it failed to rise above the 100 despite closing above 8,000. Also note the falling volume. While this looks like a short term top, a rise above the 100 on rising volume next week would be bullish.
The NDX is both the most bullish and potentially the most bearish. Here’s the daily chart, that’s an outside hammer. With a gap down open on Monday, it could turn into a shooting star. Note, though, that the 50dma is just crossing the 100dma, that’s bullish:
As I zoom out to a 6 month daily chart of the NDX, you can see that it’s trying to poke above up sloping resistance. There are technicians calling this a triple top breakout, but I think it’s still right on resistance and is likely to turn right here. If it doesn’t, and it continues higher, that would be bullish. Note though that the stochastic is overbought, my guess would be a pullback followed by a run higher later. The big name tech companies have been performing more strongly than the broad market and I guess there’s a good case for that as at least they make real products and for the most part aren’t actively involved in outright fraud like our banks!
Here’s a chart of the Transports. Again, a hammer on lower volume:
The XLF was strong on Friday, but closed right on the resistance of its prior high, on lower volume, and with the stochastic approaching overbought again:
IYR looks bearish here. That was a monster move on Friday, and was not justified by one company’s stock sale. That said, it was on higher volume, it broke the 50dma, and there’s still room on the stochastic. It did close above the upper Bollinger and is just above the top trendline of the megaphone it’s been in. I would expect a pullback to at least keep within the bounds of the upper Bollinger. I do see the potential for this wave to be a C wave up… if so, the target would likely be around 30.50 which is coincidental with the 100dma. If you are long SRS, that will hurt. There is, however, a bunch of overhead resistance in this immediate area if you zoom back a couple of months:
Bonds made an aggressive move on Friday, lower in price and higher in yields. That’s a big NO THANKS to Bernanke, he better be able to keep it contained or rates are going higher (one way to keep it contained is to let equities sink). Frankly I hope it happens as this is the last chance at market discipline we have left. The TNX made a big move and here’s TLT with an impulsive move beneath the 50dma on higher volume. Support is in the 101 to 102 area, we’ll see if he can keep it in this range. It’s been in it a long time already, they are creating a never ending supply of fake money debt, I’m pretty sure there’s NOT a never ending supply of idiot buyers to match:
The most bullish thing I see about Friday was the fact that the VIX broke beneath 40 and tripped a lower target on the P&F diagram of 33. It’s actually been lower than this level several times in the past 3 months, so it could still find support and move higher, but it bears watching:
That’s about all I have… this run’s gone on for quite some time already and the SPX is right on an important downtrend line. I certainly would have expected at least some sort of moderate pullback in this rally and we just have not seen it yet. A pullback to SPX 800 would be the minimum from here, and I think the odds of still going back to 750 are good too. If we don’t turn here and head higher on Monday, keep in mind that there is a strong Fibonacci cluster that has a best fit of sometime next week. I think there’s a potential for a turn right here, you may get to see the NDX turn into a shooting star…
Bad Company – Shooting Star:
“For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, the man you're about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s.”
Bill Moyer’s Journal (9 minutes):
Bill Moyer’s Journal (10 minutes):
Bill Moyer’s Journal (9 minutes):
If you wonder why we would pour $9.7 trillion dollars at the banking system and virtually nothing at the people of America, then look no further. I saw an interesting statistic that said $9.7 trillion is enough to literally buy 90% of all the mortgages in America. Would that have been a better use of the funds? You bet. Not what I would have done, but at least you would be helping the PEOPLE of this country and you would underpin the banks and derivates as well allowing the game to continue. As it stands today, the game is at risk, and Larry Summers is one of the reasons why.
Summers Earned Millions in D.E. Shaw Salary, Bank Speech Fees
By Timothy J. Burger and Kristin Jensen
April 4 (Bloomberg) -- Lawrence Summers, director of President Barack Obama’s National Economic Council, earned millions working at a hedge fund and speaking to banks such as Citigroup Inc. that later received taxpayer bailout money.
Hedge fund D.E. Shaw & Co. paid Summers more than $5 million in salary and other compensation in the past 16 months, according to a financial disclosure form released by the White House yesterday. Summers served as a managing director at the New York-based firm. Summers, a former Treasury secretary, also earned more than $2.7 million in speaking fees.
“There was considerable interest in hearing his economic insights,” said Ben LaBolt, a White House spokesman. At the White House, Summers “has been at the forefront of this administration’s work to shore up our nation’s financial system and to put in place a regulatory framework that will strengthen the financial system,” LaBolt said.
The disclosure statement for Summers and several other top administration officials illustrates the quandary Obama and his predecessors have faced in their personnel decisions because “powerful people are almost always also rich people” who have earned money from private interests, said Steffen Schmidt, a political science professor at Iowa State University in Ames, Iowa.
Obama’s “choice going forward is to choose unknowns of modest means who may be less controversial in terms of their connections,” Schmidt said. “Except those people would be far less knowledgeable and thus less of an asset to fix these very same urgent problems.”
Speeches by Summers
Summers spoke to Citigroup, Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. audiences twice last year, according to his disclosure statement. Lehman, which went bankrupt in September, paid Summers $67,500 for an engagement on July 30, the filing showed.
Summers contributed a $45,000 fee from Merrill Lynch & Co. for a Nov. 12 speech to charity, according to his form. When the economist learned that Merrill would be accepting taxpayer funds because of its merger with Bank of America Corp., he tried unsuccessfully to cancel the appearance and then decided to donate the money, a White House official said.
“In ordinary times, a U.S. economic expert receiving honoraria from U.S. banks wouldn’t raise many eyebrows -- nor would a money-making stint in the private sector,” said Rogan Kersh, a public-service professor at New York University. “These aren’t ordinary times, and as populist anger at the banking and hedge-fund industries continues to spread, Summers could have some serious explaining to do.”
Kersh said he didn’t see any obvious conflict of interest for Summers, who served as treasury secretary under former President Bill Clinton and a stint as president of Cambridge, Massachusetts-based Harvard University.
No conflict of interest? Are you kidding? Is there any wonder why ALL the bailout money, stimulus, and guarantees go to these institutions? Do Americans really believe the lie that we must bail the people who created the problems out in order to get credit (debt) flowing again? What nonsense. The exact opposite is required to move the economy forward. The bad actors need to be removed and their debt with them.
And to imply that people of “modest means” don’t know enough to fix the problem is exactly THE problem. The people who created the problems are NOT capable of fixing the problems. The only people who ARE CAPABLE of fixing the problems are those who are removed from the situation and can step in to do the moral and ethical things required.
My solution would be to separate the money from politics all together via an amendment that would separate Corporations from State and would return the central banking functions to the people. THAT would produce a long term cure for almost all our economic problems.
The article continues…
The White House also released the personal financial disclosure forms of other top White House officials yesterday.
White House Chief of Staff Rahm Emanuel’s form listed a holding of less than $1,000 in shares of American International Group Inc., the insurer that has taken $182.5 billion in taxpayer funds to avoid financial collapse. The White House said Emanuel doesn’t currently own shares in the company, which sparked a public furor by paying $165 million in bonuses to its employees as it was taking the taxpayer money.
Emanuel’s congressional disclosure form that covered 2007 said his wife bought between $1,000 and $15,000 worth of AIG stock in August that year.
He also reported holdings of between $1,000 and $15,000 in Limited Brands Inc., and less than $1,000 in Wal-Mart Stores Inc. Those are small holdings “that do not present a conflict of interest under ethics rules,” said Sarah Feinberg, a White House spokeswoman.
Valerie Jarrett, a senior adviser to Obama and a close friend from Chicago, sold shares she owned in CME Group Inc., Caterpillar Inc., Hewlett Packard Co., Intel Corp., Sony Corp., General Mills Inc., General Dynamics Corp., Costco Wholesale Corp. and Nike Inc. The income from those sales and dividend payments ranged from as little as $200 to as much as $100,000 each, according to the filing, which only lists ranges.
Jarrett also reported at one time owning between $15,000 and $50,000 worth of Apple Inc. shares and between $1,000 and $15,000 in stock of Best Buy Co., Brinker International Inc., Staples Inc. and Starbucks Corp. The White House said she no longer owns any shares.
Jarrett reported income of $393,286 for selling restricted stock options in Navigant Consulting Inc., a Chicago-based consulting firm. She earned a salary of $302,000 from Habitat Executive Services Inc. in Chicago and directors’ fees of more than $346,000 from groups and companies ranging from Navigant to USG Corp., a manufacturer of building materials.
David Axelrod, the chief strategist of Obama’s campaign who is now a senior adviser to the president, received $1.55 million in salary and partnership income from public affairs firms. He agreed to buyouts that will pay him $3 million over five years, his disclosure form showed.
Axelrod’s clients included the AFL-CIO, a federation of labor unions; the American Association for Justice, formerly known as the Association of Trial Lawyers of America; AT&T Inc.; and Bally Total Fitness Corp.
Carol Browner, the White House energy policy coordinator, was paid $450,000 for her work last year with Albright Group LLC, a consulting firm founded by former Secretary of State Madeleine Albright. Browner is still owed between $350,000 and $750,000 in Albright Group member distributions and has agreed to sell her ownership interest for about $370,000, to be paid over three years.
Browner also is selling her interest in Albright Capital Management LLC, a related investment advisory firm. Browner didn’t disclose the amount she will receive. She listed among her assets Albright Capital Management holdings worth between $450,000 and $1 million.
Browner also listed a stake in Downey McGrath Group Inc., a lobbying firm headed by her husband, Thomas Downey, a former Democratic congressman from New York. The stake, owned by her husband, was valued at between $1 million and $5 million.
White House Press Secretary Robert Gibbs earned $156,188 last year as Obama’s campaign press secretary. He and his wife own shares in four residential buildings in Alexandria, Virginia, which they rent out. He valued his ownership in the buildings at between $700,000 and $1.5 million.
White House Counsel Gregory Craig was paid $1.7 million by the law firm Williams & Connolly LLP, where he was a partner. His clients included companies such as Abbott Laboratories and Digital Fusion Inc. and former UN secretary general Kofi Annan.
Desiree Rogers, the White House social secretary, was paid $1.8 million for less than seven months’ work as president of Peoples Gas and North Shore Gas. In July, she left the utility company to work for Allstate as president of social networking, and was paid $350,000 through the end of the year.
She also was paid $150,000 for serving on the board of Equity Residential, a real estate firm and $20,000 for serving on the board of Blue Cross Blue Shield in Chicago. She owns between $250,000 and $500,000 worth of stock in Equity Residential.
Thomas Donilon, deputy White House national security adviser, was paid $3.9 million by O’Melveny & Myers LLP, his former law firm. Donilon represented such clients as Penny Pritzker, Obama’s campaign finance director; Verizon Communications Inc.; UnitedHealth Group; Citigroup; Goldman; and Apollo Management LLP. He will receive a pension from Fannie Mae, where he worked from 1999 to 2005.
“This is one of many stories where we see the intricate connections” between the government and those that it oversees, said Julian Zelizer, a history and public affairs professor at Princeton University in New Jersey. “There is a long history of this and it does not mean that serious regulation cannot take place. But without substantive lobbying and campaign finance reform, the nation will always face this challenge.”
Zelizer is correct in that reform is needed or we will always face this challenge. The interface of bankers and corporations with our political system is the ROOT cause of a government that is out of control and a banking system that is out of control.
If you want real fixes to the problems at hand, step one is to remove those who created the problem. Larry Summers is one of those people.
Friday, April 3, 2009
Much like on ESPN's "SportsCenter," let's go inside the numbers, shall we?
The revisions to the unemployment data over the past six months has been, to say the least, breathtaking. Consider the following:
September 2008 job losses, originally reported as being -159k, were actually -403k after the final revision. That's a total difference of 153% to the downside.
October 2008 was almost as egregious. Originally reported as -240k, the final revision came in at -423k, for a total difference of 76%.
November (-533k to -597k) and December (-524k to -681k) revisions weren't as sharp, but still represented a respective 12% and 30% total change.
January 2009 saw a total revision of 24%, but it's the actual numbers that are the story. Originally, the losses were reported as -598k, but when the dust settled two months later, here in early April, we find out that 741k jobs were shed in January, making the first month of this year the first to lose over 700k jobs since the start of this recession-cum-depression.
If you apply even a conservative percentage of revision, say 30%, to February's (which were suspiciously unchanged in its first revision) and March's numbers, then you would have actual respective losses of 846k and 865k.
Just since September, using the revised and raw numbers we have as of today, the economy has lost a mind-numbing 4.16 million jobs that are never coming back. No magic wand waved or spell cast will change that. They're gone, baby, gone.
Now, adding the 30% revisions to Feb. and March, since September job losses would actually stand at a whopping 4.45 million.
Non-seasonally adjusted U3, BTW, is now 9%, while unadjusted U6 is already 16.2%, which is up from 9.3% a year ago and 10.6% in September.
Coming up, after the break, A-Rod's resurrection is days away. It will be a feat worthy of Jesus.
Hey, Jesus didn’t have steroids! Did he?
Seriously, the data from the government is just not trustworthy. John Williams at ShadowStats.com has devoted himself to tracking this data and providing numbers that are consistent with past calculations. What’s the point in tracking the data if you change it so that it’s not comparable to other timeframes and people can adjust it and tweak it at will?
Mish has also done a great job of reporting on their “birth/death” model and seasonal adjustments. Here’s his latest take on today’s report: Jobs Contract 15th Straight Month; Unemployment Rate Soars to 8.5%
And the unemployment data is just one of the problem areas. I’d say the largest is in the area of calculating inflation data with hedonistic adjustments and so forth that warp and skew not just inflation data, but also the growth data and the paychecks on which many people live. This is one of the root causes of the bubble and bust! Bad data leads to malinvestment as the distortions grow larger over time, one adding onto the other.
David Bowie - Changes:
First let me say that I believe this current crisis will prove to ultimately be FAR worse than any of the others, especially in REAL dollar terms. Our per capita debt levels are much higher than those of the late 20’s just prior to the Great Depression, and we now have derivatives that have flooded the world bringing systemic risk that has yet to be seriously addressed. In fact, despite all the happy feelings of “action” surrounding the G20 meeting, the real problems of debt and derivatives were not even discussed much less a part of their action plan. Oh, excuse me, actually their plan is to further permeate the globe with debt and derivatives, that will make it all better (sarcasm)!
Here’s a chart of the DOW during the Great Depression. The selling came in three phases, the initial plunge was the A wave, then there was a 50% B wave retrace that was followed by an orderly stair-step lower C wave into the eventual bottom that was an 89% loss from the high. Note that THE bottom did have a sharp rebound, but even it failed to exceed the prior step. It then flattened for quite some time and was well over a year before the last step’s high was exceeded (1955 before new market highs), thus again showing that there is no reason to participate in a buying panic, in fact, had you done that on any of the steps that were not THE bottom, large losses can result unless you are extremely nimble:
The next chart comes from Elliott Wave International showing the stair step decline of the C wave during the Great Depression. This chart is interesting in that it shows that at no time did any of the rallies exceed the high of the previous step. Also, there were times when the current downtrend line was broken only to have a new plunge.
I made a similar chart of the current SPX showing the moves in percentage terms (click to enlarge):
While I didn’t mean to draw that big pennant, I just noticed that it’s there and that we are just retesting the break.
If you look at the current rally and compare it to the previous ones of this bear, like the one in November or the one last March, it would appear that this one's not over and needs a little more time.
For me to be long term bullish and think something other than a typical bear market rally is occurring, we would really have to break the peak up in the 943 area. That would be different from the rest of this bear and it would be different than the decline during the Depression.
Also interesting is the math. High to low, this bear has seen a 57.7% decline, and even after a 27% rally is still down 47.2%. That means that it took a 27% rally to regain only 10% of the loss. A great lesson in how percentages work against you when you’re talking losses on a 50% or greater scale.
When I add all the percentages on that chart, it comes to 131.2% of declines and 106.5% of rally gains to date. A difference of only 24.7%, yet we are down 47%.
My takeaway? The stair step decline is continuing until we make a new high. I know there are Elliott Wave experts who believe we have begun wave B up. Many are looking for a 50% rally similar to the one during the early part of the Great Depression. To accomplish that, we would have to get to the 999 mark. It’s possible, although I think unlikely.
When you look at the largest market declines of the past century, you find that they take about 2.5 years top to bottom in the equity markets. We’re 17 months into this one, I would expect 2.5 years at a minimum, and that means April of 2010 at the earliest.
I'll leave you with Doug Short's Mega Bear Quartet. Look at the TIME at which THE bottoms occured and how long it takes to recover a meaningful percentage:
The headline jobless rate jumped to 8.5% with 663,000 jobs lost in March. Unadjusted U6 jumped to 16.2% while seasonally adjusted U6 rose to 15.6%. January was adjusted down by 86,000 jobs, naturally - BLS Alternative Measures.
Futures were up initially, but fell back after the revisions were realized and that there have now been more than 2 million job losses so far in 2009. Here’s a chart of the overnight action, it’s pretty close to where we closed yesterday. RIMM’s report is holding up the market right now and thus it doesn’t look like we’re going to get a gap down to produce those shooting stars, but it’s still early.
Non-manufacturing ISM comes out at 10 Eastern, that has the potential to move the market as well.
Below is a Shadowstats.com chart that will update automatically when the new employment data is inputted. His numbers, and the U6 data, is much closer to the way unemployment used to be computed, so if you’re looking to compare today with the Great Depression, those are the numbers you should be using, not the watered down modern media numbers.
McHugh went long yesterday and is pointing out a "confirmed" Inverted Head & Shoulder's pattern on the SPX that would effectively double the rally to date if fullfilled. While that's possible, I don't think that pattern is as clean as he makes it sound. Remember the last one that was supposed to send us to 10,000? Never happened. We'll see, the action to date certainly feels like we've begun wave B up, but once you hit that feeling, that's usually about the time it ends. I think being careful in both directions is warranted, and I definately do not think people who are long term investors should be buying into the rally, the long term indicators have not been tripped and we have yet to even make a new high.
Have a great day,
Thursday, April 2, 2009
Roses and sunshine.
See how many One World/New World Order references you can find in this article - sickening. Any talk about getting rid of debt or clearing out toxic assets (which are debt)? How about keeping derivatives under control? Nope, more of the same, but on a bigger scale, who would have guessed?
G-20 Shapes New World Order With Lesser Role for U.S., Markets
By Rich Miller and Simon Kennedy
April 3 (Bloomberg) -- Global leaders took their biggest steps yet toward a new world order that’s less U.S.-centric with a more heavily regulated financial industry and a greater role for international institutions and emerging markets.
At the end of a summit in London, policy makers from the Group of 20 yesterday delivered a regulatory blueprint that French President Nicholas Sarkozy said turned the page on the Anglo-Saxon model of free markets by placing stricter limits on hedge funds and other financiers. The leaders also pledged to triple the resources of the International Monetary Fund and to hand China and other developing economies a greater say in the management of the world economy.
“It’s the passing of an era,” said Robert Hormats, vice chairman of Goldman Sachs International, who helped prepare summits for presidents Gerald R. Ford, Jimmy Carter and Ronald Reagan. “The U.S. is becoming less dominant while other nations are gaining influence.”
A lot was at stake. If the leaders had failed to forge a consensus -- Sarkozy this week threatened to quit the talks if they didn’t back much tighter regulation -- it might have set back the world’s economy and markets just as they’re showing signs of shaking off the worst financial crisis in six decades.
That’s what happened in 1933, when President Franklin D. Roosevelt torpedoed a similar conference in London by rejecting its plan to stabilize currency rates and in the process scotched international efforts to lift the world out of a depression.
Seeking to avoid a repeat of that historic flop, President Barack Obama junked the at-times go-it-alone approach of his predecessor, George W. Bush, and adopted a more conciliatory stance toward his fellow leaders.
“In a world that is as complex as it is, it is very important for us to be able to forge partnerships as opposed to simply dictating solutions,” Obama told a press conference at the conclusion of the summit.
Stock markets rose in response to the steps taken by the G-20 leaders. The Standard & Poor’s 500 Index climbed 2.9 percent to 834.38. The Dow Jones Industrial Average added 216.48 points, or 2.8 percent, to 7,978.08. Both closed at their highest levels since the second week of February.
In an effort to promote harmony, Obama soft-pedaled earlier U.S. demands that the summit agree on a specific target for fiscal stimulus in the face of opposition from France and Germany. Instead, he settled for a vague pledge that the leaders would do whatever it takes to revive the global economy.
Repudiation of Past
The president also signed on to a communiqué that Nobel Laureate Joseph Stiglitz said repudiated the previous U.S.-led push to free capitalism from the constraints of governments.
“This is a major step forward and a reversal of the ideology of the 1990s, and at a very official level, a rejection of the ideas pushed by the U.S. and others,” said Stiglitz, an economics professor at Columbia University. “It’s a historic moment when the world came together and said we were wrong to push deregulation.”
In bowing to that view, the leaders conceded in a statement that “major failures” in regulation had been “fundamental causes” of the market turmoil they are trying to tackle. To make amends and to try to avoid a repeat of the crisis, they pledged to impose stronger restraints on hedge funds, credit rating companies, risk-taking and executive pay.
“Countries that used to defend deregulation at any cost are recognizing that there needs to be a larger state presence so this crisis never happens again,” said Argentine President Cristina Fernandez de Kirchner.
Financial Stability Board
A new Financial Stability Board will be established to unite regulators and join the IMF in providing early warnings of potential threats. Once the economy recovers, work will begin on new rules aimed at avoiding excessive leverage and forcing banks to put more money aside during good times.
German Chancellor Angela Merkel, who had unsuccessfully sought to convince the U.S. and Britain to sign on to similar steps before the crisis began in mid-2007, hailed the communiqué as a “victory for common sense.”
The U.S. did, though, take the lead in getting the summit to agree on an increase in IMF rescue funds to $750 billion from $250 billion now. Japan, the European Union and China will provide the first $250 billion of the increase, with the balance to come from as yet unidentified countries.
“This will provide the IMF with enough resources to meet the needs of East European nations and also provide back-up funding to a broader set of countries,” said Brad Setser, a former U.S. Treasury official who’s now at the Council on Foreign Relations in New York.
The G-20 also agreed to an allocation of $250 billion in Special Drawing Rights, the artificial currency that the IMF uses to settle accounts among its member nations. The move is akin to a central bank such as the Federal Reserve effectively creating money out of thin air, except it’s on a global scale.
The increase in Special Drawing Rights will allow countries to tap IMF money without having to accept changes to economic policies often demanded as a condition of aid. The cash is disbursed in proportion to the money each member-nation pays into the fund. Rich nations will be allowed to divert their allocations to countries in greater need.
The G-20 said they would couple the financing moves with steps to give emerging economic powerhouses such as China, India and Brazil a greater say in how the IMF is run.
Emerging Markets Benefit
Citigroup Inc. economists Don Hanna and Jurgen Michels called the summit agreement “a boon to emerging markets” in a note to clients yesterday.
Mexico said Wednesday it will seek $47 billion from the IMF under the Washington-based lender’s new Flexible Credit Line, which allows some countries to borrow money with no conditions.
Emerging-market stocks, bonds and currencies rallied yesterday on speculation other developing nations will follow Mexico’s lead. Gains in Polish, Czech and Brazilian stocks helped push the MSCI Emerging Markets Index up 5.6 percent to 613.07, the highest since Oct. 15.
In a bid to avoid another mistake of the depression era, G-20 leaders repeated an earlier pledge to avoid trade protectionism and beggar-thy-neighbor policies that could aggravate the decline in the global economy.
The Paris-based Organization for Economic Cooperation and Development predicted this week that global trade will shrink 13 percent this year as loss-ridden banks cut back on credit to exporters and importers.
To help combat that, the G-20 said they will make at least $250 billion available in the next two years to support the finance of trade through export credit agencies and development banks such as the World Bank.
The summit took place amid speculation among investors that the deepest global recession in six decades may be abating. Data released yesterday showed orders placed with U.S. factories rose in February for the first time in seven months, U.K. house prices unexpectedly gained in March and Chinese manufacturing increased. Still, a report today is forecast to show U.S. unemployment at its highest in a quarter-century.
“If the economy turns more favorable, this meeting will probably be viewed as a milestone,” said C. Fred Bergsten, a former U.S. official and director of the Peterson Institute for International Economics in Washington.
The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union. Officials from Spain and the Netherlands were also present.
There's just so much wrong with everything in this article that I would have to highlight the whole thing.
Welcome to the world of debt slavery, Mexico. Bet you'll have fun paying it back when Cantarell's oil fields go dry. Watch... the central bankers print money and give it to Mexico who will ultimately pay it back with the last of their oil. Fair trade? If I were Mexico I'd rethink that one.
Once again, where does the money come from? More control for Central Bankers is what I see, with the potential to pit one country's labor and natural resources against the other. Protectionism? If you're a middle class American, that sucking sound you hear will be the very last living wage jobs leaving America (if I can borrow from Ross Perot).
Bruce Springsteen - My Hometown (Performed in Paris of course):
Q&A: IAN GORDON
A bear's bear: We're only at beginning of collapse
April 2, 2009
Anyone wondering what a bear's bear sounds like need only spend some time with Ian Gordon, a Vancouver-based investment adviser and market historian whose genial nature seems at odds with his decidedly grim outlook. Basing his views on an interpretation of market cycles going back more than 200 years, the president of Long Wave Analytics has been consistently accurate in his forecasts in recent years. And if he is right now, much worse is yet to come.
Can you explain how your thesis works?
I sort of extended Kondratieff's economic cycle into something far bigger than he had ever intended. [Nikolai Kondratieff was a Soviet economist who concluded in the 1920s that capitalist economies endure recurring booms and busts over long cycles running up to 60 years.] I quickly discovered that it was very easy to recognize exactly where you were in the cycle.
You divide the cycle into the four seasons of the year and say that right now we're at the beginning of a long winter. Why is that?
I consider the seasons to be very appropriate. The present cycle started in '49. The spring started with the bear market ending that year. Spring ended in '66, when that bull market topped in June, with the Dow just under 1,000. ... Spring is the rebirth of the economy, and stocks perform as the economy performs.
And what happens when spring turns to summer?
We have always had an inflation in the summer of the cycle. The reason is that there was always a war. And it was always financed through paper money printing. In the first cycle - and I'm using the U.S. - it was the War of 1812. In the second cycle, it was the U.S. Civil War. In the third, it was the [First] World War and in the fourth cycle, it was the Vietnam War.
When I started to write about this in '98, I knew exactly that we were in the autumn bull market [which always follows], and I knew that, given the massive increase in stock prices up to that point in time, we were much closer to the end than the beginning.
Which obviously leads us to winter.
When the stock market peaks - you can go back to the 1873 stock market peak or 1929 or 2000 - you go into the Kondatriev winter. The winter is really the death of the economy, because debt has to be taken out of the system. And that's what's occurring now.
I could anticipate all this simply by looking at all the previous cycles, knowing that the stock market peak would be the indication that we were going into the winter and that the debt bubble would burst.
So why didn't this happen back in 2000 when tech stocks blew up?
Because [then Fed chairman Alan] Greenspan wouldn't let it. He brought interest rates down to 1 per cent [by 2004] and flooded the banking system with money.
Where do we sit now?
We're only really at the beginnings of this massive collapse of the debt structure. Much as the central banks are trying to feed money into the system, the collapse basically takes money out faster than they can put it in.
So all those government efforts to remedy the problems are going to come to naught?
My own feeling is it could be the end of paper money. ... The central banks and the treasuries' response to all this is to just continue to increase the debt. They're trying to get the credit lines open again, but I ask myself: Who's there who can actually take up the loans?
But the markets appear to be rebounding. How do you explain this?
In '29, the [market] peak was on Sept. 3, when the Dow hit 381. The first crash bottomed on Nov. 14, 48 per cent below the point from whence it had begun. Then you got a massive rally [because of government monetary intervention]. Into April, 1930, it recovered [almost] 50 per cent.
I think we're very much at that same point again ... where people think that the government is starting to control the problems.
What about the argument that another depression is unlikely, because of all the economic, fiscal and social measures designed to prevent such a nightmare from reoccurring?
I just don't think that those measures are going to work. The U.S. consumer is absolutely tapped out, and that's who you have to depend on for your economy.
So it would be wrong to assume you're advocating a heavy weighting in stocks?
There's a time to be in stocks and there's a time to be in gold. When you're in one, it's because the other doesn't work. In this kind of environment, the only thing that has ever made sense is gold, because people will be so scared of anything else.
Based on your interpretation of Kondratieff theory, when do we see spring again?
The last spring really only started after the [Second World] War, and the war basically stopped the Depression. This time, the United States is in a much more difficult position. Going into the last Depression, it was far and away the world's largest creditor nation. Today, it's the world's largest debtor nation. So its efforts to try to overcome the effects of the Depression are going to be offset somewhat by its ability to borrow.
Getting back to the market, you obviously don't see this as anything more than another bear rally.
Ultimately, the stock market has to reflect the reality of the economy. If we were to emulate 1929-32 in the stock market, that would be an 89-per-cent loss in stock prices. I have a target for the Dow of 1,000 points at the bottom.
Boy, you're going to be a barrel of laughs Tuesday at a Night with the Bears (the Toronto event is sold out).
Having written about this and studied it, I honestly wish it wouldn't happen.
Do you ever depress yourself?
I do. But I hope that I've prepared myself and those that I've advised to basically look after themselves in the best way they can, given what we could see was going to happen.
The DOW gapped up at the open, rose to a little above 8,000 and settled at 7,978 for a 216 point gain and a new high for the rally that has gone on now for nearly a month with no legitimate pullback. The SPX gained 2.9%, the NDX 3.3%, and the RUT with 4.9%.
Nearly 7 to 1 issues advanced on the NYSE with 91% of the volume on the upside producing yet another panic buying day. Boy, that leaves me with an edge of the cliff feeling, not a solid and rugged base. Still too many believers, too much money, and too much of a rally to be outside of a bear market.
Along those lines, keep in mind that we are in an area of heavier resistance, and still a ways from breaking out to a new high (above 878). While today was obviously a bullish day, we are overbought (still and again), and I see the potential for some “island” candlesticks should the market go lower tomorrow. Some of the financials, like GS, have them and if they are confirmed tomorrow then they will be shooting stars (only on a gap down). The gap down may not happen after RIMM’s report that exceeded estimates and sent its shares zooming 20%+. We’ll see, it was apparent there was some nervousness just prior to the close.
And everyone’s all giddy about the G20… TRIPLE the size of the IMF, it’s GREAT for emerging markets (if you don’t mind being a debt slave)! And more regulation for everyone! But what about the debt? What about the toxic assets? What about the derivatives? Ahhh, the accident that involves you is almost never the one you see coming.
And while I’m mentioning emerging markets, EEM jumped 5.4% today with a huge gap up. Here’s a 1 month chart, you can see that today’s candle is isolated above all the others. That sets up a potential shooting star with a gap lower, but this candle is more bullish looking than the one on say Goldman, although there are many others. This particular candle is on a resistance area from 3 months ago. It’s also on higher volume which is common with shooting stars and also note that it’s up against the upper Bollinger:
Now let’s look over the SPX starting on a 20 day 30 minute chart. Here you can see the down slopping blue trendline that comes off the Nov/Jan highs – we threw over it and closed just beneath that line and just above the prior high. The pivot above is at 848 and we nearly got there today, close enough to say that pivot turned it away. Note the stochastic on this timeframe – the fast is mid-range (McHugh would call that indecisive) but the slow is just coming down, I would call that bearish. The 60 minute is overbought and just coming down on a fresh sell signal, also bearish in the short term, but the 5 minute is oversold, so a little rise followed by a turn wouldn’t surprise me tomorrow from what the stochastics are saying (they haven’t been that much help lately):
Zooming out to the one month daily, we can see that the SPX finished just above the 100 day moving average – that’s bullish if it can hold it. There’s that blue trendline, we threw a pin through it and pulled back. The daily fast turned up from the 50% area which is the most common place to turn if it’s not going all the way to the bottom, and that’s bullish in the short term. Note that the bottom Bollinger is turning up steeply now and has already risen to the 690 area. That’s an indication that any sell off will have problems making a run for the old lows. I don’t think that happens right away, I think we get a mild retrace and possibly another run higher – no, I don’t think we’ve had a valid pullback yet to qualify as a wave B:
Zooming still further out to a three month daily, we can see the layers of Fibonacci retracements from each of the peaks. Today’s rally was stopped by the confluence of the prior high’s 78.6% and the January high’s 61.8%. The red up slopping line across the chart is the bottom of the old big pennant. Remember that?
Now that you’ve seen that bullish looking SPX candle, let’s look at the SPY… now that’s a different looking picture! That is a top looking candle, a big time potential shooting star that is right on the 100dma and on higher volume. Bulls had better pray for a higher open tomorrow, a gap down would confirm the shooting star. The DIA is basically the same candle. It’s also possible that if we don’t gap lower that we move sideways for a while creating a multi-day “island” with the gap below. Again, be wary of a gap lower in the morning, that would be very bearish (the Q’s are in the same boat):
The DOW daily looks like the SPX, except here we pinned the 100dma and pulled back beneath the original channel line. Again, the DIA looks like the SPY, not like this and is vulnerable to a gap lower open:
The XLF has an ugly black candle with a gap beneath. This is less of a shooting star because of the candles behind it, but a gap lower here would be bearish nonetheless. Note that the XLF and IYR failed to exceed their previous peaks:
Yesterday I pointed out the hammer on TLT that was on the upper Bollinger and said that if it reversed it was bullish for the equity market. That turned out to be the case and the clue of the day. Now what? Follow through from here? Bonds down usually means stocks up. It’s a confused picture here, one that’s been muddled by intervention. At some point it’s all going to make sense and I’m afraid it’s not going to be pleasant when it does:
I also pointed out GLD’s hammer yesterday and mentioned that a break beneath was bearish and man, was it ever. All the way down to the bottom Bollinger with a spinner on higher volume. I heard something about the ECB selling gold today, just incase the inflationistas wanted to run the price on them throwing money all over the planet. Just a reminder that the gold P&F chart is targeting $870:
Possibly today’s clue, the VIX produced a hammer right on support. The VIX is not as reliable for TA work, but that looks like a potential bottom indicator. It’s outside and on support. You can see we made an inverted hammer I pointed out a few days ago and it produced a huge gap up. The fact the VIX was down only a half percent is a bearish market divergence. A gap higher here would make shooting stars in some of the equities:
The Put/Call went down to .69. Gee, everyone’s favorite number, perhaps it’ll have meaning? That’s a way low reading perhaps another clue:
What can I say? The world is awash with debt and derivatives yet none of the actions of the world’s leaders are working to clean any of it out of the system. Quite the contrary, they are working their damndest to push more into the world. It’s nuts, it’s literally insane, it’s like we’re being lead by groupies in a teenage wasteland.
The Who – Baba O’Riley (Teenage Wasteland):
Pete Townshend - Teenage Wasteland (slow and more adult version):
Honest Man Emerges From Muck of Banking Crisis
Commentary by Jonathan Weil
April 2 (Bloomberg) -- Remember this man’s name: Charles Bowsher. He’s one of the few people leaving the banking crisis behind with his reputation enhanced.
Bowsher, who was comptroller general of the U.S. from 1981 to 1996, had a simple reason for resigning last week as chairman of the Federal Home Loan Bank System’s Office of Finance. He didn’t want to put his name on the banks’ combined financial statements, because he was uncomfortable vouching for them. Bowsher, 77, had held the post since April 2007.
With so many top executives complaining they can’t figure out what their companies’ assets are worth, the real wonder is that more corporate directors haven’t quit rather than certify financial reports they don’t understand.
The job Bowsher left is a crucial one. The Office of Finance issues and services all the debt for the 12 regional Federal Home Loan Banks. That’s a lot of debt -- $1.26 trillion as of Dec. 31, making the FHLBank System the largest U.S. borrower after the federal government. The government-chartered banks, which operate independently, in turn supply low-cost loans to their 8,100 member banks and finance companies. If any of the FHLBanks were to fail, taxpayers could be on the hook.
The finance office’s board also oversees the preparation and auditing of the FHLBanks’ combined financial statements. Some of the banks have run into trouble the past year because of plunging values for mortgage-backed securities they own.
“I was not comfortable as an audit-committee member in signing off on the financial statements, after I became aware of the standards and processes for valuing the mortgage-backed securities,” Bowsher told me.
The finance office didn’t say why Bowsher was quitting, when it issued its March 24 press release announcing his resignation. On March 30, a spokesman, Michael Ciota, told me the people who work there didn’t know, including its chief executive, John Fisk. “We’re not aware of any reason,” Ciota said. “There’s not a whole lot to tell.”
After I told Ciota yesterday about Bowsher’s comments to me, Fisk called me back. He confirmed that “Mr. Bowsher has expressed his concerns to me around the complexity of valuing mortgage-backed securities and the process of producing combined financial statements from the 12 home loan banks.” He added: “I don’t think it’s appropriate for us to speak for Mr. Bowsher.”
Bowsher told me he was concerned, in part, with the methods used for determining when losses on hard-to-value securities should be included in banks’ earnings and regulatory capital. The way the accounting rules work, as long as such losses can be labeled “temporary,” they don’t count in net income.
For the fourth quarter of 2008, the FHLBanks said their total preliminary net loss was $672 million. It would have been many times larger, had they included all their red ink.
The year-end balance sheet at the FHLBank of Seattle, for example, showed $5.6 billion of non-government mortgage-backed securities that it says it will hold until maturity. Yet the estimated value of those securities was just $3.6 billion. The bank, which reported a $199.4 million net loss for 2008, said the declines were only temporary. They’ve been anything but fleeting, though. Most of those securities have been worth less than they cost for more than a year.
The FASB’s rules on this subject, which have never been well defined, are now in flux. Today, after caving in to pressure by the banking industry and members of Congress, the Financial Accounting Standards Board is set to vote on a plan to relax its rules on mark-to-market accounting, so that companies can disregard market prices and ignore losses on their securities indefinitely.
Pressing for Change
While that wouldn’t make the banks any healthier, it would make their numbers look prettier. The FHLBanks have been among the most vocal lobbyists pressing for the change.
Bowsher said the process of valuing such assets was fraught with doubt already. “Now if you think about it, the FASB might be changing the whole thing, and everybody might mark their assets up,” he said. “Who wants to be part of that?”
The finance office hasn’t released the banks’ audited combined financial statements for 2008. It was scheduled to do so March 31, but issued a press release saying it would delay the disclosure, because the FHLBank of Boston was late filing its annual report with the Securities and Exchange Commission.
Tough stands are nothing new to Bowsher. As comptroller general, he was in charge of the General Accountability Office, the investigative arm of Congress. At his direction, the GAO was among the first to warn the public about the brewing savings-and- loan crisis during the 1980s. He testified before Congress in 1994 that there was an “immediate need” for “federal regulation of the safety and soundness” of all major U.S. derivatives dealers. (How’s that for prescient?)
Most recently, in 2007, he led an independent committee that issued a blistering report on financial missteps at the Smithsonian Institution, whose board of regents included U.S. Chief Justice John Roberts.
Now the question for taxpayers is this: If Charles Bowsher can’t get comfortable with these banks’ financial statements, why should anybody else be?
Somebody ought to give this guy a medal.
What’s there to say about this other than the obvious… we need more like him, we need people like him in the Administration, adults should be leading instead of the children who are loose in the candy shop.
Morals and Ethics… hard to find these days.
The FHLB is MASSIVE. What kind of rot is waiting for us there?
Again, where does the IMF get this “money?"
Note Mr. Darling’s words towards the end where he says that they need to “help developing and emerging countries.”
Please allow me to translate… We are printing money from thin air. You cannot do the same, we make the rules and we make the money. We are going to lend money to countries, DEBT, so that we will control their people and their natural resources, enslaving them and using them to beat down other countries who get too high and mighty.
I think that about sums it up. Oh, and bubbles and never ending growth – Bankers rule!
G20 To Call For Doubling of IMF Budget – CNBC (4 minutes):
Sorry Ken, let them leave the country then – adios amigos!
Ken Lewis BAC CEO – CNBC (13 minutes):
Well they did it…
FASB Eases Fair-Value Accounting Rules Amid Lawmaker PressureKey phrase, "Pressured by lawmakers and financial companies..." They are sincerely cohorts in crime. Separating the two is the only real answer to getting America back.
By Ian Katz
April 2 (Bloomberg) -- The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.
The changes approved today to fair-value, also known as mark-to-market, allow companies to use “significant” judgment in valuing assets to reduce writedowns on certain investments, including mortgage-backed securities. Accounting analysts say the measure, which can be applied to first-quarter results, may boost banks’ net income by 20 percent or more.
Of course the XLF and most financials have turned into obscurating rocket ships. The futures are up, of course, and the DOW even broke the high it made just a few days ago. Here’s a chart of the overnight action, the /ES is at 825.
Meanwhile, back in lowly mark-to-reality land, unemployment claims for last week rose, unexpectedly of course, to 669,000. Oh, and last week was revised higher and continuing claims rose to only 5.7 million people.
Of course the stochastics are overbought again. The dollar is going down again, and bonds are going wrong way up again. Good luck playing this "market," the bankers can have it all to themselves as far as I'm concerned.
I’m certain that the CNBC crowd will be crowing in delight over the accounting changes, but I can assure you this was another decision that will ultimately be long term negative for America.
Mark-to-fantasy? Hello again – you’re a fine pigman’s friend:
The Cars – Hello Again:
Wednesday, April 1, 2009
G20 Summit must focus on Derivatives, Off-Balance-Sheet Vehicles.
8 Bubbles Quadrillion Play Grows 22% to $206k per person-on-planet
London, UK - 19th March 2009, 10:30 GMT
[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]
As the April G20 summit in London approaches, it is worth noting that the trans-national play of derivatives has grown from USD 1.144 Quadrillion to USD 1.405 Quadrillion, ie, +22% worldwide. This is a staggering increase and most of it is seen in the Over-The-Counter (OTC) category as opposed to exchange traded derivatives. As a result, the global size of the derivatives bubble which was calculated last year at USD 190k per person-on-planet, has risen to USD 206k per person-on-planet. The ever rising commitment of governments for the repeated bailouts of financial institutions is partially linked to various flavours of derivatives exposure settlements and “black hole” losses emanating from off-balance-sheet vehicles.
The traditional argument has been to discount derivatives altogether: “On one side of the equation there is a loss, on the other side there is a gain. Nothing disappears. It is just one big shuffle of wealth and assets.” However, if this is the case, why has the US tax-payer had to bail out AIG repeatedly in excess of a hundred and fifty billion dollars so that AIG could settle the Credit Default Swap (CDS) and other derivatives claims of the largest trans-national financial institutions in the world?
In the ATCA briefing, "The Invisible One Quadrillion Dollar Equation" published in September 2008 we discussed the main categories of the quadrillion dollar derivatives market as quoted by the Bank for International Settlements in Basel, Switzerland. Since then the quantum has grown significantly in certain crucial categories and the latest revised numbers follow:
1. Listed credit derivatives stood at USD 542 trillion, about the same as before; however
2. Over-The-Counter (OTC) derivatives stood in notional or face value at USD 863 trillion (UP +44%) and include:a. Interest Rate Derivatives at about USD 458+ trillion (UP +16%);The myth of the single bubble behind The Great Unwind -- manifest as the global credit crunch -- has essentially been dumped in the last few months and subprime mortgage default, a USD 1.5 trillion challenge within the USD 5 trillion mortgage based assets envelope, is seen as a component of a much larger overwhelming global crisis with unprecedented scale, speed, severity and synchronicity. The global crisis has wiped a staggering USD 50 trillion off the value of financial assets — currency, equity and bond markets worldwide — last year, according to the Asian Development Bank.
b. Credit Default Swaps at about USD 57+ trillion (DOWN -1%);
c. Foreign Exchange Derivatives at about USD 62+ trillion (UP +10%);
d. Commodity Derivatives at about USD 13+ trillion (UP +44%);
e. Equity Linked Derivatives at about USD 10+ trillion (UP +17%); and
f. Unallocated Derivatives at about USD 81+ trillion (UP +14%).
The truth that there are as many as "Eight Bubbles" [ATCA] at play and in the process of bursting together is understood to a greater extent now than in the past. We have gone from being able to “rescue the world” with less than USD 1 trillion in October 2008 to USD 11.6 trillion commitments in the US alone along with a further announcement of USD 1.2 trillion of quantitative easing by the US Fed in March 2009. There is a realisation worldwide including the G7 + BRIC + MISSAT that this is a USD 20 trillion problem and growing. As time goes by, the full extent of the collateral damage from the Quadrillion Play and 8 Bubbles burst is being revealed.
The bursting process is taking the form of deleverage on an unprecedented scale. Even 1929 pales in comparison because the industrial production collapse witnessed over five successive years in the 1930s in the US is now taking place in five to six months, most notably in Japan. At a follow on recent ATCA roundtable we posed the following questions for Socratic dialogue:I. If the Dow Jones Industrial Average has fallen from above 14,000 to below 7,500 as a result of some of the 8 bubbles collapsing, ie a 6,500 points drop or 46% decline, where will the equities market reach by 2010 as other larger bubbles burst?We discussed “Eight Bubbles” in play worldwide in November 2008 and their approximate scale, based on latest information in 2009, is as follows:
II. If the world government bond market is around USD 35 trillion, how can governments rescue the eight bubbles bursting step by step with an ever larger quantum and momentum?
III. How can Quantitative Easing (QE) defy the laws of financial gravity without devaluing paper currencies significantly?
IV. What ought to be the focus at the G20 Summit in April to bring about stability in regard to the rising derivatives exposures and use of off-balance-sheet vehicles?1. Subprime Mortgage linked Loans & Assets (USD 1.5 trillion) within Mortgage backed Assets (USD 5 trillion);The relative scale of the world's financial engine is as follows:
2. China, India, Eastern Europe and other Emerging Market Loans (USD 5 trillion);
3. Commodities (Commodity Derivatives at about USD 13 trillion);
4. Corporate bonds (USD 18 trillion);
5. Commercial (USD 22 trillion) and Residential property (USD 45 trillion);
6. Credit Cards Outstanding Debt (USD 4.5 trillion);
7. Currencies (Foreign Exchange Derivatives at about USD 62 trillion); and
8. Credit Default Swaps (USD 57 trillion) as a subset of all Derivatives (USD 1,405 Trillion).1. The entire GDP of the US is about USD 14 trillion and falling.Assuming a 10% conservative default or decline in asset value, this could be a USD 100 trillion challenge on the base of a Quadrillion. USD 50 trillion of asset decline is already manifest. What are the likely outcomes? "Four Scenarios” have already been suggested by ATCA. We are keen to receive your answers and solutions. Please note that the numbers quoted are a rough guide.
2. The entire US money supply is also about USD 14 trillion with rising Quantitative Easing in trillions.
3. The GDP of the entire world is USD 45 trillion and falling. USD 1,405 trillion is 31 times world GDP.
4. The real estate of the entire world is valued at about USD 65 trillion.
5. The world stock and bond markets are valued at about USD 70 trillion.
6. The trans-national universal model financial institutions own about USD 150 trillion in derivatives.
7. The population of the whole planet is 6.8 billion people. So the derivatives market represents about USD 206,000 per person on the planet. .
$1.4 quadrillion equals $206,000 in derivative exposure for every man, woman, and child on the planet. We’re not just talking about us relatively rich and spoiled Americans, we’re talking about the true masses.
Is it just me or does that figure seem INSANE? As in WHY would the people of the planet allow so much derivative exposure? What it the need? What is the purpose?
I think I can answer that in one word – GREED.
Or I can give you the lengthier but still condensed version that goes thusly:
In the old, old days when blacksmiths stored gold for people and issued “gold receipts,” they figured out that they could issue more “receipts” than they had gold in their possession, thus effectively printing their own money in excess of their actual holdings. This worked as long as not everyone came to claim their gold at once, and thus the fractional reserve banking concept was born.
Eventually the gold was completely done away with (President Nixon 1971 in the U.S.) and a fiat money (by decree) fractional reserve system has survived so far, now only 38 years young. Over the years the reserve requirement has gone down. This has allowed LEVERAGE to increase. But recently the largest banks have virtually done away with reserves altogether (now even barrowed reserves) and thus fractional reserve lending had reached its limits. What’s a central banker to do? Create derivatives that in essence move some of the leverage off their balance sheets.
As the world now knows, there are many types of derivatives. Many are derived from debt, a lot are credit default swaps (an unregulated form of insurance), and many are based upon interest rates. To be fair, although we are talking unfathomable sums of notional value, it is true that if they all were to go bad at once that the NET result would be a loss far less than the notional value. But what would happen is that some players would be protected while many others would not. Those who are not, like AIG, would not survive.
So, how much money are we talking about here? Well, the latest figures I have show Global GDP is running a little more than $60 trillion a year, so $1.4 quadrillion would equate to about 23 times world GDP (they show $45 trillion and 31 times GDP... I do not know which is correct - either way is unbelievable).
I know that those numbers sound meaningless, but mi2G did a nice graphic showing how how much a trillion dollars in 100 dollar bills would look, How big is $1 Trillion?
They also did an even better series of graphics to visualize how large a stack of pennies would be if there were a quadrillion of them! How big is 1 Quadrillion? Make sure you flip through the series.
The OCC (Comptroller of the Currency) just released their 4th quarter derivatives report for the United States. I did an article on that, but want to show a couple of the many outrageous charts illustrating how many of these derivatives are located in our top banks, and the leverage found within.
Below is a current chart of the holdings of our largest banks:
That's $87 TRILLION that JPMorgan holds in derivatives, many times their net worth. And that's more than $30 TRILLION that Goldman Sachs holds, they are leveraged to extreme proportions.
This next chart shows the holdings for the 5 largest U.S. banks. Note that each category derivative is multiples of their Risk Based Capital:
The leverage deployed is absolutely insane and guaranteed to fail. The central bankers will tell you they have it all under control – they do not. They have created such a monster that they have permeated the entire globe with credit (debt). Every nook and cranny that can be filled with debt has been (Death by Numbers). We have pulled ALL our future earnings into the here and now and this shadow banking system is how they did it – all at arms length.
Those who follow my work know how exponential growth ends. If you need a refresher, please Spend some Time with the Good Dr. Bartlett…
Since they can’t keep it under control, they keep it out of sight, hiding as “level 3 assets” which they get to mark to THEIR model of value (wish I could do that – and pay myself large bonuses for my fantasy). Their latest? Change the accounting rules so that they are not forced to mark-to-market. Change the rules, hide and obscure – get the taxpayer on the hook for their sins. They use their “money” to buy and control politicians, thus they are safe… for now.
While I normally don’t like CNBC fluff, this short piece is informative on what to expect tomorrow. No, I don’t agree with most of these proposals that are meant to simply obscure and allow the further creation of false profits. Yet another moral hazard, a part of what got us into this mess.
Inside Potential Accounting Changes – CNBC (2 minutes):
And after all that, the DOW finished up 152 points (2%), the SPX rose 1.66%, the NDX gained 1.3%, and the RUT rose 1.5%.
Internally, advancers were a little more than 3 to 1 on the NYSE, while 82% of the volume was up. The number of new lows rose to 12 producing a slight bearish divergence. The Put/Call finished at a neutral .91.
The XLF managed to gain 2.8% on hopes that the FASB will amend the mark-to-market accounting rules tomorrow morning, and that they will be proactive, allowing the financials to mark up the previous quarter’s write downs. To which all I can say is HA, HA, HARDY-HA! Okay, now that I have that out of the way, I do expect that the accountants have been fully coerced and that it will happen. The arguments for doing so ring terribly hollow to me, even if they PLAN to hold it to maturity as they can always unplan to do so later after jerking investors around.
And while the rate of economic decline slows in some of the recent reports, most data is still declining at record pace, especially year over year. Is the data exceeding expectations? Well, if they are expecting zero, sure, but let’s face it… some of these numbers are so low they almost can’t get much lower, it’s impossible for the rate of decline to continue. Does that mean it’s bottomed and has to turn up? NO. What if it looks like this – L? SPLAT!
And how about the other headlines today besides economic data (which wasn’t really that good)?
Let’s see... we have riots outside the G20, Thornburg Mortgage (jumbo loans) finally filed bankruptcy and won’t be back, the GAO says Giethner is full of it when he says that there is $135 billion of TARP money left – they say it’s only $32.6 billion, Ford sales plunge 41%, GM sales plunge 45%, Gottschalk’s is officially adios, Moody’s says credit card charge offs soar 20%, a study finds that Chinese manufacturing is worsening, our Fed bought another $8 billion of our own Treasuries, South Korea exports decline 21%, Honda offers employees buyouts and cuts wages in North America, another Obama nominee has tax filing problems, a mall owned by Simon Property Group (SPG) defaults on their payment, of course GM and Chrysler are on the verge of bankruptcy (don’t count F out), and to top it all off we learn that Geithner is limiting his new program to buyers only who have $10 billion or more (Mish Article – More Ugly Details… and How Geithner’s Plan Really Works…); all in all a pretty rosy outlook, I can definitely see bottom in that – lol!
Maybe I need lessons in “looking past it,” you know, out into the future. Because I certainly couldn’t have seen this economic storm coming, NOBODY DID, that’s what I keep hearing on CNBS (just don’t read the chapter in my book entitled “The Perfect Economic Storm”). Of course my advice is that if you want to see into the future, keep your eye on the debt and the $1.44 quadrillion derivatives timebomb that’s still ticking… G20 Summit must focus on Derivatives, Off-Balance-Sheet Vehicles.
Enough, to the charts!
Here’s the 10 day SPX. I’ve taken all the channels down because I don’t see any good ones. From a distance, it’s beginning to look like a rounded top? While the reversal and climb was impressive, it failed to break the 61.8% at the close. Yesterday and today look an awful lot like an abc correction, possibly wave 2? Sure looks like it. Wave 2’s are supposed to make you question your thesis and a run of 61.8% is the most common destination. If we get above that tomorrow, I get more bullish. I can actually envision a spike higher on the FASB release in the morning, but I’m not sure it will run and it could be a sell the news event. Be nimble – a pinball wizard. Note that the stochastic here is overbought as it is on all timeframes up to 60 minutes, making a down day tomorrow more likely. Also note that today’s action closed the gap:
On the daily SPX we can see that the bulls are still clearly in charge with a pin through the 50dma and a rise above yesterday’s candle. This area is a real chop zone, the bulls are trying to be bullish but there is a bunch of volume resistance overhead:
The DOW looks similar and you can see that it was on lower volume. The DIA was also on lower volume, but the SPY was about equal:
The XLF closed its gap today as well, but did so on lower volume. Again, much will depend on the market’s reaction to what the FASB says tomorrow:
GLD produced an interesting black daily candle today as you can see on this 3 month chart. Usually the market goes lower after a black hammer like that, but note how it did so right at the confluence of the old breakout point (blue line), the uptrend line, and the 50dma! It came on lower volume today, but I’d say a break beneath that trendline would be very bearish while a break above the hammer is very bullish. I think it’s going to have to make a move soon:
TLT produced an outside hammer today just outside of its sideways channel and just under the upper Bollinger. That’s a reversal candle, but again would need to be verified with a break in the morning beneath the hammer. Bonds going up as they have at the same time as stocks do is not the natural way of the world. If money were to come out of bonds tomorrow, it would likely be bullish for stocks. This shows how Bernanke’s move to prop up the bond market influences stocks. Again, the markets are no longer free, so we’re going to have to deal with it. His underpinning will not work forever, eventually he will be swamped with supply:
Below is a chart of the VIX. Again note how it is trapped between the 50dma on top and the 200dma beneath. This is going to have to resolve fairly soon. The P&F chart is still saying it will resolve up, but the market will have the final say, of course:
Here’s a StockCharts.com chart of the past 3 months on the SPX. I placed their price volume on the side so that you could see the volume resistance just overhead. That’s what the bulls have to contend with. That’s one of the heaviest volume areas of the past two years, and why the bull push came to a screeching halt on the first run. Perhaps they’ll take another shot at it here, changing the rules again seems to be their method in addition to throwing all our future earnings at it:
So, we STILL have not had a pullback that amounts to a hill of beans. I think if the market gets above the 61.8 in the morning it’s more bullish and if it doesn’t manage to break it, then we may yet finish a respectable retrace of the bull run. Either way, you best be a pinball wizard if you wish to play!
Tommy – Elton John, The Who - Pinball Wizard: