Friday, May 21, 2010
Equity futures are lower once again this morning after trying to rebound yesterday evening. The overnight action can be seen on the 5 minute charts below, the Dow is on the left and S&P on the right:
Bonds are substantially higher again, breaking to new highs for this wave – this shows money is still moving to “safety.” The dollar is lower and the Euro is higher – not as high as they were, but there is a correction in progress. The Yen is higher, that seems to be a better indication of market action over the past couple of days. What’s there to say about oil? A complete and very rapid collapse, down some more today. Gold is also down again, bouncing off the $1,170 support area.
Both the S&P and Dow futures have now made lows that are beneath the May 6th pin lows, and the S&P is very close to breaking its February low. If this is a wave 3 movement, as I suspect, the bounces will be minimal in size and duration until we hit wave 4, but the wave math says 1,018 minimum, so any bounce is likely a part of the wave 3 structure.
There are no economic releases today, but remain aware that it is options expiration and wild moves can occur. Yes, the markets are very oversold in the short time spans, but in the longer time frames it is not. Yes, bounces can come from any point in here, but wave 3’s tend to create extremes in internal readings. The put/call, for example is at an extreme. There are other indications that you would normally expect a bounce from, BUT not all indications are at extremes, in fact some are very far from them. Wave 3’s are generally the longest waves, and if this is wave C down, this wave 3 is only wave 3 of wave 1 – the beginning.
Just to put this market into perspective, below is a chart of the XLF going back to the beginning of 2007. Note the all out collapse, and the WEAK rebound that retraced only to a perfect 38.2%! This is the index for the financials, you know, the companies who can’t lose on a trading day and who report billions in earnings. They are now off 17% from their most recent highs – that meets the 15% threshold definition of a crash. Why do you suppose that chart is so weak and now is breaking down even further? It’s telling us something about which we have failed to address as a nation and around the globe:
The Senate just yesterday passed the “Wall Street Reform” bill. The Senate bill has more teeth than the House version and now they have to work together to create a cohesive bill. Below are excerpts from a CNN article on what was passed:
Senate passes sweeping Wall Street reform
"Those who wanted to protect Wall Street, it didn't work. They can no longer gamble away other people's money," said Majority Leader Harry Reid. "When this bill becomes law, the joyride on Wall Street will come to an end," he added.
Senate passage marks the last big hurdle for an effort more than a year in the making. The bill will now be reconciled with the House version in "conference" negotiations, where differences are ironed out.
Then both chambers will vote again and send the compromised bill to President Obama sometime before July 4, said the bill's main shepherd, Sen. Christopher Dodd, D-Conn.
Earlier on Thursday, Obama praised the Senate's progress saying, "Wall Street reform will bring greater security to folks on Main Street."
What reform means: Congress first started working on financial overhaul last spring. The House passed a version in December, and the Senate began drafting bills last November.
Since January 2009, financial services firms have spent nearly $600 million and hired hundreds of lobbyists to influence the debate, according to the Center for Responsive Politics.
The legislation would establish a consumer financial protection regulatory agency that could write new rules to protect consumers from unfair or abusive mortgages and credit cards.
It would create a council of regulators that would sound an alarm before companies are in position to trigger a financial crisis. The bill would also establish new procedures for shutting down giant financial firms that are collapsing.
The bill aims to shine a brighter light on some of the different kinds of complex financial products, called derivatives, that are blamed for bringing down financial companies such as American International Group (AIG, Fortune 500) and Lehman Brothers. It would force most derivatives on to clearinghouses and exchanges, to help pinpoint the value of the trades.
Republicans objected to some of the bill's major provisions, particularly parts that establish the consumer agency and create new rules for the derivatives. While they generally favored more consumer protection and more regulation of derivatives, they argued that the legislation is too heavy-handed in these areas.
Sen. Richard Shelby, R-Ala., who helped craft parts of the bill, blasted it in a 30-minute speech late Thursday, calling it a "massive new consumer bureaucracy" and a "liberal activists' dream come true."
"This bill doesn't listen to the American people -- it promises massive government overreach in ordinary business transactions," Shelby said.
However, the final vote garnered more Republicans than earlier key Senate votes on the bill.
Joining Democrats were Sens. Scott Brown, R-Mass, Susan Collins, R-Maine, Chuck Grassley, R-Iowa, and Olympia Snowe, R-Maine.
Two Democrats, Sens. Russ Feingold of Wisconsin and Maria Cantwell of Washington, voted against the bill saying it wasn't aggressive enough against Wall Street.
Sen. Robert Byrd, D-W.Va., and Sen. Arlen Specter, D-Penn., missed the vote.
What's next: The Senate will appoint 12 members, seven Democrats and five Republicans, to negotiate with the House over differences in the bill.
The Senate's negotiators plan to vote next week to figure out where they stand on a controversial issue that didn't make into the final bill: a Republican-backed move to exempt auto dealers from the purview of the proposed new consumer protection regulator. The House version has that carve-out for auto dealers, but the Senate didn't get to it.
There are several other key differences.
The Senate bill limits the size and scope of banks' investment activities, preventing them from owning hedge funds and trading on their own accounts. It also includes a controversial measure preventing banks from trading any derivatives. Banks would be forced to spin off their swaps desks that make these trades.
The House bill lacks such limits on banks' investment work.
Also, while both versions of the bill create a council of regulators who monitor big Wall Street banks, the Senate gives the top job of running that panel to the Treasury Secretary and the House gives the top position to the Fed chairman.
Consumer protection agency under the control of the Fed or Treasury is a huge mistake. Separating hedge fund activities is terrific, as are restrictions on derivatives – a good start. However, this is only partially closing the barn door AFTER all the animals are gone. It will NOT cure the bad math of debt backed money, it will not change who is in control of that process, it will not bring back mark to market, but it may help to limit speculation and it will definitely end too big too fail bailouts for the banks.
What does that last part tell you about the psychology of wave C down? Are we likely to see the same sorts of maneuvers as we did during wave A? Unlikely, and the single largest factor, in my opinion, that created the wave B bounce was the bank’s ability to mark toxic assets to model. Pure Fantasy.
Traffic - Dear Mr. Fantasy
Thursday, May 20, 2010
Oh the wailing and gnashing of teeth! ZeroHedge’s Tyler posted this photo of the reaction from the CNBS anchor staff, very telling of the maturity levels found on that set, lol:
The internals were a mess. 98 new lows and only 7 highs on the NYSE – that is a sign of significant weakness, especially for a market that was recently at rally highs following 14 months of ridiculous up movement – yet, it is not anywhere near washout bottom type of numbers. Today 98.6% of the volume was on the downside, a severe panic day. The problem is that it's not yet at washout levels of volume, this is important as it means to me that the selling is likely to continue.
The day began with the SPX breaking beneath 1,100, that was key support and then it went after the 1,066 pin lows from the “flash crash,” nearly making it there but closing on the day’s lows just above at 1,071.
Below is a 3 month daily chart of the SPX, you can see that we closed well beneath the 200dma (red line), and also below the green line which is a 20 year uptrend line. That uptrend line is important, it is the line that caught the lows in 2002 and 2003 but was broken in 2008 and now again today:
Let’s zoom out to a 20 year non-log scale chart to view that green line in context… see how it stopped the decline in 2002 and 2003? This is a monthly chart, note that the 200 MONTH moving average is just below 1,050. The RSI is on a fresh sell signal and is exiting the overbought area. Finally note the falsely steep slope of the bounce and look at the range of this month’s candle – it greatly exceeds the range of any of the last bull market’s candles. That’s because this is not and never was a bull market:
What’s clear to me is that from the April 26th high we moved lower into the 1,066 low and bounced. That’s wave 1 down and 2 up. For the past 6 sessions we have been moving downward in what appears to be wave 3 – it has all the characteristics. Wave 3s cannot be the shortest wave. Wave 1 was 155 points. If you subtract 155 from 1,173, you are left with a minimum target for wave 3 of 1,018 - minimum. Zooming further out we can see that there is support in the 990 to 1,020 area:
As you can see on this chart of the SPY, volume was not at panic levels:
The major indices except for the Transports and the RUT closed beneath their 200 day moving averages. That’s bearish.
The Transports broke below, and closed below the May 6 pin lows. That sets up the potential for a DOW theory sell signal, needing only for the Industrials to break 9,870… some technicians would say it’s already happened based on a closing basis as we closed below the prior closing low on both the Transports and the Industrials:
The RUT came very close to closing below the pin lows as well.
More ominous for me is that the entire globe is melting down. Europe, Asia – including Japan and China, Australia, Brazil… all are now moving significantly lower. The western world, awash in debt and false accounting is clearly in deflation mode once again. Note that the psychology is different during this decline. The latest trillion for the banks didn’t help, it hurt. That’s because they can’t fall back on false accounting more than they already have with mark to fantasy. The added debt based money never was a solution that was going to work; it was simply the greatest robbery in the history of mankind.
What’s worse, technically, for the world markets is that the Emerging Market Index not only broke below and closed below the May 6th lows, but it also broke below and closed below the February lows! So much for the theory that emerging markets were going to lead the world. This index is now back to where it was in July of ’09:
The financials, of course, are sick and broken. Should defaults begin to occur in the global debt markets, the banks that hold those debts are toast, even with mark to fantasy. Thus, my conclusion is that this is the wave down that ushers in meaningful change. Unfortunately I think that people who currently hold power will not give it up easily. You are about to be distracted with “other events” that history says are coming.
You will be led to believe that there are no solutions other than austerity. That is patently false, it’s only true inside of the debt-backed money box that supports their power structure.
Moving back to the markets, the currency markets are ringing alarm bells. The Point & Figure charts for the Dollar, the Euro, and the Yen are now all saying the same thing – that should worry you because what they are saying is that they still have about 30% further to travel. The Dollar, of course, has been strengthening and now has a target of 112:
The Euro has a bearish target of 92:
And the Yen has a bullish target of 151, or about 35% higher than here. That’s a bad thing because most of the world has been short the Yen and the further unwind of the carry trade means more deflation for Japan and the world:
And that’s the FEAR, isn’t it? A self-reinforcing deflationary spiral? That’s what the markets are saying, and it’s exactly what Bernanke thought he could prevent. They can’t because of the psychology shift. Never again will they be able to toss trillions at the mortgage market on behalf of the bankers – the people now are familiar with that game and they're tossing politicians who were bought and paid for enough to vote for it.
So now fear and volatility are back. During bull markets the VIX does not exceed 40… today it exceeded 46:
VIX 3 month:
VIX 2 year:
VIX P&F target = 56:
These are high levels and the CBOE Put/Call ratio went to 1.5. That’s extremely high, a point at which market turns can occur… but yet these types of extremes are also where market crashes come from:
What happens in the markets tomorrow? It could be ugly, especially if markets overseas continue to descend. Be on the lookout for a high volume down move or intraday reversal that could mark an intermediate bottom.
I have been mentioning that I thought global markets are overvalued and clearly exhibiting signs of yet another bubble. I’ve been showing Hyman Minsky’s bubble stages and that you should pay attention to those stage 5 “wise voices (who) will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”’
A couple days ago I mentioned that it now looked like we were progressing to stage 6 with the insiders already sneaking out the exits… and here we are:
Stage Six – Financial Crisis/Panic:
A bubble requires many people who believe in a bright future, and so long as the euphoria continues, the bubble is sustained. Just as the euphoria takes hold of the outsiders, the insiders remember what’s real. They lose their faith and begin to sneak out the exit. They understand their segment, and they recognize that it has all gone too far. The savvy are long gone, while those who understand the possible outcome begin to slowly cash out. Typically, the insiders try to sneak away unnoticed, and sometimes they get away without notice. Whether the outsiders see the insiders leave or not, insider profit taking signals the beginning of the end (remember who has sold their rental properties?).
Stage seven – Revulsion/Lender of Last Resort:
Sometimes, panic of the insiders infects the outsiders. Other times, it is the end of cheap and easy credit or some unanticipated piece of news. But whatever it is, euphoria is replaced with revulsion. The building is on fire and everyone starts to run for the door. Outsiders start to sell, but there are no buyers. Panic sets in, prices start to tumble downwards, credit dries up, and losses start to accumulate.
This is where you may see the “lender of last resort” who is usually the government. The government, although they were talking up a soft landing, are now forced to step in to prevent the crises from spreading to other sectors. Ironically, this is where the savvy investor who profited before, really profits now. With government backing, they are asked to step in and return “normalcy” to a now damaged sector.
The government’s attempt to “put out the fire” usually works. However, the conditions beyond the year 2010 will require oceans of water that the government does not posses. You must be ready!
I wrote that in the year 2005 and now here we are, trillions are not enough. Folks, there are major global events and change coming. Our monetary system, not just our financial system MUST change. Again, the powers that benefit from them will not just let them go while they sit quietly by and watch. In Thailand the people are setting the power structure’s buildings on fire. There’s more of that coming, it’s a legitimate fear.
That fear, by the way is not just psychological. Many market callers have written about “animal spirits” and market psychology, but what they don’t write about is the very REAL underlying triggers. When the rule of law does not mesh with nature, eventually the system breaks down and animal spirits are required to enact meaningful change. For example, the math of debt backed money doesn’t work – that’s REAL and there are limits. It is destined to fail. Likewise, the planet only has so much easy to get oil and a population and energy demand that is growing exponentially. There’s a REAL limit in there – we are not taking care of it properly, so animal spirits are required to enact the change that’s necessary.
While I have seen these events coming, I see that eventually mankind will take a leap forward. Unfortunately we may have to traverse those other events in the here and now. My advice is to get ready for those events… pray that they don’t come, but be mentally and physically prepared, be careful, and act conservatively.
Robert Prechter from just this afternoon (ht RRH):
Equities are down sharply this morning with the S&P 500 now below important support at the 1,100 level and beneath the 200 day moving average. Below is a 5 minute chart showing the overnight action of the DOW on the left and S&P futures on the right:
Bonds are sharply higher this morning as money is obviously flowing towards “safety,” if you can call buying the debts of a bankrupt country safe. That term is certainly relative, that’s for sure. The Dollar is higher, the Euro lower, oil is higher but still below $70, and gold pulled all the way back to $1,174 before bouncing a little.
Weekly jobless claims “surprised” to the upside once again, this time jumping to 471,000 from last week’s 444,000. The consensus was looking for 440k, here’s Econoday:
In a setback for the May payroll outlook, initial jobless claims jumped 25,000 in the May 15 week to 471,000. The disappointment includes a 2,000 upward revision to the prior week. There are no special factors to explain the latest week's jump. The 471,000 level is the highest in five weeks, the second highest since February, and 12,000 higher vs. mid-April. But in an important offset, the four-week average of 453,500 does show improvement from mid-April's 461,000.
Continuing claims also show improvement, down 40,000 in the May 8 week to 4.625 million. The four-week average of 4.643 million is little changed compared to April. The unemployment rate for insured workers is unchanged at 3.6 percent.
Initial claims have been stubbornly high with expectations hoping for a big move lower -- not a big move higher. If next week's report doesn't show a reversal, estimates for May payrolls will be very conservative. Stocks and commodities are moving lower in reaction to the data with money moving into the safety of Treasuries.
What, no excuses? I’m sure the weather was bad somewhere. The mask of debt based stimulus is slowly being peeled back to reveal the hideous creature underneath.
According to the DOL, “States reported 5,101,246 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending May 1, a decrease of 94,788 from the prior week. There were 2,268,367 claimants in the comparable week in 2009.”
These EUC citizens are seldom reported but are up still nearly 3 million from a year prior.
The so called “Leading Indicators” and the Philly Fed are released at 10 Eastern. Regarding the “leading indicators,” people who worship this indicator are drunk with bad thinking. It cannot see the debt, the sovereign risk, the psychology of fear, the oil gushing into the gulf, volcanoes erupting in Iceland, nor the world tensions created by needless wars and massive differences betweens the haves and have nots. What were the leading indicators saying in 1999 or in 2007? That’s really all you need to know about “leading indicators.”
The same myopic vision is shared with most economists who fail to pull their heads out of academia. They fail to study history as it really is, they create fanciful formulas with no relationship to debt backed money, they ignore WHO controls the markets and what their agenda is, and their livings are financed by the very people who strive to keep their common sense suppressed.
Want to see a leading indicator for the United States? Take a look at the Chinese markets, which are crashing, and look at the separation between their markets and ours (updated chart below). Take a look at Japan, listen to the anger pouring from the South Koreans who finally admit that it was North Korea that lashed out and killed 47 of their sailors. The North has nothing to lose, they have nothing – the gap between the Korean halves and have nots is huge.
Did you see the city of Bangkok, Thailand, on fire yesterday? The exchange building was one of those lit on fire and burned. Can you imagine the same type of thing occurring on Wall Street? It’s occurring on the streets in Greece again this morning – yes, it can happen here. And you’re right CNN, we’re not Greece, we hide FAR MORE toxic debt than Greece did, in fact we’re the shameful debt pushers of the entire globe – debt central.
Do the leading indicators show that the people are angry and are removing incumbents left and right? Harry Reid had better look out, I can see that he’s feeling the heat – finally. The financial “reform” bill went down in flames yesterday… gutted, it would have been meaningless other than as another propaganda tool to placate the masses.
The drop below 1,100 on the S&P is serious. It means that lower is in our futures sooner, rather than later. I think we’re headed to the 990/1,000 area now before we encounter a significant bounce. When we do, it will be just another sucker move. But first we have to get beneath 1,066, the pin lows of the “flash crash.” Once both the Dow Industrials and the Transports exceed those pin lows, you will have a new DOW Theory sell signal and an official resumption of the bear market based upon that indicator. That’s only 20 S&P points away, the Transports are even closer. The next milestone is in the 1,150 area, the lows of the pullback that bottomed in February. Just keep in mind that nothing travels in a straight line.
The VIX has jumped above 40 this morning, again reaching levels of fear reserved exclusively for bear markets:
Remember all that bull market talk? Deficits don’t matter. Remember the green shoots talk? Remember that subprime is contained? Remember too, we’re not Greece… uh, huh.
The Kinks – You Really Got Me:
Wednesday, May 19, 2010
Equity futures are lower this morning falling sharply after the close yesterday and being down as much as 100 points overnight. Yesterday’s close stopped exactly on 1,120 which is the 50% retrace mark of the entire bear market and was acting as strong support. We are now underneath that mark turning it now into overhead resistance with the 1,107 pivot and 1,100 acting as support and is now the key support area. It is not unexpected to test that area from below and rising back above it would be bullish in the short term – I would not be surprised by a short term bounce that takes us back over, but believe it will eventually fall.
McHugh received a couple of longer term sell signals yesterday, including his secondary indicator and his put/call signal that had been on a buy signal for the past year. Those signals are medium term indicators and do not change often.
The Dollar is down and the Euro is slightly higher after being pummeled yet again yesterday. Merkel’s naked short ban was taken as a sign of desperation, appropriately so. Venezuela also instituted limits on the trading of their currency. Currency controls and banning short sales NEVER work. The CDS restrictions will only work if they are done in concert with other countries joining in, and so far other nations have refused to follow their lead - that’s one of the reasons restrictions of that type don’t work. Below is a chart of the Dollar on the left and the Euro on the right:
Bonds are flat after being higher overnight. Oil is down again, now beneath $69 a barrel after trading below $68. Of the past 13 days, oil has now been down 12 of them. The 13th bar is typically as far as a move will run without correction, it would be quite rare to run further from a time basis. Gold is correcting some more, now just above $1,200 an ounce. If that area is breached, $1,170 is the next support area.
The completely worthless MBA Purchase Application Index plunged 27.1% last week following the expiration of the buyer’s credit. No, I still don’t believe numbers like that, and again only report this worthless index to you so that you know what garbage everyone is being fed by the Realtor’s Association – here’s Econoday:
HighlightsThat plunge follows a very large drop in new housing permits. Low rates are good, but just look at the expense to achieve them. Literally trillions, its nuts, its fiscal suicide.
The expiration of second-round housing stimulus pulled sales into March and April at the very heavy expense of May. The Mortgage Bankers Association's purchase index plunged 27.1 percent in the May 14 week on top of the 9.5 percent plunge in the May 7 week to pull the index to its lowest level since 1997. These results point to very weak home sales for this month and a new weight on home prices.
Falling mortgage rates failed to limit the fall in purchase applications but they did give a big boost to refinance applications which jumped 14.5 percent. Mortgage rates, being pulled lower by safe-haven demand for U.S. Treasuries, are at their lowest level since November last year with 30-year loans down 13 basis points in the week to an average 4.83 percent.
Wider refinancing will help keep homeowners out of foreclosure and will limit distressed sales, but the purchase results point squarely to new risk for the housing sector and will raise talk for a third round of housing stimulus. Existing home sales for May will be released Monday morning.
The CPI came in lower than expected, dropping .1% month to month and falling from 2.4% to 2.2% year over year:
Inflation is hardly a problem for the Fed. In April, overall CPI inflation dipped 0.1 percent after edging up to 0.1 percent the month before. Analysts had projected a flat headline number. Core CPI inflation was flat for two months in a row, compared to the median forecast for a 0.1 percent uptick. At the headline level, a drop in energy prices weighed on costs while food was still moderately strong. The core was kept low by extremely soft shelter costs along with a decline in apparel.
Looking at detail, the energy component fell 1.4 percent, following no change in March. Gasoline dropped 2.4 percent after a 0.8 percent dip the month before. Food inflation rose 0.2 percent in both of the two most recent months.
At the core level, apparel prices fell 0.7 percent and the huge shelter component was unchanged. Providing some upward pressure were gains in recreation, airline fares, and medical care.
Year-on-year, overall CPI inflation eased to 2.2 percent (seasonally adjusted) from 2.4 percent in March. The core rate slipped in April to 1.0 percent from 1.2 percent the prior month. On an unadjusted year-ago basis, the headline number was up 2.2 percent in April while the core was up 0.9 percent.
Consumer prices inflation remains extremely low-giving the Fed plenty of leeway in its timing of unwinding its balance sheet expansion. Bond traders should like today's news and equity markets should be happy that the Fed is not under pressure to tighten sooner rather than later. But markets are still focused on Germany's new limits on naked short sales. Also, MBA home purchase applications declined sharply, suggesting a slowing in housing.
A negative CPI is interesting with oil still falling sharply. It shows just how strong the deflationary forces are.
Some very sharp guys are starting to turn very bearish. Richard Russell who writes the Dow Theory Newsletter had this to say:
Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know -- who told him?" Tell them the stock market told him.Pretty powerful statement. I have followed his writing for quite some time and can tell you that he is one of those old wise voices that may not time events perfectly but is almost always on the right side of them. He knows that all is not well beneath the façade.
…Just as for years I asked, cajoled, insisted, threatened, demanded, that my subscribers buy gold, I am now insisting, demanding, begging my subscribers to get OUT of stocks (including C and BYD, but not including golds) and get into cash or gold (bullion if possible). If the two Averages violate their May 7 lows, I see a major crash as the outcome. Pul - leeze, get out of stocks now, and I don't give a damn whether you have paper losses or paper profits!
Then there’s Hugh Hendry, another person who absolutely gets the fundamental picture and had this to say about China:
The Shanghai is already crashing, having peeled off more than 25% from its high last year.
Hugh Hendry Shorts China, Betting on 1920s Japan-Like Crash
May 18 (Bloomberg) -- British hedge fund manager Hugh Hendry is betting China’s “credit bubble” will burst, causing its economy to contract and triggering a global crisis.
Hendry’s Eclectica Asset Management has bought options on 20 companies in international markets that will profit from “a dramatic collapse” of China’s growth that’s been fueled by an unprecedented lending boom, Hendry said in a May 17 telephone interview from London.
Hendry joins hedge fund manager James Chanos and Harvard University professor Kenneth Rogoff in warning of a potential crash in China. The nation’s 13 trillion yuan ($1.9 trillion) of new lending in the past 16 months, bigger than the economies of South Korea, Taiwan and Hong Kong combined, is spurring industrial capacity expansion in the same way Japanese credit built inventory during and after World War I, Hendry said.
“There are striking parallels with Japan in the 1920s, when ultimately the whole system collapsed,” said Hendry, 41, whose firm manages $420 million in assets. “China could precipitate a much greater crisis elsewhere in the world.”
Japan’s export boom collapsed after the war amid excess global capacity, slashing growth and sparking a stock-market crash and bank runs.
Hendry’s flagship Eclectica Fund, a global macro hedge fund with $180 million in assets, may gain almost $500 million from its options if China’s economy plunges into a recession, he said. The options cost the fund about 1.5 percent of its net asset value annually, Hendry said.
China’s vulnerability to a crash comes from the “inherent instability” created by a lending binge for infrastructure projects that’s “unprecedented in 400 years of economic history,” Hendry said. The country is also exposed to exports to a U.S. economy that could shrink from $14.6 trillion at the end of March to $10 trillion within 10 years, he said.
Chinese officials allowed lending to surge starting in late 2008 to fight the global financial crisis. New loans rose to a record 9.59 trillion yuan in 2009 and banks advanced another 3.38 trillion yuan in the first four months this year.
“China’s at the mercy of a credit bubble,” Hendry said. “Once you’ve unleashed the genie it’s out there. They are ultimately unstable and it’s that instability that creates their demise.”
The Shanghai Composite index of stocks has plunged 21 percent this year, the worst-performing index in Asia, as investors sold Chinese assets on concern a withdrawal of stimulus spending and a slowdown in construction could choke off growth after an 11.9 percent expansion in the first quarter.
When I hear wise voices like these I often reflect on Minsky’s bubble stages:
Some wise voices will stand up and say that the bubble can no longer continue. They argue that long run fundamentals, the ratios and measurements, defy sound economic practices. In the bubble, these arguments disappear within one over-riding fact – the price is still rising. The voices of the wise are ignored by the greedy who justify the now insane prices with the euphoric claim that the world has fundamentally changed and this new world means higher prices. Then along comes the cruelest lie of them all, “There will most likely be a ‘soft’ landing!”That’s stage 5 of the bubble. Personally, I think we and China are now past stage 5 and already getting into stage 6 where the outsiders are starting to get infected with the selling.
China crashing, Europe in trouble, the U.S. bankrupt, our banks insolvent and hiding toxic assets… What a mess, a central banker debt money mess.
Tuesday, May 18, 2010
Equity futures are higher this morning, below is a snapshot of the DOW futures on the left and S&P futures on the right showing the overnight action. There is a potential rising wedge outlined, but being that it developed in after hours, it may not be a valid formation:
There was a small change in the McClellan Oscillator yesterday so I do expect a large move to be likely today.
Yesterday’s action produced what appeared to be a topping candle in the U.S. Dollar and a potential bottom candle in the euro, and indeed, you can see that the dollar is lower, euro higher this morning:
Note that neither are back inside of their channel. If the Euro reenters, I would be more short term bullish on the Euro and therefore more short term bullish on equities. I think the negative sentiment on the Euro got pretty high and I think it may need a period of consolidation before the decline resumes. Don't forget that the move yesterday pierced overhead resistance and triggered a huge 112 bullish target for the dollar.
It could be a short period of consolodation, however, as it is possible to count the prior down move in equities as wave 1 of 3 down, this would be potentially a wave 2 bounce with 3 of 3 to follow. If that’s occurring then the bounce should not go too much higher and we should get a very large decline in the next few days. There are alternative counts, so it will be important to track over the next couple of days.
Bonds are higher this morning, that’s not the direction you would expect for a significant bounce in equities. Oil is higher this morning, if you’re looking at the /QM futures, the front month contract rolled over, so the bounce is not nearly as high as depicted on that chart. Gold is continuing its correction this morning but is still above the $1,200 mark.
The headline on the mainstream media says, “New Home Sales Spike 41%!” LOL, yes, year over year from last year’s disaster. Month over month new home sales rose 5.8%, up to 672,000, with 650k expected, 626k the prior. It is near peak season, and not in the headlines is the fact that permits plunged from 685k to 606k, a drop of 11.5% in the month, double the increase in sales over the same month!
And the bottom line is that inventory is NOT what the housing market needs. Here’s Econoday’s spin:
The recent spike in home sales has boosted new construction, but according to permits, homebuilders are still cautious about a likely dip in sales now that special tax credits for homebuyers expired in April. Housing starts in April advanced 5.8 percent, following a 5.0 percent gain in March. The April annualized pace of 0.672 million units topped analysts' forecast for 0.650 million units and was up 40.9 percent on a year-ago basis. April's gain was led by a 10.2 percent increase in single-family starts, following a 2.1 percent rise in March. The multifamily component fell 18.6 percent after a 24.4 percent surge the month before.
By region, the April gain in starts was led by a 23.9 percent boost in the Northeast with increases also seen in the Midwest, up 16.7, and the South, up 7.0 percent. The West declined 13.3 percent.
Given the expiration of special tax credits in April, homebuilders are not rushing to the courthouse to pay for new building permits and are actually dialing back a bit. Housing permits declined 11.5 percent, following a 5.4 percent boost in March. The April pace of 0.606 million units annualized was up 15.9 percent on a year-ago basis.
Overall, the April starts report shows homebuilders benefitting from recently robust home sales but being rationally cautious about future strength. Nonetheless, housing appears to be slightly better than believed ahead of the report. Markets were little changed on the news but futures were up on mostly favorable company news.
The PPI fell .1% in April. Year over year it is up 5.4%, but that is down from March’s 6.1% increase.
Headline inflation came in better than expected but higher auto prices boosted the core rate. Overall PPI inflation eased to down 0.1 percent in April from a 0.7 percent spike in March. The April number came in below the consensus forecast for a 0.1 percent rise. Declines in both food and energy helped pull the headline figure down. At the core level, the PPI came in with a 0.2 percent increase, following a 0.1 percent uptick in March. Analysts had expected a 0.1 percent bump in core prices. The key factor behind the boost in the core was cuts in discounts by auto dealers.
The dip in the headline PPI was led by a 0.8 percent decline in energy costs, following a 0.7 percent increase in March. Gasoline dropped 2.7 percent in the latest period after gaining 2.1 percent the month before. As expected, food prices slipped 0.2 percent on lower prices for fruits and vegetables as the impact of severe winter weather fades. Egg prices also fell significantly.
At the core level, the boost was led by a 0.6 percent jump in passenger car prices after declining 1.1 percent in March.
For the overall PPI, the year-on-year rate decreased to 5.4 percent from 6.1 percent in March (seasonally adjusted). The core rate firmed to 1.0 percent from 0.8 percent the month before. On a not seasonally adjusted basis for April, the year-ago increase for the headline PPI was up 5.5 percent while the core was up 1.0 percent.
Markets had little reaction to the PPI report. Generally, the core topping expectations would get market attention but worries over sovereign debt in certain European countries, related austerity measures, and declines in commodity prices has markets more worried about potential deflation than blips in the core from off and on discounts on autos. However, equity futures are up largely on mostly favorable company news.
With oil down sharply in the past month, look for the May report to be substantially lower.
In what I would normally consider to be a contrary indicator, I was shocked to read a Fortune article on CNN news this morning that went like this:
2010's coming stock market crash: 1987 all over again
(Fortune) -- In two tumultuous weeks in October 1987, the stock market shed nearly one-third of its value in perhaps the second most notorious crash in U.S. history. It could happen again. Don't be deceived by the rebounding economy, any more than the bulls should have been misled by the balmy climate during the late Reagan years. Right now, stocks are extremely vulnerable to the same scenario. The reason: The market is even more overpriced than when thunder struck on that distant Black Monday.
That doesn't mean that a giant correction is inevitable; far from it. But the quasi-bubble that followed the big selloff in late 2008 and early 2009 makes the probability of sudden downward swing far more likely. And today's high prices make it practically certain that investors can, at best, expect extremely low returns in the years ahead.
Let's gauge where the market stood just before the shock of October '87. For this analysis, we'll use the price-to-earnings multiples developed by Yale economist Robert Shiller, who smoothes the erratic swings in profits by calculating PEs based on a 10-year average S&P earnings, adjusted for inflation.
In the fall of 1987, stocks were on a tear. The Shiller PE had doubled to 18.3 in just four-and-a-half years. That's far above the historical average of less than 14 (though pales in comparison to recent giant PE numbers). The dividend yield was also an extremely narrow 2.6%, well below the norm of around 4.5%. That's important to remember, because over long periods, dividends are by far the biggest source of investor returns from equities. Then the bottom fell out of the stock market.
When the carnage ended, the PE had dropped to 13.3, around its 60-year average, and the dividend yield was approaching 4%. In other words, the fall hardly made stocks a bargain. But with brutal speed and efficiency, it chopped valuations to levels that made sense.
The slow crash of 2008-2009: a temporary return to sanity
From early 2008 until March of 2009, stocks suffered a steep decline that echoed the 1987 correction, though over many months versus a few days. During that period, PEs fell from the low 20s to 13.3, precisely their level following the '87 crash. Once again, dividend yields approached 4%. For a few brief weeks, it appeared that sanity had returned to the capital markets. Suddenly, equities--overpriced for 20 years-- looked like a good buy, just as they had in at the close of 1987.
But the rational interlude didn't last. By early May of this year, the PE had soared back to almost 22, shrinking the dividend yield to 1.8%. In recent days, stocks have dropped over 7% amid giant gyrations. That decline isn't nearly enough to restore equities to anything like their fair value. So what do the current, extremely price PEs tell us about the future of stock prices?
The best bet is always that equity values, like most investments, "revert to the mean." So following a bubble or bubblette, PEs and dividend yield will inevitably fall back to their historic averages. The big question is how long it will take. In 1987, it took a few days. In the 1990s and early 2000s, stocks remained overpriced for years.
The problem is that the returns investors can garner at today's lofty valuations are just too low. They're also too low to last. If PEs stay constant, the total return to investors is the dividend yield plus the growth in earnings per share, with an added bump for inflation.
Today, the yield is 1.8%. Earnings per share typically grow at a "real" rate of around 1.5%, way below the pace that Wall Street advertises. So the total gain from investing at today's prices is 3.3% or so, plus around 2.5% for inflation, for a total of between 5.5% and 6%.
That's not enough. Stocks are far too risky for investors to accept those puny rewards, as the wild swings of the last two years, and last two weeks, make abundantly obvious. The only way for future returns to rise is for PEs to fall.
How far must prices fall to get back to basics? For the S&P to return to a PE of around 14, the index would need to drop by around 33% to less than 800, its range in early 2009. That would substantially raise dividend yields, and raise future real returns into the high single digits, where they belong.
The drop is going to happen. Here's how:
Here's how I see the odds. The chances are about one in three that we suffer a huge, wrenching correction in the next year or two similar to the one in 1987. That possibility is so high because stocks are so startlingly expensive. Another high probability event is that markets go on a long sideways grind, with smaller drops along the way. What's extremely unlikely is that the market rises substantially from current levels and stays there for any extended period.
Whatever happens in the next couple of years, the odds are overwhelming that investors who buy stocks today will reap puny returns for 10 years. For example, if you'd purchased shares at today's PE of 22 in early 2003, you would have gotten a return of around 3% a year, barely enough to compensate for inflation, let alone buy the blood pressure medication you'd need to survive the scary ride of stock ownership.
Now let's look out a decade or two. The evidence is extremely strong that price matters, and matters a lot: except in rare cases, buying stocks when they are pricey -- when the Shiller PE exceeds 20 -- leads to puny returns ten years later.
Not that you'd ever know that from the happy talk from Wall Street. So screen the noise out, and follow the numbers. They'll eventually get better for investors. But to get back there, we may revisit October of 1987.
Wow, I’m very surprised they put that into print. Making crash calls is almost never a smart call, nor is betting on one, at least with money you cannot afford to lose. The valuation point of the article, however, is correct and the markets are certainly overvalued, not that I am a fan of Schiller’s smoothing technique. And reading mainstream articles about crashes tells me that there may be too much fear for a crash to occur now – although with a potential wave 3 of 3 looming (one count possibility), it’s not out of the question either.
Here’s an interesting update and photo of the oil spill. This photo comes from Dr. Jeff Masters' WunderBlog, an interesting article discussing this satellite photo showing the subsurface movement of the oil spill:
The oil beneath the surface is being pulled southeast and is being picked up by the “loop current.” A good thing or a bad thing? I guess we’ll find out over time, it’s certainly a crying shame no matter where that oil eventually lands.
That's not the only crying shame as this morning we needlessly lost another 5 of our troops to a suicide bomber in Afghanistan...
Question Mark & The Mysterians - 96 Tears:
Monday, May 17, 2010
When a debt based money system is born, the system is not yet saturated and adding debt (leverage) to the system works to increase growth of the economy.
The economy cycles, and if one adds debt time and again to stimulate down cycles yet fails to remove that stimulus on the up cycles then DEBT accumulates over time. This accumulation starts out slow, but with each cycle builds upon itself creating exponential growth. Witness the charts of public and private sector debts below:
Federal Government Debt:
Household Sector Debt:
As debt begins to permeate the economy, the stimulation effect diminishes as was thoroughly demonstrated in the last article on THE Most Important Chart of the Century:
I have been pointing out the continuous series of lower highs on that chart that gave way to a phase transition into negative territory at the debt saturation point. I’ve presented descriptions of a debt saturated environment and noted that employment and production should fall once saturation is reached and still more debt is added. This is due to the fact that new income must be used to service existing principal and interest payments. I even theorized that the recent “jobless” recoveries are part and parcel of debt saturation.
I have spent a lot of time examining charts, but it never crossed my mind to look for the same chart pattern as is present on the diminishing productivity of debt chart. But today it dawned on me that in fact I have seen the same chart pattern, just not in areas where the statistics are manipulated or based on dollars as they distort the pattern. So I started by looking at the employment charts… and look at what I found:
A chart with the same pattern over the same timeframe only it is inverted. A series of higher lows and a phase transition, that’s the chart of the Median Duration of Unemployment. Is the correlation exact? No, but the correlation is extremely high.
We see the same thing when looking at the Mean Duration of Unemployment, this chart goes even further back in time:
In fact, when we look at a chart of the raw number of people on unemployment we see the same pattern. Note that since the late 1940s that our population has doubled but that our number of unemployed has risen by a factor of 8!
Most of the production charts are measured in dollars and that makes them all follow the exponential money parabola. But what is it that is not tracked in dollars regarding production? How about Capacity Utilization? Again, same time frame, same series of continuously lower highs:
Capacity Utilization, Total Industry:
Capacity Utilization, Manufacturing:
Note that we are still operating at less than 70% capacity in manufacturing. Lower highs and lower lows.
I believe these charts are driven in a negative overall direction by debt.
And near the top of the debt pushing pyramid you will find the Federal Reserve and a money system that requires our government to borrow money from the private sector. Thus we wind up owing private individuals for the use of our own money. Who does the money system belong to after all? It belongs to the people, we should not have to borrow our Federal money into existence and we should not have to pay interest for the privilege of doing so! In fact, that notion comes pretty darn close to the fulfilling the definition of insanity – it certainly meets the definition of stupidity.
Let’s look at the Fed’s latest chart of MZM, currently their largest measurement of money:
Hmmm… only a little more than $9 trillion in money deposits, how does that compare to the amount of debt in the system?
Well, just from our first two charts, Current Federal Government Debt equals $13 Trillion, and Household Sector Debt equals $13.5 Trillion, or roughly $26.5 trillion. Simple question… aren’t the same people ultimately responsible for BOTH those debts? Of course they are. That’s $189,285 for every worker in the United States. And we didn’t even start adding up business, city, county, or state debt, nor did we launch into GSE obligations or unfunded liabilities.
So, if we start to pay back the debt with our money, how long will the money last? Not nearly long enough! Since the majority of the world’s debts are denominated in dollars, as people fight to pay down those debts, they need to first convert other assets into dollars. This increases the demand for dollars and thus we see the dollar presently increasing in value. Don't look now, but we just tripped a higher target on the dollar Point & Figure diagram that is all the way up at 112! That will require a lot of deleveraging:
What happens to the money supply then if we pay back debt? It goes down! And you can see that in John Williams latest chart, updated today, that M3 (previously the broadest money measurement and no longer tracked by the Fed) has gone hugely negative on a year over year basis, now dropping at 5%:
How does that compare with history?
When we look at the discontinued series from the Fed going back to 1960, you will see that it has been very briefly negative on only one other occasion:
How will falling money and debt affect the economy? It won’t be pretty. Once you reach debt saturation the alternatives are bad or terrible. Letting deflation run its course is bad, but if you allow it to run its course then more cycles can occur without reaching saturation. If, on the other hand, you insist on throwing more debt into a debt saturated environment, then you are choosing fiscal and monetary suicide.
Frankly, the debt pushing Fed system could use a nice dose of suicide, then we could get on with establishing a system outside of the debt pusher’s debt-backed money box. In fact, where’s Dr. Kevorkian when you need him, we need a prescription for the Fed STAT!
Steppenwolf – The Pusher:
Equity futures are toying with breakeven this morning after being down more than 120 Dow points overnight and then zooming 160 points (on low volume of course) into positive territory only to fall again. Below is a 5 minute chart of the DOW and S&P futures showing the overnight activity:
That’s a very volatile session, the Euro fell further from its channel setting a new low at 1.22 and the Dollar rose above 87 before correcting. As you can see in the daily chart below, the move has clearly entered a parabolic stage. The initial target area for the dollar is about 88 to 89 and for the Euro is around 1.2:
Bonds are higher after doing the same sort of seesaw, oil is lower, and gold is down appearing to consolidate near its prior highs.
The Empire State Manufacturing Index came in this morning much lower than expected at 19.1 when 30.0 was the expectation following last month's 31.9 reading. With this index, any reading over zero supposedly indicates expansion. Both Bloomberg’s and Econoday’s reports put the positive spin to the max, here’s Econoday:
Manufacturing activity remains very strong in the New York region though it did slow from April's exceptionally strong pace. The Empire State index for May came in at 19.11, well above break-even zero to signal significant growth compared to April. The April index was 31.86, to indicate vast acceleration from March.
The key here is that May's numbers may be lower than those in April -- but that doesn't mean May is weak. New orders came in at 14.3 on top of April's 29.49 to extend a long run of monthly gains. Shipments, at 11.29, increased compared to April though the monthly rate of growth slowed. Hiring did not slow with the employment index up more than 2 points to a very strong 22.37. Negatives in the report include continued acceleration in input prices and continued draw down in backlog orders, the latter pointing to still abundant excess capacity.
A slowing in manufacturing activity would be no surprise given the strong rate of acceleration so far this year, a rate that reflects a base effect with the depth of the sector's prior decline. The Philadelphia Fed will issue its manufacturing report on Thursday.
What spin, nice try. Manufacturing has collapsed. It came to a near stand still in late ’08 and early ’09. In the past several months it has turned positive from stand still levels. This is another example of people who don’t understand math. When something falls 50%, a 50% rise doesn’t get you even close to even. But yes, it is positive, but it is also slowing substantially and that is consistent with the removal of some of the .gov life support. Going forward there’s a severe challenge without that support and with debt levels having not been cleared.
March’s net TIC flows (Treasury International Capital) came in slightly positive with a $10.5 billion gain. This is another very weak number, we need inflows to at least match our trade deficit numbers, near $40 billion a month at this time.
How bad are some of the states hurting? Well, at least Illinois doesn’t issue I.O.U.s, they simply don’t pay their bills:
Illinois deep in debt, doesn’t pay bills
Paralyzed by the worst deficit in its history, the state has fallen months behind in paying what it owes to businesses and organizations, pushing some of them to the edge of bankruptcy.
Illinois isn't bothering with the formality of issuing IOUs, as California did last year. It simply doesn't pay.
Plenty of states face major deficits as the recession continues. They're cutting services or raising taxes or expanding gambling to close the gap. But Illinois is taking the extra step of ignoring bills.
Right now, $4.4 billion worth of bills, some dating back to October, are sitting in the Illinois comptroller's office waiting to be paid someday.
Shawnee Development, for instance, is waiting on about $380,000 in back payments, officials say. That amounts to one-quarter of the council's budget for senior care in seven southern counties. "It makes me mad as heck," said Georgia Smith, a 66-year-old volunteer at the agency. Seniors, she said, "are used to paying our bills, paying our way."
Prisons refused bullets
Illinois' deadbeat reputation has created some embarrassing situations.
A supplier refused to sell bullets to the Department of Corrections unless it got paid in advance. Legislators have gotten eviction notices for their district offices because the state wasn't paying rent. One legislator said he had to use campaign funds to pay the telephone bill after service was cut off at his office.
The practice of simply putting off payments became commonplace under ex-Gov. Rod Blagojevich , who liked to spend but adamantly opposed a tax increase to help cover costs. Before he was arrested and kicked out of office, Blagojevich's toxic relationship with legislators essentially paralyzed government, so bills just piled up.
I wouldn’t lend the Governor a bottle of Coke without payment in advance, that’s just me.
Tax collections are way down and that’s putting even more pressure on states - here's one from the WSJ:
States' Tax Collections Falter, Widening Budget Gaps
By AMY MERRICK
April tax collections are falling short of forecasts and even dropping below last year's depressed levels in a number of states, complicating budget troubles and prompting some governors to dip into rainy-day funds.
Following several months of modest improvement, the weak April revenue numbers are disappointing for states that hoped for economic recovery soon.
Based on reports from more than a dozen states, the figures suggest the recession may have taken a heavier-than-expected toll on employment last year, cutting into income taxes.
The shortfalls also are punching fresh holes in state budgets. Widening state deficits could in turn put pressure on the federal government to issue new stimulus funding; a 2009 cash injection from Washington has helped shore up battered state finances, but much of that will dry up by the end of this year.
April is the biggest revenue month for many states because it is when they collect a large portion of income taxes. The month's collections came up short of expectations in California by 26.4%, or $3.6 billion; in Pennsylvania by 11.8%, or $390.1 million; and in Kansas by 10.2%, or $65.3 million. More states will report in the next few weeks.
A drop in income taxes collected by the federal government last month may have foreshadowed the state-level declines. Through April 30, federal income taxes not withheld from workers' paychecks fell 17.6% from the same month a year earlier, the Rockefeller Institute reported May 4.
Kind of puts the lie to the other massaged statistics, doesn’t it?
And if you can stand the truth about how messed up our Federal Government is, their current budget numbers forecast a nearly 8% growth rate in revenues from now through 2020 just to come up with disastrous forecast they currently have. Have we ever grown revenues at near that rate for near that long? Not even close, and the reality of tax receipts so far this year is showing just the opposite. How bad is it? Take a look at this article written by Doug Casey, he spells out the debt picture pretty clearly. Bottom line is that their “math” is somewhat flawed, and to say that it doesn’t work is the understatement of the year:
The U.S. Government Is About To Get Hit With 'The Perfect Storm' Of Debt
Doug produces some great charts and this is a great article, I hope you take the time to read it.
It looks like BP is at least siphoning off some of the oil from the leak, that’s good and I sincerely hope it continues to work.
This week is options expiration, expect more games and more volatility. Being Monday I was expecting at least a good attempt at putting in a bounce following Friday’s 95% down day. The internals were much worse than the decline indicated once again. The SPX 1,120 area is very strong support. A break beneath there is bearish, and a break beneath 1,100 is very bearish.
Oil broke beneath support Friday and triggered a new bearish target on the Point & Figure diagram of $62 a barrel:
At this rate of fall it will be there quickly... gold is shown on the right:
There's no other way to spin that action in oil other than deflation. Take a look at the monthly oil chart, it has clearly broken support, a very bearish development for the medium term:
Eyes, of course, will be on the currency markets this week, but also on key stocks like Goldman which is barely holding onto support and appears to have developed a bearish pennant.
Sam Cooke – One More Time:
Sunday, May 16, 2010
I present this video due to the sentiment readings for gold that Prechter points out. I don’t think it’s wise to ignore what he’s saying for maybe the short or medium term. In the long term, until the debt and structural problems with the currencies are cured, the bullish case will continue to make sense to me. Therefore I see both sides of this issue and would probably present their cases as a matter of timeframe (ht RRH):
I will note that gold has obviously had a very steep ascent in this latest move, but it did recently trigger a new bullish target on the gold Point & Figure diagram of $1,310. Perhaps the move continues into that range but then experiences some pullback or consolidation until the fundamental problems underlying the currencies are either resolved or come to the forefront again. Personally I think the issues will keep resurfacing until they are resolved and that technical patterns may give only temporary respite.