Friday, July 23, 2010
Equity futures are moving back and forth across the even line this morning with the dollar up, bonds flat, oil down, and gold slightly higher.
Regarding oil, it is currently at $79 a barrel and did almost make it to the $80 mark again yesterday. Last night I read an article showing a very high correlation between oil at or above $80 and the pressure that it created on equity markets and the economy. Going back to mid ’07, if we look at the times that oil exceeded that $80 mark we will see that indeed the markets and economy have struggled greatly. The year spent over $80 from October of ’07 to October ’08 correlates almost exactly with wave A down that bottomed five months after oil fell back below $80. Again at the end of last year and early this year oil began to push $80, and the markets and economy have stalled again. I’m not saying that it’s instant or that the cause and effect are directly related to that mark, but there is a strong correlation and we are pushing that point again so it’s worth acknowledging and watching this demarcation line.
There is no economic news today, however, Standard & Poor’s is threatening to downgrade Hungary’s debt to junk (duh, but notice how they will only downgrade the less powerful nations even though many of the more powerful nations are as bad or worse debt wise), and today is the European “Stress Test” results, Ooooo, I can’t wait. This is the one and only mention you will hear from me regarding these stress tests – it can easily be summarized in one word, JOKE. They are not fooling anyone but themselves… well maybe a CNBC “analyst” or two along with every Nobel Prize winning economist, but other than them no one else is that gullible.
Significant earnings movers overnight were AMZN which is down dramatically after recognizing that profits are pressured by price cuts for the Kindle along with higher expenses and opposing that weakness is Ford who posted strong gains, Microsoft, Verizon, and McDonalds.
Yesterday’s 200 point romp indeed turned out to be yet another 90%+ day, this time coming in at a “weak” 90.5%. It pushed prices right into resistance at the SPX 1090 level. That was the 9th 90% up day since the April peak, the score is now 11 down and 9 up for a total of twenty – nuts.
We did not exceed the high of July 13th, but we did come close. That action is very close to eliminating a smaller wave 2 of 3 and probably indicates that a larger degree wave 2 is in progress. If that’s the case, then July 1 was the bottom of wave 1 and the July 13th high was five waves into a wave ‘a’ top. That means that we may be working our way higher in wave ‘c’ which would need a sideways to down movement followed by another push higher to more fully draw in the bulls. A daily chart of the SPX shows that we are now progressing outside of the wave 1 down channel. Keep in mind that H&S target of 860, it is a large pattern and obviously just needs time to play out:
There is a rather large bearish divergence on the short term RSI that developed yesterday and is still in place. That contrasts with a significant bullish divergence on the daily RSI which this wave higher should work off. So I would expect some sideways action followed, of course, by a 90% chance of a Monday HFT ramp job.
Guns & Roses – Patience:
Thursday, July 22, 2010
Equity futures are up substantially this morning with the dollar down, bonds down, oil and gold up. The media, who must always find a reason, are touting CAT and Ebay earnings, but neither stock is actually higher by any significant degree, in fact CAT was substantially lower on the report.
New Jobless Claims jumped from 429,000 all the way back to 464,000. The consensus, which has been very much behind the latest downturn, was estimating 450k. Here’s Econoday:
The Labor Department confesses: it was holiday distortions tied to July 4 that held down initial claims in the prior week. Claims for the July 10 week jumped 37,000 to 464,000 (prior week revised 2,000 lower to 427,000). Despite the jump, the four-week average, at 456,000, is slightly lower than this time last month which does hold out hope for improvement in monthly payroll data.
Continuing claims fell 223,000 in data for the July 10 week. The four-week average for this reading shows only marginal improvement from a month ago: at 4.567 million vs 4.573 million in the June 19 week. The unemployment rate for insured workers fell two tenths in the week to 3.5 percent.
Weekly initial claims data will be distorted through the month of July, beginning with the opening holiday and in following weeks on calendar shifts for retooling in the manufacturing sector. Nevertheless, today's report isn't very good.
The four week average is down due to their seasonal manipulations. Continuing claims are down as people fall off the rolls and due to the end of emergency benefits which are in process of being restored.
Existing Home Sales and Leading Indicators come out at 10 Eastern this morning.
Want to get angry? General Motors, who we all just bailed out and who completely sunk GMAC, is now buying subprime lender AmeriCredit (ACF) for $3.5 billion so that they can recreate their terrific financing activity! On your nickel, I might add. This bailout was the worst of the worst. The media and meatheads blaming the unions, but the truth is that GM could have paid NO wages, no benefits, and no retirements and they would have still lost Billions due to their incomprehensible finance arm. They financed subprime mortgage loans, and they were responsible for blowing a price bubble in automobiles! Cars became so expensive due to their financing anyone with a heartbeat, that they went from three year financing with 10% down, to seven year financing with zero down. This is what created a bubble in car prices, a bubble that still exists. And just look at the industry now. Zero down, zero interest. Where is the financing cost? It’s in the price of every car! Way overvalued, and we can thank our government’s meddling for that. GM and Chrysler continue to block out real and meaningful competition, it’s the de-evolution of our entire manufacturing base.
Looking at the wave count, it appears that the down move on Bernanke’s concerns yesterday was a wave (b) of wave c of wave 2. By that favored count, this should be the final wave higher and it may take us into the weekend to be proportional with wave (a), as that wave lasted approximately two days. That said, the final wave can easily truncate at any point, so we’ll see what kind of data we get this morning. Patience, it will soon be time:
Chambers Brothers - Time Has Come Today
Wednesday, July 21, 2010
The Stinging Critique of a Worker Bee
A little while back, a Fed Economist by the name of Kartik Athreya, wrote a piece urging the public to only listen to economists who have PhDs from top level universities when searching for economic insights. Regarding other sources of macro-economic analysis, specifically bloggers, Mr. Athreya writes, “it is exceedingly unlikely that these authors have anything interesting to say about economic policy.”
Obviously this paper was a lot of fun for me to read. So I thought I’d present some thoughts on Mr. Athreya and the group of “experts” he represents.
For starters, Mr. Athreya introduces himself as the following:The relevant fact is that I work as a rank-and-file PhD economist operating within a central banking system. I have contributed no earth shaking ideas to Economics and work fundamentally as a worker bee chipping away with known tools at portions of larger problems.Now, the primary thrust of Mr. Athreya’s arguments is that one needs to have taken some form of graduate work on economics to provide any commentary on the subject that is “meaningful.”
Seeing as this is essentially a “leave the difficult stuff to us experts,” argument, I want to start with the self-description of the “expert” writing it. I wonder, when reading Mr. Athreya’s self-description, if worker bees do in fact “chip away” at things?
I realize that bees make honey and build hives… but chip away? What do they chip away with? “Known tools”? Do bees use tools? Which ones are these? And what “portions of larger problems” do bees “chip away” at? Building hives? Making honey? How do you produce honey by "chipping away"?
More to the point, what on earth is Mr. Athreya talking about?
We’re not even past page one of his “us experts are the only ones who know what they’re talking about,” diatribe and already it’s not even clear that he has a firm grasp on how to use basic metaphors. And he is meant to represent the sort of people us ordinary folk should listen to when it comes to explaining things that are “very complicated”?
I also wonder if Mr. Athreya, when making his somewhat self-deprecating introduction, was aware that most “worker bees” are in fact sterile females? Moreover, did he intend, by using the “worker bee” metaphor, to imply that the Central Banking System is in fact a metaphoric “hive” of which Fed Chairman Ben Bernanke is the “queen”?
I’ve written some pretty critical words regarding Chairman Bernanke and his policies, but implying that he is a large female whose only role is to sit around laying eggs all day is too rough even for my taste. A charlatan and a fool? Certainly. But a insect whose sole purpose is to lay eggs? That’s a bit much.
Of course, I am making an intensive examination of Mr. Athreya’s choice of words. However, if Mr. Athreya wishes to write a paper elevating himself and those of his profession as the only ones qualified to discuss difficult topics such as macro-economics, I would assume he would be intelligent enough to make a cogent metaphor (I am, of course, assuming Mr. Athreya was not aware of the implications of his “worker bee” self-description… for all I know he may in fact want us to believe he and his ilk are sterile females working for a queen).
However, in the interest of taste and decorum, let’s set aside my analysis of Mr. Athreya’s creative language and focus on the brunt of his intellectual argument. Rather than analyzing his entire essay, I thought it best to summate his points in a few bullets:1. Macro-economics is very hardMr. Athreya then goes on step further and points out that while many bloggers focus on the Financial Crisis, they fail to provide a similar amount of commentary regarding two other major crisis, specifically the earthquake in Haiti and the Tsunami in East Asia.
2. Only those with at least some advanced PhD-level coursework can comment on macroeconomics knowledgably
3. Everyone who pretends they understand macroeconomics without having pursued said coursework is doing the world a disservice and misleading the general public
He writes:I find the comparison between the response of writers to the financial crisis and the silence that followed two cataclysmic events in another sphere of human life telling. These are, of course, the Tsunami in East Asia, and the recent earthquake in Haiti. These two events collectively took the lives of approximately half a million people, and disrupted many more. Each of these events alone, and certainly when combined, had larger consequences for human well-being than a crisis whose most palpable effect has been to lower employment to a rate that, at worst, still employs fully 85% of the total workforce of most developed nations.I chose this passage because it shows, in clear terms, just how self-righteous and clueless economists like Mr. Athreya are. To be clear, I do not think ALL economists are clueless. Moreover, I do not think all economists AT the Federal Reserve are dolts. It is quite clear from several of the papers published by folks at the Fed that some of them understand exactly what is going on and that they are as fed up as the rest of us.
So, if you have a PhD in Economics or work for the Fed, do not think that the following is necessarily directed at you. It is, instead, directed at those Economists who, like Mr. Athreya, believe they are somehow smarter than the rest of us, when in fact the vast majority of them missed the biggest Financial Crisis in 80+ years all the while promoting theories and policies that have done severe damage to American savers, the value of the US Dollar, and American living standards.
Over the last 40 years, Americans has seen a dramatic decline in incomes, living standards, and generalized quality of life while their savings and wealth were transferred to Asia, OPEC, and Wall Street.
Indeed, when you adjust for inflation using the Bureau of Labor Statistics OWN data, REAL incomes have declined some 40%+ from 1972 to today (weekly earnings of $143 in 1972 are worth $746 in 2010 dollars… compare that to the ACTUAL weekly earnings of $355 today).
Between 1970 and December 2009, the US Dollar lost 81% of its purchasing power courtesy, at least partially, of the Federal Reserve and the economists who decide policy there. This, combined with the drop in weekly earnings, is why, in the ‘70s, only one parent worked and families got by whereas today both parents typically work and are struggling to make ends meet.
In plain terms, the Fed’s policies eviscerated the middle class while funneling their money into Asia (per capita income in China doubled twice from 1978 to 1987 and again from 1987 to 1996), OPEC, and Wall Street (the financial industry’s profits as a percentage of total S&P 500 profits rose form 10% to 31% from 1970 to 2003).
In 1979, the top 10% of income earners in the US took in 67% of all capital income (income from stocks, bonds and the like). By 2006, this group was snagging over 80% of all capital income. Talk about concentration of wealth in the hands of the few!
Economists like Mr. Athreya and their “very precisely articulated model(s)” are indirectly if not directly responsible for this happening. Their work was used to back up policies that were in fact horrible for the American people and their living standards. In plain terms, they dressed up a bunch of theories that were complete and utter CACA all the while claiming these theories were facts. And all 300+ million of us in the US have suffered because of it.
Mr. Athreya decries the fact that bloggers focus on the Financial Crisis instead of the earthquake in Haiti or Tsunami in South East Asia. He implies that this focus indicates bloggers are in some way not concerned with the welfare of others.
Unfortunately for his arguments, neither the earthquake nor the Tsunami were man-made catastrophes. The Financial Crisis, in contrast, WAS man-made (actually IS, since it’s still going).
Moreover, the risks of the Tsunami and the earthquake were not well known to the experts well in advance (a handful of studies warned about a potential earthquake in the Caribbean, but the Tsunami came “out of left field” so to speak).
In contrast, as early as 1998, soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, approached Alan Greenspan, Bob Rubin, and Larry Summers (the three heads of economic policy) about derivatives. She said she thought derivatives should be reined in and regulated because they were getting too out of control. The response from Greenspan and company was that if she pushed for regulation that the market would implode.
So, the Economists and experts knew a full ten years in advance what the risks were in the financial system. And they did NOTHING to rein them in.
Finally, neither the Tsunami nor the earthquake resulted in the Federal Reserve channeling TRILLIONS of taxpayer dollars into the corrupt bank oligarchs’ coffers, often times paying 100 cents on the Dollar for worthless assets that are now poisoning the Fed’s balance sheet and assuring that the very issues plaguing Europe will one day hit the US.
The Financial Crisis DID all of this and more.
In no way shape or form am I belittling those who were killed or continue to suffer from the earthquake in Haiti or Tsunami in East Asia. My primary point is that both of those incidents were natural catastrophes that could not have been prevented. The Financial Crisis, which wiped out $50 trillion in wealth and has resulted in millions losing their jobs, COULD have been prevented.
And yet, consumers are supposed to listen to the guys whose entire careers are meant to focus on forecasting economic events when less than one percent of them forecast the Crisis (despite those at the top of the economist food chain knowing a full decade in advance of the risks in the financial system)?
Truly, Mr. Athreya and his ilk are “chipping away… at larger problems.” However, those problems are not economic models or unemployment, they are the following:1. That ANYONE listens to economists like Mr. AthreyaHowever, do not be alarmed, I am sure that as long as the Fed keeps publishing this kind of nonsense while funneling taxpayer money into the Wall Street banks, both of these problems will soon be fixed… permanently.
2. That the US Dollar still has a value greater than toilet paper
When that happens, we can all toast Mr. Athreya and his ilk with $100 beers and take comfort that the experts knew what they were doing all along.
Oh wait, I guess I do have more to add! It occurs to me, and I’d have to do a $257 million study to provide the empirical data of course, that the more one is educated in economics the larger their misunderstanding of the true dynamics become. I strongly believe that our money system and who control it is to blame. Those same central bankers also are responsible for funding and thus control our higher educational institutions.
The “science” of economics is closer to astrology than it is to any real scientific field. Modern day economists use linear formulas with their basis in the days of Adam Smith. Highly touted and respected economists like Keynes, Friedman, Greenspan, Bernanke, and Krugman (among many others) have been making grandiose statements and predictions all built upon piles of myths and misconceptions. Their track records are abysmal at best, especially when the real non-linear world begins to leave the center of the DEBT operating envelope.
In short, these people have failed to pull their heads out of academia where they are programmed with one misconception built upon the other, all supporting the current power structure – a debt backed money box that feeds the central banks.
Indeed it’s time to advance the conversation – the place to start is by dismantling the Fed and sending people like Mr. Athreya onto the streets where they can learn the reality of economics and free their minds to understand the real world.
Equity futures are higher this morning following yesterday morning’s about-face. The dollar, however, is higher. Bonds are down slightly, and both oil and gold are higher.
Yesterday Apple reported record earnings and iPad sales that exceeded their entire lineup of iPod sales. APPL stock is roughly $12 higher this morning or about 4.7%. Intel and Apple appear to be leading the tech sector at this point. Google’s stock, another tech bellwether, is not performing as well. Yahoo disappointed yesterday and is down more than 6% this morning. Wells Fargo profits are down year over year, but they beat expectations largely by lessoning their loan loss reserves – again taking more risk on the assumption that the worst is behind. Morgan Stanley also beat but mostly on trading profits. So far it seems to me that earnings have been largely disappointing with a few notable exceptions such as Apple. The second quarter, however, was only just starting to slow economically and thus I think the next two quarters will be important and will likely show more deterioration than is currently assumed.
Extended Emergency Unemployment benefits have now been reinstated. That will bring in an additional $10 billion per month into AAPL’s coffers – err, I mean into the economy. If you think about it, that’s a very substantial sum, nearly $120 billion a year. Of course it’s all additive to our deficit and in the end simply progresses us to the day that confidence in our money is lost.
Additionally it appears that we now have “financial reform” via the “Dodd-Frank” bill. I personally do not think this accomplishes anything for the economy – it consolidates power in the wrong hands while failing to address current debt levels, derivatives, and the GSEs. The market does not appear to know how to digest it – there are many discretionary powers and delayed timelines so it is difficult, if not impossible, to know all the ramifications in advance. I was recently interviewed by a European publication regarding this bill, below are their questions and my responses:
1 - Does the new Bill target the roots of the crisis engine?
Absolutely not! It fails to target the debt and it fails to target derivatives – thus leverage in general will still be far too high. The true root of the crisis was not financial in the first place! The root of the crisis is found in our money systems and most importantly WHO controls them. The same private organizations are in control today as were in control during America’s Great Depression. To truly address the roots of the problem, we must address debt, derivatives, and our monetary system along with who controls it and how.
2 - What do you think are the stronger points of the new financial reform?
It is very strong if you are a central banker and wish to keep your games rolling! It gives them more discretionary power while obscuring what is truly transpiring. This reform does not have any strong points for the average citizen. Placing “Consumer Protection” under the Fed, for example, is absolutely putting the fox in charge of the hen house! The “consumer” is saturated with debt as are our governments. This bill fails miserably once again at addressing this.
3 - What do you think are the weakest points of this Bill?
It gives discretionary power to those responsible for making the mess in the first place. It fails to address current debt, derivatives, or the GSE’s (Fannie Mae and Freddie Mac). It does nothing to bring government deficits under control or to right government programs that are insolvent. In general, it fails to change the equation of WHO produces the money and how.
Additionally, the Fed now has the authority to impose new capital standards, regulate, and/or even to divest certain portions of those financial companies! Keep in mind that the Fed is owned by the member banks! Who are the largest shareholders in the Fed? The largest banks, of course! This gives those forces the power to regulate competitors or to even force them into disadvantaged capital positions – ultimately they could even force them to divest entities that the larger member banks could then pick up! This is inexcusable and a total mess for our nation and the world. It centralizes power further into the very hands of the organizations responsible.
True and lasting solutions will only come when we begin to think and operate outside of the central banker debt backed money box. Inside of that box the only answers are continually growing deficits or austerity – neither is the correct solution. When neither of those work look for “other historical events,” like war, to follow and to distract.
4 - This Bill is comparable to the Blitzkrieg of the financial reform from FDR in the 1930s?
Absolutely not. The current problems now are far larger and far more complex than then – this addresses very little that is meaningful.
5 - One of the aspects that surprised is the expected delay between Obama signature and its application. For instance, the time to application of the so called Volcker rule goes from 15 month to more than 80 month, or even 9 years for certain aspects! A delay between 2012 and 2022! In pratical terms, that's almost a generation. What kind of reform is this?
It’s no reform at all. It is meant to look like the politicians are taking action while actually doing nothing but turning over more power and control the central banks. The Dodd-Frank bill has gaps you could fly a Boeing 747 through. The economy is far more fragile than anyone wants to admit, so they are purposely not taking any action now so that they can hopefully not have to address another steep downturn on their watch. They will fail in that regard as another steep downturn is rapidly approaching and in fact is already in progress.
A Debt saturation crisis moves in 3 waves – A, B, C. We have experienced A down (late ’07 to March ’09), B up, and now C down has likely begun as the debt has not been cleared. Wave C down is the wave that brings about real and meaningful change and will cleanse the debts restoring historical income to debt ratios. The Dodd-Frank bill is not it – I believe that meaningful reform will not come for some time still, but that time is approaching. As events continue to unfold the people will become more aware of how they have been deceived.
For those masochistic enough to dive into the entire 2,319 pages of diversionary Dodd-Frank language, here is a link: Dodd-Frank Bill
Maybe I’ll be proven wrong about the use of discretionary power and they will be used on behalf of the people – LOL, oh wait, that does sound laughable and completely implausible when looking at actions to date, does it not? The Fed in charge of consumer protection? LOL, and Dodd, of course, doesn’t believe a real watchdog like Elizabeth Warren is qualified for that job! More wool is all I see, real reform it is not.
Speaking of wool, this morning the worthless MBA Purchase Applications Index rose by 3.4% for the prior week. The refi index rose 8.6% in yet another completely unbelievable one week swing. This index is still sitting on historic lows and I maintain that the way in which it is reported should be completely banned. Regardless, here’s Econoday spinning it for all it’s worth:
Homeowners are trying to lock in record low mortgage rates. The Mortgage Bankers Association's refinancing index jumped 8.6 percent in the July 16 week, making for a nearly 30 percent gain over the past four weeks. The average 30-year mortgage fell 10 basis points in the week to 4.59 percent, the lowest ever in the survey. Low rates are one of the few positives for home sales. The badly depressed purchase index rose 3.4 percent driven by demand for government loans which have low down-payments. Today's report, along with yesterday's rise for housing permits, are rare bits of good news for the housing sector.
Good news for the housing sector? Tell us another good one, I love Science Fiction stories! Ohhh, too bad, that’s the only “economic report” for the day. Tomorrow we’ll get Jobless Claims, Existing Home Sales, and Leading Indicators.
Let’s take a look at a 3 month daily chart of the SPX with all my drawings turned off so that we can see the series of lower highs and lower lows. The most recent high appeared to be the end of wave 2 of 3. In fact, if we exceed the July 13th high, then it may turn out that was just wave A of wave 2 and that the recent decline was wave B with C started yesterday. That’s an alternate scenario if we go on to make a higher high – so far we’ve retraced roughly 61.8% of the downmove, so a turn right here would not be unexpected and if so then the climb yesterday was simply a smaller wave 2.
The only truly bullish case I can make is if we exceed the June 21st high with both the DOW Industrials and Transports, then you would produce a secondary DOW Theory buy signal. I don’t see that happening yet, but it’s a possibility. The VIX was down substantially yesterday, that simply looks complacent to me. For now the SPX 1090 area is acting as resistance, while the DOW’s magical and magnetically attractive 10,000 is acting as support.
With the dollar higher and bonds not far from making new highs, I still believe that the risk is squarely on the down side – that verified H&S pattern has a target of 860, the odds are very high that we will get there - it’s simply a matter of time.
Tuesday, July 20, 2010
Equity futures are down sharply this morning, the dollar is higher, bonds are higher, oil and gold are down.
Yesterday evening and this morning IBM, Johnson and Johnson, and TXN all reported sales that were below expectations and all are off significantly. Also this morning bad boy Goldman reported a very large miss with expectations for earning of $1.99 per share but coming in at only $.78 – an 82% drop in earnings for the quarter. What happened to their trading mojo? Hmm, why do I feel like I’m always being played by any report they release? JPM and BAC trading revenues fell as well but not as significantly.
Housing Starts came in lower than expected once again at a very anemic 549,000 units. Prior was 593k and the street was looking for 580k, that’s a 7.4% one month drop on the heels of May’s 10% drop and the largest plunge in history for New Home Sales. Here’s Econoday:
Housing is still suffering from the end of expired tax incentives as starts fell sharply in June. But the good news is that housing permits rebounded, perhaps indicating a bottom for starts. Homebuilders again slowed the pace of ground breaking as housing starts in June declined 5.0 percent after a 14.9 percent plunge in May. The June annualized pace of 0.540 million units fell well short of analysts' expectations for 0.580 million units and is down 5.8 percent on a year-ago basis. The latest fall was primarily due to a 21.5 percent plummet in multifamily starts, following a 4.3 percent gain in May. The single-family component only slipped 0.7 percent after an 18.8 percent decrease the prior month.
By region, the decline in starts was led by an 11.3 percent drop in the Northeast Census region. Decreases also were seen in other regions with the Midwest down 6.9 percent; West, down 5.9 percent; and the South, down 2.4 percent.
The near term outlook is less gloomy as permits rebounded 2.1 percent in June, following a 5.9 percent drop in May. Permits in June came in at an annualized rate of 0.586 million units and are down 2.3 percent on a year-ago basis.
Clearly, the starts and permit levels are weak. But June's starts numbers are not as bad as at face value as the multifamily component is very volatile and led the drop. And the comeback in permits suggests that the post-tax credits decline is leveling off.
Oh yeah, it’s a great report – lol. Check out that chart, in 2007 housing starts were only three times what they are now! Is this the bottom, the time to buy? Uh, not yet… Here’s a reminder where we are, 2012 and after is the time to be thinking about real estate again, but have plenty of cash at the ready to take advantage.
Fundamentally also keep in mind that our population of peak earners has peaked and is in the process of crashing. The peak earnings and thus peak spending statistically occurs at age 46.5 in the United States and the Baby Boomers aggregate peak is now beyond peak! They also pulled future income forward in time, shifting that peak sooner via the massive use of debt. So, with peak earners/spenders in steep decline, and the Fed targeting 2 or 3% growth, what does that tell you? It tells me that the only way to create “growth” is via more paper. It’s a completely ridiculous notion that a government would attempt to create growth with a shrinking population of peak earners (this is far more important than overall population size). This is just another example of how unsophisticated the Fed and our government is in understanding the economy – intentionally so, I might add.
Speaking of population size, the U.S. has 308 million people. China has 1.324 billion people, four times as many! Yes, it is significant that their total energy consumption just exceeded that of the U.S. – our energy consumption has declined the past two years which fits with the shift beyond the Boomer’s peak. Harry Dent has done a ton of good research regarding demographics all over the world, if you are after more demographics information, his site is where you will find it - www.hsdent.com.
Below is his chart showing the Boomer’s generational wave. Note the peak in the spending wave that has already occurred:
Next is a chart of his spending wave with the S&P 500 overlaid in front of it. Dent’s spending wave was created by taking the immigrant adjusted births in the United States and moving them forward by 46.5 years to adjust to peak earnings/ spending. Again, you can see that the following generation does not produce positive growth in peak earnings until after the year 2022! Do not expect any fundamentally strong economic growth until after that time frame:
The markets appear to be continuing wave 3 of 3 of 3 down, yesterday appeared to be a small wave 2 and this wave should be a strong part of wave 3. Remember, this wave 3 is likely a part of the larger wave 1 which I expect will conclude somewhere near the H&S target of 860ish. This wave will also have subwaves within it, so don’t expect a straight line down – the markets never move in a straight line!
Today the NDX is producing its Death Cross with the 50dma moving below the 200dma. The RUT and Transports are the holdouts for now, but even the Major Market Index (basically the entire market) has crossed:
Demographics – debt – housing - earnings – markets – politics… under pressure:
Queen and David Bowie – Under Pressure:
Monday, July 19, 2010
Equity futures are slightly higher this morning. The dollar and bonds are close to even, oil is flat, and gold is down. This week’s economic reports are dominated by housing data, the housing market index is released at 10 Eastern today. The LEI, which lags the ECRI, is released on Thursday.
Friday’s 261 point plunge was the 19th 90%+ NYSE volume day since we topped in April – another HFT extreme, 95.7% of the volume was on the downside. The score is now 11 down, 8 up, which is a very dangerous combination.
Last week produced another key reversal on the weekly candle by producing a new high and finishing lower. This is often a sign of a coming decline. I think it is highly likely that wave 3 of 3 of 3 (of 1) began Friday. There is an alternative, but in either count much lower is likely dead ahead – the target of the H&S top is 860ish.
I want to point out that the EW people who believe we are in a new bull market (I believe they are just wrong) think that this pullback is wave 2, and that the rise from March ’09 was wave 1. Thus they expect that once wave 2 finishes that we’ll go roaring onto new highs in wave 3 up. That means that what happens after we arrive at the 860ish area will be critical. We will probably then bounce with them believing wave 3 up has begun, and people like me believing that wave 2 up has begun. I think the bears will be proven right, and as evidence I simply have to point at the levels of debt which are still obscene. This is why it is critical that we consider the true underlying fundamentals of the market. Then there are the people who believe that the economic data can continue to be bad, but stocks still rise like post 1932 during the depression… to that I agree, however, I do not believe that enough debt has been cleared yet for that to happen – that our timeline is longer than then as events are unfolding more slowly due to the larger scale of the problems and massive intervention.
For now it is clear that we just made a new lower high, turning right on resistance and once again failing to get over the moving averages. Speaking of moving averages, the 50dma is now nearly 2% beneath the 200dma on the SPX, this virtually assures that there will be no quick whipsaw on the death cross indication. Note on the daily chart below that the daily stochastics are just rolling over, so there is a long way to go to oversold on this timeframe. We closed beneath 1070 which I believe opens the door to get back below 1040 and to create a new low soon:
On the shorter time scale, however, we are oversold and can expect some sideways to up action following the large down move on Friday. Also, on the 60 minute chart below you can see that there is now a new down slopping Head & Shoulder’s pattern that is worth approximately 120 SPX points… that slopping neckline will be in roughly the 1000 area by the time we descend to it and the target will thus be in the 880is area, very near the larger H&S target area of 860ish. I like it when multiple patterns target the same general area, the markets are talking loud and clear on where we are headed:
I was reminded that yet another long term indicator triggered a long term sell signal at the end of last month… that occurred when monthly prices closed below the 20 month exponential moving average. This is the 4th long term indicator to issue a long term sell signal in the past month:
Note that the gap between the Shanghai index and the SPX has yet to narrow – this gap should not be ignored, the world functions largely together and you can see that historically they work to close the gap:
It’s been awhile since I updated the Point & Figure diagrams, below you can see that the SPX P&F is targeting 900 – again close to the H&S target area:
The DOW’s P&F diagram is targeting 8,700:
Everyone was breathing easier over the cap on the BP well head holding… and then the truth emerges that indeed there are leaks coming from the sea bed floor. Tragic – my fear is that keeping the cap on makes the damage to the well worse, I would think they will have to uncap it soon. Fingers are crossed that they can kill it later this month. As I read what is occurring, the one thing that makes me extremely angry is the lack of transparency from our own government. This Admiral Allen has acted like a BP spokesman and his latest release provides zero information about what is happening on the sea floor – exactly what a BP spokesman would want to provide.
Obama’s “debt panel” is finally talking… and what are they talking? Why austerity of course:
Obama's debt panel: Hints of an endgameNote the psychology shift – austerity is the plan now and not stimulus! Welcome to wave C, however, we must first wait… and wait… and wait… as the economy is “still too fragile.” No kidding… and the deficits mount and mount while we hear the sound of the very empty can rattle down the road as it gets repeatedly kicked. Eventually an event or series of events will come along that draw everyone’s attention away – unfortunately history says that those events will be very significant in nature.
NEW YORK (CNNMoney.com) -- How to get the federal budget back on the right track? Here are just two ideas from the co-chair of the president's bipartisan debt commission: Rein in tax breaks. Set hard caps on federal revenue and spending.
Erskine Bowles, co-chairman of the panel and White House chief of staff under former President Clinton, has twice in recent weeks mused in public about what he'd like to see in a debt-reduction plan.
The commission has much work left, and Bowles only gets one vote. But if the commission can't agree on its own set of official recommendations, he is likely to play an influential role in shaping the advice given to President Obama.
Obama, for his part, has said he will deliver serious deficit-reduction proposals next year after reviewing the commission's report, which is due Dec. 1.
If Bowles has his druthers, no plan would take effect before 2012. "The economy is too fragile," he said at the commission's last public meeting and reiterated again at a jobs summit last week at the U.S. Chamber of Commerce.
And as I’ve been shouting since the 9/11 attacks, our reaction to it has been one of fiscal suicide. We spent and spent in order to “be secure,” but in so doing we bankrupted our nation unwittingly in the end making our nation far less secure – oh, the end we have not seen yet, it’s coming. “Those who would sacrifice freedom for security deserve neither” to paraphrase Benjamin Franklin.
Report: U.S. intelligence community inefficient, unmanageable
Washington (CNN) -- The September 11, 2001, attacks have created an intelligence community so large and unwieldy that it's unmanageable and inefficient -- and no one knows how much it costs, according to a two-year-long investigation by the Washington Post.
Ahead of the publication, many in the intelligence community worried that the stories would disclose too much information about contractors and the classified tasks they handle.
The Post article that appeared in Monday's edition says its investigation uncovered "a Top Secret America hidden from public view and lacking in thorough oversight. After nine years of unprecedented spending and growth, the result is that the system put in place to keep the United States safe is so massive that its effectiveness is impossible to determine."
The Post investigation found that "33 building complexes for top-secret intelligence work are under construction or have been built since September 2001," or the equivalent of nearly three Pentagons.
"Some 1,271 government organizations and 1,931 private companies work on programs related to counterterrorism, homeland security and intelligence in about 10,000 locations across the United States," according to the Post, with an estimated 854,000 people holding top-secret security clearances.
Two years to study it and it's so unweildy that they can't even count the money spent...
To those who still believe that our reaction was appropriate all I can say is that we are all about to be spanked severely for our lack of clear thought, and none of us are going to like it. I already don’t like it – from the perspective of a thinking airline pilot, it was a disgrace. Just yesterday evening I drove to the local store and passed a completely unmarked police car, with dark windows and hidden lights, pulling over a local in my small community… does my little town spend heavily on unmarked vehicles to pull over locals for speeding? WHY? Then my wife and I drove down to the Tacoma waterfront for dinner – passed the defense industry stop light cameras and permanently installed speeding traps (tickets by mail) to arrive at the waterfront. At the beginning of the waterfront drive – a police car. In the middle – two police cars. We go for a walk and see 3 more. Sweet, what a nice lifestyle, the land of the free – heck, I almost felt safe except for the fact that I am living in a total police state where the state does not have the means to pay for it. My local town deserves to be bankrupt. I was just reading how the city of Federal Way earns $2.2 million per month from automated tickets by mail – they are now addicted to that money… oh, and the DOD company that build them, they take 40% of the haul. Federal Way’s court system is now so busy with cases that they are backed up and need to hire more judges – sweet!
Me? I moved out of the town of Lakewood due to this very thing and I’ll be heading to another town that is not a police state, as far away from this type of crap as possible. If that town then proceeds to do likewise I’ll move again. Hopefully the cleansing that’s coming will cure this type of nonsense, but again I fear that we may only see more of it – I am on guard and make my opinions known to local politicians regarding these issues, I hope you do too.
Jimi Hendrix - All Along the Watchtower:
Sunday, July 18, 2010
Two things I want to point out that strike me in this paper…
The first is that he states in the opening paragraph that, “We are beyond hope, and it is a sad day that it is just impossible to ever make a difference or avoid a catastrophe.” He continues later, “We are entering a new era where all that once was is coming to an end. The real issue is HOW do we rebuild what is going to collapse?” So, in his previous paper we are not going to encounter another Depression, but in this paper we are going to experience catastrophe and after the collapse we will have to rebuild!
Playing it both ways? Yes, this guarantees that he will be right regardless of outcome and can later quote just how right he was! I’m simply pointing out what I see, and I am seeing more of this. Still, Martin adds depth to the discussion and there is great value there as long as you keep it in perspective.
The second point is that Martin echoes Adam Smith’s “Everyone acts out of their own personal self-interest” line, and that “COLLECTIVELY the sum of all actions is the real trend.” Here I also disagree that it is happening. Is assuming more debt than you can repay acting in your own self-interest? Is voting for people who spend more than their government takes in acting in your own self-interest? Is allowing Wall Street to manipulate markets and buy politicians acting in our own self-interest? How about being underwater on your mortgage yet continuing to pay full amount on a debt owed that is secured by that underwater property – is that acting in your own self-interest (many are dipping into life savings in order to do so)? No, it seems to me that collectively we are FAILING to act in our own self-interest – that is the danger of this time! We have not forced the businesses to fail who should have failed, we have failed to recognize and to act in our own self-interest! And in fact that is what Martin describes to some extent when he says that it is impossible to avoid a catastrophe.
The fact of the matter is that our markets are not free and that people collectively are NOT acting in their own self-interest – they are acting in the self-interest of the few oligarchs who are obscuring and manipulating the markets, our economy, and our political system.
When evaluating possible market outcomes, I have learned that it pays to completely ignore people who discuss one outcome or another in absolute terms. Those who do will be right on occasion, but they will be wrong on occasion as well – of course they will only brag about the occasions that they were right. In his forecast, Armstrong says that we will not make new lows below the March lows – an absolute statement. Personally, I give the odds of making a lower low below the March low greater odds than 50% - I acknowledge that I don’t control and cannot predict the actions of others. What I do know is that the debts have not cleared and that fundamentally most “assets” in America are vastly overvalued relative to the income available to support them.
In this paper Martin boldly states that those comparing now to the Great Depression are wrong, “…Not only was there a Sovereign debt crisis in 1931, but there was an advancement in technology that was eliminating jobs in the agricultural sector, the dust bowl, and the fact that the dollar was NOT the dollar but it was de facto gold! Most such events are NOT present today!”
Umm, let’s see – sovereign debt crisis then and now, check. Advancement in technology eliminating jobs then, and I certainly think that jobs are being massively eliminated now both by advancements in technology and via off shoring (not to mention wage arbitrage), so double check on that one also. Dust bowl then was an environmental disaster caused by pushing the boundaries of growth and understanding that definitely impacted the economy – today we have an oil environmental disaster from pushing the boundaries of growth and understanding, again definitely impacting the economy hugely, so check again. And the dollar rising because it was gold then is a complete misread of history in my opinion – gold has NEVER in the history of mankind worked to keep the total quantity of money under control, it certainly did not during the “Roaring Twenties,” a time of tremendous credit expansion – credit dollars that had NOTHING to do with gold! In fact, when banks issue CREDIT dollars and get repaid with gold certificates, what is transpiring is the consolidation of gold into the hands of the banks! The deleveraging of CREDIT necessitates a MECHANICAL (temporary) demand for the currency in which debt is issued.
So, Martin is flat out wrong in his depression comparison on all counts! From my point of view, the similarities are startling and would require a book they are so vast. The largest difference from my point of view is the sheer scale of the debt today which is far greater than it was then. Another area of difference is the free floating of currencies and the speed at which capital can now traverse the globe. Also, the layers of obscuring financial engineering make seeing the game that’s being played all the more difficult now.
The largest overlooked SIMILARITY between now and the time of the Great Depression is the fact that WHO controls the money has not changed! It is the same central bankers now as then – gold standard then, no gold standard now.
All that said, there is still much value in reading and digesting Martin’s work, that is why I continue to present it to you… BEWARE ABSOLUTES, and beware of over generalities like, “Some nations will suffer inflations and others will suffer deflations.” No kidding… and a great example of why investing in this environment based on the “genius” of any single individual is strictly caveat emptor.
Let’s see, two plus two equals ???
You have the largest banks that ARE THE FED who had ZERO losing trading days during the first quarter of the year, and now you see that the “Fed” is fueling their game directly. Graham is right, when are we going to do something about it? Again, I caution all “players” (gamblers) in this market that it is anything but a free market…
I Thought Quantitative Easing Ended?
Well, it’s options expiration week again and as usual Wall Street is gunning the market for all it’s worth. The bulls are falling for this shenanigan yet again, just as they did in June.
How’d that work out?
Tracking options week manipulations isn’t easy because there are no strict rules: the action all depends on where the market is and the number of outstanding contracts at given price points.
For instance, back in April investor bullishness was at extremes. Consequently, Wall Street ramped stocks first upwards (the usual predilection) to shank the puts… only to swiftly reverse the action in the middle of the week to shake out the calls.
This whole system occurs courtesy of the Federal Reserve which openly and blatantly pumps the market on options expiration week. I’ve shown the below chart before. It’s staggering that no one in Congress or any of the regulators actually bother following up on this. How much more obvious does Bernanke need to get?
Options expiration weeks in bold
July 8 2010
July 1 2010
June 24 2010
June 17 2010
June 10 2010
June 3 2010
May 27 2010
May 20 2010
May 13 2010
May 6 2010
April 29 2010
April 15 2010
April 8 2010
April 1 2010
March 25 2010
March 17 2010
March 11 2010
March 4 2010
February 25 2010
February 18 2010
February 11 2010
February 4 2010
January 28 2010
January 21 2010
January 14 2010
January 7 2010
December 31 2009
December 28 2009
December 17 2009
December 10 2009
December 3 2009
November 27 2009
November 19 2009
November 12 2009
November 5 2009
October 29 2009
October 22 2009
October 15 2009
October 8 2009
October 1 2009
September 24 2009
September 17 2009
September 10 2009
September 3 2009
August 27 2009
August 20 2009
August 13 2009
August 6 2009
July 30 2009
July 23 2009
July 16 2009
Notice that on non-expiration weeks the Fed either pumps the system slightly or, more commonly, removes money.
However, once options expiration week hits, it’s PUMP time. To whit, the Fed has NOT had a single options expiration week in which it HASN’T pumped the market in nearly one year.
Moreover, note that despite the Fed’s Quantitative Easing Program ending in March, the Fed continues to pump $10+ billion into the system EVERY month when options expiration week rolls around.
Didn’t Bernanke say he wouldn’t continue buying assets from Wall Street after QE ended? More importantly, didn’t QE end? Why is the Fed still pumping money into this system?
And finally… how many times does this have to happen before someone in power actually notices it? Seriously, we’re talking about the Fed going 12 for 12 in the last year. And it’s not like the pump jobs are even subtle: they’re DRAMATICALLY larger that any other capital infusions the Fed makes during non-options expiration weeks.