Weekend Sept 29 2012
Thursday Sept 27 2012 An alert reader suggests this article about the slowing economy is of interest, he's right. Boeing Deere and CAT are alll predicting lower earnings.
The Israel PM raises the stakes with Iran.
Student Loan Defaults Mount Again, page A2 Weekend WSJ, eventually this will assume the same sort of prominence of men who fled to Canada to avoid conscription during the Viet Nam War. They became symbols of exodus. The same sort of mood will be projected on those with degrees and a mountatin of debt but no job. It will be argued that these indivduals are facing an exodus not of their own choosing but of events out of control. The plight of their entire families from Grandparents to children struggling under the debt burden will be highlighted. There will be a call to bring them in from the cold of their jobless isolation. You heard it here first.
Simply dissolving the city and selling all assets to pay creditors isn't an option, since we have to continue providing services to residents. The Council has cut police officers by 25%, fire by 30%, and other by 43%.
Stockton City manager Bob Deis, A Message from the City That Went Bankrupt, WSJ Page A 15 Friday 9/28/12
After Meredith Whitney's prediction of massive defaults by cities, we opined that she would likely be correct if her definition of default was expanded to all the stakeholders, her prediction was that the creditors would not get paid. Our prediction was that the three way pool of creditors, city employees, and city resident would all likely share in the default. The necessary moves described are deflationary.
Next year expect that municipal woes and student debt defaults will become center stage issues.
Mark Hulbert describes the system of another college professor who concludes, as we have, that over the long term this is not the time to be an aggressive investor. Again the risk reward here is not what it was in March 2009, we are at the other end of the spectrum.
On page A 17 Former Deputy Asst Treasury Secy David Malpass points out Economic Signals Point to a 2013 Recession. See that article in relation to our conclusion below at end that a top of some significance lies directly ahead. Interesting quote there about buying $1700 gold rather than investing in jobs.
Overall
The markets worked off their temporary excess after our exit Tuesday Sept 18. Since then options expiration on 9/21 and the quarter end of 9/28 have passed. Risk off assets re bounded and risk on pulled back. Let's take a look at that first.
TLT bonds
The Dollar
GDXJ
Run your eye down the three charts and you will see the first two high correlate while GDXJ inversely correlates. Each has been in a channel. There seems to be a bout a two week cycle going on here from top to bottom in each investment.
Investors have been running right back into bonds at every whiff of danger, I had originally thought hte rout out what with QE III would be stronger. As others are speculating, perhaps Ben is not getting the bang for his bond buck, to the tune of $40 B a month, that he thought he would.
Internal Indicators
I exited positions as it seemed to me that the risk reward of being long six figures ( a fistful of stocks?) was increasing. Of course the very end of a move is often the most spectacular, and also the most difficult to time. Now where are we?
Bullish Percent 150 day MA
This is a pretty good picture os just where the overall market lies. This indicator finally pushed through all the MAs, pulled back in a test and now looks set for a final run up. It does not make we want to own lots and lots of stock again but as out title suggests, the Final Run Up Lies Ahead.
A return to the previous high at 90 would be a 28% move so there is plenty of room left for some fireworks to drag investors out of bonds, TLT and into the stock market now that it has doubled since March 2009.
NASD Advance Decline and A/D volume
IN the final throes of a move up, investors tend to focus on recent winners. This was the Nifty Fifty in the 1970s. These days it is Apple and Google. Apparently Apple is a bit pressed to pull the entire NASD up especially with the SOX index performing poorly. I left the ribbon of MAs on but one can see the channel evident here as well. This chart looks to be struggling to me, don't you think? Volume in the lower panel looks weak and weaker.
It may be that the NASD fails to make new highs along with the big stocks. The big boys offer a considerably different picture over the same time frame.
NYSE A/D and Volume
Here is the same time frame and the same indicators but for the NYSE rather than the NASD. Investors are buying the big stocks. At bottom volume is lower than the April high but in the main panel price has exceeded the April high, a warning of non confirmation.
The Overall Weekly Track Record for Risk Assets
Gold is the gold line, silver is the gray line, crude oil WTIC is the black line, and the semi conductor index SOX is the green line. Is this helpful, I think so, this weekly version is easier to read than the daily. Again there seems to be a four to five month cycle going on here measured from top to bottom. This suggests a potential return to the 1875 are for gold. Give that four months has elapsed since June in our 4-5 month cycle, it suggests that if history repeats you don't want to be out of the trading room when this tops, it may not last long, remember the original Cassisus Clay bouts? Notice how the players here swap positions. Oil was a leader in February, not now though.
Has Anyone Noticed the Decline of Fantasy Farming?
The appeal of Farmville missed me completley but then I am not a computer gamer either, rearders realize I prever the real thing. But like the dot.coms post Year 2000, enthusiasm wanes. Could the poor ecomnomy have people spending less on fantasy and more on he the real world? Unlike the luxury end of hte market Farmville seemd to have lower end appeal.
The Bottom Line
In terms of opportunity we believe that a top of multi-year significance is approaching. The probability of profiting from by placing bets on the downside exceeds those of betting on the long side now. We have some calls on GDXJ and puts on TLT. That gives us plenty of upside but limits our downside.
Socionomics
Displays of extravagant wealth are signs of the top of a market. We noted the announcement of the financing for the Kingdom tower, a one kilometer strucutre in Saudi to top the Burj in Dubai.
Yesterday i addressed the State Convention of the Structural Engineers Association of Texas. Members from nearby Austin were describing the plans for the Austin Grand Prix to be held there next month. Just last year the very existence of the track was in question. Now, check out the pre Grand Prix Images.
Austin, TX is the Texas equivalent of California's Silicon Valley. It is a manufacturing center for Samsung, Motorola, Applied Materials, as well as numerous other start ups. The University of Texas is ground zero for attracting PhD candidates from overseas. Down the road here in San Antonio, the UT Health Science Center, Medical School, acts as the anchor tenant for our bio medical high tech industry.
In the 1990s Los Gatos Ferrari was the number one Ferrari dealer in the US. When companies went public the Silicon Valley CEO would treat himself to a new Ferrari. Well history repeats. Austin now has its own
Ferrari Dealer. And just in case you thought that was for show, what's a dealership with without
the Hill Country Ferrari Club?
I am told the Grand Prix will feature
-50,000 expected to fly in from all over the world, crowding an airport designed for 5,000 at a time
-the downtown Main Street will be blocked off so the cars can be on display for all to see, blipping throttles and slowing for photo opportunities
-what's a race without a fashion show?
A true socionomic moment, bright colors, short skirt, a sort of faux Dallas Cowboy Cheerleader look. It may have the flavor or Monaco F1 season but hey this is Willie Nelson's hometown, note the Cowgirl boots on the model.
-one engineer told me his group was working on routing traffic to the Far East location of the track, it lacks enough roads to support the expected 100,000 plus attendance expected
-and yes readers, I did ask, okay after all this is over, how does one make money with the track? I was told that then it really makes money. The track will offer up scale service to those that want the thrill of driving a race car on an F 1 track. Speed Limited cars will be available to those that pay $10,000+ for the privilege. We pick you up at the Airport, 4 star hotel accomodations, a professional driver at the track offers suggestions for improving your performance, etc.
-and of course the track will be rented to Car Clubs looking for a legal way to let their Porsches and Vettes run to over 150 mph.
-for $55 on November 1, one can meet Ron Howard and see out takes from his racing movie, Rush. I expect that event is sold out....
What could go wrong? Well the subject of my talk friday was break even analysis. We need to know the monthly fixed cost of the track, the alaries and debt service and maintenance. The projected cost is $300 million.. A business plan that extrapolates an infinite regression line of well to do individuals flying from around the world to pilot a race car for five figures over a couple of days is indeed audacious. I willl run some numbers to get an idea of what break even would require. This will be an interesting project to track, ouch what a pun, over the coming years.
The Retama Horse Racing Track, built in 1995, here in San Antonio has lost $250 million to date. But quarter horses are not cars but we are in Texas, note cowgirl booots above, what can we say about fickle social mood?
How times change. I can recall sitting watching an Alfa 'Graduate' Spider easily outrun a Datsun 2000 around the Austin Auditorium about 1968. I don't think I paid anything to watch but and there was a
disappointing lack of leggy women, just a few gals in tank tops and cut offs. I recall the date as there was a new AMX two seater, British Racing Green with tan interior I think, at the event.
Texas World Speedway appeals to the RV set. Parking by the track in an RV is a far cry form jetting in from around the world. I may be all wrong about the future of F1 in Austin, but there is no question that such unbounded optimism accompanies market tops.
Recall that in 1971, then icon Steve McQueen produced Lemans Frankly most racing movies are boring but feature interesting clips of racing along with the expected slow motion crash. The period leading to the Market Low of 1974 would also be a top for McQueen's career. The Getaway, Papillon co starring with Dustin Hoffman no less, and finally the
Towering Inferno, his only appearance with Paul Newman, followed in succession. After 1974 he would not appear in another major film until Tom Horn in 1980. That too was bittersweet, his became his second movie since Sand Pebbles where his character is killed. America had yet to emerge from its recession, neither had Steve.
Towering was another sign of the times, the Disaster Movie which paralleled the ecomnomic disaster of the day. It began with a movie about a cruise ship which turned upside down and movies went on through a series of fires, earthquakes, and other events displaying individuals acted upon by sudden events.
In 1971 the markets were headed back up to celebrate their 1966 high of Dow 1,000. Now the markets are celebrating their March 2000 and Fall 2007 highs as everyone flocks to the tracks again. We are repeating the same pattern of social mood. The need for speed is rather like the need to build the tallest building in the world. Positive social mood is expansive, taller, faster, more expensive and ostentatious. Recall that we noted the latest Vogue magazine contained whopping 900+ pages. It's all here on displayn our job as a socionomist is to point this out.
Finally Friday's WSJ points out a series of religious themed movies are in production. Moses, Noah, Cain and Abel and even Mary get their turns. The advantage is that no royalties are due the Bible Authors, now long gone. Redemption and salvations become centerstage in a recession depression.By the time these films hit the screen the timing should be just right, in tune with a population looking for a divine intervention.
Thanks for reading The Market Perspective
Dennislelam@gmail.com
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Just superb analysis and charts once again! On another note, you had recently eluded to an 18-year cycle in regard to the stock market so I thought I would do a little arithmetic research on that. I looked at the closest fibonacci number to 216 (18 x 12), the closest would be the fibonacci number 233.
Then I got to thinking about the lunar cycles during this calendar period as I was recently made aware of some striking correlations with stocks and lunar cycles and guess what?
(see definitions below)
"If we take 223 synodic months (6,585.321 days) and compare them with 242 draconic months (6,585.357 days) we can see that they are almost the same. This period is the Saros and it amounts to 18 years, 10 and a third days." (courtesy of http://www.oarval.org/metonic.htm)
Ok, we are back to the 18-year reference (for "the Saros") and 233 is almost exactly the average of the two cycle periods: 232.5 (223+242)/2= 232.5 here is a remarkable fibonacci coincidence don't you think?
definitions:
Draconic month: The interval between two successive passages of the Moon through the same node of its orbit.
Synodic month: The interval between two successive New Moons.
Posted by: StuartD | September 29, 2012 at 05:17 PM