The Market Perspective

Correction of ETF Transaction

Monday  April 22, 2013

We erred in a statement regarding ETFs. A reader sends this information.

The only things that have any bearing on the actual expansion or contraction of an ETF's underlying portfolio is the creation and redemption feature and the slight adjustments to keep in line with the index.  There is no such thing as a withdrawal from an ETF.

The creation and redemption is only accomplished by the authorized participants (usually the big brokerages). These are done in large chunks, typically 50,000 to 100,000 shares of the ETF. The AP can exchange the underlying portfolio for newly created shares in the ETF, or vice versa to get their money out of an ETF. So, they buy or sell the underlying portfolio stocks separately.

KPMG Where are the Internal Controls?

Wednesday April 10 2013

KPMG has pulled its audit reports on Herbalife and Skechers. 

There are more reports on the KPMG Los Angeles partner resignation in the news. As one client asks, what controls does KPMG have in place to prevent a 'rogue' employee from peddling inside information. 

I published a Business Case Study on KPMG's Tax Shelter Fine. The fact that there are recurring problems at KPMG after they paid the biggest criminal fine in history with out a trial raises questions about their internal controls. 

External accounting firms are held to a high standard of trust. Now that the number of Big Firms has narrowed from eight to four, the business can ill afford another incident that might implode a firm ala Arthur Andersen. This bears watching. 

 

More Confirmation on the Recession

Monday April 8 2013 7 20 AM CST

This weekend I suggested the Recession was already underway. Here are a few updates from the Monday WSJ. 

Front Page -  Worker Stuck in Disability Stunt Economic Recovery - the article notes that there is little incentive to leave disability for a low paying job, and medical benefits become available two years later

A4 Chicago's Pension Fund is underfunded by $24 billion - 

A6 Midland Tx plans a 53 story building, recall my story about the First National Bank of Midland adding ten stories in 1979 and then going bankrupt in 1986. The proposed building would take two years to complete.  The article admits the original Petroleum Tower built in 1927 opened empty as the Depression set in. Incredibly Chevron plans a $100 M office campus in Midland. Chevron put our family owned business out of business in 1987 demanding a lower bid, we shall see how this plan works out. Thisis another sign of an impending top in mood.  

A6 Graduate Programs in the US lose some Allure Overseas - Higher Ed is built on the assumption that demand is inelastic, I suggested the wheels were finally coming off the Education Juggernaut, the WSJ notes the unions blame testing not teachers for the Atlanta Scandal

A13 In a tragic link with the terrible end of the Viet Nam conflict six Americans died in Afghanistan this weekend, just like the stock market, 40 years later the same story occurs

A19 A former doctor now raising Christmas Trees warns of the danger of Obamacare

 B5 The Evil Dead took in $26 M at the box office this weekend $5 M more than the next comedy, here is a sign of down turn in mood but

B6 Like Midland, Tx optimisim abounds as Sootheby's plans a $30-40 M sale of a Francis Bacon painting

Cyprus Edges Toward Euro Exit Just like Stockton CA taking bankruptcy, or Chicago looking for an exit to its $24 B pension liability, it only takes one participant racing for the exits to start a mad dash. I suspect this will prmpt a string of bankruptcies both across Europe and among US cities, for about the same reason, over promising entitlements

So optimism is still high for buiding projects and painting which is what we would expect at all time market highs. 

 

Tuesday Morning WSJ

Tuesday April 2 2013

I made the previous post based on a technical analysis of the charts and correspondence, much appreciated, from interested readers literally around the globe. 

Since then I have been perusing the WSJ, well well well, I suspect that, like our gold miner bullish percent getting into higher gear, things we have mentioned for months and years are about to accelerate. 

Municipal Disasters on the Radar Screen

on the editorial page A 12, Bondholders Beware, the WSJ notes that Stockton CA is likely to favor workers over bond holders, Mert Whitney will be proved right, widen her definition of default to include all stakeholders, citizens, employees, bond holders, and the muni bond market itself

London Whales and other Frightening Sea Demons

In our previous post we noted potential weakness in the XLF, hmm, on page A 13 Shelia Blair notes 

Regulators Let  Big Banks Look Safer than They Are - the headline says just what the graph of XLF says, and as I mused, did anything really change, notable comment

Bet on it there will be future London Whale surprises, and the next one might not be so easy to harpoon

Chinese Capitalism on the March

In A Pacific island Prefers Chjinese Investment to US Welfare

Now a Chinese investor plans a 4000 room resort on the 39 square mile Micronisia Island of Yap, Japan wanted to establish what it termed the Greater East Asia Co Prosperity Sphere but failed losing WWW I, will the Chinese succeed without firinga  shot 

Leading from Behind

In Venus and Mars Revisited Kenneth Weinstein examines the US retreat from international leadership, from Poland missle defense to Afghanistan to Syria, now even the Europeans look bold by comparison, this parallels the US retreat leading to the fall of Viet Nam, a similar disaster during a similar 18  year period of stagnation. This led to the murderous rampage of the Khymer Rouge and the belief that the US would do nothing. 

Goldman Unit to Seek Risk

Goldman GS is launching a specialty finance company to invest in high risk debt primarily of midsize US companies with no credit rating. Hmm, have they retained Mike Miliken as an adviser? This reminds one of course of the rush to sub prime mortgages, leverage no less in this time frame five years ago. This is typical of the desire to embrace risk at new highs in a market, think dot.coms in 1999 or junk bonds in 1987 or sub prime in 2008. 

And on page C4, IPO Pricing Signals Surge in Demand

GS is not alone, More IPOs are being priced at teh high end of expectations. The article relates that post financial crisis, 2009, IPOs were discounted, now the premiums are up, way up. In an ironic echo to the housing collapse of 2008, Taylor Morrison Home Corp will raise $524 million.

I can't make this stuff up folks....

Periods of stagnation exhibit similar events, it is the job of the asocionomist to point them out, they are plain to see. 

Late Monday Observations

Monday March 4 203

The waterfall decline in the miners suggests an abandon ship attitude, the sort of thing not seen since Nov 2008 or March 2009. Apparently there is a mass bear raid on the entire sector. There are aparently no bids fo rstock. While this has reduced some companies to a capitalization worth less than their cash, the slide continues.

There is no way to predict how low they may go. Eventtually there will be a bottom and a bounce but hard to imagine when or where.

Gold ws steady throughoutthe day and remains around 1575. AS noted my original idea of limiting exposure to Central Frund was correct.

Cycling Through the Numbers, Then and Now

Monday January 21 2013

Fibonacci Numbers: The Fibonacci number sequence (1,2,3,5,8,13,21,34,55,89,144,…) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next number is 61.8 percent, which is a popular Fibonacci retracement number. The inverse of 61.8 percent is 38.2 percent, also used as a Fibonacci retracement number. It is the ratio of the Fibonacci sequence that is important and valuable, not the actual numbers in the sequence.

Stockcharts Glossary

Entire boks have been written on the importance of this number series often referred to as the golden ratio. Note that it appears in nature and in  art that seems to please the human eye. 

Socionomics holds that endogenously generated social mood plays out in waves of human activity.The timing of these waves is in proportion to the Fib number cycle. Let's take a look. 

Market Since 2000

2000 top plus 3 equals 2003 bottom

2000 top plus 8  equals 2008

Eight seems to bracket both the top and bottom of this crash

and in between 2008 + 3 = 2011 intermediate top

2000 top plus 13 equals 2013 potential top

 

Bull Market 1982- 2000

The labels on the chart show a similar pattern but it is up in this overall positive bull market period. 

We might add that the low in 1982 + 21 years = the low in 2003

Hopefully this demonstrates to readers the importance of fractals or how the markets break into smaller pieces of bull and bear action. 

Other cycles

Today is Presidential Inaugural Day, January 2013. It is exactly 40 years from Nixon's Inauguration in 1973. Then as now, Nixon asked for resignationns of near across the board of his appointees so he could re start.  Now the President seeks to replace State, Treasury, Defense, and CIA, all top posts. Now as then the President celebrates a big election  victory. Now as then the markets are in top timing position. Then the market topped in January 1973. Nixon's inaugural speech was January 20, 1973 so we have an almost day to day  linkage. The market topped early that month at Dow 1049. 

While Lehman, Bear, and nearly Merrill disappeared in 2008, the same thing occurred from 1973-74.  Prudential  took over Bache, Dean Witter Reynolds eventually owned by Sears, Merrill grabbed White Weld which got them into the real investment banking business,others like Goodbody, duPont Walston, and Spencer Trask were absorbed by other firms. 

FDR was inaugurated March 4, 1933 when the Great Depression was well underway but actually recovering from the 1932 low, though few seemed to realize it at the time. At any rate that was 80 years ago or four full generations, enough for most of those folks to be gone that were alive and experiencing it then. 

It is said that one condition for a collapse is the absence of anyone who remembered the conditions of the last one. Already few seem to remember 2003 or 2008. Richard Russell observes that given this time span, few alive today really know hard times. 

And notice that 

2008- 21 = 1987 Low

2003 - 21 = 1982 Low

 

Dow Industrials Weekly 1971 - Early 1975

Notice that then as now, the market engaged in a long sideways action from 1971 through 1972. then there was a spike from November 1972 into January 1973 , JUST AS NOW!  While there is no assurance that 1971-74 will be an analog for 2011 - 2014, the parallels are here to see, I am just pointing them out. 

The Inauguration was a peak in social mood, as good as it would ever get for Nixon, and the country in that period. Soon both Watergate and Congressional refusal to fund more action in VIet Nam would doom both scenarios. The market had collapsed 250 points by the end of 1973. The rest came in 1974 as Nixon resigned.

Year 2013 minus 80 takes us to 1933 when the markets were recovering from the disastrous mid 1932 low of Dow 41.

Dow Industrials Monthly 1929 - 1948

From 1929 + 3 = 1932 Low

1929 + 5 = 1934 Intermediate Recovery

1929 + 8 = 1937 High

1929 + 13 = 1945 End of WW II 

As Mark Twain observed, history may not repeat but it sure does rhyme. We hope you have enjoyed this stroll through cycles as we observe the repetition of human experience. 

My take is that an 18 year cyle is also  in force.

Bull Markets

1911 - 1929

1948 - 1966

1982 - 2000

Bear Markets

1893 - 1911

1929 - 1948

1966 - 1982

2000 - 2018 ?

Bottom Line

While it is easy to arm chair these past results, appreciate what a market collapse of 50% does to the overall wealth of an economy. Individuals, trust funds, endowments, are all invested in stocks. But after a 50% collapse in the MAJOR averages, we are presented with what I termed in 1973. the Black Hole Theory. It is as thogh a Black Hole in the Universe occurred silently taking half the wealth in storage.  The available total wealth supply shrinks drastically. And of course many smaller stocks disappear altogether. This wealth or Black Hole collapse is why repeated savage attacks on wealth during one of these 18 year perods saps the economy. It then takes years in the ensuing recovery to build wealth and confidence. This helps explain the huger run up in stocks from 1995 to 2000, It took 13 years form 1982-1995 for te public confidence to rise to the level of investing again, but at the wrong time. We appear to be at such a time again. 

 

The Fiscal Cliff Soap Opera Continues

Wednesday after market close Dec 26 2012

Eric Sprott believe there will finally be a shortage of gold as world banks scramble to buy.

I am off ot New Orleans for a visit with an old friend tomorrow returning homw Sunday. So no up date until this weekend. 

There is little to report, no action to speak of today. We will have to wait till the New Year for more clarity I think. 

The biggest purchaser of US Debt is no longer China, it is our own FED printing the money to do so. This is the ultimate Ponzie Hand Off. The US has literaly become the pre-bankrupt General Motors. GM borrowed and borrowed and never paid any debt off. Some 40 cent of each dollar the US now spends is borrowed money. And we continue to spend and not on infrastructure but on transfer payments. Let interest rates return to normal and the interest will consume half the Federal Budget. 

Bullish Percent Gold Miners

This indicator has just about bottomed. In the past this has taken a couple of weeks so be patient. This is lining up with myidea of a year end low for gold mining stocks and our 1650 target for gold. 

Happy New Year and thanks for Reading The Market Persepctive. We sincerely hope our efforts have improved your investment returns. 

GM Repurchases Shares at $27, Another Longer Term Prediction Come True

Wed Dec 19 2012

Readers were turned off by my suggestion of buying uncervlaued GM. THis morning GM announced a 200 M share buyback. The price is $27  causing the stock to jump to  $27.54. TMP concluded the balance sheet was quite undervalued compared to Ford. At this price it still trades at a mere 10.39 P/E.

 

 

The Collapse of A Civilization

Tuesday Dec 18 2012

Two of the world's oldest civilizations, Greece and Egypt, are in a state of collapse. I have referred to Niall Ferguson's Civilization in several recent posts. I noted that Ferguson details just how    quickly a civilization can collapse from its 'normal' state. 

There is a long article detailing the woes in Greece  beginning on the front page of the WSJ today.Succintly only 3.7 million people have jobs in a population of 11 million. That is down from 4.6 million just four years ago, and we can be sure these so called jobs pay a lot less now than then. One widow has sent her son to an orphanage.

Al debts must be paid either with cash or default. Greece is has not quite defaulted yet but the idea that aid to banks to loan mondy will help seems a stretch at this point.  Businesses have pulled out of Greece, investment shrinks, it has not hit bottom yet.  I suspect the situation in Greece will be repeated around the world the next few years. 

Fiscal Cliff Update

Monday Dec 17 2012

Here is an interesting comparison of 2011 and what might happen now. Chart for WSJ today .