The Market Perspective

Weekend Update June 26

We have not been posting s much here as interested readers seem to prefer receiving e mailed PDF files. If you are interested in our updates, drop us an e mail at [email protected] 

   

Simply put out view is that stocks have made another short term bottom. This patern has persisted throughout the summer. We anticipate a two to three week rally in stocks. Recall that the President is making three major speeches just this week. We have illustrated past fall time periods when the market held up well into Sept and then collapsed. 

 

In 2008 the market had fallen below its 200 day MA, just as it has now. And it had drawn out the summer in slow sideways fashion with the internals weakening. It held up until Seot 22 touching the 200 MA one last time, And then as we draw the analogy, the cookies fell off the tray as hedge funds were savaged with redemption and margin demands. 

We expect the decline for the next two years to more closely match the 1972-74 period. If that is the case, 2010 = 1972 when the markets peaked but to the casual observer not much was happening. A two year drawn out bear market followed with the Dow collapsing 50% in two years from 1,000 to 577. There never was a crash, just a slow meltdown. AS a result most had ben lulled to the negativity of the markets and missed the December 1974 low, the best buying opportunity of our lifetimes. We are working on charts for that period using historic data as stockcharts.com does not go back that far. 

We took profits in TLT the bond fund. it  is now in a parabolic move up and reversed Friday to the downside as stocks enjoyed a significant rally from oversold conditions. Such opposites in bonds and stocks are usually a reliable indicator of a reversal. 
 

Mood Peaking, Imagine DOW 6,000

Thursday August 19, 2010

 A few posts back we  led off with  photo of the $200,000 Mercedes SL AMG gullwing  sports car. Our point is that the mood had improved such that there is no fear of backlash against high priced luxury goods. Which is to say the public mood is a good ways from where it was March 9, 2009. Mark our words, the eventual bottom of the stock market will be marked with an extremely negative social mood. A past example was the public mood in reaction to the taking of American hostages in Iran in 1979. Unable to extricate them, and after a failed rescue  attempt, Carter took a serious beating in the election. The mood had spoken. Likewise, the mood was running against Bush in the last election. Obama now occupies the same office but is no doubt surprised to see his rating tanking like that of Bush. Same economy, same sentiment, no surprise there. And remember we re only half way through this 18 year cycle of stagnation. 

All sorts of wonderful silly things are taken seriously in a bull market. The ultimate was the dot.coms which the public bought despite the total lack of earnings. Even the new term, burn rates, to reflect how fast dot.coms ate up their IPO capital did not dissuade most folks. THe purpose then of a bear market is to unmask the bad practices of the past bull market, wipe them out, and come round to those that do work to start the next bull market. But since we are only half way through this bear market, we are nowhere close to good practices. Indeed the worst business model is about to become law, see Mish posting today August 18.

We bring this up as  an excellent example of our New Civil War thesis. Right to Work states have attracted most all the new manufacturing business in the US, indeed the entire auto industry has moved south. This explains the bankruptcy of GM and Chrysler with their unfunded union pensions. Anyone reading the blogs is aware that CA, IL, NY, NJ are in desperate condition due to the inability to make good on promises to unionized government employees. And so are those states becoming right to work states, hardly. The New Civil War continues as I outlined at the start of this blog. This map from the WSJ details the New Bargain. 

The details of the bill are in the link to Mish. My point however is this, does this map look familiar?  It should, it is the same as the three maps we have in our New Civil War section, the original CIvil War states as well as the western states, the Red Blue States, and the Right to Work States. The Administration is trying to promote  compulsory union membership in police and fire unions in right to work states. Whether you personally believe that is a good idea or not, our point is that this will only increase tensions and bad feelings. These tensions and bad feelings will peak at the eventual bottom of the stock market. 

Here is another view of the New Civil War-income taxes. The most favorable states, to avoid income taxes,  in order are AK, WY, NV, SD, FL, TX, WA, TN, and NH, according to Steve Kaplan at True Contrarian. AK, WY, NV, SD, FL, TX, TN are either southern or western states. Rather than emulate these states, in Washington Bill Gates' dad is actually backing a state income tax. If the Administration really wanted to attract business it would eliminate all Federal Corporate Income tax as well as the double taxation of dividends. This would allow start up corporations to return more to investors. Instead we are about to have some of the largest tax increases in history. Coupled with new employee mandates and ever increasing unemployment insurance, it is no wonder unemployment is stuck in the double digits. 

But enough of the accounting specific recommendations. We are still full tilt in foisting one bad economic idea on another group which has already rejected that idea. This will not improve the public mood. Expect that mood to deteriorate with the market. 

Our recommendations are performing well in UUP and TLT. One should no longer be buying TLT. It is time to either place orders to sell above the current 104 or let TLT continue to rise and use a trailing sell stop. For now we look forward to the end of the summer doldrums and for the real Jack Bauer action to begin after Labor Day. 

Bear Market Underway

Saturday August 14, 2010

The bear market of 2011-2012 is underway in the same fashion that the bear market of 2008 began in 2007.  The smaller cap stocks will decline before the larger stocks. The relative calm behavior of the larger stocks distracts most of the crowd, like the anchors on CNBC from what is really happening. 

This is a performance chart. The purpose is to show the performance of one index relative to another. The chart shows that the  S & P Small Cap and the Russell 2000 small stock index have had much larger percentage fluctuations than the other two. Next in order is the NASD Composite in blue. It contains large caps like MSFT and APPL as well las traditional smaller stocks. And so its performance sandwiches between the two. The DOW Industrials has the largest percentage of large capitalization stocks of the group. Hence its volatility is the least. These will be the last stocks sold in a bear market. 

The performance chart is showing that the small caps are already down some 20%. Most of the market is focused on the GM IPO, how Apple will handle the challenge of the Google Android, and other distractions. Make no mistake, the bear market resumed in April, 2010 and is now underway. The summer months have done their usual job of distracting by convincing most folks there is nothing to worry about.  Note that the two small cap indices peaked before the Dow. 

Distractions

Let's look back at 2008 to see how even the internal indicators could 'distract' one from the big picture. We are aware that our call for stocks to rally from early July upset some readers in the bear camp, but that is what happened. Look at how the summer of 2008 performed by comparison. 

 
Indeed, precisely the same thing happened!  Stocks hit a low in July at 25 BP and then rallied, no doubt convincingly to many at the time, to over 50%. But after Labor Day the entire picture fell apart. Note that the vertical axis is extended to near zero for the Fall Collapse.

This is the same chart through today two years later. Again stocks collapsed into the summer and arllied into August form 40 to 60%.  

However the brief summer rally for 2008 ended badly that fall. The smart money rallied the stocks so that they could sell from better levels to those that did not believe the bear market was underway. 

We hope the parallel is clear. The danger level is high. Wile such a large collapse does not appear probable at this point to most it did not then either. The point is that this is a much better time to be selling than buying as it was then.  

Since the market sold off violently just two years ago, but more slowly in 2001-02, we would guess that a longer two year grinding bear market lies ahead. This would be more like 200-2002, 1930-32 or 1972-74. In those years there was not a crash spanning a few days or weeks. There was a grinding multi year stair step down bear market. Sharp rallies distracted participants from what was happening. Each rally brought in new buyers only to be disappointed again. The bottoms of 1932 and 1974 came with a whimper not a bang. 

Here is another example of how the media distracts from the big picture. BIDU in blue provides Chinese internet service and has performed in spectacular fashion. APPL in red  has had one product success after another. The RUT is underperforming other indices as previously shown. The public has crowded into junk bond funds in green. Further note the irony that JNK was originally a Lehman Fund; Lehman went under in the 2008 debacle.  There are always stocks that funds will 'hide in. In other eras this would be IBM, DEC, University Computing, or in the 1990s, the Mexican Telephone Company of all things. These are distractions, the big picture is that the bear is underway. 

Bond Strategies

Friday August 13, 2010

Johnson & Johnson sold $1.1 billion of debt at the lowest interest rates on record for 10-year and 30-year securities amid surging investor demand for corporate debt.

The drugmaker, in the first offering by a nonfinancial AAA rated company in 15 months, sold $550 million of 2.95 percent, 10-year notes and the same amount of 4.5 percent, 30-year bonds, according to data compiled by Bloomberg. That’s the lowest coupons for those maturities on record, according to Citigroup Inc. data going back to 1981.

Yesterday we ran Gary Shilling's piece from the Yahoo site. Gary like Dave Rosenberg believes that the thirty year bond will sink to a 3% yield. At some point the thirty year bull market in bonds, higher prices lower yields, will end. That will be the end of deflation. We will need to see more defaults before that happens. By defaults we mean the failure to be able to make good on promises. Six figures civil pensions, junk bonds, car warranties, all sorts of mayhem. And after that point, all the money the FED has sloshed into the economy will start to have a real inflationary impact. And so, one can understand the strategy of borrowing long term at low rates.

Consider the above example. Johnson and Johnson promises to pay 2.95 percent for ten years. Just a few years back such ten year bonds were paying six percent. If rates return to that level, the value of the bond will collapse by about forty percent, say to sixty cents on the dollar. If J and J simply puts the proceeds in the bank, at that point the company can quietly begin buying the bonds back on the market. And in the process pocket the difference between the sales price at 100 % and the re purchase price at 60%. Forty percent on $550 M is hmm, $220 million. Not bad for the Corporate Finance Dept, and at zero risk. 

Investors have poured money into corporate and municipal bonds. We suspect many more of those municipal bonds are junk than people realize. If and when rates return to more normal levels. the value of these bonds, like the J and J bonds will be a fraction of their issue price. Like the sub prime borrowers with adjustable rate mortgages, the issuers will then face higher re financing costs as the debt comes due. With lots of nervousmoney tied up in such bond funds. the result will likely be a stampeded out of corporate and municipal debt. It won't be pleasant. Here is how it played out in the 1930s. 

 investor 
The thing that killed stocks in the 1970s was the availability of high interest rates at the FDIC banks. And so, when rates start back up say in 2012, investors see the value of their bond funds drop. Stocks will be dropping to their final 6% yield level on dividends. And it is not hard to imagine investors checking out of both stocks and bonds to the 'safety' of guaranteed 6% bank deposits.  

Such an event is a few years off but that is not long. Meanwhile the smart corporations are betting long on low rates. Investors with lots of exposure to long maturities at historic low rates are now at the highest level of bond risk in thirty years. Since a bond fund, the usual choice of retail investors, has no maturity date, it is subject to interest rate fluctuations, with no assurance the current high prices will ever be seen again.  To be informed is to be prepared.

Here is a visualization of what we are describing. 

The red black bars are the declining rates on the thirty year bond yield. It just dropped below 4%. Gary Shilling has a target of 3% over the next couple of years. The black line is the price of the Franklin Federal Tax Free 'Insured' bond fund. Recall that AMBAC is in bankruptcy and MBIA trades for a fraction of its price a few years back. Those are (were) the primary bond insurers.  But we digress...AS rates have fallen investors have scurried into long term bond funds for yield. The yields continue to drop the prices go up, so far so good.  But as one can see investors are buying at all time high prices. A reversal in rates will likely reverse bond prices, violently. Few will be prepared for the need to exit, quickly. 

Half Way Back

Tuesday August 10, 201

We discuss farrows methods to analyze where the markets are and where they are liable to go. We have used the parabolic stop and reverse, point and figure charts, and various internal breadth charts all across different time horizons to discern what is happening. Yet another methodology uses Fibonacci numbers. From the stockcharts glossary

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.

The ratio we are interested in today is 50%. The series of 38.2, 50, and 61.8 is so popular there is a tool to calculate retracements on this basis. But we are making a  Big Picture Analogy today.

Think of a tray of cookies. As Gladwell says, there is a Tipping Point beyond which events take on a new life of their own. Once the tray is tilted far enough that first one then another and then whoosh, all the cookies fall off the tray. Now, continuing the metaphor, suppose some cookies are larger than others. The large cookies may have more surface area which has cooked them to the tray, they will be more stubborn, defying the tilt of gravity. And so we might expect the smaller cookies to fall first. That would be a method of examining the internal breadth of the cookie tray, who is leaving who is staying.

But another way of looking at our cookie tray is this. Most of the cookies will probably stay on the tray until 51% have fallen off, then we can reasonably expect the rest to follow.

Now let's compare the stock market to the cookie tray. We have larger cookies represented by the larger cap stocks like GE, Exxon, MSFT. They are more apt to stay on our tray and portfolio managers will sell them last. But in the overall, the market has to decide to own stocks or sell stocks. Those same stocks my be owned by more or fewer participants but the number of shares does not change much on our graph.

 At 14,198 stocks were owned by the maximum number of participants. At Dow 6469.95 stocks were owned by the fewest number of participants. If we use absolute highs and lows we have

14,198.1 and 6469.95 with an average of 10,334.03

If we use close prices we have 13,930.01 and 7608.92 with an average of 10,769.465. The point is this, 10,769.465 is half way back to the top. If there are consistently more stock owners that want to sell, the averages will have a hard time vaulting past this half way area. If there are however, more that want to buy or add to portfolios, then stocks will move right on up indicating accumulation

past the half way point.  If stocks cannot get past this half way area, the entire market is casting its vote as a seller not a buyer.

We posted this chart to make the cse that stocks have been dilly dallying with this half way area all year!

Dos the market want to own stocks or not, it cannot seem to make up its mind.

Thsi is why we look at numerous indicators like the market internals in an attempt to divine what the players are thinking and whether they are accumulating or divesting.

Our slowest moving Monthly SAR has stocks still in a sell mode since the April 26 high. Stocks would need a monthly close over 11,163,30.  

Theater of the Absurd

Tuesday August 10, 2010

One of our routines here at Market Perspectives is scanning various sites before the markets' morning opening. And so I rubbed my eyes and read

Freddie Mac FMCC reports a $4.7 B loss, paid the government a $1.3 B dividend, and will, this is logical right, ask for $1.8 B to cover its $1.7 B net worth deficit at the end of June. (Mind you this is a serious article in Marketwatch rather than The Onion).

But wait Alice, said the White Rabbit, it gets better!

Two companies insured a majority of the municipal bonds that bought insurance. They are or shall we say were AMBAC and MBIA. AMBAC is preparing its bankruptcy filing as we write and MBIA claims to be making money. But then investors have poured so much money into municipal bond funds chasing yield that no one imagines a mass default which would call on MBIA. 

So, as Congress mulls a $26 B bailout for various locales, the bond insurers are toast, the Federal Government becomes an ATM to bring Freddie and presumably Fannie to zero net worth status each quarter, and the Comptroller for the State of California says he will begin issuing IOUs again in September or October. 

This is not a problem that will be solved with extending the Bush tax cuts nor increasing the top tax rate 3 points on less than 5% of the population. This will simply take a mass re structuring of the economy and it will be painful. 

At Marketwatch, Paul Farrell dissects David Stockman's article on our pile of debt, while we are reluctant to even mention articles that spotlight one party or the other, this pretty well sums up the spend spend mantra of both parties since Nixon took us off a gold backed doilar and Congress has been free to print money. 

So here we are, both mortgage companies are bankrupt, at least one of the two bond insurers are bankrupt ( and this before we have mass defaults), and we face $18 T in debt.  It is absurd to think that two bond 'insurers' or that the FDIC could do what they claimed to do.  There is just not enough premium to 'insure' everyone'. Nor is there  enough re insurance to backstop all the promises municiplaities have made to everyone.   And we doubt that their schemes would pass anything like an actuarial test for risk.  As the saying goes, all debts must be paid whether in default and bankruptcy or otherwise. 

Hmm, Marketwatch explains why the FED can't fix real structural problems.  Hmm, now there is phrase for our times in this article. people with real estate related skills.....what does that mean, simply that there is no market alternative, read real job,  for thousands of realtors, mortgage 'brokers' and paper shufflers as the market for real estate disappears.  

Commodity Prices Eerily the Same, Again

Monday August 9, 2010

 

Note this is the weekly chart form 2008. The bars are the price of oil, gold is copperand brown is lumber. At bottom is the SPX. That year commodities sprinted to new highs in July. Our newspaper column at the time warned those in the Oil Patch to start hedging. Oh well...All three quickly lost their luster so to speak crashing into the fall. But the highs preceded the fall in stocks by about 2.5 months. We drew the blue line in the middle from the top of commodities to the start of the waterfall decline in stocks. Hmm, any similairty to now I wonder?

 
The chart starts about the same point and uses daily ratehr than weekly bars as, darn it, stockcharts is still not capable of projecting the rest of the year for us. Frankly one would not expect the same exhuberance and it is not present. This time Copper has joined WTIC but lumber has not joined in. This late in the recession,the word is out on housing and lumber is not rallying. However, WTIC and copper have. this is complete through last Friday and one can see the drop in WTIC. We are not experiencing the same giddy heights of price specualtion becasue the economy is just not in that same great condition. Will lightning strike twice, are new highs in commodity prices, but lower than the previous high, a prelude to another stock sell off? The best answer of course is to bookmark Market Perspectives and we will keep you posted. However we think it is relevant to point out that commodiy prices can and do peak as a precursor to a stock market sell off.  

This Time It's Different, Yes It's Much Worse

Monday August 9, 2010

The Headline in the WSJ reads that companies struggle to find workers at 9.5% unemployment. Employers wonder why they are not doing any better than when unemployment was under 5%. But the line that really caught my eye was this one. 

The difficulty finding workers limits the economy's ability to grow. It is particularly troubling at a time when 4.3% of the labor force has been out of work for more than six months—a level much higher than after any other recession since 1948.

1948 was my birth year. In other words we have three generations now facing an event for the first time in their lives. Yes this time it is different. This links to my comment in the previous post that stock options, yesterday's version of the business lottery ticket, are now often worthless. The 'dream' of home ownership' has people tied to under water mortgages. Remember the character in UP?

Note the retiree spends his 'adventure' tethered to his floating house wherever he goes. This is a pretty good metaphor for our time, now thousands of people are tethered to homes they cannot sell to move to another location.

In a cycle of business stagnation one can depend on the government to do the wrong thing. This of course extends the cycle that might otherwise right itself. 

Since everyone in the Administration is a college graduate, usually in liberal arts, their solution is, you guessed it, to produce more liberal arts graduates.  But as one reads the first article about employers trying to fill jobs, this is precisely the wrong solution. We need lawnmower mechanics and flight attendants in the short term. Now it is true that we are falling behind other countries in college grads, but that statistic does not tell the full truth. We are falling behind in engineering and science. We are doing quite well however in political science, sociology, and oh say, recreation (yes that is a current major). 

And so more debt will be piled up 'training' students for non existent jobs or jobs in government that depend on a growing economy to fund them, which of course is what we do not have. The stimulus has only grown government and not done that very well. Newspapers now detail lists of 'shovel ready stimulus jobs' that have yet to begin. 

Changes in Attitude, The Times they are a Changin'

Monday August 9, 2010

 Yesterday we chronicled the re emergence of Glitz at what appears to be the top of Wave Two. The mood is the polar opposite of March 9, 2009, the bottom of Wave One.  We even noted the emergence of the It Shopping bag, a discretely designed leather bag with the appearance of a plain brown shopping bag. It of course does not carry the stigma of low price for those 'in the fashion know.'

This past week we discussed accounting for stock options in my college class. One adult student noted that her stock options at over three times the current price of her company would probably never be worth anything to her. And then it hit me, here we have another example of the change in attitude. Things do not always go up forever, the public is getting it!

Mish Shedlock reflects the same attitude in his column today. 

Watkins missed when the regime change occurred and possibly what the regime change even is (changing social attitudes on housing, consumption, risk taking, and debt, by consumers and banks alike).

The "attitude change" was the game-changer, NOT the event (the collapse of Lehman).

Nonetheless, Watkins is light-years ahead of most economists and economic cheerleaders in understanding that we did have had a massive regime change, that the regime change is lasting, and that stimulus efforts to date have done nothing to fix the structural problems at hand.

This weekend we also mentioned that the worry is not just that the US has become Rome, but that it has become Japan, consider this graph from Mish in 2005, also in his column today. 

Those recent to the investing game missed the story of the Rising Sun in the 1980s. Over thirty US Governors trooped to Japan begging them to build plants in their states. Japan ran up housing prices in Hawaii to absurd levels. An exchange to trade country club memberships to play golf appeared in Japan. The Japanese were big players at gambling casinos. The Nikkei went parabolic and then....it has been downhilll ever since. The reason as even Greenspan noted is the reluctance to write off bad loans and really re start.  The US is now undergoing the same thing. Bad loans and bad business models, like public employee unions, are being continued. Just yesterday the President was rambling on about keeping teachers in classrooms, this is hardly the issue. Demands from those employees exceed the city and state ability to pay, just that simple. 

With an unlimited supply of the world's reserve currency and a larger economy, the US has been able to juggle the balls in the air for quite a while, ten years and counting now. But we are still jsut half way through the inevitable period of 18 years of stagnation. As we said yesterday, zero respondents blame the business cycle but all blame Bush or Obama. One can change Presidents but one cannot repeal the Business Cycle. 

Glitz is Back!

Sunday August 8, 2010

 

From a Socionomic standpoint we are seeing a classic Wave Two top in emotion.   The negative emotion of Fall 2008 has been replaced with sheer giddiness. How giddy? High end products are back in vogue. Here is the $200 K (that is the price not the model number) AMG SL Mercedes. Mercedes has been left out of the gee I gotta have one Ferrari Maserati Aston procession, so important to NBA players don’t you see. Tops in fading markets often harken back to past triumphs. This car is a re do of the 1955-57 gull wing Mercedes. The AMG LS is an impractical but stunning piece of computer wallpaper to be sure. Elsewhere John Travolta continues to hawk expensive Breitling watches. A few  Distinctive Properties have made it to the back of the WSJ, amid the auction ads. These are all typical signs of a Wave Two Top, relax don’t worry, things are okay. Remember those same headlines after the Flash Crash in May?  The Clintons just purchased a $11 Mansion in New York,  Michelle vacations in Spain with a few dozen  close friends.

Al Gore buys a California beach front home at age 60 and splits with his wife. Remember the Jack Welch (GE) divorce  just after  the top of the market in 2001?  Please read the article to refresh your memory!  Welch’s first divorce occurred in 1987, near the top of the market at that time!   Bear markets topple former stars, Tiger Woods and Al Gore are testaments to that.

We are aware that our calls for higher stock prices, at

least for now,  has been both correct and frustrating to bears.  But this is the seasonal high.  And the Administration is well aware of falling favor-ability ratings, as well as their desire to re sell GM to the public. Both require a strong stock market. And so the stock market rises while the demand for energy falls. And, with one year interest rates scraping bottom, it is no wonder that savings and 401Ks are in REITs and the stock ,market in search of returns. The stock market is if anything inversely correlated to the real economy. Money is  seeking return; the fear of another collapse has already been cast aside by  most, surely it could not happen again so soon. But the RPE graph above suggests that the a slow two to three year meltdown ala 1930-32 or 1973-74 may now be underway.   The bond market confirms this view, otherwise there would be a demand for money.

 

Saturday August 7, 2010 1:45 PM CST

I scoured the database of charts and information to deliver what we honestly believe to be valuable information in the preceding section. This morning,  after writing the above, I obtained a copy of the Weekend WSJ. Amazing, let’s see how my view of valuable information stacks up against the WSJ, ( I am not competing with the WSJ nor suggesting the WSJ as an alternative to Market Perspectives but look at what is in the news!  The existence of these news items certainly seems to confirm my observations from this morning.

On the front page H-P chief Mark Hurd Quits in Scandal. Seems that Mr. Hurd is embroiled in an improper relationship demonstrating a ‘profound lack of judgment.’  The obvious parallels are the cases we cited such as Al Gore, Welch, Woods.

The socionomic observation is that bull markets result in more risk taking, caution is thrown to the wind. The divorces and scandal coming out now are a result of the prior bull market phase giving rise to emboldened behavior. H-P seems to be a company notable for indiscretion given the previous boardroom leaks, ouster of Carly, etc.

The front page features a graph  of  non farm payrolls compared with the two year note yield.

Observation The bond market is leading the way to a slower economy, slower than most living Americans have ever experienced.  This is the reason we posted the One Year Yield chart,  note our resistance line.

The Editorial page notes that the stimulus, whether Bush or Obama, is not working. This is of course born out by all the charts that show an ever  sinking stock market, even after a trillion plus of stimulus.

But more to the point, on the next page Peggy Noonan , former speech writer for Reagan turned columnist notes ‘America is at the Risk of Boiling Over.’  She notes that American are trading in their passports headed for places like Ireland and Africa over tax issues. Americans do not believe their children will have a better life than themselves.  She notes the USA versus AZ lawsuit and cites increasing pessimism and powerlessness.

Socionomic observation If Ms. Noonan thinks this is boiling over, she will be truly frightened at what will happen 5, 000 Dow points lower. Bear markets are the manifestation of negative mood.  Packing up and leaving the country is the ultimate negative vote of no confidence. The fact that those seeking exit are the ones expected to pay their fair share, as more ‘undocumented aliens’ stream in should be a pretty clear indication of where things are headed. Ms Noonan wonders ‘do political leaders have any sense of what people are feeling deep down?’  The answer of course is no, this is the essence of what forms revolutions. In retrospect one might have asked Marie Antoinette, at least prior to be separated from her head. But there is more, much more

In the next section Station Casinos Family to Remain in Control  In a poor  example of business judgment in the Fertittas family took Station Casinos private in a leveraged buyout  just prior to the stock market collapse. This of course was typical top of a market thinking-it never ends.  They could have purchased it for pennies on leveraged buyout price had they waited a year or so. One annual report prior to this stunt compared running Station to Business 101. After all, more people come to Vegas, more people gamble, we make more money, got it, what could go wrong?  Indeed, everything could go wrong.   That sort of complacency is a metaphor for what we are seeing at a Wave Two top, what could go wrong?  Station is now in bankruptcy court, perhaps the family should re take Business 101.

Berkshire’s Net Falls 40%

Observation-good thing Warren bought the railroad….

The Enemy of My Enemy regarding an Iran nuclear weapon makes the case the other Arab states are least likely to favor that outcome, siding with of all nations, Israel.  Again the ultimate negative human emotion is war, and that in fact is on boil again in the Middle East.

And now for the socionomic event of the week….

The Anti It Handbag This is a leather version of an ordinary brown  paper grocery bag for $1,045. Sales of expensive hand bags were up prior to the  2008 economic collapse After that, restraint and classicism returned. The toned down bag enjoys increasing popularity.

Socionomic observation  This is precisely what we meant about the re emergence of flashy high end consumer products at the top of a Wave Two. Harder economic times will result in less not more conspicuous consumption. The plain handbag does not attract the attention that the Chloe Paddington did at $1380, adorned with a metal padlock. Better to look like a plain shopping bag, only the informed consumer will know and recognize (the real point  in any luxury good) the difference.  What next, a Mercedes without the three pointed silver star?

Finally the Weekend Journal concludes with  one full page of expensive real estate, but at least the photos are in color…..splashy, eh?

Bottom Line

The Wave Two top beckons as the Sirens did to Ulysses. New highs in stock indices belie the weakness underneath. The bond charts are screaming deflation which will eventually weaken all asset classes. Deflation is reinforced by the chart of power companies.  The decrease in demand for power is the real clue as to the strength of the economy. It is weakening. Finally there are multiple scoionomic clues as to where we are in the cycle.  Six figure price tags amid multiple car manufacturers are top of the market items as are technically obsolete watches (any electronic Timex or Casio keeps better time)  sporting big price tags.  Divorce and betrayal make headlines, the Mid East is on a collision course with itself as high end baubles are back in vogue. The It Bag forecasts more demure consumption over the horizon.