The Market Perspective

Start Your Own Hedge Fund!

Wed Sept 29 2010

We use socionomics to observe social mood and how it affects markets. When non financial publications begin running financial articles particularly articles spoofing the current markets, you can usually assume a market extreme is ocurring. 

A case in point is Start Your Own Hedge Fund in the current Vanity Fair. 

Gee this reminds me of Bonfire of the Vanities spoofing the bond market traders in the 1980s. 

It is a fun article and of course such exaggeration suggesting that so many are doing this anyone ought to be able to do it, a sure sign that everyone is now long the market. 

Smoot Hawley All Over Again

Monday Sept 27 2010

Currency Wars

 

We call your attention to Mish's Global Economic Analysis today. The mid term elections loom, polls give Republicans the edge,  Democrat candidates shun the President, the entire economic team has been sent packing though they ‘resigned’ what to do?  Like any administration, blame the problem on someone else. And that is precisely the latest strategy-blame China.

Please click and read the column, no point in my recounting it but the idea is that if only the Chinese currency were more valuable, the world would scurry to employ more Americans.  As Mish says this presumes the world wants to pay us more more money to do what the Chinese do . The real problem is that corporate tax rates in America are too high, there are too many unnecessary costs with American workers like social security, there are too many  unfunded mandates in pensions, and there is just too much uncertainty on what Congress might do next, our case in point today.

This sort of thing has a terrible history.  In a similar downturn in the early 1930s Congress passed the infamous

Smoot Hawley Tariff. Then as now the idea was that foreign competitors had unfair advantages, Congress would level the playing field. Historians agree that the tariff only made things worse.  Note the tariff apparently stayed in effect until Bretton Woods in 1944. The article details how much worse this made world trade.

Now fast forward to the Fall of 1987. Then Secretary of Treasury James Baker was hammering on Germany to lower its

 interest rates. German, having weathered the collapse of its currency in the 1920s, was not about to do that. Then as now, the US viewed Germany’s refusal as the call to ‘do something about it.’  The stock market had been falling already that month, the bond market had been falling since March 1987. Baker declared that if Germany would not cooperate the US might just let the Dollar fall. Experts later viewed this as a refusal of the US to defend its currency. That following Monday

stocks crashed.  This wiki article does not give Baker the credit he so richly deserves for helping this happen.  But the world took hat comment as believing the US would not defend the dollar. Accordingly the world sold dollar denominated assets, ie stocks.

Our point here is that as always during periods of stagnation it is government interference that often causes problems. This latest ‘we have had enough’ from our biggest trading partner, and as Mish points out, buyer of Treasuries and airplanes, is the latest in the history of government folly. This also helps explain the recent collapse in the Dollar and UUP.

Bear markets are a manifestation of negative social mood. Here is another example of how mood results in precisely the wrong move at the wrong time. At least in 1930, the US was a net creditor. Now as a net debtor, such mistakes take on even greater significance. This is especially so as the Chinese recycle our Dollars back into US investments like Boeing.

We are not publishing to predict an imminent  crash. We put this out to highlight government interference in a long history of other such failed attempts.

 

 

Buffet and Munger do Antoinette

Arrogance Takes Center Stage

 

"The 86 year old told the 25 million of Americans who comprise the 16.7% of the underemployed population in the country, to "suck it in and cope." Not only that, but apparently, all those who have been without a job for 99 weeks and more and no longer have recourse to insurance benefits, should "thank God for bank bailouts." Why of course he would say that: after all $26 billion worth of direct BRK investments were the recipient of over $95 billion in bailouts."

Charlie Munger, 86, Principal at Berkshire Hathaway, to University of Michigan students

Bear markets have a way of dethroning idols. The latest will surely be Warren Buffet, Charlie Munger, and the money juggernaut known as Berkshire Hathaway BRK.   Buffet has of course been hailed as a ‘legendary investor.’  He is the only one to make it to the Forbes 400 Richest List by investing rather than inheriting or going public.  But it turns out, Warren has friends in high places.

The old guard in Russia collapsed in 1989 with the Berlin Wall. After a couple of iterations a new sort of criminal oligarchy has emerged.  All Putin has to sell are commodities dug from Russian earth. If one helps him do that,  one prospers.

The same thing seems to be happening in America.  Let’s follow the  money shall we?  BRK is a substantial investor in Wells Fargo. Wells Fargo bought Wachovia which had acquired Golden West Financial. Golden West specialized in what one writer called zombie home loans. Part of the interest payment could be deferred and added on to the note. Both were guilty of predatory lending. Adjustable rate mortgages were often substituted for fixed rate mortgages. Sub-prime was passed off as first mortgage, government guaranteed. And so, Wells and the rest needed a bailout. They got it.

Now a handful of privileged big banks, JP Morgan, Wells, CITI, Bank of America, and Goldman Sachs are the recipients of ‘too big to fail’ stimulus bailout money. Now, has that money gone into productive enterprise to create the jobs that the Administration promises?

Uh, no. As a matter of fact a lot of that money has gone into the stock market. Just today I read that the CEO of Wal Mart notes people come shopping for baby formula at  month end at 11 PM. After midnight they head to the check out aisle. The government support check has been electronically deposited to their accounts and now they can pay for the items. The CEO makes the point that WMT is always open, the timing of the deposit determines when to shop.

In this case the stock market is not the barometer of the economy. It is not even a reflection of the economy. With  one of six people on food stamps, three million skipping mortgage payments, and eleven million homes under water, what is going on? 

The demand for money is zilch. There is no magic in Bernanke keeping rates low when low demand is near non-existent. Product demand is near non-existent. Want a new car, pick one off the lot, nothing down,  no interest, get lost, they do not want to repossess  And so the stimulus money has found its way to stock market speculation. While the 2.5%  S & P dividend rate is low, since the money is free, why not invest?  Markets move up at night, and languish during the day on low volume. At Goldman Sachs, the  High Frequency Trading Machine bumps the market, truly as Oliver Stone says, Money Never Sleeps.

Too many are looking for the next crash. This fall is shaping up like last fall. We may get a sell off, but it is likely to come from S & P 1175 or higher. And at that, even a 200 point sell off would keep us at Home in the Trading Range.   The mid term elections loom. And there are pay offs to be made, from the new Oligarchs on Wall Street to the benefactors in Washington. It can’t go on forever but it has and will for a while.  In the mean time, suck it up and cope as Charlie says.  I wonder if that advice will make it to the annual BRK shareholder letter?

 

 

Sunday Sept 26 2010

Perception  

Look at your self in the mirror every day. Most of us do whether as men we shave our face or as ladies we do our hair. The day to day changes in appearance are hardly noticeable. But take a look at one’s high school yearbook photo, gee a few decades makes a difference! (that would be of course reserved for we guys appearance…) The same is true for markets. A look back reveals the obvious places to have invested. Dec 1974 at Dow 577, Early summer 1982 at Dow 800 or so, post 1987 crash near Dow 2,000, post 9/11, and Fall 2008. It is hard to go to sleep Rip van Winkle style, ignoring the day to day exhortations on CNBC, in the press, etc, when every one seems to be making so much money.

Just yesterday some ‘wealth expert’ was assuring Kathy Willis that he had his clients money safe, after all the markets always go up over a ten year period. Presumably this is how he will justify not having any money to invest on the next crash low… It is even more difficult psychologically to maintain multiple frames of reference. One would be the very long term frame of reference.

We are half way through an eighteen year period of stagnation. We have had two ‘crashes.’  There is historic precedent to expect at least one decline and then another ragged seemingly endless sideways to down market at the end of the 18 year period, guaranteeing that most will miss the final opportunity to buy in cheap.   At the same time, during the 18 years the markets swing from these extreme lows to surprisingly bullish highs. Governments fuel speculation, individuals buy back on the way up, and of course endless hype in the media.  

The market jumped up from March 2009 to about DOW 10,000 in a few months, since then we have had  nerve wracking sideways action usually labeled on television as the start of a new bull market.

The best example of this in my lifetime happened as follows. 

Imagine that you were employed by a committee consisting of the most successful, shall we say, stinking rich individuals in the country, guys like Gates, Soros, Buffet, et al. At 1047.49  on the DOW above, I was doing just that. I went to work for Ross Perot at DuPont Glore Forgan. We spent six months in training on Wilshire Blvd in Los Angeles. The Dow had just crossed 1,000 in the spring of 1973 when we ‘graduated.’  Things looked great, Nixon had been re elected in a landslide, McGovern carried but two states.  But , as you can see that is not the way it turned out. The Dow lost half its value, Nixon got the boot, Viet Nam ended horribly, and Ross, oh yes, I almost forgot. He took over another firm, Walston in an effort to keep DuPont afloat. That too failed and the entire thing collapsed and was sold off piecemeal. Yes, Wall Street was bigger than Ross Perot.  Yet, in the next year the DOW regained what it had lost.

This is pretty much what has happened since the Fall of 2007. While Dow 14,000 is a ways away, DOW 10,000 has hung around long enough to convince most it is here to stay. We doubt that. The difficulty is seeing the history that the market will swing up and down for another nine years.  Note the ragged end at 784 in 1982. We cannot make the market go where we want. The government seems to be able to do this for some periods of time. But inevitably reality reverts to the mean average. See our article on the Ruling Class at the next post. We have correctly identified the short term turns in the market since April.  We have the market up during September. It turns out this was the best September in 71 years. Should we have urged you to go long in early July, well, the analysis was here, you decide. We suspect this fall will be like last fall, the bears are disappointed.

But remember,  bears that begin in January are the worst. My Bear Memory shown above began in January 1972.  The trashing of the Dollar suggests we may be closer to a top than most think.   Let’s start there shall we?    This past Thursday we showed the DOW in terms of gold. It has been in a bear market measured in gold since 2000. Here is the price of gold in Swiss Francs SF, a traditional storehouse currency. Gold has corrected in SFs. The uptrend is intact. The selloff in 2008 barely scrapped the 200 week MA.  Note that articles about gold hitting $1300 are now appearing outside the financial press and in the general media, a usual precursor for some sort of top.  An outfit names www.securedgoldbuyers.com has a full page ad in today’s paper offering to buy gold and silver jewelry.   There are vending machines in Europe selling gold by the gram. Such events are signs of a topping market. We would not initiate long positions in gold or silver or any other commodity at this point.   No one of course was running offers to buy when gold was $300 in 2000.

We have recommended UUP the Dollar ETF. We bought too soon, I should have been watching the longer term chart. But I still own 600 shares of UUP at $24.20. I think I will keep it looking to add at the Dollar Index level of 76, about $22.50. Here the dollar is in the red black bars and the SPX is in the black solid line.  Clearly UUP runs opposite the SPX, the correlation appears near perfect. Note that as the stock market started tanking in early 2008, no one wanted the Dollar, it bottomed.  It soared just a year later. If one is bearish the stock market, we suggest watching the pink uptrend line carefully. The FED has begun Quantitative Easing again, buying bonds and printing money. The result is to cheapen the dollar.

The other illusion is that commodity prices increase in terms of dollars. This is part of the reason for the rise in gold and silver, as well as coffee and sugar we showed earlier this week.  Apparently the idea is to give the illusion that prices are going up, and in terms of a weak dollar they are. But with one of six Americans on food stamps, how does artificially raising the price of coffee help the consumer?Bottom line, However we cannot predict just how low the US Government will push our currency. As many have observed no country wants a strong currency. Central Bankers believe that a weak currency makes exports more attractive, and so the race to the bottom of the currency heap continues.

We are about a buck below our recommendation for UUP, it closed  near $23. One might be better advised to sell and step aside at this point. Readers should have closed out the TLT trade with a  nice profit. The only reliable is that the US Government will  continue printing money right up to the election which will not help UUP.  Those staying long need to watch the price action of the Dollar versus the trend line above.

    Many  sites are showing a version of this reverse head and shoulders formation. Let’s take a look at the last requirement for a head and shoulders reversal pattern.  Our take is that volume here is suspect. CMF is the Chakin Money Flow at top which is certainly improved over what we had at the bottom. It has risen to where it was April 26. Volume: . With light volume on the pullback, indicators like CMF and OBV should remain strong. The most important moment for volume occurs on the advance from the low of the right shoulder. For a breakout to be considered valid, there needs to be an expansion of volume on the advance and during the breakout.               Here is the much longer view of where we are shown on the SPX ETF which allows us to use the Chakin Money flow, the Dow Diamonds do not go back this far. ·      Participation has exited the stock market for junk bonds and municipals, see collapse of CMF at right ·      SPX has resistance at the 50 month MA but is trading above the 200 moth MA in red ·      Time patterns from peak to trough vary greatly. The sell off from 2000 took three years, most of the 2008 collapse happened in one year; however we have shown in past updates that the internals had weakened much earlier.

·      666-700 is very important support

·      SPX is trading lower than at the 2000 top; this forms the start of a right shoulder

·      How did this play out in China, the new AsianTiger?      

·      Shanghai has a much higher peak on its speculative bubble.

Frankly the action from 2005 forward looks  a lot like the spike in gold in 1980, afterward most thought gold would come back, it did not. But  despite all the articles about overbuilding  unaffordable homes and apartments in China, the uptrend is intact.  And  SSEC also is trading between its 200 and 50 month MAs. Remember however that China is our creditor, we have lost the role the USA played as a net creditor in the 1930s. And so this is the better looking chart than the USA stock market.  

    As usual we prefer to examine the market internals. Here the NYSE Weekly Summation Index tested the 200 week MA and then bounced above the 50 week MA. This is bullish, period. Yes we have read all the statistics about housing, auto sales, number of  unemployed,  etc. But as we reflect in our opinion piece, the stimulus money ends up in stock market speculation regardless of economic fundamentals. Corporations and small business, as Fox Business has reported daily, sit on mountains of cash, unsure what new regulation Washington will pass next. The result is continued unemployment and stock market speculation.      

Again, we have a massive non-confirmation of the price of gold shares to the price of gold. Yes the FED can manipulate the value of the dollar, coffee and sugar rise. And to the FED’s embarrassment, this increases the price of  gold and silver.  Here the red black bars are the XAU index of gold shares. The black line is Gold. Note that the shares led until last fall. On the run up this year, the price of the metal gold has surpassed the value of the XAU. This is not the way it should be. In two years the value of the XAU has not made a new high!  This is a glaring non confirmation!  

Bottom Line We expect stocks to continue to S & P 1175-80, even higher prices are possible this fall.  See page see for DOW 10,800-11,100.   The fall sell off expected by many bears has been avoided as it was last year. Note stocks could fall 170 S & P points from 1180 and still stay in the recent trading rang.e The US Government continues to print money sending the Dollar down. If one stays long UUP please observe the trend line on page 5. A break of that line means the Dollar Index is headed to 72.   Europe bond sales have been weak, the French demonstrate against austerity as I write, but the Dollar sinks for now. The US Government has not been serious about the recession. Massive ‘stimulus’ rests in bank vaults, nothing has been done bout Fannie Mae or Freddie Mac, nothing has been done about millions of bad housing loans.   The 1960s and 70s saw wage push price inflation. Now we have the opposite. The more unemployment rises the more purchasing power declines, and fewer people are hired to produce goods and  services. Yet the markets do not reflect this reality other than in near zero interest rates.  

 

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Sunday Sept 26, 2010

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Summation Index Turns Down

Labor Day 2010

 

As the President trots out the Second Stimulus, we take a longer look at the internals of this market. This is the Summation Index for the NYSE.  The green red blue ribbon is the 21, 34, 55 week exponential moving average. Note that once all three turned down in 2007, they never recovered until the rally back in 2009. Note that once again all three have  crossed over with the longest 55 bar green line on top now. We think this is significant and cuts thru all the talking head mumbo jumbo about the economy and what might or might not happen. The pink lines trace the downtrend channel that took place from 2006-2009. This spanned three years. If our analogy holds true here, we are in for a similar long and grinding bear market now. The three MAs confirm that down turn. And we have the start of another down  trend .

We continue to believe that examining the internals  of the market, what stocks are doing without the weighting of the big price indices is key to discerning what is really happening. Our conclusion is that the new down trend is underway.

Remember that we are only half way through the 18 years period of economic stagnation. The latest stimulus idea of tax credit for one sector while taxing oil and gas will achieve no overall success. Unemployment numbers continue to increase. Polls indicate massive discontent with current policy which is typical of a bear market.

We are recovering from surgery to repair a retinal detachment so our graphs will likely be fewer and comments more frequent, bear with  us, we continue to monitor the markets.