The Market Perspective

Social Mood, Much Improved from March 2009

Sunday Nov 28 2010

Popular Culture and Social Mood

Mark McCormack (the original sports rep, he signed Arnold Palmer and went on to form Intl Management Group) relates that he was having lunch with the CEO of Rolex Europe. Someone came to the table and inquired 'how is the watch business?'

 

The CEO replied that he had not idea how the watch business washis correct perception, of course, was that he was not in the watch business, he was in the business of offering jewelry that made a statement about its owner.

 

Like one off dresses for the Academy Awards, cost is no object where exclusivity is the end desire. 

 

The WSJ is chock a block full of ads for expensive mechanical watches, which in terms of function are more or less obsolete in terms of time keeping accuracy, but my point is….

 

These mechanical watches are retro, a throwback, a statement like a fountain pen in a world of ballpoint pens, I have not heard of most of the brands but perhaps that adds to the allure. We are at the top of a Wave Two in the markets, politicians assure that all is well, but the charts in this issue speak otherwise. This belief will be shattered by the end of 2011The improvement in social mood has brought a return to fascination with luxury objects. This was also the case in the Depression as many 1920 luxury items finally went out of business.

From Wikipedia

Employing imaginative designers such as Alan Leamy (who was chiefly responsible for the 1933 Speedster)[1] and Gordon Buehrig (who modified leftover bodies to produce the 1935 851 Speedster, and facelifted the four-door),[2] Cord built cars that became famous for their advanced engineering as well as their striking appearance, e.g., the 1928 Auburn Boattail Speedster, the Model J Duesenbergs, the 1935–1937 Auburn Speedsters and the 810/812 Cords.

Styling and engineering failed to overcome the fact that Cord's vehicles were too expensive for the Depression-era market and that Cord's stock manipulations would force him to give up control of his car companies. Under injunction from the U.S. Securities and Exchange Commission to refrain from further violations, Cord sold his shares in his automobile holding company. In 1937, production of Auburns, Cords and Duesenbergs ended.

Auburn Cord Duesenberg has its echo in the expensive cars and watches of today. It is interesting that Cord finally succumbed during the second bear market beginning in 1937.

Aston Martin just debuted a new $200,000 car, the Rapide.  The firm is now owned by a Dubai Group of Investors. Dubai is another mecca for unoccupied real estate. 

Lulu Frost fashions  antiques into desirables.  Here is an article featuring the ‘must have’ attributes of a new jewelry line crafted from antiques.

Two original volumes are expected to bring record prices at auction.

Twin Peaks, Audubon and Shakespeare Original Volumes

 

In an interesting cross promotion, a Breitling signature clock  is featured in Bentley automobiles. Going themselves one better, Breitling has introduced the ‘Limited Edition Bentley Supersports watch. The decline in markets by Christmas 2011 should be such that people will not be flaunting wealth but hoping to hold on to it. 

Running On Empty

Sunday Nov 28 2010

Running on Empty

No one would have anticipated the steps the EU has been forced to take to shore up the euro.

Angela Merkel, WSJ A9 11,24,2010

Prime Minister Merkel’s comment is self-serving and defensive at best. One only had to do some minor analysis of budget deficits or observe that France and Belgium entered this downturn with 9% unemployment, about where the US is now. If one connects the dots in this Wednesday 11/24/2010 WSJ, it is not hard to see where all this is going, if you have the paper I suggest reading the articles, if not, it is easy enough to see where this is going.

In Ireland Bailout Triggers a Wave of Anger Page A 9

Anger is the social mood of bear markets. As the perennial weak sister of the British Isles, the move from Celtic Tiger two or three years ago to Bailout Now is especially galling.  (On the way to page A 15, notice on page A 13 that Argentina actually wants ‘help’ in creating a new inflation index. If there is anything the Argentines ought to be able to create on their own, it is an inflation index, the one thing they have consistently produced this past century is inflation. )  The Irish Domino on A 15 puts the outcomes plainly.

Either Germany will ‘loan’ Ireland $115 B which the Irish will struggle to pay back for years and years.  But like Greenspan bailing out Long Term Capital Management, this really just encourages the high spending countries to revert to their usual ways.  The parallel is that after Greenspan bailed out LTCM, Lehman, Bear et all assumed he would do the same for them. Who was more stunned when the end came, Richard Fuld at Lehman in 2008 or Gorbachev in 1989, I wonder.   The more likely outcome is that politicians in Ireland, Portugal, Greece, et all will renounce the Euro. There will be a call to revert to a ‘sovereign’ currency,  safe from the meddling of Brussels’ Bureaucrats who claim to run our country better than ourselves! (Not a bad sound bite I must say.)  And so the indebted countries default as they have in the past, go back to separate currencies, and Germany and the Netherlands for a new union between the two adult countries in Europe.

Sometimes an anecdote can tell us more about reality than all the economic data and economists as the saying goes, laid end to end. On page B5, Campbell Soup reports ready to serve soup sales slid 13% in the quarter ended Oct 31. The shift comes as heavy supermarket promotions of such simple meals as boxed macaroni and cheese have battered Campbell earnings in recent quarters.  So there you have it, even the purveyors of the soup line are suffering price competition, i.e., deflation.

In Section C, spreads for Ireland, Portugal, and Spain widen over German yields as ‘Investors Dump the Euro for the Dollar.’ 

Bernanke’s  plan to flood the banks with Dollars has only put dollars on balance sheets and created unintended inflation. La Z Boy reports higher material costs and a 34% lower second quarter profit (recall this was one of or short recommendations). At Cracker Barrel, the CEO warns higher commodity costs will impact earnings the rest of the year. 

China

China like Bernanke is attempting to print prosperity.

Financial markets tend to focus on one feature at a time; this feature becomes an obsession.  After Milton Friedman won a Nobel for his work on Money Supply, that was followed in micro detail in the press. Today the FED does not even report those numbers. In the 1980s, the question was, how much of the US debt would the Japanese purchase at each Treasury auction. Now the Chinese have supplanted the Japanese as the world’s growth engine. And the press wonders, yes, how long the Chinese will purchase American Treasuries.

China has grown by becoming the manufacturing engine for America and other countries. Now that purchasing has slowed in America, the Chinese have artificially created ‘growth’ in Asia with various construction projects. This ‘work’ is represented as growth. There is no way the Chinese consumer can replace the American consumer. The result is that China continues to build not only empty projects but also entire empty cities. Here is an article reflecting this attempt at substituting building for manufacturing.  Be sure to watch the interview with Chanos.

These three links cover some of the same ground. Yet the parallel between the building boom in the US pre 2008 and what is happening in China will be clear after you read and watch all the links.

Chanos reflects on his short China position.

http://globaleconomicanalysis.blogspot.com/2010/11/chinas-economic-treadmill-to-hell.html

 

Here is a video, from AlJazeerah no less, of an empty city in Mongolia.

Mongolia is Las Vegas

http://www.youtube.com/watch?v=0h7V3Twb-Qk

Ordos, Mongolia surely has as its counterpart the empty condos of Florida and particularly Las Vegas, a city built on gambling. Readers will recall that prior to 2008, Las Vegas was the fastest growing city in the US. Note that speculators own the apartments in Ordos. This of course is an echo of recent US real estate activity. Not long ago 25% of all US mortgages were on second homes. Today of course FNM and FRE are broke.   In other words the same story is playing out in China but a few years later, and it will end the same way. And the market knows it…

 

In the clip, Ordos, Mongolia is compared to Shanghai, so this picture of the SSEC is most relevant. The US equivalent the SPX is at bottom. Despite all the money spent by both governments, the bear market continues. One can see the failure at the pink downtrend line. In November the SSEC failed at its 200 week MA. This led me to suggest this past week that the bear market had indeed resumed. The fact that the defensive markets of US long bonds and the Dollar have also come to life confirms this view in my opinion. The British FTSE has managed to move above its MAs but I suspect the 50 week MA will not bet much above the 200, if at all, China

 Another non-confirmation. 

The Stock Market – The Bear Market Resumes

 

Our centerpiece as always is the internal condition of the stock market. The summation index for the New York Stock Exchange Index peaked a year ago. Since then it has traced out lower highs, which means fewer stocks participate on each rally. Yet the overall market is higher!  This is clear in the first segment below the actual NYSE index. This is a massive non -confirmation that shows the market is tiring with less breadth on each rally.

As I looked at the chart a second and third time, it occurred to me to draw the intersection of the green uptrend and the pink downtrend lines. And sure enough, when drawn this intersection occurs just before what increasingly appears to be a November peak worldwide, see SSEC and FTSE on previous page. Remember stock indices are now volume weighted, so participation by giant companies masks the fact that many smaller companies are already off the radar screen so to speak. This is why it is vital to examine the internal action. Finally we put the Bank ETF the XLF in the lowest segment. Despite all the literal trillions spent, the XLF is breaking down, 

Euro zone

Greece and Portugal have about the same sized populations, 11.5 million. Pennsylvania has 12.6 M by comparison.  Ireland is rumored to have 4.5 M though Wikipedia puts it around 6.2 M in 2008. Spain however, the S in PIGS, has 46 M population. Now if the Irish bailout were estimated to cost $115 B, what size would Spain be?

STD is a large Spanish bank traded on the NYSE. This past week it shares broke a two-year uptrend. Need we say more about the expectations?

Spanish Credit Default Swaps Increase

The PIGS of Europe have cousins in the US, which are the states of CA, NY, IL, and NJ not to mention the real estate graveyards of NV FL AZ.   Already Prime Minister Merkel is rightly calling on bondholders to shoulder the burden, i.e., take less money from the PIGS. In the US CA and NY have stayed afloat by selling Build America Bonds. The Federal Government guarantees 35% of the interest. But I suspect that Germany will balk at bailing out everyone and even if it does not, the citizens of those countries are already protesting against even modest austerity measures. Either way defaults loom. Here the new Republican Congress is unlikely to approve bailouts for CA and NY, These are Democrat controlled states and will their defaults will likely be a centerpiece of Republican strategy in the 2012 elections.

 

The Dollar

 

 

Need we say more?  We have a third year of a higher low; note how the Dollar has jumped the last three weeks on a flight to safety amid Euro woes.

It was a  close race as to which was getting more negative publicity, Lindsey Lohan or the US Dollar. Both ended up out of jail.   Market bottoms are marked by excessive negative publicity. We wish Ms. Lohan a sober and healthy life as well as our positive outlook for the Dollar. We regret being way early and ignoring our PAR SAR sell signal. This led to some serious disappointment; we will not ignore a short-term market turn that way again.

Gold

Gold has advanced too far too fast above its 200 day MA. Price appears to be curling over past a right shoulder of an H & S pattern. A measured move top to bottom would take the price back to the 200 day MA at 1220. And note the blue arrow, this corresponds to the breakout point for this last rally. So going back to re test that seems logical.

Remember that gold and silver rallied strongly before the last collapse, but the last man standing was crude oil. Let’s take a look.

Crude Oil

While oil has not experienced the same sort of rally as gold, it does exhibit the same H & S pattern. Top to bottom would indicate an $8 pullback from the neckline to around the 72-74 area.

Could there be a repeat of the 2008 rally? Let’s take a look back.

Oil is trading for about the same price now as then. It pulled back and then was the subject of massive speculation. It was the last market to make a high before the collapse. We would not be surprised to see a pullback to 72-74 and then a rally into this next year. Putting a number on that now would be as pointless as guessing it would double to 145 in 2008. But we certainly do not discount the possibility of last minute fireworks. The banks have put lots of money in circulation to fuel another speculation. 

Bottom Line

The Government is investigating Hedge Funds and ‘insider trading’ at a time when it needs; you guessed it, liquidity from hedge funds and insider trading to keep the market up. The Government will likely get what it wants in reduced trading. Muni bond traders note that the loss of Lehman and Bear Stearns has meant less liquidity for that increasingly weak market, fewer bids mean wider spreads and so prices fall. SSEC is predicting the failure of China’s ‘stimulus efforts. Other world stock markets are much the same. Participation or breadth is failing in the US market again portending an end to the counter trend rally from 2009. While the overall market has higher index prices since April, Bank of America has been cut in half (19 to 11) and Citi trades lower than in April as well. We recently noted the big banks are trading for less than book value. Bonds and the Dollar are now rallying further confirming the negative outlook for stocks and commodities.

Still we expect a last gasp leg up for stocks and perhaps particularly for commodities in early 2011.

 

 

 

 

 

 

 

 

The Good The Bad The Ugly

Friday Nov 26, 2010

Turner Classic Movies is showing this film tonight at 7:00 PM CST. TCM shows the movies without interruption , a relief given the two hour plus length. Sergio Leone's direction coupled long slow scenes with violence. The Bridge scene is particularly evocative of just how violent and deadly the Civil War was, new era weapons and old era medicine. 

This was the third of the trilogy of Spaghetti Westerns. These cemented Clint Eastwood as an action hero, back then westerns were still the leading action genre. Eastwood starred in the first, A Fistfull of Dollars, as the quiet but efficient bounty hunter playing both sides against one another. Building on the success of this surprising low budget film made in Spain, veteran actor Lee van Cleef was hired to team with him in For a Few Dollars More. This was great casting, van Cleef had been around for years as the guy Gary Cooper let out of jail in High Noon and the ruthless sidekick to Lee Marvin in The Man Who Shot Liberty Valance. His scowling personna was just right for these movies. 

In the third 'big budget' version, another Hollywood great was hired, UT grad Eli Wallach. Wallach was no doubt picked for his portrayal of the Mexican bandit in The Magnificent Seven. 

At any rate the movie revolves around a search for lost gold by three different desperate men. In my opinion the movie resonated with the public on several different levels. 

It came out in 1966 at the very top of the bull market in stocks, projecting the downturn in social mood to follow. 

The backdrop of the violence of the Civil War fit all too well with the violence of Viet Nam. Why is everyone dying?

This was a big move from an emphasis on the group experience to the importance of well just looking out for one's self. Viet Nam was dramatically different from Afghanistan in that one could be drafted for Viet Nam. Survival was so important that many young men fled to Canada. The Man With No Name was a symbol for individual existence against a the most violent backdrop imaginable. 

During my undergrad years at U Austin, 1966-1970, membership in Greek fraternities and sororities declined every year. Social Mood had turned down and the individual not the group became paramount. There was even a big confab my second year there appropriately named I the Starting Point. 

The characters are not so immoral as amoral, the means justifies the end result. 

Eli Wallach continued a successful career in films and does so to this day. Eastwood wisely packed up and came back to American, starring in two or three mainstream Westerns before hitting pay dirt as his own director in Play Misty for Me, still one of his best in my opinion. Lee van Cleef however no doubt weary of not seeing the big pay day in Hollywood, stayed in Europe grinding out B grade westerns. Eastwood reflected recently that he could have done that but did not, a wise decision. van Cleef eventually came back but to lesser also starring roles in TV and B movies. 

The Dow Jones hit 1,000 that year. It then went sideways until 1982-84. The period saw four grinding bear markets with a 50% plunge in 1974 to Dow 577, still the all time low since 1966. We are in a similar period now, And most movies have taken a much darker tone, hence the popularity of vampire flicks on books and now television. Harry Potter's final battle with Valdemort will take two movies this summer to play out, see the connection?

Interestingly Eaastwood's latest film is about life after death, after all, that fits the social mood. 

 

Enron The Smartest Guys in the Room

Friday Nov 26, 2010

Enron The Smartest Guys in the Room airs on CNBC tonight at 7:30PM, had I realized this it would have been assigned material. The really great thing is that the Enron bunch was so proud of themselves there is ample footage of them proclaiming just how smart they were. From the 17 the biggest firm is the US to bankrupt in one year. 

Highly recommended. 

Emerson on Gifts

Black Friday Shopping Day Nov 26, 2010

I have on my student blog posted some or part of Ralph Waldo Emerson's famous essay on gifts the last several Christmas seasons. He wrote these essays from 18330-32. Note the relevance of the first two sentences. Gee nothing has changed.

 

"Gifts"
By Ralph Waldo Emerson.

IT is said that the world is in a state of bankruptcy, that the world owes the world more than the world can pay, and ought to go into chancery, and be sold. I do not think this general insolvency, which involves in some sort all the population, to be the reason of the difficulty experienced at Christmas and New Year, and other times, in bestowing gifts; since it is always so pleasant to be generous, though very vexatious to pay debts. But the impediment lies in the choosing. If, at any time, it comes into my head that a present is due from me to somebody, I am puzzled what to give, until the opportunity is gone. Flowers and fruits are always fit presents; flowers, because they are a proud assertion that a ray of beauty outvalues all the utilities of the world. These gay natures contrast with the somewhat stern countenance of ordinary nature: they are like music heard out of a workhouse. Nature does not cocker us: we are children, not pets: she is not fond: everything is dealt to us without fear or favour, after severe universal laws. Yet these delicate flowers look like the frolic and interference of love and beauty. Men use to tell us that we love flattery, even though we are not deceived by it, because it shows that we are of importance enough to be courted. Something like that pleasure the flowers give us: what ant I to whom these sweet hints are addressed? Fruits are acceptable gifts because they are the flower of commodities, and admit of fantastic values being attached to them. If a man should send to me to come a hundred miles to visit him, and should set before me a basket of fine summer fruit, I should think there was some proportion between the labour and the reward.

For common gifts, necessity makes pertinences and beauty every day, and one is glad when an imperative leaves him no option, since if the man at the door have no shoes, you have not to consider whether you could procure him a paint-box. And as it is always pleasing to see a man eat bread, or drink water, in the house or out of doors, so it is always a great satisfaction to supply these first wants. Necessity does everything well. In our condition of universal dependence, it seems heroic to let the petitioner be the judge of his necessity, and to give all that is asked, though at great inconvenience. If it be a fantastic desire, it is better to leave to others the office of punishing him. I can think of many parts I should prefer playing to that of the Furies. Next to things of necessity, the rule for a gift which one of my friends prescribed is, that we might convey to some person that which properly, belonged to his character, and was easily associated with him in thought. But our tokens of compliment and love are for the most part barbarous. Rings and other jewels are not gifts, but apologies for gifts. The only gift is a portion of thyself. Thou must bleed for me. Therefore the poet brings his poem; the shepherd, his lamb; the farmer, corn; the miner, a gem; the sailor, coral and shells; the painter, his picture; the girl, a handkerchief of her own sewing. This is right and pleasing, for it restores society in so far to the primary basis, when a man's biography is conveyed in his gift, and every man's wealth is an index of his merit. But it is a cold, lifeless business when you go to the shops to buy me something, which does not represent your life and talent, but a goldsmith's. This is fib for kings, and rich men who represent kings, and a false state of property, to make presents of gold and silver stuffs, as a kind of symbolical sin-offering, or payment of black mail.

 

Fourth Wave in Stocks Underway

Tuesday Nov 23 2010

 

 

 

The fourth wave is in progress in stocks. Note that Wave Two was down sharply, so Wave Four is likely to be  a sideways affair.  We expect  this to last until mid December. 

Meet the new IBM. AAPL is 20% of the QQQQ, which is a big reason the QQQQ refuses to go down. Apple has already sold 7.5 M  iPads since its April introduction and is expanding production facilities for many more. And unlike Dell, none of them are heavily discounted at Wal Mart.   We see there may be some sales at $399 for the upcoming season but still….AAPL is working off its overbought condition by moving sideways. 

 

The head and shoulders formation projects 1220, which is about the 200 day MA. This is quite realistic, as gold and silver have risen too far above those respective MAs. This is setting up a buy and a final blow off in commodities in early 2011. The low here should coincide with the near term high in bonds and the US Dollar. This is why we targeted December 17, options expiration as an exit date.

 

Our entry into TLT and IEF is working very well; TLT is overdone on the hourly chart, which may allow us to add more on a pullback early this next week.  We will have more to show you this weekend as commodities and stocks set up for a real fireworks fifth wave display into 2011. 

 

 

 

Protest Movement Alive and Well

Monday Nov 22 2010

We are in a parallel of 1968-1982. That was a time of protest movements. The TSA has provided  the perfect opportunity for everyone FED UP with their tactics to protest, such protest are already under way or should we say under wear.  Click the link to read that one protestor stripped to his Calvin Kleins rather than be patted down. 

 

Not so long ago I recall an e mail going around which had obviously been photoshopped, everyone at the airport was standing in line in his or her underwear, well reality trumps photoshop. In the link you will note a country singer has already parodied a song to the tune of get me thru the night. 

AS this review notes, most of you have not heard 18 minutes of Alice's Restaurant.

It launched the career of Arlo Guthrie, son of Depression Era singer Woodie Guthrie and here we are in a Depression Again!  

At any rate in today's WSJ the TSA announces that the pat downs and intrusions will continue. America just ousted over 60 Reps from Congress, America is not happy with WAsh DC. This idiotic waste of time and money at airports is the perfect foil for a right wing protest. And with Thanksgiving Day coming up, airports jammed, imagine 30 or forty middle aged protestors striped to their Calvins, having alerted the local TV station, well, that is not a prediction but...

I just returned from Chicago last week, the TSA set up is absurd, it will not catch a terrorist who will certainly do something different next time. More rear view mirror from the FEDS. 

Has the Bear Market Resumed?

Sunday Nov 21, 2010

The weekly advance decline line for the NYSE has not turned down, but it has stopped going up. Casino stocks (VS, MGM) crashed two years ago, and now trade for a fraction of their former value. For profit colleges (CPLA, STRA)  crashed 50% in  a matter of weeks  amid suspicions the Federal Government would not continue to provide carte blanche financing for all students. Now municipal bond funds have wiped out a year or more of dividends in the last few weeks. Pimco’s PMF is down 15% form its August high.

The bear market is under way in various sectors but not in all at the same time. This is how investors are  like our friend Wiley Coyote chasing the Road Runner over the canyon cliff.  QE II has done the opposite of its intended goal, bond prices have fallen and the dollar has firmed. We thought the Government would pressure underwriters to hold the market up until the GM IPO came off, they did so in spectacular fashion.

We also have a couple of qualitative events that should mark a market high. The US Government has a habit of attacking market success stories at stock market highs. In the 1920s it was RCA, in the 1960s it was IBM, in the 1990s, it was Microsoft. Notice how Microsoft stock has gone nowhere since, investors now call for the company to be broken up and or for Ballmer to resign. (Gates says teachers need incentive pay for results, I wonder why he does not apply that in reverse for Ballmer, oh well…. Now the WSJ and Zero Hedge report that expert networks are about to be exposed as insider trading. We do not doubt this to be true. Sounds like Mike Milken and Ivan Boesky and Dennis Levine all over again. But out point is that such scandals accompany market tops.

From a societal standpoint, the Beatles emerged  in 1963-4 near the end of the 1949-1966 market bull run.  Now they are back via iTunes. We suspect this retro nostalgic move will celebrate another market top, which as we say may well be under way already.

 There are only about four real bull markets the last three years, long government bonds, the US Dollar, and gold and silver. Silver is near 50% above its 200 week moving average; gold is some 44% above its 200 week moving average. Those last two statistics explain why we are recommending government bonds and the Dollar., neither of which is that high above long term moving averages.

But first,  here are a few headlines from our Thursday letter which did not run due to computer problems. 

Municipal Downgrades

San Francisco Downgraded

Philadelphia Downgraded, CA faces higher rates – Hamtramck, MI declares bankruptcy, how long before Miami, Houston, Los Angeles, Philly asks Mish

Buffet to Receive Medal of Freedom, Supports Bailout, Profits from Bailout

Wall Street Journal 11/18/2010

From Sacramento to Austin to Albany, the day of fiscal reckoning is here.

This past weekend we noted how quickly bond funds, not just in NY or CA were collapsing through major weekly moving averages but national funds were doing so as well. That news hit the papers this week. We also noted that this is occurring much faster than the 2008 meltdown. Suspicions that the Republican Congress will not go along with bailouts for CA, NY, IL are part of the problem but, let me sum this up for you.

Accounting Analysis

California and other states simply do not have enough revenue to meet the current obligations of payroll, services, pensions, and debt and interest payments. So they are selling long term commitments to meet short term obligations. For example, Chicago sold the revenue from its parking meters for the next 75 years. Mayor Daley has already spent that money, incredible!  CA is trying to sell $10 B in revenue anticipation bonds. This is a euphemism for factoring. CA is tendering future tax revenues for cash today thereby incurring long term debt to meet short term obligations, like payroll. Firms in needs of cash will factor their accounts receivable. Banks used to do this for a substantial interest charge. The problem of course is that the firm factoring is then permanently behind in cash flow. Unless business somehow doubles, how will they ever be able to stop factoring?  One recalls that Bear Stearns, Lehman et al were selling short term commercial paper to finance borrowing leveraged mortgages. When the mortgage payments slowed, the paper could not be paid, the entire commercial paper market locked up, ie, no one wanted anyone else’s promise to pay.

Municipalities are now doing the same thing. They are borrowing long term to pay short term commitments. The markets see this happening, sense a lack of insurance (read bailouts) on the part of the Federal Government, and realize it is only a matter of time.  California and even Harvard have had to pay higher rates to sell bonds this past month. Higher interest rates make the time to default even sooner.

 

 

The inverse head and shoulders pattern for stocks projected another 100 points up. This would be from the break out point of the neckline at 1120. That target at 1220 has been achieved. We suspect 1250 or so is in the cards.

Specifically we are over bought, see MACD at bottom which may take out that uptrend from June. We expect stocks to correct into mid December. So in the mean time , we are initiating trades in TLT, the 20 year bond fun. As Dave Rosenberg it is risk on, stocks up, or risk off, stocks down. When stocks are down bonds are up. We will be employing conservative strategies to enhance the 3.7% annual dividend that TLT pays at these levels.

But first a preview of what more and more markets will look like as the bear market progresses. We have seen casinos, then for profit colleges collapse, now municipal bonds have joined the fray.

 

This is the closing graph Thursday, Friday closed at 12.56. Yes we expect a rebound from this oversold condition, but that will be the case for  most investments, the frog is slowly boiling in the pot of water. And so we highlighted the stair steps down just since August for this major bond fund.  15 to 12.75 is an 18% loss in just three plus months or the equivalent of three years of dividends!  

One can almost hear the retirees calling their brokers for re assurance, or at AARP, hey you can do this yourself, is there a broker?  At any rate, yes there will be a rebound but not to 15.00.

 

We bought 250 shares of TLT at an average price of 95.60 the last couple of days by placing limit orders below the market. We are up a buck. In an ideal world we would have sold puts under our existing positions. We will attempt to do that Monday.  The Dec 10 94 puts are about $100. We believe stocks will experience a ragged sideways movement between now and option expiration Dec 10. So we expect bonds to advance, note the reverse head and shoulders patterns in TLT and in On Balance Volume. And at bottom MACD is turning up. As the price increases we will sell calls above the position hoping to be called by expiration Dec 10.

The strategy here is to sell puts when we believe TLT is near a bottom. We are not adverse to buying more TLT should  we be exercised but want to take in the premium to enhance the overall return.   We believe this will be a successful strategy for the next year during the expected bear market. We expect that selling puts and calls should enhance our overall return to well past 10%.  The ideal strategy is to use  December 10 expiration date to 

Buy TLT at 95.60. (9800 – 9560 would be about 250)

Sell 94 puts for 100

Sell  98 calls for 100

Collect the monthly $30 dividend at the first of the month.

Sell TLT at 98 on December 10 for a total gain of

100 Put + 100 Call + 30 Div  + 250 Cap Gain = 480/9560 = 5% in about one month or 60% annualized, not bad for a low risk trade  Stay tuned to see how we do (yes the author has been  a Registered Options Principal and  a Securities Principal with considerable experience in this area). We are ignoring commissions and will account for that in our final tally. 

The Thailand ETF is at top. We used green underscore to emphasize its increase. Note this occurs when the US Dollar is falling. This same scenario exists for most emerging markets. Such markets have become the New Frontier for speculation fueled by cheap dollars at zero interest rates courtesy of the FED. This will soon reverse with emerging markets crashing back to reality.

The US Dollar appears to have made another annual low and rebounded. It is doing the opposite of what Bernanke claims QE II will do. Most of the press and Congress still seem to think the Dollar is falling.  It is not. Now another stock market also moves inverse with the Dollar, ours.

 

We remind you that the stock market collapse in 2008, was accompanied by a sharp dollar rise, the genuine flight to safety. Since  then the market rallied in 2009 on a falling Dollar. The FED beat the Dollar back this year, but the results have been marginal at best, the market has mostly moved sideways on money sloshing through the FED to broker dealers who use it to support the market. With the latest Dollar bottom the stock market is probably on

borrowed time.

 

QQQQ

As various sectors like for profit colleges fail, the money is forced into the fewer risk assets left that are still rising.  Consider that the top ten holdings of QQQQ comprise 46% of total assets. Apple AAPL alone is 19%. And so as more groups buy QQQQ, Apple goes ever higher, one move begets the other. Google and Amazon are also represented, and of course have been going up. This same sort of crowding by the herd into fewer and fewer stocks typically happens at most market tops. In 1929 it was RCA, in 1970 the nifty fifty, in the 1999 the dot.coms and DELL. Now it is Apple. If the 4% of QQQQ that is MSFT were that much more of Apple, QQQQ         would be even higher now.

 

Now about that Chinese Growth Engine…There are continued reports of massive over building in Chinese real estate. Here Shanghai has failed on its attempt to get through the red 200 week MA. Note that the blue 50 week  MA never penetrated the 200 week MA. The trend is down. Shanghai usually leads the US stock markets, as it is a derivative of US trade, this makes perfect sense.

Bottom Line Stocks are consolidating and should do so until mid December. Government bonds are bottoming and we bought them. There are examples that the bear market is well underway in various sectors such as colleges, casinos, and now municipal bonds.  The US Dollar appears to have made another annual bottom  which further confirms that the bull market in stocks is on borrowed time. We are buyers of UUP the Dollar, at 22.55 and below.

 

 

 

 

 

Municipal Bonds Warn of Danger

Sunday Nov 14 2010

 

 

 

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Canaries were literally once used in coalmines to warn of a lack of oxygen, if the canary stopped singing, get out of the mine. Likewise on the high seas, a canon shot across the bow of another ship is the warning to stop and be boarded.  These are a metaphor for the above charts and this market. 

We have written extensively about the New Civil War, the Southern Response looms.  New York and Californian have partied like the grasshopper while other states acted more like the ants preparing for the winter. No doubt California and New York, both re elected Democrats as Governor, expect the Federal Government to backstop their indiscretions. The republicans swept the southern states . See the  battle ahead?  Already both NY and CA are selling Build American Bonds, with 35% interest guaranteed by the Federal Government. This past week major, note major, not some small town dinky industrial revenue bond, bond funds run by Nuveen, New York, and Pimco, CA, suffered 5% and 12.5% losses. This wipes out one  or two years of interest payments. This is why chasing high yield is so dangerous.   Retirees are necessarily a huge segment of the investing public; young people have not saved any money. But retirees are always chasing the maximum yields to provide more cash income, so much for the fixed income theory.  Bernanke’s zero interest rate policy has in fact set the stage for  the next crisis. Retirees have crowded into high yield municipals and junk bonds. The result is as usual pictured below; everyone is heading for the exits at the same time as they realize both principal and income are in danger.  And it is not just New York and CA that are starting to melt

 

 

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The first two, NNP and PCK,  were one-year weekly charts, for emphasis this is a six-month daily chart. Note the volume bars in the bottom clip at far right; this is a major league sell signal. Note the chart broke both moving averages of 50 and 200 days in just three trading days!  These charts are screaming, get out, go to cash, and take that extended cruise.  I put this letter together over the weekend. I woke up this morning deciding to add the longer-term view of this same municipal bond fund. This is added to emphasize what an early warning indicator this can be.

 

 

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This is a weekly chart of the same Van Kampen fund, VKL. Note it tested the 200-week MA in January 2008 but took until late summer to collapse.  A few observations that prick the conventional wisdom balloon of investing.

• It does not matter which big company, Nuveen, Van Kampen, Franklin ‘manages’ the bond fund. Most are required by law to stay invested in the specific underlying securities. 
• Diversification is a myth; the market moves as one, the fact that one owns hundreds of bonds across dozens of states does not prevent the value of all of them falling together, which as one can see is exactly what happened.
• Once the 200 week MA was broken the price really collapsed, why? At this point it became obvious to fund holders that the price was collapsing, so they called the mutual fund company and sold out. The fund manager was selling into a collapsing market with few to no bids whatsoever. And so the price fell very, very fast.
• No doubt the buy and hold crowd would say, not to worry, it all came back, so what. Well glad you asked, three comments.
• First, let’s suppose you sold $100,000 of VKL at $11 in January of 2008. You did not have to sweat the collapse of that fall.  This saved a lot of worry.
• Second, not many were clever enough to catch the bottom but one could certainly have started adding back at $8.50 once the 50 week moving average was broken to the upside. Now how much does one own, well 100,000/8.50 =  11,764 shares.   The sale netted 100,000/11= 9090 shares. So our retiree now has another  2674 shares collecting interest. This would result in a considerable income increase. 
• Third, after the junk bond collapses of the early 1990s, the funds did not come back to full value nor did they resume paying what they had been paying, There is every reason to think this will happen to municipals this time around.  Google public employee union protests and read some of the 408,000 results. In 1976 it was one city, New York City. Now we have entire states and cities in a similar situation. But the public employee unions are not showing the slightest bit of realism on this issue, even in the face of the GM and Chrysler bankruptcies and final concessions.  This will not end in a pleasant fashion. We do not want readers to be worrying about their life savings amid future headlines such as CA Default Looms, LA City Council in Crisis Mode, Chicago Begs Dubai Investors for Relief, believe me those are coming.  

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For those of you that think I am perhaps intense about markets now, you should have known me in the 1980s. After trading bonds for years, I simply could not believe stocks were ignoring the bear market in bonds. Each day at 2 PM CST once the bond market closed, stocks would dutifully rally. Even Bill Griffin was amazed on CNBC, FNN back then.

Bonds were the early signal for the collapse of 1987 as well as the collapse of 2008. It is happening again, now.

 

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Market Perspectives to Date

We began circulating this letter last spring. We caught the move down in stocks last April as well as the bottom and move up in July. We admit that we should have been more adamant about going long in July, amidst e-mails wondering why we were not short. We recommended buying TLT and caught a nice ten point move up.   Our call on buying UUP, the Dollar was way early, and UUP fell 1.50 after our recommendation.

Our defense for all of this is simply that the worst of the bear market still lies ahead.   The graphs of the municipal bond funds above show that once the fall begins, it is hard to get out of the market fast enough, look at 1987. Now, 1987 was a fourth wave in an overall stock bull market, which began in 1932.  As we all know it recovered by Christmas. But we are not in an overall bull market now.

The US is a net debtor to the world, read this weekend WSJ for a take on how the US policy of trashing the Dollar policy was received at the G 20.

The 2008 collapse started just this way, high commodity prices, stocks falling, and the dollar bottoming, just three years ago.

Most participants believe another collapse this soon is not possible. Yet we have shown that this occurred during prior 18-year periods of stagnation, indeed four collapses during those periods were the norm. We have had two so far, 2000-2002,and 2007-2008; we have two more to go.

Act now to preserve your life savings. Exit any and all municipal or junk funds. Conservative investors should lighten up on all stocks. Traders can stay for what will not doubt be an exciting conclusion to the rally from March 2009. We expect the end of that rally in the first six months of 2011. As Art Cashin advises, stay nimble.