The Market Perspective

The Correction Gets a Foothold

Monday Jan 31 2011

Click The correction Gets a Foothold

to view our latest post, We inadvertently posted to the student blog, I just realized the error.

Breakdown

Friday Jan 28 2011

Breakdown

President Barack Obama privately pressed Mubarak in a telephone call last week to embrace democratic changes, said the official, who requested anonymity. Secretary of State Hillary Clinton yesterday said Mubarak, in power since 1981, has an “important opportunity” to enact economic, political and social reforms.

It’s a little too late to do the right thing now.

Tanya Tucker

There are three stages of a bear market, denial, panic, and resignation. The President and Hillary are still operating in Stage One, denial.  But this serves as a model for what we are seeing from all governments in response to world wide breakdown. Remember when Gorbachev thought glasnost and perestroika were  going to save the Soviet Union?  That didn’t work either …

The results of governments flooding markets with money are now in the Cairo streets for all to see. The money did not put anyone to work; it did put dissatisfaction with decades old despots on display. The flood of money resulted in rampant speculation in stocks, then commodities, then stocks in commodity producing countries as well as currencies of those countries.

The riots began in Tunisia. ‘President’ Zine al-Abidine Ben Ali ‘stepped down’ and fled. Now unrest has spread to neighboring Yemen and Egypt. Social Media like Facebook and Twitter are helping spread the word and alarm as these despots attempt to control the riots and hold on to power, see quote above.

The same sense of denial is displayed  on the 24/7 news channels as local politicians here claim that ‘temporary’ tax increases and such will solve the developing municipal debt problem. It is now apparent that many debt issuers either fail to file financial reports or are so late that investors cannot assess their financial condition. A story in the Wall Street Journal this week features a silver haired  Maryland retiree shocked to hear of an offer for her MD municipal bonds-at fifty cents on the dollar. Will she take to the streets, Cairo style, and riot?

The next stage is panic. It took a year for this to happen in the US from the fall of 2007 to the fall of 2008. It did not take nearly that long at the Dhaka Exchange in Bangladesh.

On Jan. 10, the Dhaka stock exchange's index dropped 660 points, or 9%, in an hour.

Egypt’s Exchange was down 11% the last I read. You can substitute the names of other developing countries for Dhaka as the unrest becomes ‘widespread.’

This is why we have been out of the stock market. If overall indices are down 9% in an hour you can bet there is literally no market for some issues, just ask the lady in Maryland about her bonds.

Expect governments to announce absurd plans to contain, reduce, quiet, stem the problem. Observers denied that GM would or even could go bankrupt. How quickly sentiment changes. Now Newt Gingrich suggests it would be best if entire states went bankrupt. Yet tiny Vallejo, CA has been in bankruptcy for years now with no outcome. Can anyone imagine the eighth largest economy in the world in Bankruptcy Court (that would be California).

Resignation is the final stage. Reports are coming out now that panic at Lehman lasted as long as it took them to be ushered out of their building; resignation kicked in as they exited the front door. Really nothing has been done to address the underlying problems. The Egyptian does not care to live on $50 a month when he sees the rest of the world living in relative luxury. Like the Watts riots of 1969, people are tired of waiting for change.

So the FED policies have only brought us $3 gasoline. If the Democrats were not holding the White House there would already be calls for price controls on oil companies. Now prices are falling, the markets do work. Oil fell below $90, gold is down over $100, and silver is falling as well.

Our best estimate is that prices of commodities will fall, only to rise again later this year. Remember QE II, printing money and handing it to brokers for speculation, does not officially end until June of this year. Here in the US the municipal bond market was the first to experience widespread breakdown. Denial quickly surfaced as PIMCO and others assured investors this was a ‘buying opportunity.’ Flash crashes have already occurred in numerous stocks. Be prepared and informed, in a depression, cash is king. 

 

Internship Opportunity

Thursday January 27 2011

Whatabuger has an Internship position available. See me for contact information here are the particulars.

Whataburger LP is currently seeking 4^th year students that are pursuing an Accounting or Finance Degree that are interested in Internship opportunities within Internal Auditing for our Internal Compliance Department.  With this internship opportunity you will be evaluated for a full time opportunity with the company. This is a paid Internship and no experience is necessary.

The Internal Compliance (IC) Intern will have the responsibility to assist all members of the IC team. In doing so the Intern will prepare schedules, charts, process flows and reports as dictated.  The Intern will also assist team members with the testing phase of internal audit reviews. This will require a general knowledge of the business group as well as the reason for the testing. The Intern will have the responsibility to assist the Director and Managers with recurring reporting requirements.  The Intern will also assist the IC team with the entering of past Survey’s performed by the Asset protection team into the LPMS system. These responsibilities as well as others will allow the IC Managers more time to perform their most important task, the identification of risks within the individual business teams

The Intern performs work under the direct supervision of the Internal Compliance Director/Manager.  

 

Another One Bites the Dust

Thursday Jan 27 2011

New York State has seized control of 'formerly affluent' Nassau County citing legislative budget shortfalls. 

I have written extensively about the unfolding municipal crisis, spotlighting the breakdown in muni funds last November. Since then money has continued to exit that sector. Meredith Whitney was virtually ambushed on a recent CNBC segment over her assertion that 50-100 issuers would default. Her defense was, correctly, I am being vindicated everyday. This hyperlink makes her point. 

We cannot know where the Malcolm Gladwell  'Tipping Point' will be. It is high irony that NY State is supervising a bankrupt county given that New York is one of the Ns in CINN, CA, IL, NY, NJ. 

But just as Lehman was the lynchpin from the housing bubble, somewhere there will be a municipal 'crisis' just like the NYC crisis of the mid 1970s that will bring on a rout across all financial asset classes.  

The Problem with Bankruptcy

Wed Jan 26 2011

I served as the Chapter Seven Bankruptcy Trustee for the Western District of Texas for five years. I mention that to offer some experience in these matters. 

One blogger made the correct point yesterday that Vallejo, CA has been in Bankruptcy Court even before the 2008 melt down. And of course unions throw up an objection every time the City wants to discard the agreement with the unions and start over. The blogger makes a  good point, if this is the case for one small city imagine what would happen with an entire state. Indeed without the Federal Govt in charge there is no way GM would have zipped through the process. 

Canada has a one year time limit on the process, the US should do the same. Otherwise the process is bogged down in endless legal wrangling. Worse, no one gets paid in full but the lawyers while this is going on so the lawyers have every incentive to go on litigating rather than settling the matter. 

What we are hearing on all government fronts is the idea that we can cut a bit here and there, the economy will improve, and then we can go back to assuming never ending expansion. This is nonsense. The thing one learns in bankruptcy is that one needs to start all over with a new business plan, the old one did not work and cannot be fixed. This means eliminating spending not cutting it 5% but of course no one wants to do that. For example, I suggest we eliminate the Department of Energy which has never done anything to make us energy independent or well, what are they supposed to be doing, certainly not inspecting and preventing oil leaks or spills. 

All governments above the level of small cities consume too much and produce little or nothing of value. But no one wants to , hit the restart button. 

The Correction Gains Steam

Tuesday January 25, 2011

Gold stocks represented by Market Vectors GDX separated ways with the SPX large caps as soon as the markets opened this year. This is ominous. Gold stocks lead the overall stock market direction. Gold stocks went down before the overall market in 2008. Gold Stocks recovered in November 2008, SPX did not make a low until March 2009. The red black bars are GDX, the black line still headed up is the SPX. I left the three EMAs on to show that the 8 blue and 13 day  red EMAs have crossed over to the downside, a reversal of direction for GDX.

We showed the Dow Industrials this weekend, here is the New York Stock Exchange in the above chart. It looks to have topped out and already started down. All the major indices in this country have this look. 

All the emerging markets sport this general pattern. The 21^st month and 89 weeks from March 2009 the markets topped. Most have since recorded a lower high as Poland did above.  The huge injection of money by world governments has resulted in rampant speculation in emerging markets like this. Today’s WSJ is chock a block full of stories about how France and  India, two countries with notorious government interference in markets, both want price controls.  Such headlines are nearly always a sign that such controls  will not be needed in  what will be a forthcoming market collapse. 

Coffee, copper, livestock, silver, are off their recent highs, gold is $100 below its triple top at 1425.  And the most emotional commodity of all, crude oil, is breaking down.

The PAR SAR blue dot indicators reveal a stair step market right up to $92 at which point all assumed $100. Not yet.  Now we have a breakdown in the run from the low in September.

It’s AOM All  One Market, stocks, gold, silver, (Central Fund CEF was down again today) and yes even  crude oil is all turning down.  So bonds should be turning up

The smart money has been accumulating bonds on this sell off low, there is still time to do so. If stocks, oil, gold, and silver collapse as we believe will happen in the next month, TLT should rally nicely. This fund pays an annualized 3.94% dividend on a monthly basis at this level.

 

 

 

 

 

Markets Begin a Correction

Sunday Jan 22 2011

Note to readers, all our graphs do not appear on the blog, to receive the complete free report e mail

dennislelam@gmail.com

One can make  a case that three waves from the March 9, 2009 low have or are near completion. I first drew this with five waves but after examining the Chakin flow that makes no sense. If we had finished five waves, the Money Flow should be exhibiting a lower high. Near all the Elliot Wave counts I have read have been calling for a top, claiming we have finished five waves, some saw the top way back in  August/September of 2009!  All those calls have been wrong.  The fact is that this market is not exhibiting signs of a final top.

Our view was that this would not be over until the internal indicators (such as the weekly A/D NYSE line or the Summation Index)  say it is over, more on that in a bit. We called for long positions this past July and have not changed that position. But some sort of pattern completion appears to be at hand.  Let’s take a closer look. 

This daily chart would be a breakdown since our call to be long, about when our expanded distribution of this service occurred. Again one can make a case for five waves. So some sort of correction should be underway.

 

If this analysis is correct the internals should show waning participation, fewer and fewer stocks should be participating, is that the case? First here is the daily  summation index by itself.  We have shown this a good bit lately but it illustrates just how close the market is to rolling over, at this point we still do not know how deep a correction this portends but so far, nothing that dramatic. And of course the GS traders are looking at the same chart.

We do experiment with various chart configurations And we are sensitive to the fact that we are much more used to looking at these charts than the readers, too much information can be overwhelming but bear with us. We put the NYSI, the summation index in purple on the same chart as the actual NYSE Advance Decline Line. The index itself, the NYSE shown as $NYA is in the top panel. The tri-color ribbon of blue, red, green represents exponential moving averages MAs on the Advance Decline Index. Still with me, okay here goes.

The Advance Decline line has only broken the ribbons of MAs when the index itself corrected. The idea of Elliott Wave Theory is that the third wave is the strongest. This is reflected in the purple line of the Summation Index, a sum of the net new highs and lows in the market. That peaked along with the A/D line in the big chart and the price index at top. But, Elliott also specifies that fifth waves are marked by declining participation, breadth of the number of stocks is less in terms of advance, the overall move up is slowing even though price moves to a new high. This is precisely the picture above. Also note that at the peak of Wave One and Three, when NYSI started to turn down, it did just that, it went down taking the index with it.

Our buy recommendation from last July is still in effect. 

 

Here is another view of the SPY with the money flow at bottom.

Stock Summary, the Political Environment

The ‘re-alignment’ of Obma’s cabinet has brought Wall Street even closer to the Oval Office, if that was possible. Now J P Morgan has become the Chief of Staff, and GE is an official top adviser. Goldman still gets printed money from the FED. January through April 15 is seasonally an up period for the market. Obama’s goal is to look more business friendly; what is more friendly than a bull stock market, improving all the 401Ks? Our conclusion is that commodities and stocks will undergo a correction here and then resume their upward path.

Tom Wolfe in The Right Stuff made the point that some jet pilots would crash their planes while focused on the instruments; they failed to look outside the cockpit and see the plane rushing to the  ground. The performance of GM is the best look outside the cockpit so to speak. The Re-election campaign has begun. Obama has CA, IL, NY, he must win the mid West to win the election. Here is the mid West.

If there is a signature business/ union event in the Obama administration it is the rescue of GM. And the stock as you can see Friday, is up. Ford F closed at 18, up from 10 in July. 

Here is the definitive update on gold and silver . At top Central Fund is more owned by individuals I think and not so subject to J P Morgan alleged shenanigans.  The big moves happened after August but silver really got going, perhaps it was the last metal of choice playing catch up. Gold was up 29% for the year, most of that happened after August. So far this looks like a normal correction in an ongoing bull market. 

Bonds

The muni market has attracted some buyers from its oversold condition, this is to be expected. Meanwhile the ten year note has not bottomed yet. 

Price is below both moving averages. Will the 50 week MA cross the 200 week to the downside, we don’t know but so far it looks that way. The divergence between bonds and stocks continues, see updates this past week.

This triangle will resolve this spring, our guess it that it does so to the upside.  Remember the Chinese Central Government is watching the same graph.

Consider that the United States

• Continues unemployment checks for a third year, paying people not to work rather than ending unemployment at some point and forcing people to find employment and re-adjust
• Props up government pension systems that are hopelessly bankrupt
• Tuesday the President will apparently call for even more spending.
• The weak Euro with no taxing power or military is the real support for the dollar
• Has made employees a liability with onerous payroll taxes and constant threats of lawsuits for near any imagined slight by the employer
• Has a net debt that grew from $3 Trillion in 1990 to $14 T now
• Manufacturing is about 10% of the economy, everyone else is going out to eat or playing computer games or spending 30 minutes a day on Facebook ( a real statistic)
• Has produced so many lawyers they cannot find jobs

 

 

Consider that China

• Has a hard working population of hundreds of millions, a history of entrepreneurship, and now that has been unleashed
• Is investing its net inflows into real assets, one can question their methods but not the results in this lengthy report
  • http://www.fastcompany.com/magazine/126/special-report-china-in-africa.html
• Is the net creditor to the US
• Sends Chinese  students here and has US teachers in China, a friend of mine is going in February, they are copying everything, Russian  stealth fighters and now the Boeing 737, backbone of the Southwest Air fleet
• I have never met a Chinese student that was not proficient in math, a majority of US students in community college need remedial math and fail that, San Antonio is beginning yet another remedial algebra program in all high schools as I write

I am not aware of a centrally planned government that has succeeded in the long run. But considering that the US has hamstrung itself in so many ways, trying to be ‘fair to all’ hmmm, no wonder the Chinese are winning

 

Bottom Line

It would be much better for analysts if markets came to convenient turn points each weekend, but they do not. We believe that

• stocks and commodities are correcting,
• That there will be more upside to both this spring,
• Bonds have yet to bottom in price
• Yields on bonds versus dividends on stocks continue to diverge, this is the steepest yield curve since records were kept in the late 1970s  Look at how long rates are soaring against the one year yield. The long rates are on the left scale, the one year rate is on the right. Since QE II began in August  the yield curve is up sharply.  Bernanke has wanted inflation and believes he can control it. We shall see. 

 

 

 

 

 

 

 

 

Real Investment in Real Infrastructure

Sunday Jan 22, 2011

 

An alert reader sent this article which I reprint below. My thoughts are as follows.

 

The Chinese are marter than the Japanese, instead of going to war they will create a Greater East Asia Co Prosperity Sphere by building literal routes to China. Gee what an irony and another point to make in my letter, as Franklin said, honey works much better than vinegar. I  put the photos linked on on my student blog of the Chinese RR system and terminals, amazing, we of course still do not have a train from San Antonio to Austin to Dallas, ridiculous. Instead we are paying people not to work by extending unemployment benefits, maintaining all sorts of government offices that produce nothing whatsoever other than regulations, the Energy Dept is a good example, and doing it all on borrowed money, from the Chinese that they made manufacturing goods for us as we have no interest in doing so. 

China’s Vision for Integration with Southeast Asia

The Thailand and Chinese governments are about to sign a “memorandum of understanding” that will lead to the building of an important new rail line and within three years allow introduction of high-speed train services between the Chinese city of Kunming and Bangkok via Vientiane in Laos.

Currently there is no rail connection between China and most of Southeast Asia. The new line, whose construction will begin soon, will be the first phase of an ambitious Chinese plan to give its economy fast, high-capacity rail access to the region, using Bangkok as the hub of a major new system.

Later stages will replace the obsolete narrow-gauge track that currently links Bangkok to Singapore via Malaysia with a standard-gauge connection carrying trains running at up to 350 kms an hour. Then will come new rail routes to Bangkok through Vietnam and Cambodia to the east and through Burma to the west.

The new network, financed by cheap Chinese government money and equipped by China’s fast-expanding railway equipment industry, will not only open up the region to Chinese factories, but also give Southeast Asian economies much easier access to Chinese markets for their exports of agricultural commodities, natural resources and manufactures, and encourage inbound tourism.

The Chinese vision is even grander. The Beijing government wants improved access to Europe through high-capacity over-ground access to ports on the Indian Ocean and planned rail links from Northern China through Central Asia and Russia.

Within a few years it could take as little time as two days to travel in comfort by train on an unbroken journey all the way from London to Singapore.

With trade among Asian countries growing twice as fast as their trade with the rest of the world, there is fast-growing need for improved intro-Asian transportation links.

 

Softs Most Overbought in 5 Years

Monday January 17, 2011

An alert reader of this blog asks 'did we have record grain and food prices before the last crash'?

Good question, here is the answer. Big spikes occurred in early 2006, 2008, and now in 2011. 2011 is clearly the most rise of all. At top RSI is the highest ever. At bottom the MACD is just about literally off the chart. To a technician this is screaming topping action. As newspapers around the world report danger of food shortages, inability to afford food, etc., we have the classic signs of a top. The parabolic rise since early spring has now doubled the Soft Index. 

The purpose of technical analysis is to see recurring patterns among market participants and draw relevant conclusions. The relevant conclusion here is that prices are even more skewed than in similar time frames that preceded a serious pullback. Those market peaks were occasioned by  spikes  in food prices and then a subsequent collapse  in world stock markets. 

See our previous post on the break down of the municipal bond market. 

Bear Stalks the Municipal Bond Market

Monday Jan 17, 2010

Vanguard Funds notified the SEC it will not market three new municipal bond funds designed to emulate various municipal bond indices. Hmm, perhaps Vanguard instead should have brought a bear muni bond ETF to market. 

Historic Observation - In early 2010 I wondered if we would see a repeat of 1987. Then bond prices started down in March while stock prices marched up to August. The difference in the dividend yield on stocks and the interest rate payment on bonds became wider and wider. All that was erased one Monday in October 1987 when the stock market crashed. Then it was a bond market in general  lead by Treasuries. 

Today - This is not a crash prediction but the same thing is happening now. Be sure to read the hyperlink about Vanguard above. Municipal bond funds are primarily owned by retirees. As a former broker I can testify that this group tracks their investments daily and are very worried about potential principal loss. As the muni market fell in November bond funds touted that, as always, if you liked it at 12.75 ( for say this fund) you will love it at 10.50!  PIMCO even put out a release that its Chief Guru Bill Gross was personally buying more such funds. But as we have said, defaults take many forms. 

And in the oh by the way department, remember that such fund prices are at best estimates. Each day funds get representative quotes on their holdings. But if there are no bids, what is the quote, an estimate at best. 

Investors are defaulting, so to speak, on their long term commitment to municipal bonds. As we reported yesterday, New Jersey had to cut the size of an offering. Municipalities are being shut out of their source of long term funding. And this is happening at a time when their operational budgets are all short. Former Minnesota Governor Tim Pawlenty observed   on Fox Sunday last night  that 49 of 50 states have budget deficits. 

Now the same thing is happening that happened in 1987 but so far it is more confined to Municipals. But let's think about the Crash of 2008. The housing bubble led to over exposure to sub prime mortgages which led to Lehman et al using short term commercial paper to finance leveraged holdings of mortgages. When the mortgages stopped paying the commercial paper could not be paid and the entire financial market froze. Here we have a market beginning to freeze in slow motion so to speak. 

In 2008, Secretary of Treasury Paulson begged for $700 Billion, and got it. But the markets still continued their plunge. My point here is to ask, what will it take to assure muni investors that they should hold rather than sell their positions?

Markets descend or ascend to assume new trading ranges. The blue arrows indicate the first post crash range for municipal bonds. Now bonds are descending to a new lower range. Finance.yahoo indicates the yield for this fund is a whopping 8.6%. That is 400 basis points over Treasuries and 680 points more than the dividend yield on S & P stocks. Such increases always indicate fear that dividends will be cut. 

There are several serious concerns here in this weekly chart of the same fund.  

• Prices are falling much faster now than in 2008 at the far left.
• Prices have already hit the 200 week moving average MA.
• Selling volume shown the the down arrow at far right, is already higher than at the worst time of the sell off in late 2008 shown by the down arrow at far left. 
• In short, investors are selling municipal bonds faster than they did in the last crisis. 
• In the bottom panel, the MACD has headed down. Note that it never stopped until full crash mode occurred in late 2008. 

Going back even further, bonds did make one last stand in 2007. 

 It appears that some party intervened and got prices back up at a similar juncture at the blue arrow in late 2007. But now the MACD is falling at a much more rapid rate. There was one big week volume spike in late December 2007 which screams intervention by some market makers. As usual in such instances, it was not to last. 

Bernanke has suggested the municipal bond situation can be 'controlled.' If so, Ben's  control had best begin right here right now. 

One more thing...the stair step down pattern shown here is typical of a 'stealth' bear market. The market drops, the brokers and funds assure everyone it is a 'normal' correction, the fund drops again, the funds assure everyone that it takes courage but the great bargains are at the lows, and then of course the price drops even lower to yet another new trading range.  Commercial paper barely rates a few sentences in the finance and accounting textbooks, yet it became the very center of the 2008 melt down. Municipal bonds are another quiet sector that gets little mention in the textbooks but .......