The Market Perspective

The Bear Market Resumes in Emerging Markets

Sunday Feb 27, 2011

Note, not all of our charts appear in this blog, those interested in receiving the full report by e mail please contact us at dennislelam@gmail.com

The Bear Market Resumes in Emerging Markets, Officially…

The bear market in emerging markets has resumed. This is a high probability statement for Shanghai, Brazil, and India.  US stock markets have benefitted from inflows of money exiting the emerging markets. That should keep most US indices in uptrends for a while longer.

At least an intermediate term bottom has been seen in the government bond market. It is no coincidence this has occurred as emerging markets rush further into bear mode. This also suggests that the US stock markets have peaked internally. This is the message of strengthening bonds as oil price hit triple digits.   Our recommendation to buy TLT, a fund of long term government bonds, this past week was right on target. TLT has rallied nicely since then.

It appears that the oil market will top last among major markets, just as it did in 2008.

We will later lay out a road map or  investing game plan as the bear market resumes.

 

Brazil, India,  Shanghai Resume Bear Markets

Our emerging market conclusions are based on the slow moving monthly charts. Note only three signals have been generated since 2008, a sell in Sept 2008, a buy in June of 2009, and now a sell in January of 2011. These are generated from the blue dots comprising the Wilder Parabolic Stop and Reverse PAR SAR system.  The Slope indicator in the bottom window confirms these signals. The Slope indicator tracks the direction of the market. It moves faster than PAR SAR. It turned up just after the March 2009 low and turned down at the April 2010 top. This was many months before the current  January 2011 sell signal from PAR SAR.

Here the Indian Bombay Exchange exhibits the same signals. We boxed in the two blue dots to make sure you are aware of the sell signal.

 

The truth of the matter is that the SSEC Shanghai has merely recovered to its downtrend line shown in pink.  For all the hype written about the Chinese miracle this is an incredible underperformance.  The first PAR SAR signal was given in April when many blogs and letters declared a top, only to be faked out by higher stock average numbers since then. That covers B, I , and C of the BRICS, what about the R?  Glad you asked.

Hmm, think back over what we have shown you over the last week, does this chart look familiar, it should!  This is the exact same pattern as the continuation chart in West Texas Intermediate WTIC. And well it should; Russia is a carbon exporter so its stock exchange looks like the oil chart And that is why Russia is up and the others are down. Even here SLOPE has flattened.

Advisors attempting  to short the US markets have simply tried to fit heir notion of a bear market to the facts, and they have been  early.  Globalization among hedge and sovereign wealth funds means that money is seeking whatever markets are going up. So the money exiting emerging wealth funds has been funneled to the US Stock Market. This will no doubt keep stocks headed up through the usual seasonal up move in the spring.

We observed a week ago that the move up in the Transports made no sense as oil prices were already advancing. Well the Trannies came to their senses this past week. We have a weekly PAR SAR sell signal at 5360, the index finished at 5060. This pretty well qualifies as an outside reversal week, just like the first week in May 2010.  Again note the Slope was an early warning indicator, and is now headed down in solid fashion.

Other indices including the QQQQ, Russell Small Cap, S & P 600, S & P 100 show a deteriorating SLOPE but lack a PAR SAR sell signal on their weekly charts. More money means more volume, and so the Volume Advance Decline indicator is still headed up.

This is a chart of the cumulative advancing volume on the NYSE. It has been rising since our buy recommendation last summer. Aided by massive volume in trading favorites like CITI, the volume for the entire exchange appears to be advancing.  And so money flows into stocks.

 

Bonds

We speculated that yields would hit resistance at their previous high of 4.8%. This is exactly what happened. We may have a second spike in a couple of months just as we did coming off the lows from August and then in October we pulled back. This could certainly coincide with a final top in oil prices. Note, oil prices topped in July in 2008. 

Hourly charts can be of assistance in placing orders. This chart  reflects the big rush off the lows at 88.25. The weekly chart shown next indicates a low on TLT is now in place. We would buy on pullbacks; TLT is overbought on this hourly chart,  see blue arrow at bottom. It is near previous resistance at 92.50, see blue box at left top. Two weeks from now we should have a good shot at lower prices. Please consider putting lower and lower orders in below 90 at this time. The weekly chart on TLT turned up on the PAR SAR indicator. 

The move up gives a nice low risk entry as we had advised. Note this indicator has only given a buy last April at the stock market peak, a sell in September and now a buy again.

In summary, if one is still not on board resistance lies above at 92.50. We would expect TLT to pull back and make a higher bottom in the next two weeks before advancing again. This is an early warning indicator. Bonds which usually dislike inflation are advancing in the face of triple digit oil prices.  The market is buying at 30 year yields over 4.5%.

 Energy 

We suggested using Patterson PTEN as a proxy for the top in the oil market. Here a similar pattern exists in XES, the oil and gas energy service ETF. XES is $7.50 why of its high in 2008.  A reasonable time target for XES  to reach $50 would be May, 2011. Until energy service stocks reach previous peaks speculation about the eventual high in oil prices is just that, speculation. But remember the clamor for change in the Mid East will  result in more production and sales of oil to generate income. The Arab World has only oil to sell, it is not competitive in a single consumer market. The pace of internet news and social media means these upheavals are likely to quickly oust existing autocrats. Whoever takes over will be forced to sell more oil to generate revenue.

Price spikes in oil in 1974 and 1979 were caused by shortages. While oil has gone up, there is no shortage, period. The only shortage is in the belief that there will be a shortage. Speculation rather than lack of supply has pushed prices higher. The Russian stock market is still in an uptrend as Russia stand ready, as does the rest of OPEC, to fill any Libyan shortfall. Hugo Chavez needs the money, make no mistake. OPEC has never been able to enforce production cutbacks for any meaningful period of time. There is no more a shortage of oil or gasoline than there was a shortage of dot.com stocks in 1999. This shortage will be over before you know it.

Strategy

Bear markets creep in. Otherwise the transition would be far too obvious.    The Bear is cunning and wants to take as many along to lose their fortunes as possible. For example, China apparently began a bear market last April but one would never know that listening to the news. A gradual stair step pattern down has begun in emerging markets. This is  unlike the severe ‘all at once waterfall drop of 2008.’ This should look much more like 1973-74 when the markets slowly Chinese water tortured Wall Street for two years.  This will cause most participants to believe each pull back is only another buying opportunity.  Note that US stock indices other than the Transports are still in uptrends!

Continue to accumulate TLT on pullbacks. Long government bonds will ultimately prove to be a safe haven when the bear really takes hold.

We will be shorting energy service companies as the top approaches in crude oil.  We will also consider long term puts for those wary of short positions.

TLT has rallied strongly in the past when stocks sagged. The push to reform the Middle East will eventually result in massive oil production which is likely to bring prices down. These two strategies, long TLT and short energy service,  should result in maximum profits by the bottom of the bear. We expect that to be well into 2012.

At that point we will begin exiting short energy service positions and long government bonds. Amid the chaos we will start accumulating REITs like WRE, now at 30 which traded at 14 at the 2008. Tanger Outlet Malls TGT is one of the top five tourist destination in Texas and is another potential acquisition. Potential acquisitions at future 2012 lows include pipelines such as EEP, OKS, and MMP. We would also favor Mesabi Trust MSB now at 36, up form yes $5.  Of course we want to buy at $5.  These are all  well managed companies which will be paying ‘buy of a lifetime dividends’ at what we expect will be a new low under DOW 6666. We have intentionally shied away from dabbling in speculation as the market has risen ever higher, preferring to wait a relatively short year or two for such an opportunity. We seek to purchase dividend paying stocks at what should be their 18 year cycle lows.  We expect this will be in 2012.

We plan to be long TLT and short energy service as the Bear Market really takes hold.  Note, we have recommended buying TLT we have not yet recommended shorting any energy sector stocks.  We will shop for bargains in dividend paying stocks at the bear lows expected to be S & P 500-600. We will play those to the upside anticipating the same fourth downturn that has occurred in all the other 18 year periods of economic doldrums this past century.  That last low, scheduled for 2015-2018,  tends to be ragged enough to scare off even the hardiest investors. It typically has a low above the third low of the 18 year period. That will be the last chance to buy bargains.

Thoughts on Investing

In 1999 the dot.coms were all the rage. Oil was $12. Yet no one on CNBC was recommending oil related investments.  Everyone was talking about new age investing in the dot.coms. Dot.coms offered the same old products Sears sold in its catalogs for decades, washing machines, garden tools, clothing, etc. But since the order method was different, using the internet rather than say the Post Office, that alone was deemed to make the new companies worth buying even though they had no earnings.

The outcome of course is now obvious. The dot.coms went bust.  Oil is back to $100 and energy service companies are on a tear. Yet here we go again. Yet all of cable news is consumed with guessing just how high the price of oil or gasoline will go, even though there is no shortage of either!  No one had Boone Pickens on television in 1999 confidently predicting that oil, then $12, would experience a 10x rise to $120. Yet this past week, Pickens came on television to predict just that-$120 oil. Nearly everyone from Glenn Beck to Geraldo to the past president of Shell Oil is on telling us the economy is doomed as gasoline will soon be $5 and no one can afford it.

Where is the person saying the obvious, well then, the price cannot stay there for long?  No doubt new suppliers will come on the market and consumers will cut back. Or, where is the person to state the most obvious fact that the economy went in the tank on $35 oil in 2008, not $145 oil. Or that very high oil prices as in 1980 or 2008, never last for long. We noted that even Southwest Airlines peaked with high oil prices in 2008 and bottomed with low prices in 2009.

The existence of high oil prices means the economy believes it can afford them. The existence of low oil prices means the economy does not believe it can afford them.

Bernanke now has his worst nightmare. We have high prices for many varieties of commodities but if anything, sales are lower, and unemployment does not budge.

The one outcome that is certain is that stock prices will deflate, and by 2012. This has already begun in companies like HPQ and in entire nations like India, Brazil, and China.

Gadgets, gizmos, and the other computer hype

Apple is the new IBM, but some cracks are already appearing among believers in that new IBM type company.

Returning  my iPad

The Dot.coms have been replaced by firms using the internet or some new computer software that is being hyped as ‘new wave innovation.’ We have spotlighted examples such as Open Table OPEN and Salesforce CRM. The price earnings ratios are now 158 and 195; no, that was not a typo. Insiders continue to sell these stocks as fast as they can.  Once these stocks crash, and they will, all will say, well it was perfectly obvious that was not sustainable.

In the last month, the WSJ  credit column was quoting ‘analysts’ at various firms saying things like

The price of bonds is falling like a hot knife through butter

There is no interest in bonds at this level as rates will surely go much higher on the back of rising commodity prices

Dealers braced for a poor auction,

This all proved to be incorrect  as TLT posted a solid four point rise coming out of the government bond auction. The hardest thing about investing is seeing the crowd going one way and realizing it is time to go the other.

 

 

 

 

Strange Quote of the Day

Thursday Feb 24, 2011

The US Economy is in better shape now than it was in 2008 to withstand $4 a gallon gasoline. 

WSJ Editorial page A 14 Today Feb 24, 2011

From the stand point that 8 million fewer people go to work each day that might be true, there is less demand for gasoline. But pardon the sarcasm, what are the Editors thinking?  A U 6 unemployment rate of 16% suggests to us that the USA is in much worse shape to withstand high gas prices. Other articles in the same paper note widespread strife and protest, declining sales at Wal Mart, and their own comment on a nearby letter on the same page, when your 401k doesn't deliver what you expected. 

Cities and states are struggling to balance their budgets,  they are far less equipped to deal with added transportation costs now than then. 

 

Dear Mr. Glassman

Thursday Feb 24, 2011

ON page A 15 of today's WSJ James Glassman explains the error he made in titling his 1999 book, Dow 36,000. He mentions the usual culprits for those predicting new highs at,well existing highs. 

I was right, long periods result in greater gains in stocks than bonds BUT

the world changed, the US is declining (really, you hadn't noticed?)

demographic imbalance, too few support too many (again earth to james, nothing new here)

risks that we cannot measure like 3,000 Americans killed in one day or a flash crash of 1,000 points

This is all an excuse for failing to compare the proper periods.  Glassman extrapolated that all eras are bull markets, they are not. The US has clearly sustained both bull and bear eras broken into 18 year or about one generation cycles. It is only valid to compare one bear with another, say 1930-1948 with the current time now or 1912-1930 with 1948-1966. 

Other eras had plenty of risks and unexpected disasters from the Spanish flu to wars such as  World War I  and II and Korea which were quite a bit worse than 3,000 people killed in one day. 

The strategy has to fit the times which is what we are doing on this blog. 

A DEW Line for Crude Oil

Thursday Feb 24, 2011

There is no shortage of dire predictions about how high oil and then gasoline prices are going. And of course there are dire predictions on what how high prices might affect the economy. This of course is very short sighted. As I explained to mywife two days ago, the talking heads on tv need to look back at what happens after those prices peak, because that is when the economy tanks. The economy and the stock market were still high in 2008 with oil at $145, but once oil fell to $35 by Christmas 2008, things were dire indeed. 

As we have said, oil is a very emotional commodity. The better measure is the utilization of oil service companies who spring into action when prices rise. 

 This is a weekly graph of Patterson PTEN a major driller and workover rig operator. 

The first top at $35 in 2006 preceded a top in oil at $75, see top panel for WTIC. 

The second top at $35 coincided with the top at $145. 

Now oil has broken through the $75-90 resistance and is headed up, how high?  We would rely on a price objective for PTEN at $35 rather than make predictions on how nervous the traders will be at the New York Mercantile where oil is priced. PTEN has eight dollars to go before gaining its highest ground again. 

New Civil War

Thursday Feb 24, 2011

We began this blog with a thesis that the USA is now involved in a New Civil War. We noted that this Civil War breaks down along the same geographic lines as the Original Civil War, the Right to Work States, and the Red Blue Republican versus Democrat states. 

Page A4 of the Wednesday February 23, 2011 WSJ reached the same conclusion. See Two Track Economy. 

And we quote

Heavily unionized states of the Upper Midwest experienced deeper job losses and slower growth in personal income than many right to work states in the Sublet with weak union protections. 

This war is now taking on Greece like in the street dimensions in Wisconsin. Unions are planning similar protests in other states. Frank Lunz notes this is a public relations disaster, and indeed it is hard to see how unions believe taxpayers are impressed with demands from public employees, who have yet to suffer a layoff. 

Our other theme here is the socionomic parallel to the same era of 1966-82, also marked by demonstrations and urban bankruptcy. 

More Distant Early Warning Indicators DEW Line

Thursday Feb 24, 2011

The DEW Line is a series of radar stations constructed across Northern Canada in the 1950s. This was another cold war attempt to give an early warning of an across the north pole attack by plane or missle from the Soviets against North America. Hence the name Distant Early Warning or DEW Line. 

Here are multiple  DEW line indicators. This DEW line is warning investors of the impending turn to a bear market much like 2008. 

Silver is at the highest level since the Hunt Silver Spike in 1980. I have read blogs of equally and experienced advisors some of whom are shorting silver and some predicting $50. Note, price spikes iun metals tend to be violent, and brief. It seems to me the better message is in the above ratio chart of silver versus gold. 

The ratio is certainly of predictive value at market bottoms. We plotted the SPX in the top pane. The red arrows plot lows occurring in both stocks and the silver gold SG ratio. 

The predictive value of a market top is not near as timely but is still there. First there was a rush to silver as stocks came off their 1997 lows. 

SG registered a double top in 2006 and 2008 which certainly preceded the 2008 implosions in stocks. IN fact notice that in 2008 SG made one final high as stocks were actually declining. 

Now SG has matched or exceeded its 1998 high, and bettered the 2006 and 2008 highs. We take that as a serious warning indeed. The import of tech analysis is not why these things happen, but that they do. I have no idea WHY the earth spins in such a manner that the sun appears to rise in the east, but I do  count on it. 

Our next DEW Line Indicator is legendary Southwest Airlines. We observed last week that the surge in the Dow Transports made no sense whatsoever as oil prices which fuel the Trannies were rising. It did not take long for investors to react, let's take  a look. 

LUV exhibits a one-two high, higher progression, right before the fall. Note that the same patter from 2007-08 is happening again. LUV made a high in 2007, first blue arrow, pulled back to the first blue line, then topped a second time. This was followed by a complete collapse. Now the same high, pullback to blue line, and a second high has happened again, Notably on this daily graph, LUV has already fallen below its 200 day MA. Once this happened in 2008 it was game over. And by the way, notice LUV made lower highs in 2011 than in 2007-08. 

Emerging Markets

I have no doubt that growth rates in Emerging Market countries will exceed that in developed countries in the future. After all, where folks are trading motorbikes for automobiles and scrap metal shelters for real housing, the rate of change is much faster. Think the Western USA after the CIvil War, good comparison. A rough ride but a rewarding one. 

This is the ratio of the Emerging Markets to the Europe Asia and Pacific ETF. So emerging markets have attracted more investment money than large ones. Our focus is that the ratio has only broken the 50 week MA four times since the inception of this ETF. The third break was the big one in 2008. At bottom MACD is already plunging, notably peaking two years ago. Does anyone think the riots in the mid east, will end or resolve quickly. Will the demand for more freedom of expression spread to, gulp, China?  This chart suggests it might. 

 

 

Municipal Update

Tuesday Feb 22, 2011

My predictions are being confirmed every day

Meredith Whitney on her prediction of widespread default

The state of Michigan approved a plan for Detroit to close about half of its public schools and increase the average size of high-school classrooms to 60 students over the next four years to eliminate a $327 million deficit.

The plan was submitted in January by Robert Bobb, Detroit Public Schools' emergency financial manager, as a last-ditch scenario if the district couldn't find new revenue sources, which it hasn't so far. Final approval came after Mike Flanagan, the state superintendent of public instruction, cleared Mr. Bobb's initial plan with some new requirements, including that the district not file for bankruptcy protection during Mr. Bobb's remaining months in office.

WSJ 2,22,2011

 

What Happened to Wal Mart?

Tuesday Feb 22, 2011

Massive optimism and belief in the 'can't fail' model always precedes a top. Just a few years back entire communities were organizing against Wal Mart. The firm was seen as domineering and the new permanent fixture of its landscape, which come to think of if is what everyone was saying about DELL also. 

Now WMT grapples with its Worst Sales Slump Ever.

As always trying to be something one is not never works. WMT attempted to go up market and left its core customer base. The Rise of the Dollar Stores as well as chic alternates like Target have proven to finally make inroads. And once people begin shopping elsewhere it is hard to lure them back. My favorite quote on this trend from one shopper

The thing I like about the Dollar Stores is I don't have to get dressed up like I do to go to Wal Mart to shop. 

 

Then and Now

Tuesday Feb 22, 2011

The past 18 year bust period featured four clear periods of stock market decline. We lined up the

1966-82 period with the present period as a road map of what to expect. Other incidents are quite similar to now in terms of emotions and even actual markets and geographic places. 

None of these similarities of course are being reported on CNBC or in the financial press. 

Dennis Elam dennislelam@gmail.com

www.themarketperspective.com

Feb 21, 2011

 

Similarities between Then of 1972-3 and Now 2011

Stock Market Declines

Past 18  year cycle declines have contained four declines. The fourth tends to be a multiple bottom, a ragged end where any remaining optimism is met with waves of year after year selling to cause all to exit stocks.  The first three declines tend to be quite sharp.

Years	Dow Ind.	Percent	Years	Dow Ind.	Percent
1966-67	989-744	(25)	2000-2002	11722-7286	(38)
1969-70	985-662	(31)	2007-2008	14164-6547	(54)
1973-74	1047-577	(45)	2011-2013	12000+
1976-78	1009-747	(26)

If the parallel continues one would expect the next decline to exceed the 45% of 1973-74, the first two have exceeded their counterparts.  We are in a Wave Pattern of Higher Degree than in the 1966-82 period so all moves are magnified. 

 

Endless War

Then Vietnam, Now Iraq,  Afghanistan

Mid East

OPEC stages a first oil embargo causing long gas lines

Now revolt spreads across the Mid East, as always the West worries about supply interruptions, gas prices now as then on the rise

Municipal Disruptions

New York City went bankrupt,  Chapter 9 of the Bankruptcy Code created for Cities

Now entire states CA IL NY NJ and cities like Detroit and Chicago are in trouble

Legislation begins to allow states to go bankrupt

Civil Unrest

Then protests against conscription into the Viet Nam war

Now unions protest loss of benefits for state employees as unemployment for the nation stays fixed at 16% on a U-6 measure

Madison, WI cited as one of the ideal cities to live in the US becomes the battleground for public employee unions

Then as now the nation faced high unemployment

Inflation Deflation

Then inflation was the scourge with Gerald Ford sporting  a Whip Inflation Now button WIN

Now both are a problem. The FED has created inflation around the world with high commodity prices but denies it (they really wanted inflation) High gas prices then and now

But deflation in housing prices threatens bank balance sheets, FNM FRE shut down

El Erian of PIMCO uses the term stagflation from the 1970s to describe 2011

 

Stock Market

35-50% swings or even 100% swings  are common which is a feature of bear markets, then and now

Nifty Fifty

Then the Nifty stocks dominate trading including IBM, Polaroid, Eastman Kodak, Wang and DEC are new wave computer stocks

Now Social Media and service stocks like GOOG, NFLX, Apple, BIDU,PCLN, AMZN Notably not one of these companies produce a tangible product made in the USA

Polarization and Reversal

McGovern carried but two states earning 17 electoral votes to Nixon’s 520 but Nixon’s schizophrenia led to his downfall just 2.5 years later

Bush loses House, Senate, Presidency for the Republicans, does not even appear at his own convention in 2008

Just two years later, Barack Obama  suffers a similar reversal losing the House Majority, in the New Congress more have voted to repeal Obamacare than voted for it,

In Texas Republicans take 99 of 150 seats

Entire Nation divided into Red  Blue States

Economy

The term Rust Belt and Sun Belt are coined to highlight the different economies of North and South, new airports in Atlanta and DFW ease the transition to leave Union Shop states for Right to Work States

National Security

Then the Pentagon Papers were leaked revealing US meddling in other countries,

Now WIkileaks reveals, yep, meddling in other countries

Commodity Prices

OPEC raises gasoline prices with a 1972 and then 1979 oil embargo

Nixon takes the country off the gold standard, Americans are allowed to own gold, by the end of the 1970s gold and silver prices are soaring

Eventually the Hunt Brothers attempt to ‘corner the silver market’ by demanding delivery on their contracts, the Exchange alters margin requirements, the Hunts go bankrupt, Silver falls from a parabolic panic high of $50 to an eventual $3.50

Now, gold is $1400, silver back to $30+ as rumors circulate that JP Morgan and HSBC are  massively short the silver market, rumors of ‘fails to deliver’ and a crisis at the metal exchanges make popular fodder on weblogs

Cotton, sugar, coffee, cocoa,  and even onion prices make world headlines

Real Estate

Real Estate Investment Trusts were popular income vehicles then and now. In the 1974 meltdown, many were shut down or lost half their value.

The same thing happened in 2008; REITs and junk bonds are now the best performing a

Wall Street

Then back office computer delays cause shortened trading days, Old line firms are forced to merge or be taken over, Merrill acquires White Weld  which takes ML into investment banking, upstart Shearson acquires Loeb Rhoads, numerous regional firms  disappear, national wire houses DuPont and Walston merge and close shortly thereafter, Prudential acquires Bache, Sears buys Dean Witter

Greenspan ‘rescues’ Long Term Capital Management in 1998, Glass-Stegall is repealed the next year, now everyone is back in the investment business and emboldened, believing they, like LTCM, are ‘too big to fail’

Bear Stearns fails and is bought, Lehman fails and is not rescued, Merrill’s Thain cuts a deal with Bank of America one hour before Lehman fails, Rubin resigns as Co Chair from CITI Board, stock falls to low single digits, Goldman et al receive bailout money

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Optimism Reigns at Market Tops

Sunday Feb 20 2011

All the interviews from the floor of the exchanges are bullish. From  the hype on CNBC, another week of new highs on various indices, expensive mens’ shoes  and watch ads adorn the pages of the WSJ, and are now joined by Distinctive Properties   that are for sale (again) rather than auction,  everyone is on board for higher prices. Please recall that at the height of the 2008 pre-crash boom, Distincitive Propery ads for about ten pages in the WSJ.

Yet the cover of the Feb 7 Newsweek featured Rage as a theme with photos of Mid East Unrest in the streets. This past week the WSJ even had a long article on Sidewalk Rage, the angst of slow walkers. Photos and video of hundreds of teachers protesting a request that they pay for their benefits are getting lots of views. Has Athens, Greece come to Madison, WI?  You bet it has. Make no mistake The New Civil War we detailed on the blog, www.themarketperspective.com  is underway in the USA.

This juxtaposition of optimism mixed with outright protest replicates 1968 as the big bear market of 1966-82 began. The Chicago Seven disrupted the Democrat convention and armed troops were brought in to guard the Capitol at Washington DC.  More on that later, let’s look at some overbought markets first.

 Stocks

The NYSE Summation Index has been registering  aeries of lower highs since late 2009. I noticed the NYSI tends to make a high early in the year and then pull back, the four blue arrows register those highs up to this year. As the NYSI is now up against resistance we expect a high in the stock markets to occur over the next two weeks or so. We drew the line from the low in 2008. A conclusion to this triangle should occur by June, the month QE II bond buying is due to end.  It is QE II that has kept the stock market up, not to mention cotton, oil, sugar and all the rest.

Other measures are so overbought as to be useless. The number of stocks above 50, 150, and 200 day Moving averages is over 400.

It appears that the Dow Theory has delivered another buy signal with the Transports moving to a new high along with the Industrials. This happened as oil prices bounced back and energy service is on a tear. How can that be, higher oil prices are usually a problem for transportation costs.

 

We used charts like this to call the low last summer. This is the percent of stocks in the SPX exhibiting bullish patterns on a point and figure chart. This indicator is the highest it has been in the last several years, an amazing 89.2%.   Just buy something, it’s bound to go up, right? Note our buy recommendation was last summer in July, not now!

The Weekly A/D line  is still up. So bullish sentiment abounds we put our faith in the NYSI and think at least a pullback will materialize in March as it has the last three years.

Emerging Markets

We have lists of dozens of ‘emerging markets’ from the BRICs to Viet Nam and Eastern Europeans like Poland to Oceania like Indonesia. All either exhibit broadening tops or have begun declines. Last weekend we stated that India’s Bombay Index ( as well as Brazil and Shanghai) was due for a rally probably back to its 200 day MA. The ETF India Fund mimics the Bombay  right down to the moving averages.

Notice the big bounce, just as we suspected. The blue numbers suggest this was a fourth wave up. Wave Three broke down into five waves identified by the red numbers. Wave 2 in blue broke down into the appropriate three wave a b c pattern.

The consensus view seems to be that the emerging markets are simply in a corrective pattern. As we said money has moved from those markets to the US driving our markets higher.  After writing this I ran across this Saturday morning gem….

WSJ Weekend Edition Saturday Feb 19-20, Page B9

Emerging Markets Get Cheap

This article suggests that ‘investors have been pulling out, emerging economies are facing competition from the US and other developed nations (what we started making our own iPads?), and that inflation is spooking the markets. The move away has been too extreme, and emerging market p/e s are 16% lower on average than developed markets, the largest difference since the financial crisis.’

But the real gem is this comment, ‘developed markets have beaten emerging markets for five consecutive months, the longest streak since the five months ended October 2008. ‘

Yes, and then what happened in November 2008,  one might ask Ben Levinson, author of the article. Answer, the financial world collapsed.

Market Perspective Analysis

The US market is anything but cheap sporting an overall dividend less than 2%. We have detailed numerous stocks such as OPEN, CRM, and LULU that sport price earnings ratios from 80 to over 200. Here is a short list of NASD leaders that are driving tech higher, do they look cheap, are these bottom of the market, ala 1974 or 1982 bargains sporting 6% dividends and single digit p/e s, hardly

Symbol         P/E

GOOG         24

NFLX         80

PCLN                  48

BIDU                  82

AMZN         73

The article makes no mention of run away over valuations in real estate in developing countries, or outsized expectations. The picture of page B5 of one ‘investor’ taking it hard after the Shanghai had one down day after six up days (themarketperspective did expect a rebound and said so last week). This novice investor apparently thought the market would only continue to the upside.

After mentioning the obvious connection to October 2008,the article never pauses to consider that perhaps this is a warning sign, which it most certainly is. Emerging markets decline first, sending the speculative money into the last markets still rising and considered ‘safe’ the developed countries.

We will have more to say on this in our Socionomic Strategy session.

 

Bonds

As Dave Rosenberg noted this week,  benchmark junk bonds were at 55% of  par in late 2008, now they are at a slight premium, yields are the lowest in years. Junk bond indices continue to look like stocks, up up and away. 

This is a chart of TLT a fund of long-term Treasury bonds. We have put up the bond versus stock chart from 1987 several times to show what happens when stock prices continue to climb while Treasury prices fall. Eventually a violent correction occurs. The same thing is happening again now. Investors who regularly purchased treasuries in 1987 were well rewarded as all the paper losses up to Oct that year were erased in two short days.

• RSI has made  a new low even thought TLT is higher than previous lows in price.
• TLT exhibits a series of higher lows each hear for the last several years
• The Thirty Year bond is near its 4.8% resistance level, it is 4.7%
• Weekly MACD appears to be nearing a bottom.

 

We are content to purchase TLT at these lows while sentiment on stocks has reached pre-crash levels of early 2008. Nothing has been done to cure the problem of under water mortgages. No one is serious about the value of bank balance sheets.  Money continues to ignore Treasuries while embracing funds like JNK for junk bonds. Junk bonds have now reached their lowest yields since, you guessed it, before the 2008 crash.

 

Energy

 

The daily PAR SAR in the blue dots has not given a buy signal yet. But the bounce off the 200 day MA is significant. WTIC has trailed Brent due to an oversupply at Cushing, OK see my article to follow. Note that oil had resistance back in November at the 200 day MA. It finally broke out and now has come back to test that MA. RSI is rising in the upper panel.  Volume at bottom is very supportive and expanding on the moves up, this is what the black bars mean, and the MACD is bottoming. This should be a least risk entry point. And finally, oil was the last market to top in 2008. In terms of crude oil prices  the run up is starting about where it did then around $90. This is an accumulation buy for the next few months, do not bet the farm but accumulate at this lower range of $36.

Here is the big picture of why you should consider buying USO. The price of Crude has just risen above its regression line shown as the middle line. The pattern is even repeating from 2006-2007.Note that then oil pulled back, found a low and then moved up again. After testing $70 many times in 2010, oil is breaking out again. 

Here is the way to analyze refinery stocks. A refinery, see article to follow, makes money on the spread between the price of oil and the price of unleaded gasoline. Here is a ratio chart of gasoline to oil. When gasoline prices rise relative to oil the ratio rises. Then the refinery makes money. In the bottom panel VLO has risen 50% as this has happened. VLO was over $70 in 2008 before oil dropped. So there is still time to take advantage of this spread trade.

 Strategy

Welcome to the John Templeton Warren Buffet Newsletter. This will no doubt get lots of publicity as we will  be sued for using the name Templeton that Franklin Funds paid to use and of course Warren is still alive and has not endorsed us.  If you are not familiar with John Templeton, click on the link, he pre-dated Buffet. Templeton  is noted for buying 100 shares of each company for less than $1 ($16 in current dollar terms) a share in 1939 and making many times the money back in a 4 year period.

 

         Doing this is fairly simple, one just has to buy and sell at the points noted above. Buy low sell high, so easy to say, so hard to do.  This method suggests that there will be long stretches when we suggest you do nothing, having bought or sold short at the optimum time. No we won’t bother you with interim updates. We will only send a signal at the appropriate time. Note that years may go by between signals. Since you are only interested in the signals we will only send messages at those times. Our vigilance however is not free. Of course subscribers will be expected to pay the subscription rates necessary for our vigilance. This will help investors to avoid becoming emotionally involved with the market. Since this is the get rich quick scheme, well when the time comes, that all dream of, subscriptions well be $25,000 per year about the price of a car but when did buying a car make you rich? (Yes this is all very tongue in cheek to make a point).

 

Again I don’t think that business model for a letter will work but as an investing strategy it is the optimum model.

 

Aside from the name difficulty, I doubt this service will have much chance to get off the ground. Even the services that pride themselves on occasional good calls, like Richard Russell, provide frequent updates. I am beginning to see however why Russell writes about jazz, WW II, and past history. Trying to invent something new to say about an overbought market is difficult. But this is exactly the point. True low risk entry points happen occasionally but like the Templeton example are the once in a decade or so big low risk pay off entry points. We suspect such sell and buy points lie but months ahead. The problem is maintaining the patience, avoiding doing anything so one is liquid, and then having the steely resolve to do what no one else will or can do at that point, sell high, buy low.

 

 

Socionomics and Strategy

 

         Page B1 of the Weekend Journal lists five potential merger combinations of stock and or commodity exchanges. Such activity only occurs at the top of markets. Bull markets are inclusionary. No one merged at Dow 6666.

 

         This past week  leaders  of England, France, and Germany all disclaimed multi-culturalism. They noted that the failure to merge into their respective societies by immigrants caused terminal difficulty, problems that cannot be solved. The Press Secretary of our President remarked that he was not aware of the comments. Just a few years back Paris, FR was literally on fire as a result of these failed policies. See page A9 of the weekend Journal for a breakdown on Mid East revolts. The point is that societies is not getting along well with one another; this leads to conflict which can lead to outright revolt.

 

Over here the revolts really got going in Madison, Wisconsin as unions bussed in protestors. Our theme of the New Civil War is on display as Madison WI become the new Fort Sumner, the shots are being heard round the world.  We have globalization indeed, the government workers in Madison are just as unhappy as the ones in Athens, Greece.

 

We warned about municipal bond danger last November. Meredith Whitney has gotten a lot more publicity that themarketperspective .

Check out Illinois Pension Plans Should go Dutch on page B18.  

Gaping hoes at state and local government pension plans are probably  a lot deeper than municipal  bond investors fear. Or take a look at page A 5 for the real projection on Social Security that neither Republicans nor Democrats talk about. These huge unfunded liabilities are being ignored by markets awash in government printed stimulus money.

 

An alert Canadian reader sent us this quote from Barrons this weekend about the potential downside in municipals. Again, it is expectations which will drive the market.

 

What makes the $2.7 trillion muni market particularly vulnerable, Gundlach says, is its weak psychological underpinnings. Many investors in municipals are wealthy individuals who buy the securities purely because of their tax advantages and have little knowledge of the fundamentals of the paper they own. They tend to be "all-in" investors, owning little else, and thus will be prone to panic, he figures, in the face of surging defaults.

 

"Look, I don't know whether the market will suffer $10 billion or $30 billion in defaults, but the actual amount doesn't matter, Gundlach says. "There will be a panic at the margin, and muni bonds from the highest-rated on down will plummet, in part because other sorts of investors tend not to step in."»

 

 

Our point here is that the current scene exhibits all the similarities of 1966-82. Political strife, protests in which the government shoots its citizens (Bahrain), high unemployment, couples wondering how to retire, high gold silver, and oil prices,  etc are all on display. This makes the time period like 1966 or 1972 or 1980 periods of high valuation that preceded market collapse.

 

As we go to e mail distribution, the Sunday papers are full of global revolt.  The Basque Party in Spain wants recognition.  Some 70,000 protestors are in Madison, WI, bussed in from other states. South Korean activists are releasing helium balloons with messages to the North urging revolt. In Baghdad, hundreds of widows and orphans rallied calling on the government to take care of them. Our New Civil War is world wide.

 

One positive development is that there are already 28,000 registered ‘medical marijuana users’ in of all places Montana. With so many governors  looking for revenue, ti should not be long before the connection between pot usage and potential  government tax revenues goes Ka Ching in state capitols. Legalization appears to be the only remedy for the Mad Max lawless environment now gripping Mexico.

 

Bottom Line

 

Internal indicators are maxed out such that there is little value in those indicators. 89% bullish, is, pretty bullish.

Divergent sentiment, with revolt on boil, and sky high stock pr ces ignoring the events usually precede market tops. This is the case now.  Stock could stay up  until QE II ends in June.

Meanwhile Treasury bond prices wander lower in a markdown sale that is attracting little interest.

Oil , energy and refinery stocks have come alive as they did in the final stages of the 2008 run-up.

From a socionomic stand point markets have returned to the outright bullish stance that occurs at tops but there is no sign it has abated. We note numerous divergences around the world from this optimism but the market continues to ignore them.

 

Brent versus WTIC

 

Brent Trading Higher than West Texas Intermediate

There are many grades of crude produced around the world. Brent is produced from the North Sea, West Texas Intermediate Crude WTIC is the standard for the USA, and Mayan is the Mexican product. Now Brent is trading at a $17 premium to WTIC. What’s going on?

The deliver point for WTIC is Cushing, Oklahoma, an inland port of oil storage tanks. It seems that most pipelines north of Cushing flow, not surprisingly, south. Which means it is not possible to pipeline the oil to the northeast. One recalls the terrible winter the Yankees are experiencing; well not so terrible if one is in the refining business.

Our political heroes require that ‘shipping between domestic orts be done on US flagged ships,’ according to a recent article in the Wall Street Journal. Thos US ships have expensive US paid crews. And so the surplus of  oil builds in Cushing, OK.

This has been a bonanza for US refiners that can purchase the cheaper WTIC. A refiner makes money on the spread or difference between the cost of oil and the wholesale price of gasoline. Gasoline prices have risen while WTIC has fallen. So it is no surprise that stocks like Valero VLO have risen 50% in the last couple of months.

How long will this last, quite a while apparently. New pipeline construction is a slow operation. The TransCanada Keystone XL will not be opening until 2013.  So we may expect Brent to trade at a premium to WTIC for some time. This also explains why WTIC has fallen in price while unleaded gasoline has risen.

We looked at the charts and WTIC has an upward sloping  trend line right where it bounced at the $86 level this week. This is most encouraging. If the $86 level holds into next week, we would expect higher prices into the 90s.

Frankly the charts are suggesting much higher prices later this year. We hesitate to post targets but are optimistic for triple digit prices later this year.