Sunday March 5, 2011
Mitch McConnell and John Cornyn were well aware of how Wall Street had gone head over heels for the president including support from Goldman executives who alone had donated close to $1 million to Obama during the 2008 election cycle as the firm earned $13.4 billion in 2009 thanks largely to Obama’s policies. That is $13,400 in profits for every dollar the company gave directly to Obama, an extraordinary investment by any measure.
Bought and Paid For, Charlie Gasparino, page 232
We are not going political just making a point. Wall Street has benefited from the zero interest rate policy more than anyone else. This has also allowed firms like Blackrock to become vertically integrated. More government debt means more underwritings. More underwritings means the chance to make more commissions. So why not wholesale the product to the public, and they have, Blackrock now offers several municipal bond funds. And when you think about it, more debt means higher state taxes which means more need for people to shelter income from those taxes in the municipal bonds Blackrock is selling. This may be the perpetual motion machine in action. See how this game works?
Now those policies are evident in the high commodity prices that accompany and suggest the end of most business cycles. High oil prices have had a ten-year cycle as mentioned here previously. All of them resulted in downturns in the stock market, 1980, 1990, 2000, and now 2011, coming a bit late but still here with a vengeance. Our weekend edition takes a big picture look.
Be sure to read our attached article at the end of this letter, which gives a good picture of where we think the markets are headed. In that article we detail the ups and downs of the 2008 oil run up and subsequent crash.
Weekly SPX Chart

In retrospect, here is the pay off that Wall Street got for its support of the new President. Obama continued the zero rate interest policy begun under Bush as well as the flood the market with money stimulus policy. Essentially the FED ran QE I from March 2009 to march 2010. That is the first horizontal green line. One can quickly see the 500-point march to stock recovery. At bottom one can see the money (Chakin Money Flow CMF) flowing in and then tapering off as QE I ended. The FED program bought bonds from troubled banks (as Gasparino notes one is hard pressed to find an ATM in the Goldman lobby) at higher than market prices. Then the banks borrowed money at near zero rates, bought the newly guaranteed bond prices, knowing who was buying and selling. And of course extreme leverage made stock investing attractive. But as soon as QE I ended the market stopped going up. And so QE II begins August 2010 and ka boom, look at CMF now! This has assured a steady move up, as we noted Thursday, the money came in Friday right where was needed to thwart any computer generated sell signals from indicators like the Parabolic Stop and Reverse PAR SAR.
Daily SPX Chart

This graph depicts what should be a fifth or final wave in the move up from March 209. Moving in for a closer look, it appears five waves up from our recommended entry last July have ended. The jagged up down action this past week suggests distribution to the latecomers. Thursday’s up day was surely a last attempt to give short sellers another chance at shorting from higher prices as well as running the stop sell orders for those expecting a quick fall.
We now officially recommend exiting any long stock positions begun last July. This graph speaks to the lack of a good risk reward at this juncture.
We would also summarize our recent comments.
Highflying stocks like NFLX, OPEN, CRM, PCLN, BIDU are all sporting price earnings ratios over 50, some in the triple digits. Note the 276 P/E below.
Salesforce.com Inc Common Stock (NYSE: CRM )
After Hours: 129.30 -0.67 (-0.52%) 6:29PM EST
Last Trade:
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129.97
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P/E (ttm):
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276.53
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EPS (ttm):
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0.47
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Div & Yield:
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N/A (N/A)
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Insider selling is running as high as it ever has. This is particularly true among the most favored stocks. There has not been a single insider buy at GOOG the last six months.
GOOG insider Transactions
Real estate bubbles continue around the world does $4,714 a square foot sound excessive.
Substitute Las Vegas or Miami for Malaysia
The reason for all this speculation is the zero interest rate QE I and II schemes.
QE II Ponzi Scheme
The FED has now exported the same easy money policy all over the world that caused CA, AZ, FL to become real estate speculative ship wrecks. In the Malaysia article note the mention of investors owning multiple properties. In the last years of the property bubble here, 25% of all mortgages were on second properties.
While Wall Street may think it has things under control when the worldwide property speculation bubble breaks, as it did here in 2008, there will be nothing Bernanke or anyone else can do to plug the dike of falling values.
Okay so what to do, here is our recommendation.
Daily TLT Chart
We have been recommending TLT on pullbacks. Our recommendation during this last bond sale by the Government was rewarded with a rally from 88 to 92. Now TLT is digesting that run-up. At top, Relative Strength RSI has finally climbed above 50%. In the main chart the Exponential Moving Averages have at least come together, the first time since last October. At bottom the Money Flow CMF has become neutral. If our analysis of the stock market is correct, a sell off there will result in money flowing into bonds. TLT currently pays 4.23% annually with DTN sending owners a check on the first of the month. During the 2008 sell off TLT hit 112.
Our strategy here is to accumulate TLT in the anticipation of another meltdown ala 2003 or 2008. Whether it is a slow move down like 2003, or 1973-74 or a quick one like 2008, we will be well prepared, collecting dividends while our shares advance in price. Note that TLT went as low as 80 in 2008. Yet it hit 112 later that same year, see next page. We are focused on the long term goal here. This purchase is for those that believe
We are likely at or near a stock market top.
TLT is likely to end up in the triple digits by the end of 2012, if not much sooner.
It is far better to by a proven asset when bullish consensus is in the single digits than risk assets with bullish consensus of 70% or more.
One can patiently wait for the market to come to us, budget your purchases so that you still have money left should TLT fall to 80. We do not anticipate that but it did happen in 2008. We will get paid in monthly dividends for waiting.
We reject the idea that no one will buy Treasuries after the FED stops buying in June, in fact everyone will be buying them.
In times of risk or panic, money always flows to guaranteed Treasury bonds.
The FED will not engage in QE III.
Price spikes in oil tend to be brief. See page B1 of the weekend WSJ That’s Oil Folks: Why You Don’t Need More in Your Portfolio.
Weekly TLT Chart

The long-term picture suggests this is a low in price, an ideal entry point. Bond bullish consensus is in the single digits, which accompanies long-term lows (dollar bulls as well). We have a series of higher lows stretching back to 2007. At the far right, the RSI at top is actually lower than it was in 2009 even though the price is higher. This is another divergence showing an extreme oversold condition.
I have not found a single sponsor or talking head on cable television shows recommending buying long-term government bonds, have you? Bill Gross the king of bonds, has stated PIMCO is not hanging around (the bond market) having switched to stocks after a 5,000 point run in the Dow. The financial press, like Barrons, continues to feature articles like Ten Stocks You Must Own Now, ignoring the insider selling and high p/e s shown earlier in this report.
Our aim is to position ourselves for an expected sell off in stocks. We think that will start no later than June. As detailed in the first section, it could start this next week.
Oil Service SPDR for XES Weekly Chart

The fly in the ointment of the bond idea is the rise in oil prices. Here the Energy Services ETF is in the main chart. We believe the price action in XES is a better indicator of maximum intensity in the oil sector. Note its high at $50 in 2008. At top we display the price of West Texas Intermediate WTIC. The mean or average price for WTIC is about $75 (blue and red line), for the XES it is about $30. Both have risen above their means. Note the crossover of Moving Averages in the main chart, a sign of strength. Now please read our article detailing the three-month rise and then three-month fall back down in 2008. That collapse is evident on this chart, which is why we included it.
By the way Insider Transactions at Flowserve FLS show 11 sales and no buys the last six months. FLS is a major supplier of pumps and control equipment. The insiders are rarely wrong. This is not time to be going long the Energy Services Industry, wait for a shorting opportunity ala July 2008.
Bottom Line
The best count indicates we are at a terminal point in the Elliott Wave Count since the bottom in March 2009. Please exit all stock positions recommended last July 2010. Retain positions in TLT or similar long bond funds. Remember seasonally stocks tend to top around tax time April 15, okay so maybe we are a month early, after May go away.
Oil prices may well experience a short term spike as they have in past ten year intervals at 1980, 1990, 2000 or 2008. Such spikes come at the end of a cycle as in 2008 and are invariably followed by a stock market setback.
Real estate world wide is in a bubble condition much as the US was in 2007. See the linked article about Malaysia.
It is time to be risk off and cautious.
The News and Socionomics The Weekend WSJ
Speaking of Government Statistics – There is a website titled Shadow Stats which purports to calculate the correct statistics. But it strikes me that rather than hire thousands of bureaucrats to do what they always do in the end, guess what the unemployment might be, wouldn’t it be simpler to report some truly verifiable numbers. For example how about the number of
- People receiving AFDC checks
- Federal Unemployment Checks
- State by State Unemployment Checks
- People receiving Food Stamps, or the Lone Star Card in Texas
- Number of people on Federal Payroll and their wages, hey there’s an interesting number, does it ever go down?
- The total number of workers reported on 941 forms each quarter and their total wages paid
At least these numbers would not be so subject to manipulation for political purposes which of course is why we do not have them.
Dropping Out, on page A2 the numbers of people simply dropping out of the work force continues to grow which allows the government to claim unemployment is down, among those still looking perhaps. This is a combination of endless unemployment compensation and more requirements in the future for employees like mandated health care which results in the lack of hiring.
We continue to se some positive from the economic slowdown, states are finally coming to a reality check on the failed War on Drugs. Page A3, states find rehabilitation rather than incarceration is cheaper and more effective.
Wisconsin’s Government Accountability Board calls the number of recall campaigns against both parties unprecedented on the same page. This is typical of extended periods of stagnation and social strife, remember we are only half way through the 18 year cycle.
In 1968 the Beatles won a Grammy for Sgt Pepper, they are again a top seller on iTunes, the cycle of stagnation and what was popular repeats. Arlo Guthrie, hero of 1967’s Alice’s Restaurant is on tour. Both were emblematic of the counter culture change as the bull market ended in 1966. Two generations later, they are both back.
What happened to the PIGS? Buried on page A6 Conservative European Leaders Call for Concessions in Bailout. Look for the Euro to be peaking in the next couple of weeks.
On page A 13 British Historian Paul Johnson pegs a seminal event when JFK decided to over spend whether the economy needed it or not. Perhaps but I would peg the date to Nixon taking the US off the gold standard at which point the FED, as it does now, could print all the money it wanted.
On the same page George Will notes the passion of progressives for railroads. Cars are well such individualistic machines. And if the government runs the railroad it also runs your schedule.
Peggy Noon on A15 likens the display in Madison WI more to On the Waterfront than Norma Rae. Frank Luntz, pollster, notes this is a big negative for unions. Our New Civil War is moving into High Gear.
We write a weekly column for a West Texas newspaper in the oil fields of the Permian Basin. Here is our current column.
Triple Digit Fear and Loathing
Crude oil is about 27% higher than a year ago, not an alarming gain, History shows a 50% rise (now $120) start to hit corporate earnings while an 80% rise ($150) has historically led to recession.
Gina Martin Adams, Director of Equity Research Wells Fargo Securities
Let’s remember that, next time the oil patch is on its back with $35 oil prices ala Fall 2008, we can remind everyone that, after all, a 27% rise is not an alarming gain.
This sort of nonsense gets trotted out to glibly justify high and soaring prices in such times. The fact is, roller coaster parabolic rises nearly always end badly for oil producers as well as the service industry. Our aim today is to provide some perspective on historic oil prices; where are we now in relation to past tops in price?
The inflation adjusted oil price chart shows that the 1980 peak of $36 translates to about $110 in today’s dollars. With oil at $102, that alone is a warning sign. The run-up in 2008 went to $140. Given the time proximity of that run, let’s examine it in detail.
In February-March, 2008, prices broke out of their sideways pattern and jumped above $10. Price fell back almost immediately to test that break out in April. The fall was from $110 to $100. Price then started up in a nice unbroken channel form $100 in early April to $145 by late June. That is a 40% rise in just three months. And then it was all over.
Oil fell back to $100 by September. So the fall back lasted the same three months as the price rise on the way up. Price broke the 200-week moving average in October, then at $75, and collapsed to $40 by early December.
I do not have a record of whether Gina said that the price drop helped corporate earnings. It certainly did nothing for earnings of oil service companies.
Coffee, corn, soybeans, and lumber are still at the top of their charts.
So best guess is that the analog of 2008 will repeat. Recall that gold and silver topped in March of 2008. Whether that will reoccur exactly the same way we cannot know.
What we do know is that right now there are no shortage or supply interruptions in the oil market. The run up is based on sheer fear and speculation that there will be a supply interruption. The Mid East is expressing the desire for the same standard of living that the Chinese enjoy. 1200 years of social lag time is being compressed into 2011 as demand for change.
The most realistic expectation is that whatever happens, more oil will be produced to satisfy the masses. The yearning for a better standard of living in the Middle East can only be satisfied in the short run with more income, read, more distribution of oil income.
Meanwhile back here at the Ellenberger ranch, Barack Obama is surely the Citizen of the Year for West Texas. All hail $100 oil. His policies of denying permits for onshore and offshore drilling, clamping down on coal plants, and producing EPA regulations faster than any previous administration have led to even less domestic ability to produce our own oil. No one else has delivered triple digit oil prices for Andrews like Barack. But this is the administration, like John Kerry, that wanted high gasoline prices, all the better to force and support alternative energy on us. (Has anyone filled up their electric pickup at the wind farm in Stanton, just wondered….) Four dollar gasoline coupled with double digit unemployment seems a strange brew for a re-election bid to this writer but then I never bought into the global warming argument anyway, (See photos of cars stalled in snowdrifts on Chicago Lakeshore Drive just weeks ago).
At this point our best estimate is higher oil and gasoline prices into the summer. Our best analog is to compare energy service industry stock prices now and in 2008. The XES Oil Service Exchange Traded Fund ETF now sits at $43; it topped in 2008 at $50. That leaves seven bucks on the upside to go. Notably the XES share price topped before the price of oil peaked in 2008. . It may seem redundant to keep covering oil prices in coming weeks but frankly this is the economy of West Texas . We intend to keep readers updated.