The Fiscal Cliff

Weekend October 13, 2012

A Wall St Journal columnist has a good explanation of the Fiscal Cliff here

Tom McClellan plots a 40 Year cycle. That is close to two 18 year cycles that I have described.  Importantly he notes that we are now 40 years from the start of the 1973-74 bear market that destroyed 50% of major stock values. Many other stocks and stock brokers disappeared altogether. Frankly this is my analog for what is about to happen again. See the next post for a partial look back by yours truly at that era. 

Michael Gayed echoes my concern expressed here yesterday. When the world counts in trillions, Bernanke's billions don't amount to much. We address precisely that concern today. 

This optimistic report  is the same sort of thing I was reading forty years ago as I graduated from the duPont Glore Forgan six month training program in April 1973. The major firms were wrong then, horribly so, and I expect this report is similarly inaccurate. 

US Stocks End Worst Week in four Months While one can attempt to take this as a contrary indicator, down is down, as Tom Wolfe noted in The Right Stuff, lots of capable fighter pilots have flown their plane into the ground while focused on the instruments, never looking outside the cockpit. I am changing my view that we reached a short term oversold condition this week. It is beginning to look more like the market is rolling over. 

Here is another natural gas story.  This is actually deflationary for oil  prices, something we noted yesterday. 

Overall

Day after day the markets offer a tepid up move only to collapse into sell mode by the end of the day. I suggest this is the pros running prices up so they can sell into a mini-rally. That explains the poor end of day performance. Bob Prechter has made the point that yes there will finally be terrific inflation but only after a deflationary collapse. We have noted the renewed interest in Real Estate with the WSJ reviving its Distinctive Property section now re-named Mansions. Coupled with massively optimistic projects from the Kingdom Tower to the F1 racetrack in Austin, TX, we have widespread ositive social mood which usually accompanies market tops. 

For new readers we exited our long stock positions early morning September 18. Markets have gone nowhere since. 

I originally had my historic perspective in this post. But as the length grew to over 2,000 words I decided that was a bit too lengthy, so I made it a separate post. See What Could Go Wrong nearby.  

Okay now to the regular analysis. If you enjoyed the historic perspective in the next post I would appreciate hearing from you at dennislelam@gmail.com.

Internal Indicators

I logged onto my stock charts page and perhaps this is a better view than any one or several of the charts. 

As you may have guessed, the red bars mean the indicator closed down....Shall we just quit right here?

Daily New Highs New Lows

The uptrend from the low June 1 has been broken. the indicator is below all three moving averages but well above the last great buy point. if you have not read Gayed's column in our introduction this might be a good time to do so.  His point was that the $40 B Bernanke is putting into the markets each month may not be enough to stem the tide of what is clearly some net selling. Okay, one more internal indicator.

NYSE Summation Index

I did not draw the uptrend line but one can easily eyeball and see the uptrend from June 1 here as in the High Low chart has been broken. MACD has returned to the zero line in the bottom panel. This certainly looks like a distribution pattern to me. A distribution pattern means that the smart money keeps the market aloft with periodic buy programs allowing them to dump stocks on the last to arrive. Once that pattern of buying and then selling is complete, the market is in for a collapse. 

XLF The Banks Weekly Long Term View

Most financial crises are a banking crisis. The banks in a  burst of Greenspan irrational exuberance make loans at the top of a market, the economy collapses, the collateral loses value and the bank capital disappears.  Bernanke's throwing money from helicopters  plan has managed to return the XLF banking index to its prior highs. The XLF failed each time at this level. I would mention that there is a decent head and shoulders pattern here. The head occurred at the highest point in early 2011. Let's take a closer look shall we?

Weekly XLF

Now notice that the XLF peaked in early Sept, gee we got out two weeks later! Since then we have a pattern of lower highs.. This is the inverse of the pattern of higher lows in the VIX we showed in the Friday report. Again this is the way things turn around, in a quiet manner such that no one really notices. 

Wells Fargo Weekly with Parabolic Overlay

In the Friday update I mentioned that we would have the more valuable weekly charts update by today. After looking at the XLF I ran through the charts of all the big banks C, BAC, JPM and WFC. Frankly I am amzed the XLF looks as good as it does. Since we used a WFC report in our opening, I put the Weekly Parabolic on WFC. Well look at that!  After an A B C corrective move up from last October, WFC registered a weekly parabolic sell signal. See the purple dot above the long red OHLC bar at far right?  That is another confirmation of our decision to sell Sept 18 now that I think about it. As you can see, weekly PAR SAR signals tend to be reliable, WFC dropped significantly on the last two in Agust of last year and April of this year.  

TLT a Buy Signal on the Daily PAR SAR

I promised readers open honesty in these posts. When I am right great, when I am wrong, I will admit it. I have read many investment letters over the years. Most writers either gloss over their errors or toss them off as missed opportunities or break even trades or some such. Last week I thought TLT would continue down in its channel. It hit resistance then at 125 and would surely continue down to 115. I was wrong, that did not happen. My puts are worth kaput on TLT. But that did limit my exposure. And now the daily PAR SAR has issued a buy signal. And note that TLT made a slightly higher low than the low in mid August. Hmm is that a reverse head and shoulders pattern?

Let's connect the dots. On the same day we get a sell signal in WFC, a major bank and a buy signal in a long term bond fund. Ben B. are you reading TMP?

GOLD

On the daily chart Gold generated a sell signal on the same PAR SAR indicator. The evidence mounts that a sell off is near.  Let's look at the Cohen and Steers I share on Real Estate . 

ICF

Aha!  We have another PAR SAR weekly sell signal in the ICF. Didn't the WSJ introduce the Mansions section just two or three weeks ago?  In other words they re-introduced it simultaneous with a top in a major real estate index. Recall the skyscraper theory, the Kingdom Tower, the Austin TX F1 racetrack, the WSJ Mansion advertisements on real estate. Now all we need is another Donald Trump tv show and the bear market check list for real estate will be complete. 

Ramki analyzes MTGE  and reaches a simialr conclusion. 

A word on real estate. Real Estate investment Trusts are mutual funds of rented real estate. The REIT manager pays out 90% of the earnings so the REIT pays no income tax. Here is the problem in a downturn. As the economy worsens, business looks for ways to economize. Now short term rental offices and executive suites are available as well as work from home on the computer.  These are viable alternatives to a long term lease.  In a downturn businesses are reluctant to renew leases. Once the building or shopping center or whatever falls below 75% occupancy, the project is likely failing to cover all its costs. Then the dividend is completely elimnated. This caused the values of many REITs in the 1973-74 debacle to collapse. I expect the same thing to happen over hte next two to three years. 

HDGE

Hedge is a fund that shorts individual stocks. This is unlike most bear funds that attempt to replicate markets using futures or options. Hence there is no time decay or price erosion as the fund re buys each month.  It has pulled up, close but no buy indication yet. I am thinking this might be a good time to begin accumulating HDGE.

The Bottom Line

Parabolic sell signals in real estate shares, Wells Fargo bank, and gold suggest a top here of some significance. A buy signal in TLT suggests defensive action by many investors. Longer term the XLF looks very toppy as we anticipate a long term top dating from the March 2009 low. Remember all markets do not top simultaneously. Again we rate the probablility of a long term top forming within the next few months as THE most likely outcome for the markets. 

Socionomics

I'd Never Belong to a Club that Would Have Me as a Member - Groucho Marx

On Page A 11 of the weekend WSJ the New  York Sun notes that the Norwegian Nobel Committee gives the EU the Peace Prize for 'peace and reconciliation, democracy and human rights.'  Now the god part-Norway is not part of the EU. As a well to do country why would they want to have to send money to Greece et al?

You Can Run but you Can't Hide Department

On Page A 12 NML Capital claims Argentian's ARA LIbertad, a naval schooner docked in Ghana. It seems NML owns some of hte defaulted Argentine bonds from 2001. A court in Ghana backs up the claim. 

President Kirchner like Hugo Cahvez has been expropriating assets and limiting currency exchanges. It seems there are limits after all. 

Libya

President Biden claimed the State Dept never told he or the President that the Embassy in Libya wanted more protection. This is contrary to sworn testimony by the State Dept earlier this week. No doubt Hillary will be blamed as the Secretary of State. This incident has precedent with the Iranian Embassy take over that crippled Carter's re-election changes in a similar era of discontent. Social mood repeats in similar ways across similar eras. 

Thanks for reading The Market Perspective

Dennislelam@gmail.com

 

 

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

 

Comments

[Robert Torres]

Dr. E.

This is scary, I guess history does repeat itself. Hilary came out this week and took ownership of the fiasco. Looks like we may be running into a Carter era after all this time instead of 4 years a possible 8 years due to media bias. Would you go out on a limb and confirm that? :)

Cheers

[Dennis Elam]

Robert

an interesting piece in the WSJ today Thursday oct 18 2012 by Phil Gramm makes the point that the number of people on food stamps has expanded by 18.5 million under Obama. The number on disability has soared. We are entitlement nation. If one is on food stamps and 47 million are, is that person likely to vote against the person that extended that entitlement to them? I doubt it. a TAMUSA grad might not find a job but someone else on disability and food stamps and you name it, who never took the college plunge, may be okay, as long as those college grads do find jobs and pay the taxes to support the rest riding in the wagon. In discussing this in class, I find that some students readily admit to needing some help and have used that at times, but are now in college trying to improve themselves. All citizens are not so motivated. Lifestyles can quickly adapt to available 'benefits.'

AS a former bankruptcy trustee I met many people who at their bankruptcy hearing testified that they were disabled. This person usually lived in their own house, got up, fixed breakfast, showered and such, dressed themselves, and then drove to the courthouse. I never met anyone in a wheel char now that I think about it, or using a cane for that matter. The reality was that like citizens of Greece the person had qualified for disability benefits. I notice signs around San Antonio of lawyers promising to help qualify someone for disability.Those are literally signs of our times.