Weekend May 25, 2013
Stocks Higher?
This writer suggests stocks will continue up which brings me to my 1987 ajnalog of stocks up bonds down until we have the real correction.
Gold
The best perspective I have read on gold, lately. This column in USA Today sums it up, no dividends, no interest from gold.
On the other hand, a CITI analyst suggests gold will rise with the debt ceiling.
IRS
You guys have been stealing girl's dresses. I have a daugher. You need to feed my beak too.
The Black Hand (the parent to what became The Sicilian Mafia) to Don Corleone in Godfather II
According to Apple, the company actually paid just $2.4 billion in federal taxes in 2011, which is $1.4 billion or 30 percent less than the current federal tax provision and $4.4 billion less than the total tax provision included in the company’s 2011 annual statement.146
Carl Levin's Report on Apple - note the similarity or to put it another way
Hyman Roth has survived to this age for a simple reason, he always made money for his partners.
Johnny Ola in Godfather II commenting on the importance of spreading the money around and one's surivval in the Mob
My point here is that the Senate seemed to be sending a message to Apple, remember we sued Microsoft for not sharing the wealth, nice company you got there, it would be a shame to see it be a target of all sorts of IRS Audits and Federal lawsuits, maybe if you openned a Washington Office you could hire some of our staff to keep anything from, you know, going wrong.
Don't take just my word on this.
Business Insider Notes Threats
We have been predicting unprecedented negative social mood, here it is.
Elliott Wave Theorist
Bob Prechter has some interesting thoughts in his May 2013 EWT. He quotes one financial advisor who threw in the towel noting it is just too hard to outguess the market and the Central Banks
Investors Slowly Exiting Muni Bonds
But for all of munis' stability, investors have clearly been scared the past several weeks. While other mutual fund categories have consistently attracted new cash, investors have been pulling money out of muni bond funds. During the five-week period ended May 15, withdrawals exceeded deposits, with a net $171 million flowing out, according to the Investment Company Institute.
Although that's a tiny amount relative to the nearly $590 billion in muni fund assets, April wasn't the only recent month when investors pulled cash out. Net withdrawals totaled about $294 million in March, and more than $3.1 billion in December.
Why the investor anxiety, despite munis' decent yields and solid recent performance? Muni investors' eyes are on Washington, as the White House and Congresschip away at the nation's fiscal problems. Investors, particularly those in the top tax brackets, fear a budget proposal by President Obama that would cap the amount of muni bond income that an individual can claim as exempt from federal taxes.
Municipal Bond Investors on Edge, AP
See my math example later in this post of how the value of a thirty bond can change with a one point chnage in interest rates. The same is true for a muni bond. The rush to the exits has begun with a trickle.
Overview
We thought stocks made at least an intermediate top this week. Bond yields rose and oil fell. With the World Central Banks playing dueling currencies, it makes sense to start with the Dollar.
US Dollar versus Canadian Dollar
This is a ratio chart of the US Dollar to the Canadian. This is THE chart to watch this next week for a potential pullback in the US Dollar.If that occurs we may get a pop in commodity prices.
Bullish Percent Stocks SPX
One reader notes the 90% reading in bullish percent for the SPX, asking if I have ever seen that before. Well no one has seen it in the last 14.5 years! This is a fitting coincidence with a five and thirteen year high in stocks.
SPX Tops Out Six Months from November Low
It was a near perfect six months from the November 18 low to the May 21 high. Notice how the market moved from below the moving averages to way beyond all of them. Time for a reversion to the mean.
US Bonds Peaked a Year Ago
Red Black Bars are the 30 year Bond, Blue is the Ten Year Note , Green is the Five Year Note.
This should make it clear that bond prices peaked a year ago and have been falling since. If Bernanke had not been buying $85 B a month imagine how much further these prices wold be down. And now he is having to throttle back on the purchases.
Yields Rising in Other Sectors - Utility Index and REITs begin their descent
The Dow Utility Index in green topped a month ago. Now the REITs are beginning to follows. REITs were a notable casualty of the 1973-74 debacle. And now with work from home computing, video conferencing, rent an office by the day week or month, hotel room type sharing of cubicles, none of which existed in 1973-74. the commercial office market could fall much further.
All One Market - Silver, Muni Bonds, Gasoline
First silver at top, then muni bonds in the middle and finally gasoline at bottom. Topping a process and markets do not top at the same time. But this picture validates the All One Market Theory.
An Accounting Analysis of How Rapidly Bond Prices Can Collapse When Yields Are at an Extreme
Now let me demonstrate just how dangerous holding long term fixed income instruments can be in this environment. In the last few weeks, rates have moved from 2.45% to 3.2% on the thirty year bond.
Suppose you have bought the 30year at just for the sake of example at par yielding 2.45% What is that bond worth at say a new market adjusted yield of 3.5%. The present value of a bond is the sume of the present value of the principal plus the present value of the interest stream.
Principal $100,000 x .35628 = 35,628
interest $2,500 x .18.39 = 45,975.
Now our bond which I assumed pays once a year, treasuries actually pay twice is worth
35,628 + 45,975 = $81603.
So our investor has a paper loss of $18,397 in a matter of months. Rates were 2.45% last August and have now already risen to 3.2%. The reason for this dramatic decrerase is that markets are experience huge percentage changes as a result of starting from record low yields. Bond funds which must stay invested in long dated bonds will leave our investor permanently underwater as they liquidate to meet redemptions and will never experience a maturity date
The Bottom Line
The public and most funds are heaviliy invested in the longest dated bonds of all descriptions from Treasuries to municipals to Build America to the $17B Apple offering. As we are thrity years in to the bond rally, we demonstrated above just how disastrous even a one point increase in interest rates can be. And so most of the public thinking they are 'safe' in REITs and long dated debt are actually in the categories that could fall the most if the dollar firmsa and rate rise even modestly. The treacherous months of October November are a mere four months away. Be patient. Do not sit here with long dated debt.
Socionomics
Now that England has outlawed gun ownership, a British soldier, unarmed of course, is slain with knives and cleavers. it took fifteen minutes for a group of armed British police to arrive, the attackers waited and then charged the police. As the markets top out, more negative mood emerges.
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Market tops are well, marked, by excess in color, design, and a general desire to show off. An article in Life and Culture in the WSJ Weekend, suggests things may already be toning down. The Art of the Nude Manicure suggests that nail colors are returning to more neutral colors from the outlandish colors of the last two years. Consider this excerpt from the story. If so this suggests tastes are already calming down to reflect retreating markets.
As her tastes grew more elaborate, the habit got expensive—sometimes more than $70 a session—and old. "It felt like it was ruining my nails, and I started getting sick of it," Ms. Lewis said. She then turned a full 180 degrees and developed an obsession with simple nude nails.
She's not the only one. The proliferation of nude-colored nail polishes can be seen as a rebellion against the wild nail art that, over the past two years, has infiltrated the polish aisle at drugstores and appeared on the hands of models for Chanel, Prabal Gurung and 3.1 Phillip Lim, among others.
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IRS Lies and Cover Ups
We have maintained that this next two or three years would likely duplicate events from 1973-74. Then a Republican Administration tried to cover up a 'third rate burglary' as Nixon himself put it. Now we have several cover ups in progress. Here is Peggy Noonan's take on the IRS testimony. This is from the Weekend WSj. With the IRS set to enforce Obamacare beginning in October the stage is set for much more severe confrontations.
We know the IRS commissioner wasn't telling the truth in March 2012, when he testified: "There's absolutely no targeting." We have learned that Lois Lerner lied when she claimed she had spontaneously admitted the targeting in a Q-and-A at a Washington meeting. It was part of a spin operation in which she'd planted the question with a friend. We know the tax-exempt bureau Ms. Lerner ran did not simply make mistakes because it was overwhelmed with requests—the targeting began before a surge in applications. And Ms. Lerner did not learn about the targeting in 2012—the IRS audit timeline shows she was briefed in June 2011. She said the targeting was the work of rogue agents in the Cincinnati office. But the Washington Post spoke to an IRS worker there, who said: "Everything comes from the top."
Now consider Ms. Nooan's comments from a week ago, May 17, just two days before the stock market top.
We are in the midst of the worst Washington scandal since Watergate. The reputation of the Obama White House has, among conservatives, gone from sketchy to sinister, and, among liberals, from unsatisfying to dangerous. No one likes what they're seeing. The Justice Department assault on the Associated Press and the ugly politicization of the Internal Revenue Service have left the administration's credibility deeply, probably irretrievably damaged. They don't look jerky now, they look dirty. The patina of high-mindedness the president enjoyed is gone.
Something big has shifted. The standing of the administration has changed.
Actually the Administration likes this perfectly well, Peggy is dead wrong that no one likes what they are seeing. Free from being accountable in another election. and with the public only vaguely aware of what is going on , things are going according to the White House Plan.
The mood did not change, the facts are coming out to vindicate the already existing mood. Indeed something big has shifted. The markets have up to this point reflected all the positives that have accumulated since march 2009. But mood has been moving south for some time. We show numerous pictures of various markets topping, the last few months. But at this point, it only political junkies like Ms. Noonan that are concerned. As the negative mood intensifies, see the attack on the British solider above, expect much worse incidents in the future.
hanks for reading The Market Perspective
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