Weekend July 13, 2013
The National Security Agency has conservative philosophers upset that its surveillance program is ushering in Big Brother. What's more concretely frightening is that a dweeb like Edward Snowden could download the content of the NSA's computers onto a thumb drive and walk out of the world's "most secretive" agency. Here's the short answer: The NSA has 40,000 employees. (Some say it's as high as 55,000, but it's a secret.)
Daniel Henninger, Big Government Implodes, July 10 2013 WSJ
Our analogy to 1973-74 ala government breakdown is proceeding with incredibly accuracy. Now even the staunchest of government supporters, unions, are rebelling.
When you and the President sought our support for the Affordable Care Act (ACA), you pledged that if we liked the health plans we have now, we could keep them. Sadly, that promise is under threat. Right now, unless you and the Obama Administration enact an equitable fix, the ACA will shatter not only our hard-earned health benefits, but destroy the foundation of the 40 hour work week that is the backbone of the American middle class.
James P. Hoffa
General President
International Brotherhood of Teamsters
Joseph Hansen
International President
UFCW
D. Taylor
President
UNITE-HERE
These quotes are re printed here to remind readers that all is not well. Bull markets usually begin when things are improving, not when things are imploding.
A couple of writers suggest that the markets have reached new bull market. This idea is that investors will rotate out of bonds and into stocks.
If so, the alternating 18 year cycle stock market cycle has been repealed. And, the idea that the stock market generally reflects positive social mood would also be incorrect.
Let's go back to the start of the 1982-2000 bull market.
DJIA and Interest Rates 1981-1985

The solid black line is the yield on the 30 year bond, scale at left. And yes, in lat summer 1981 it stood at 12.5% on a non callable Government Bond, for thirty years no less. On the right hand scale, the Dow Jones had jumped to its 1966 and or 1972 high of 1,000, only to fall 20% to 800 by summer 1982.
I put the 30 year yield on top of the stock index to underscore that lower rates, from 14.5 to 10%, jump started the DJIA from 800 to 1450 in one short year. Yields made one last thrust to 13% in 1984, stock pulled back but held their gains, and then it was off to the stock market races. Note the 300 point rise in the fall of 1985 in the DJIA as interest rates dropped.
Here is the wiki summary of how it happened.
The Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime raterose to 21.5% in 1981 as well. Thus, the unemployment rate became up over 10%. The economy was restored since the tight-money policy was over in 1982. According to William Silber [15] "His policy of preemptive restraint during the economic upturn after 1983 increased real interest rates and pushed Congress and the president to adopt a plan [the 1985 Gramm-Rudman-Hollings bill] to balance the budget. The combination of sound monetary and fiscal integrity sustained the goal of price stability."
However, despite the Gramm-Rudman-Hollings bill, US debt as a percentage of GDP more than doubled under the administrations of Ronald Reagan and George H.W. Bush.[16]
And so the nightmare of unending inflation, unemployment, high interest rates, the hostage stand off in Iran, and two oil embargos came to an end. Note this marked the end of the 1966-1982/4 period of stagnation and kicked off th 1982-2000 period of expansion. That period ended in March 2000 and another period of stagnation began. This period has matched 1966-1982 with vicious stock market drops, political polarization, unnecessary foreign wars, high unemployment, you name it.
The inability to simply buy a bond or CD and obtain a double digit return forced investors into high yield stocks. Exxon was paying a 10% dividend at the time for example. This is when Warren Buffet made a huge bet on Coca Cola. Reagan and Thatcher helped open new markets for just such a product around the world.
It seems to me that to support another multi year bull market we would need the same sort of circumstance now. Do we have that, here are the same parameters, brought up to current times.
DJIA Current Weekly versus Interest Rates

And the answer is, NO. Rates are rising not falling, and decidedly so. Yet I grant that the stock market is continuing to rise as well. The answer is that the internals of the stock market have turned to the upside. The rally will continue until these internals top out again.
Summation Index

The NYSE Index is in green. The summation index is the red blue line. Notice that once the summation index turns up, it moves quickly,
fall of 2011
summer of 2012
fall of 2012
now
It seems to me that this supports the idea of stock market highs in to late summer early fall say August September, which is a typical seasonal high anyway. And it may be that these are much higher than most think which would to some degree validate the bullish scenario we are hearing.
Is This a Great Opportunity?

Older readers will remember the classic Sears Catalog marketing approach. Three items would be offered labeled good, better, best! I ranked the last four lows for this indicator as you can see above.
Crude Oil strongly Correlated with Stocks

The bullish scenario is clear in this view. Both stocks, NYSE at top, and crude oil, main panel, have broken above downtrend lines going back to 2008. What's not to love here? And at bottom we have a near perfect 1.0 correlation at times between the two.
Note that oil is right where it was in April 2008, $100, just before it rocketed $45 or about 50% in three months. Could history repeat, I am guessing it will. We project crude much higher. It may be that this is keyto much higher stock prices as well. Note the correlation.
Our friends at Elliott Wave had this take on it.
Interest Rates TBF Inverse bond fund versus TLT Long Bonds

TBF has been on a tear. One would think there would be a bit of pullback here after such an extended run but not really, not yet. TBF price is staying well above its 21 day exp moving average.
Gold Mining Wipe out

The ratio chart of HUI Gold Bug index to Gold is headed to its original 2001 low. It has already fallen through its 2008 low. Barrick ABX is doing the same. the XAU is re visiting the 2008 low but no sign of a bottom yet. Gold bugs are continuing to announce THE LOW with every new low.
Gold topped in 2011 with its 40th anniversary of Nixon closing the gold window at the FED.
The Bottom Line
Stocks are short term overdone, A pullback over th next five to seven trading days is in order. Indicators suggest a stock rally into early fall, will that be the final top?
Crude Oil is headed higher, even now this means higher pump prices. Eventually the cost of transport will cool a stock rally. Oil looks to be peaking short term over this next week.
Bond prices continue to fall, yields rising. But as crude and stocks top, we expect a a short term low in bonds over the five to seven trading days.
Again, stocks and oil up and peaking short term over the next week or so with bonds making a short term low at that time.
Gold and silver have probably not seen THE Bottom yet, HUI to gold is headed back to its 2001 low. Final lows are expected in October.
By the way, readers guffawed when I recommended GM at 20 months ago based on the stellar GM balance sheet, it ended the week at $36.40
Social Mood
Mercedes W 196 fetches $30 Million. Well actually $29.6 M but...this is the most money ever paid for an
automobile. We cannot know if Mercedes purchased it for their own museum until of course it might appear there. Auctions continue to bring high prices for things viewed as collectibles.
Two Senators Suggest Abolishing the IRS. That will not happen of course, and certainly not before an alternative was in place, but it says a lot about mood right now. and notice is is on finance.yahoo not just another right wing blog.
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