The Market Perspective

Volatility Reigns

Friday July 23 2021

Volatility Reigns in the Markets

Monday July 19 crude oil futures dropped 7.5%

 

In this space we frequently warn that the crude oil and its refined products are both an economic and a financial asset. In fact financial shenanigans have a much greater impact on stocks and bonds than economic forces.  Let’s take a look back a week ago.

The first indicator is implied volatility.  This statistic is compiled from option pricing and volume.  The indicator jumped  41.2% on  Monday.  That was the highest level since April  5.

The next clue  is the spread between call options, bets on higher prices, and put options, bets on lower prices.  Monday this spread fell to minus 13.7%, clearly a move to the bearish or downside potential in price.  The $66 put option traded in  huge volumes. Once the price decline began those  who sold puts had to either buy them back, at a loss, or sell futures.  Apparently most sold futures sending prices down.

That may seem a bit complex but it does explain the huge volatility of Monday. Prices 5ouched $65 Monday.  Price has re-bounded about half-way to Wall  the high o9f $75-76 since then.

It seems reasonable that prices might re-test that $65 level by the end of August.

Recall that Fed Chair Powell  has assured us higher prices, for everything, are transitory.  Tell that to the markets.  One group estimates prices that Unilever and Nestle, big food producers, pay will increase  14 % over the next year.   The Consumer Price Index CPI has soared from just over 1% to over 5% just since January!   the 1920s  witnessed a boom in Florida real estate.it  is  back.   A Beach FL vacant lot sold for $37 M  in 2017. It just re-sold for $140M, not a misprint. The Mansion section of today’s Wall Street Journal trumpets the Palm Beach Boom  A realtor knocked on my door just yesterday announcing the neighborhood had a 9% rise in prices this past year.

Soaring prices as with the dot.com mania in 1999-2000 are part of a developing market top.  But we will need to see much higher implied volatility in the VIX index which measures just that before a top can be called.

Meanwhile mood trends negative in Haiti, Cuba, Venezuela, Russia, Hong Kong, Mynamar, and Malaysia. The political mood is so negative that Texas Democrats fled the state to Washington, DC.   Democrats want to re investigate the Kavanaugh hearings. Murders in major cities are climbing fast. So far this negative mood has been ignored, Once things break over, expect crime to be headlined.

Dennis.elam@att.net

Tuesday June 15, 2021

Lumber

Various blogs are claiming the inflation fear is subsiding as lumber has come back to earth. But wait, did wave one peak in Feb, Two bottom in March, three top in May and now four

is back near the top of wave one?  Could a new wave five follow to new high prices?  That would explain the advance of bond prices in this time frame. It would also set up a potential decline in bond prices adn rise in interest rates which  is what we expect to happen.  That event is likelly to begin in July.

Lumber versus 30 year bond price

Best guess is that bond prices will advance into July with falling commodity prices.

Stephen Moore predicted that if the Biden plan went into effect, 5-8 million would be out of work. Bingo, the WSJ editorial page confirms just that this morning.

Read a scary parallel between the US and Chile here.

https://www.bizpacreview.com/2021/03/23/stephen-moore-the-fall-of-chile-is-a-warning-to-america-1048876/

Again the DJIA is drifting away from the SPX and NASD, the FED meets today so the press is absorbed but

 

it may be that the stock market looks ahead and despite coming out of covid, Lordstown went bust and Nikola shares have collapsed, the same mania for the dot.com stocks now dissipates on SPAC, bitcoin, electric vehicles, and meme stocks.   We are now smack dab in the time frame where we thought stocks would top. 

 

Bonds Have not Topped Yet

Weekend June 12, 2021

Bond prices are still advancing in spite of the inflation news. But perhaps the high inflation numbers reflect more of what has happened in the last year rather than what is happening now.

Lumber

Lumber prices have already lost about  one third of their value.

Goldman Sachs Commodity ETF

Looks like we have five waves up and not much progress to the upside this past week.

Material ETF

Where we are now market wise looks like the peak of the dot.com ,mania in early year 2000.

Similarities include

lots of investing in firms not making money, then dot.coms, now Gamestock,  SPACS, AMC

all time low junk bond yields

big demand for junk bonds, see our comments on recent convertible bond sales

high price earnings ratios

high margin debt

lots of new inexperienced investors

hot IPO markt

high tech mania

then

the DJIA peaked in early January

the NASD then as now peaked after a huge parabolic run from 3,000 to  5m000

Switch to weekly

Indu

NASD

No doubt the big injections of FED money are keeping stocks and bonds alive and well, how long that continues we cannot know but again we have 8-9x tmes the new highs versus new llows, now as then

 

Markets at Various Junctures

Weekend June 5 2021

/for some reason my chart capture function is not working, so let me just comment.

Bonds

Bond  prices topped in March 2020 ending a 39 year decrease in rates from  1981.  The move back up is underway. Bond prices are now in a foirth wave correction.

A fifth wave down in price will follow. I am beginning to think this fourth wave may extend the rest of June, frustrating all, but that makes sense if commodity prices are peaking.

GSG Commodity fund

The ETF for the Goldman Sachs Commodity Fund GSCI on the CNBC or Fox ticker, is jot in a fifth wave to the  upside, could extend further but RSI is  already  74.37 so it os on borrowed time.

Transports

this index also peaked May 10 and has not moved up since. It closed down  75.45 Friday when other indexes showed some strength. But this is how the bear eludes the crowd. All indexes will not top at the same time.  RSI on the Transports has already fallen from  70+ to 49.02.

 

 

 

Financial Cracks Beginning to Surface

Tuesday  May 18, 2021

There are usually some warnings of impending problems as a broadening top develops in markets, here are a few

 

The Archegos blos up is on the WSJ front page again, Credit Suisse having to raise capital and send the oversight team that lost $535 B out the door.

More revelations about Bill Gates continue to surface, the MSFT Board gave him the boot after a letter from a MSFT employeed revealed a years ago affair, hmm did Bill stop paying her to be quiet I wonder?

 

AT & T Unwinds its Big Bet on Media -  no doubt it is losing billions in equity on the sale - this reminds me of Ford exiting its Premier Group of Jaguar, Aston Martin, and Volvo

On the op ed page Gerard Baker wonders if Biden peaked on inauguration day, seems like he is already surrounded by crisis, accounts of his call to Israel sound more like gee why does this have to happen to me than any sort of real suggestion or strategy

Is Tesla lead the way down in the markets?

 

Everyone was talking Tesla in February as it hit  $900. now I don't hear a word and it has shed more than a third in value since its peak, down 2.19% yesterday. At a lofty  500+ P/E I wonder if it is  returning to 100 where it started a year ago.

Inflation is on the march, crude oil up another  35 cents this morning.

XLE Energy

Sure it has doubled already but remember, crude oil is both an economic and a financial asset. There are myriad ways to  bet on a price increase, options, futures, d\derivatives off exchanges

and notice the PMO is really just now turning up, look for higher prices as Jerome maintains inflation is transitory.

 

 

A Good Day

Thursday April 15 2021

 

Inflation markets had a great day as you can see, banks advanced again with the expectation of more business activity and higher interest rates.

Crude oil has broken out above previous resistance and should move higher.

TLT

TLT a fund of 20 year bonds seems to have invalidate the idea there would be another move down. This certainly seems odd with crude, gold and silver and bank stocks all advancing.

One would expect bond prices to fall and yields to rise but the market goes where it wants.

Evidence of a Market Turn Mounts

Friday March 26, 2021

Evidence of a Turn Mounts

Six weeks of increases have put the

30 year fixed rate mortgage at its highest level in nine months-3.17%.

Mortgage Rates Hit 9 Month High, Washington Post

This column has been warning of turn in the 39 year bull market in bond prices (lower rates) for weeks.   This past week brought more evidence this is the correct analysis. And the stock market is beginning to notice as well.

Interest rates fell from the 12-14% level of 1981 to less than one Percent in May 2020. The thirty-year bond yield is now 2.356%, tripling its yield since then.

This is confirmed by the huge rise in commodity prices. Dr. Copper is up from 2.9 cents last October to 4 ccents per pound today. Lumber has doubled from $450 per 1,000 board feet to $900.

Crude oil has also near doubled in price but is on borrowed time. Price lifted from $35 las October to $65 but now less than $60 at 58.56. A week ago it was announced that world demand for gasoline had peaked given covid restricted travel and the move to electric vehicles. With summer driving season, or what will amount to that, upon us 87 octane is near $3.00.

A bull market in stocks is marked by an expansion of new hghs. More money lifts prices of more stocks. That indicator collapsed this past week. Two weeks ago the NYSE new highs reached 700+. This past week it fell to 146. Conversely the number of new lows exploded from 20 to 200+ in the same period. This phenomenon is known as a broadening top. The late comers, a surge in first time speculators opening new accounts, are buying from those who purchased at last March low at DJIA 18,000.

And none of this should be surprising. Congress passed a Trojan Horse Covid Bill of $1.9 Trillion which was really a bail out for poorly managed municipal pensions, all in Democrat controlled states and cities.   Now another $3 Trillion stimulus is being planned. Like Barack’s non-shovel ready bail out, this will likely be a pay off to unions and poorly run Democrat cities like Chicago, Baltimore, and NYC.

The plan is straight out of the Hugo Chavez playbook. Simply raise taxes on the ultra-rich and the hated corporations. Believing the tax will not affect them, who in the lower income levels would object? But the parable of killing the golden goose is applicable. Lon- term studies of federal revenue reveal that no matter what tax rules are passed, the take is never more than about 18% of GDP. The wealthy can and will move, and adjust income streams. They are migrating from CA and NY high tax states; the same will happen with s-called soak the rich plans, wake up Bernie.  Congress targeted oil companies believed to make excess profits in the early 1980s.   The result was not more revenue but an exodus from North American production. In Andrews at that time, both Exxon and Amoco abandoned their large modern buildings and employees. It simply made the real estate crash of 1987-86 just that much worse.

We have seen this before. It does not end well

Stocks Hesitate, Yields Rise

Monday February 22, 2021

A headline of the front page of today's WSJ

Bond Yield Surge buffets Stocks

Which is what we have been warning for weeks.  The 30 yer yield us up a smidge from Friday now  2.168%.

Andy Kessler has an interesting take on pump and dump ie Gamestock a lot like RCA in the  1920s.

Mary O Grady points out Gov Abbott's mistake of an embargo of natural gas to Mexico. She notes this will allow AMLO to oppose foreign investment and return to

the good ole days of featherbedding Pemex.

on page A 17 The Money Boom is Already Here, the authors note M2 money supply is already upt 12% this years, inflation is too much money chasing too few goods, so he stage is set for more inflation and higher rates, see the GSCI graph I posted this weekend.

The Covid Relief $1.9 T is not about Covid, see lead editorial, a grab bag of Dem earmarks. And there is Andy .PUPzzder's column on how the Obama stimulus lengthened unemployment for  43 consecutive months.

Here we go again, higher interest rates, more spending to no goood end, higher taxes and more regulations.

Comodity Prices track Long Bond Yield

Wed Feb 17, 2021

The Goldman Sachs Commodity Index is in the top panel.   The large panel is the  30 year bond yield. At bottom is the correlation between the two. It is clearly positive and the two

closely track one another Spending trillions of dollars one does not have causes this, that and an end to the decline in interest rates from  1982.  Carl Swenlin at Decision Point writes this is not a long term reversal yet but I suspect it is.

A Tide of Deflation Hit the Investing Beach Monday

Tuesday Sept  22 2020

One of my 12 steps in Conquer Accounting is to adopt a pattern of reading investment websites as well as the WSJ every day.

Today's Tuesday issue is a great example. Let's get started

On the back page fellow socionomist Peter Atwater is quoted commenting on the GM Nikola deal

at extremes in sentiment even th4 adults in the room capitulate and want to join the kids. Nikola was recently valued at more than Ford. As Peter notes this is typical top of the market behavior. The article cites Enron, Worldcom, Madoff and the disastrous Time AOL deal, later the largest write off in history to that time.

A front page article has short seller Hindenburg accusing Nikola of making exaggerated claims about its technology. The CEO has resigned. Nikola has lost a third of its value since the report came out and dropped 19% Monday

Even Jeff Katzenberg is having trouble signing clients for Quibi, yet another streaming service in a crowded field.

My investment weblog https://professorelam.typepad.com/markets/

spent the summer warning of decreasing breadth in the stock markets Today is the autumn equinox, often a time of shift in markets.

The DJIA was down over 900 points intra day Monday. Gold dropped $51 by day end. Silver dropped 10% on the day. Crude oil dropped 4.3%. Energy and Energy Service shares were hammered.

A judge in Michigan rules that ballots postmarked Nov 2 can be counted up to 14 days later. So expect Michigan to not report election night. See the mess coming with mail in ballots?

Daniel Planko claims the free market can deliver free college. He compares Higher Ed to the brokerage business in 1999 when a trade cost $200. .Today trades are near free. Brokerages found other ways to make money. But it is hard to see how the existing college system can do that, certainly not with the high fixed cost it carries today. I have warned Higher Ed could go the way of the whaling industry from 1848-1858.

Another article w Your Company Health Plan Isn't Safe in a Biden Presidency, Kamala wants 100% govt take over, yikes.

Cruise Lines want to sail again but the CDC says the crowded conditions are a hotbed for transmission. Carnival wants to sell 18 ships, to who I wonder?

An interview with hoteliers in the SA paper Sunday suggests to me we are not grasping all the economic effects of this pandemic. Hotel occupancy is about 30%, 60% is break even. Property taxes are still at 100%, no discount for low occupancy. And airlines, hotels and restaurants are all linked. Throw in cruise lines and those are whole industries on the verge of BK.

Harley Davidson gets a new female CEO from the Food Industry. She will have a steep learning curve to the powersports industry. I would guess HD has topped out in terms of market share.

check out Deflation.com.

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