The Market Perspective

Forget Inflation Think Deflatioin

Forget Inflation, Think Deflation

Farrell Rule #9

9. When all the experts and forecasts agree – something else is going to happen.

Translation: This rule fits with Farrell's contrarian streak. When all analysts have a buy rating on a stock, there is only one way left to go (downgrade). Excessive bullish sentiment from newsletter writers and analysts should be viewed as a warning sign. Investors should consider buying when stocks are unloved and the news is all bad. Conversely, investors should consider selling when stocks are the talk of the town and the news is all good. Such a contrarian investment strategy usually rewards patient investors.

I originally wrote this column Tuesday focusing on inflation. Friday, today, was a shortened trading day closing at noon CST. This is the typical Friday after Thanksgiving and usually consists of low volume and little movement. That was not the case today.

The Goldman Sachs Commodity Index declined 6.65%, today.

Crude Oil declined $10.24 or 13.06%, today. This reminds me of 2008 when crude soared to $140 and then collapsed to $35 by Christmas.

The Dow declined 905.04 points or 2.53%. Small caps lead so the Russell 2000 dropped 3.67%. the DJIA and S & P made new highs in November but have dramatically reversed.

while the media blames this on increased Covid, the truth is that the markets have completed a five wave pattern dating back to the lows of 1931. It is highly unusual for such a reversal to occur on what should have been a minor day but here it is.

See https://professorelam.typepad.com/markets/ ofr charts and more commentary this weekend. My opinion is that this is NOT a buy the dip opportunity. We have detailed the warning signs for months via lack of breadth, focus on electric car and a handful of FANG stocks, wild optimism for meme stocks which are not earning any money, and the crazy crypto fad. Add in the mania for art and real estate and we have a market mania top at hand.

Oil Purchases Push the Inflation Higher

Monday Nov 1 2021

For some reason my screen capture mode is not working. That said, the Energy ETF XLE has broken a multi-year downtrend from its high in  2014. My count is that the chart bottomed at  45 and is now in a fifth wave at  57.47. Reading the article on page B12 in today's WSJ, this is about right. It reports a swiss banker is buying oil  for his clients investments. So someone nt in the oil business is piling in during a fifth wave up. the time to buy was at the Wave 2 low of 27.50.

Still as we note oil is an economic and financial commodity. And world buying is pushing oil prices higher, now around  $84 for Brent and WTIC. Option bets are being placed on $2100 oil. That is the equivalent as we reported Friday of Tesla at $2,000.

the graph of options trading  volume on page A 2 is one for the record books. This is a great book end for Tulipmania back in  1636.

the average daily volume for 2021 is 38.6 million contracts. this dwarfs 2020 at about  28 million.

The article indicates  that strings of options orders are sold to other firms. Firms are moving trades to exchanges where best price is not necessarily the criteria if in fact I read this correctly.  Consider there are now some  2,000 different kinds of Apple options, simply incredible.

Small investors are buying options which historically is a losing trade. The fact that this seems t be a winning trade turns tradition on its head. But that happens at developing market tops.

Inflation

Friday  Oct 15 2021

Transitory Inflation

 

According to the Energy Information Administration, nearly half of U.S. households that warm their homes with mainly natural gas can expect to spend an average of 30% more on their bills compared with last year.

Brent and WTIC have both increased over 60% this year.

A Winter of Giant Gas Bills is Coming, Today’s WSJ

Since mid 2020, natural gas prices have soared form under $2 to near $6 mbtu. Gee this going green is really getting expensive.

There are several reasons. In burst of ‘we are green’ mood, back-up coal fired plants were closed around the world. An over reliance on solar and wind failed as wind slowed in Great Britain. Team Biden has been on the regulation warpath against conventional energy since Inauguration Day. This discourages new exploration.   And bingo here we are with gasoline prices at $3-5.

Crude oil is both a commodity (useful) and an opportunity for financial speculation. So prices may well go triple digit again. We learned yesterday that the annualized Producer Price index is up 89.28% from a year ago. Fed Chair Powell’s forecast of transitory inflation is not holding up well. President Biden delights in blaming others for problems. It seems a safe bet he will hang the inflation number on Powell and appoint a new FED Chair. And besides, Trump appointed him, so like Keystone Pipeline, reason enough to cancel.

There is always a mix of social mood and it unfolds in fractal form, higher and lower levels.   But overall mood is wildly positive. Here are some examples.

1. The stock market is 35x its high of 1966.
2. Entire sections of the WSJ are devoted to lauding the most successful ‘wealth advisors.’
3. The real estate Mansion section of the WSJ is a fat 14 pages long. The latest wrinkle is not a second home but a couple that has two primary residences in Idaho and Virginia.
4. People are quitting jobs in record numbers. Some 4.3 M workers have vanished. Between the Dems promised social welfare and the belief another job will be easy to find, this represents optimism.
5. Morgan Stanly makes big money advising on mergers. Mergers are a positive mood phenomenon reflecting inclusion.
6. Demand for the junkiest bonds, collateralized loan obligations CLOs is at record levels with   $131 B sold this year.

This is typical of a market top mood, think September 1987 or March 2000 or Fall 2007.   In fact the previous list is a warning not assuring signal.   I am preparing a presentation on how Credit Suisse lost over $5 billion this year on a single customer, Bill Hwang. How many more Bill Hwangs are out there I wonder?

And the price patterns look eerily like 1987. Despite the current rally, the indexes are not at new highs, and the Transports do not confirm even the recent highs.

Exercise caution amid these warning signs.

The Bear Market Begins

Tuesday Sept  28 2021

Jerome, you are wrong, the one picture that summarizes today

/t

The WSJ has been chock a block full of articles on the demand for muni bonds, while muni bonds are paying lifetime lows in interest rates

Today munis begin their collpse, see above down 3% on the day  half what they pay in a full year!!!!!

Bear Fund on Interest Rates

These two graphs tel it all, Jerome Powell will not be renewed as the FED Chief, you heard it here first

 

NASD 100

This is how the dot.com collapse began, a sharp peak and then a breakdown, the bear market begins.

GSG

notice the outside reversal day in the Goldman commodity fund

Powell may be right that commodity inflation is transitory but bond prices are falling as are commodity index, deflation?

Apache Corporation'

Wow a huge drop in APA - 6.754% in  one day, an outside reversal to the downside, looks like my friends at EWI are right, deflation is the worry, note PMO is topping

UNG natural gas uh oh, huge outside reversal day, thanks Jerome

I will be updating daily lots of interesting thing

 

 

 

Perhaps Jerome is Right on CommodityPrices

Tuesday August 10 2021

 

We suggested this weekend that commodity prices were likely peaking, Take a look at the action of rthe last two days.

Gold collapsed over $100, silver over $3, and crude hit a  2.5 month low openning down over $2 Monday. /we noted Lumber had dropped 2/3 from its high, copper remains weak.  The trouble in China we noted means less demand from that giant for all sort of building materials. Is the world slowdown coming?  It would  seem so.

An article on front page WSJ today reflects exactly this, Oil Nears 2.5 Month Low on Virus Surge. It notes China is taking a zero tolerance policy cancelling events and restricting travel.  All this is happening with more Covid outbreaks, and as noted NYC shuts down again to the un vaccinated.

Markets and Mood Look a Lot Like March 2000, Fall 2007

Weekend August 8, 2021

There are lots of similarities between the dates in our title and today, consider

From  1998-2000 the NASD added 3,500 points to its 18 year journey to  5,000..  this meant 70% of the move happened in 11% of the  time.  The NASD has at least doubled in the last year.  Investors were buying dot.coms which had no earnings.

In 2008 oil prices soared to $140 and then crashed to $35 in six months.  Lehman was using short term commerciall paper to leverage buying  10x sub prime mortgages.

Now Blackrock is on a home buying spree.  Investors are pouring into cryptocurrency, SPAC, and meme stocks, the latter not making any money. A front page article in the weekend WSJ  tells the ARK story. cathie wood founded ARK active research knowledge, and began buying money losing stocks. she is referred to as Mama Cathie and i South Korea The Money tree.

Commodity prices like lumber were shooting up just like oil in  2008. Oill prices recently hit the highest level in six years.    COVID  moved  most folks home where they began investing in stocks.   The verb will change to gambling once the market reverses. Does all this sound familiar? 

Investors lost billions in China stocks in July.

Investors should have paid more attention to the Luckin fraud.

China's most indebted property developer is in trouble.

Evergrande bonds now trade for  39 cents on the dollar. Western accountants have long doubted the reliability of Chinese accounting. The links above are evidence of just that.

MOre bad news from China on page B3 of Weekend WSJ.

Meituan fined #1 B

Alibaba fined $2.8 B

Huawei Revenue slides 38% due to US Sanctions

 

Lumber prices lead the way down. And notice the black line which is oil, repeating the  2008 performance. Oil is already trading below $70.

Here is a poster stock for meme ivesting, buying shares which do not have any net income.

The Robinhood IPO came public this past week. The share price soared  august 4 when option trading began, buit prices fell as fast by weekend. There is no price earnings ratio as there are no earnings. Mood is stil wildly optimistic for stocks which explains the rush to HOOD.

We have noted many times that the Transports lead. The Dow Composite  peaked in early May with Transports peaking that same day.

Dow Theory non Confirmation

Charles Dow stipulated that the Industrials and Transports should move together in the same direction to confirm a new high. Clearly that is not happening with the Transports at a mew low while rthe Industrials make a ew high.

Declining breadth  is another sign of a top. Fewer stocks are advancing, this high took place in April.

 

Mesabi Trust deals in iron ore pellets traded in the Great Lakes region. This is a proxy for manufacturing and industry. It peaked in early May.

And again note the rapid move up in April, socionnomics tells us maximum mood occurs at the end of a move, there it is.

Our conclusion is that we have numerous confirmations of a top forming. The seasonally weak August-October period now at hand should confirm this,

See our post August 6 on the reversal of the bond market. Interest rates should accelerate. If commodity prices are fallling, why would interest rates rise?  The answer is the fear of default. Evergrande in China is the perfect example of an extended company drowning in debt.

Also see our previous post that exceeding 187% of GDP in tax take is a loser for the stock market.

All this is happening amid the Dem spending spree, we will see just  how much  of the socialist agenda will pass. Again the WSJ noted the CBO research says there is not adequate funding for such blow out spending.

the demand ofr a $15 min wage is delivering just what one would expect. On page B5 we learn about Flippy the robotic fast food cook. Flippy works 23 hours a day, nver takes a vacation and is always on the job. The restaurant plans on buying more robots.

We have stated that the spread of negative mood does not support new high stock prices. Now Dems in both NY and  CA are contending with governors in trouble. After demanding that all women complaints of harassment should be honored it will be interesting to see if NY Dems live up to their beliefs.

Elsewhere trouble and unrest brew from Afghanistan where the Taliban is regaining control without a fight.  Hong Kong's best days are behind  Peru elects another far left leader. Immigrant border crossings now exceed  200,0000 per month, where are they being sent I wonoder?

Peru

 

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.