The last 6 weeks or so has seen a market experience incredible volatility. The Dow would trade in 800 to 1000 point ranges every day. The 1-day chart would look like a 1-year chart in terms of percentage moves.
The other characteristic was that the market would trade violently from key technical level to key technical level with virtually no resistance to any moves.
I noted these traits and even posted intraday charts on several occasions to illustrate how the traders had taken over and real buyers were nowhere to be seen.
I think I know what is going on, and I don't think I like the outcome.
There is no doubt in my mind that the government has used stock price appreciation as a policy tool. There is also no doubt in my mind that the Fed would buy stock futures to accelerate prices higher when needed to prop prices up. You can take my opinion for what it is, an opinion. But I have been pretty spot on in this Bear Market.
The rally into the election had classic fingerprint of Fed manipulation all over it. The markets would accelerate higher in overnight trading, when there is little selling volume to contend with and then you have these 200 to 300 point rallies in the last hour to make the price of the Dow look good for the headlines of the evening news. You can deconstruct the recent rally and see that the majority of the gains were done on these last hour moon shots and in overnight trading.
I think the Fed has taken a powder now that the election is over.
I think the markets have experienced this massive intraday volatility, because nobody wants to buy stocks for the long term at these prices. That tells me that prices are too high to find buyers.
If prices are too high to find buyers, then they need to fall to a level where there will again be an equilibrium between buyer and sellers. That is not a good thing if you bought recently or are fully invested in your accounts.
Don't kill the messenger, I am just telling you what I see and what is the most reasonable explanation for it.
Thursday, November 6, 2008
Tuesday, November 4, 2008
Did I Miss the New Bull Market?
I know that some of you are asking yourself this questions. So I wanted to review a few things.
Like I mentioned earlier, it is amazing to me how all it takes is a few days of rallying to get everybody switched from being afraid of going bankrupt to being afraid of missing the “New Bull Market”.
This Bear Market has laid waste to people’s portfolios. Many of the “top mutual fund managers of all times” are down 40 - 50% for the year. I don’t know about you, but I can’t afford hits like that in my account. They got caught. They either bought too many financials because they were “values” or they bought too many commodity and energy stocks because they were chasing returns.
The average investor is now chasing stocks on this bounce because they have no discipline, no skills for determining what to buy and when to buy, they are down a heck of a lot of money and they are grasping at straws in an effort to make back some of their massive losses.
I wanted to take a look at interest rate cuts and tax cuts versus the stock market over the last two Bear Markets. Rate cuts are Black Arrows. Tax cuts are Green Arrows. It seems to me that the clusters of Interest Rate cuts precede at least one last leg down. I assume that if things were so great, then the Fed would not have to cut rates twice in October.
What amazes me about the chart is that there was a rate cut AND a tax cut AFTER the market had bottomed. That means you bottom on horrible news and people are still Bullish these days. Yikes!
What concerns me is that the moving averages (Red and Blue Lines) need to work their way a lot lower before the Bear is over.
When markets crash, they need time to repair the damage. They don’t just bounce and not look back. The markets were cut in half in a year. Yet everybody is still looking to buy and not miss out on the New Bull Market. Things don’t work that way. I expect at a minimum a retest or two of the October low. I would not be surprised to see us undercut the lows to scare the heck out of the remaining Bulls. Can you imagine how sick you would feel if you bought today and the markets put in NEW Bear Market Lows?
I have a couple questions for the Bulls -
If things are so good, then why did we have to bail out South Korea, Brazil, Singapore, Mexico, Georgia, Belorus and Ukraine last week?
Why did we cut rates .50% last week?
Why did Australia cut rates .75% last night?
Why will the ECB cut rates on Thursday?
Why did China cut rates twice in a month?
Why did Argentina take over the assets in the pension plans householded in their country to keep their country solvent?
Why are some floating the idea of taking over 401k plans to finance the next “New Deal”?
Why is a new “New Deal” needed or even being discussed?
Why is there talk of or need for another “Stimulus Package”?
The government tried to make you feel good going into the election.
Remember, asset appreciation has been a primary economic policy. Because it’s easier to prop up asset prices to drive consumption than it is to create jobs and use savings to drive consumptions. Americans are sick of this stuff and that’s why Obama won BIG tonight.
There are a lot of people out there who have no clue what they are doing. They never studied and they never came up with rules and disciplines for how to manage money. They don’t know when to get defensive and they don't know when to invest.
What we are going through right now concerns me. All you are seeing is classic a Bear Market, where people are terrified at the lows and then get sucked in on these vicious rallies. Emotions are driving decision making. That’s never a good think. My job is to get good information out to people so that they can make good decisions. I have had to work 18 hour days lately to overcome the insanity that passes as expertise on the television.
If you are an individual investor, then you are in an uphill battle. You need an unbiased advocate on your side. Otherwise, you will get caught up in the emotions of the day and do the wrong thing at the wrong time.
If things are so good, then where is the volume (why aren’t the big investors buying)?
The volume on this bounce has been anemic, just as it was on each bounce in the 2000-2003 Bear Market. The bounce is fast approaching huge resistance.
The Dow Jones Industrial Average
I went through all 30 charts today and they fall into 3 groups –
Oh My Goodness – Alcoa, Caterpillar, DuPont, GE, IBM, J&J, McDonalds, Merck, Microsoft and Wal-Mart
Rallying into Resistance – American Express, AT&T, Bank of America, Boeing, Citigroup, Chevron, Disney, Exxon, Hewlett Packard, Intel, Kraft, 3M, Pfizer, Proctor & Gamble, United Technologies, Verizon
Eh - JP Morgan, Kraft
Oh My Goodness can be broken down into two categories –
Implosion
Hanging on for Dear Life
Rallying into Resistance
There are ZERO stocks in that Dow that look buyable. But there are many setting up as great looking shorts!
I am looking for leadership and right now I have 4 stocks that I see working. One failed its breakout hard today on decent volume. Other leadership will need to show up.
My assumption is that as the markets go through the process of testing and retesting the lows, new leadership will be able to form and eventually break out of consolidations on heavy volume. That is when I will be interested in buying again!
Until then, I am just looking to short rallies on anticipation of the highly-likely retest of recent lows.
Like I mentioned earlier, it is amazing to me how all it takes is a few days of rallying to get everybody switched from being afraid of going bankrupt to being afraid of missing the “New Bull Market”.
This Bear Market has laid waste to people’s portfolios. Many of the “top mutual fund managers of all times” are down 40 - 50% for the year. I don’t know about you, but I can’t afford hits like that in my account. They got caught. They either bought too many financials because they were “values” or they bought too many commodity and energy stocks because they were chasing returns.
The average investor is now chasing stocks on this bounce because they have no discipline, no skills for determining what to buy and when to buy, they are down a heck of a lot of money and they are grasping at straws in an effort to make back some of their massive losses.
I wanted to take a look at interest rate cuts and tax cuts versus the stock market over the last two Bear Markets. Rate cuts are Black Arrows. Tax cuts are Green Arrows. It seems to me that the clusters of Interest Rate cuts precede at least one last leg down. I assume that if things were so great, then the Fed would not have to cut rates twice in October.
What amazes me about the chart is that there was a rate cut AND a tax cut AFTER the market had bottomed. That means you bottom on horrible news and people are still Bullish these days. Yikes!
What concerns me is that the moving averages (Red and Blue Lines) need to work their way a lot lower before the Bear is over.
When markets crash, they need time to repair the damage. They don’t just bounce and not look back. The markets were cut in half in a year. Yet everybody is still looking to buy and not miss out on the New Bull Market. Things don’t work that way. I expect at a minimum a retest or two of the October low. I would not be surprised to see us undercut the lows to scare the heck out of the remaining Bulls. Can you imagine how sick you would feel if you bought today and the markets put in NEW Bear Market Lows?
I have a couple questions for the Bulls -
If things are so good, then why did we have to bail out South Korea, Brazil, Singapore, Mexico, Georgia, Belorus and Ukraine last week?
Why did we cut rates .50% last week?
Why did Australia cut rates .75% last night?
Why will the ECB cut rates on Thursday?
Why did China cut rates twice in a month?
Why did Argentina take over the assets in the pension plans householded in their country to keep their country solvent?
Why are some floating the idea of taking over 401k plans to finance the next “New Deal”?
Why is a new “New Deal” needed or even being discussed?
Why is there talk of or need for another “Stimulus Package”?
The government tried to make you feel good going into the election.
Remember, asset appreciation has been a primary economic policy. Because it’s easier to prop up asset prices to drive consumption than it is to create jobs and use savings to drive consumptions. Americans are sick of this stuff and that’s why Obama won BIG tonight.
There are a lot of people out there who have no clue what they are doing. They never studied and they never came up with rules and disciplines for how to manage money. They don’t know when to get defensive and they don't know when to invest.
What we are going through right now concerns me. All you are seeing is classic a Bear Market, where people are terrified at the lows and then get sucked in on these vicious rallies. Emotions are driving decision making. That’s never a good think. My job is to get good information out to people so that they can make good decisions. I have had to work 18 hour days lately to overcome the insanity that passes as expertise on the television.
If you are an individual investor, then you are in an uphill battle. You need an unbiased advocate on your side. Otherwise, you will get caught up in the emotions of the day and do the wrong thing at the wrong time.
If things are so good, then where is the volume (why aren’t the big investors buying)?
The volume on this bounce has been anemic, just as it was on each bounce in the 2000-2003 Bear Market. The bounce is fast approaching huge resistance.
The Dow Jones Industrial Average
I went through all 30 charts today and they fall into 3 groups –
Oh My Goodness – Alcoa, Caterpillar, DuPont, GE, IBM, J&J, McDonalds, Merck, Microsoft and Wal-Mart
Rallying into Resistance – American Express, AT&T, Bank of America, Boeing, Citigroup, Chevron, Disney, Exxon, Hewlett Packard, Intel, Kraft, 3M, Pfizer, Proctor & Gamble, United Technologies, Verizon
Eh - JP Morgan, Kraft
Oh My Goodness can be broken down into two categories –
Implosion
Hanging on for Dear Life
Rallying into Resistance
There are ZERO stocks in that Dow that look buyable. But there are many setting up as great looking shorts!
I am looking for leadership and right now I have 4 stocks that I see working. One failed its breakout hard today on decent volume. Other leadership will need to show up.
My assumption is that as the markets go through the process of testing and retesting the lows, new leadership will be able to form and eventually break out of consolidations on heavy volume. That is when I will be interested in buying again!
Until then, I am just looking to short rallies on anticipation of the highly-likely retest of recent lows.
Asset Price Appreciation as a Policy Tool
I sort of had an epiphany today. I was getting all upset about how manipulated today’s rally appears to be – 200 point gap up open, above obvious resistance and a 200-point rally in the last hour. All on Election Day for that great headline of the largest Election Day rally since 1984…
That got me thinking about the President’s Working Group on Financial Markets and as I read some articles today, all the pieces finally fell together for me.
I started to realize what a policy tool asset price appreciation has become. I started to see how prices going up made it easy for the government to avoid the tough public policy decisions required to create jobs domestically and get us back to real economic growth.
I’m not here to debate whether or not the “Plunge Protection Team” exists. I am merely going to quote a gentleman who was around when the “Working Group” was formed and opined about how the Fed could use their powers to manage the stock market, former Federal Reserve Governor Robert Heller.
A few days after the October 1989 market crash, Mr. Heller wrote the following in an op-ed, “Have Fed Support Stock Market. Too” in the Wall Street Journal (10/27/1989) –
“The stock market correction of Oct. 13, 1989, was a grim reminder of the Oct. 19, 1987 market collapse. Since, like earthquakes, stock market disturbances will always be with us, it is prudent to take all possible precautions against another such market collapse. In general, markets function well and adjust smoothly to changing economic and financial circumstances. But there are times when they seize up, and panicky sellers cannot find buyers.”
“(A)n appropriate institution should be charged with the job of preventing chaos in the market: the Federal Reserve. The availability of timely assistance -- of a backstop -- can help markets retain their resilience... The stock market is the only major market without a market-maker of unchallenged liquidity or a buyer of last resort. “
“Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole... The stock market is certainly not too big for the Fed to handle.”
“In 1987, (The Fed) pumped billions into the markets through open market operations and the discount window. It lent money to banks and encouraged them to make funds available to brokerage houses. They, in turn, lent money to their customers -- who were supposed to recognize the opportunity to make a profit in the turmoil and buy shares.”
“The Fed's stock market role ought not to be very ambitious. It should seek only to maintain the functioning of markets -- not to prop up the Dow Jones or New York Stock Exchange averages at a particular level. The Fed should guard against systemic risk, but not against the risks inherent in individual stocks. It would be inappropriate for the government or the central bank to buy or sell IBM or General Motors shares. Instead, the Fed could buy the broad market composites in the futures market. The increased demand would normalize trading and stabilize prices. Stabilizing the derivative markets would tend to stabilize the primary market. The Fed would eliminate the cause of the potential panic rather than attempting to treat the symptom -- the liquidity of the banks.”
“The old saying advises: "If it ain't broke, don't fix it." But this could be a case where we all might go broke if it isn't fixed.”
I am speechless. And that doesn’t happen often.
In his 1989 Op-Ed, Mr. Heller lays out how the Fed can use its money to keep stock markets from falling. It is a very simple formula – buy stocks futures and the prices of stocks will follow.
What scares me is how all the terminology he uses to describe the stock markets are now being applied to so many different asset classes – mortgages, money market assets, commercial paper, bank stocks...
Somewhere in the last 20 years, those in power went from using an emergency tool as a last resort to save the markets from turmoil to using the power as a policy tool to drive up asset prices to make Americans feel rich and consume a lot more they could actually afford.
These days, the Fed has become the only buyer. Period! They are buying stocks, bonds, foreign currencies and soon real estate.
I think this election is more about the construction of the economy than anything else. I think the voters have figured out that the Wall Street/Washington connection has led to an economy based only on asset price appreciation. That’s great if you have assets, but if you don’t then your future looks like you’ll be working for minimum wage at Wal-Mart. I don’t know about you, but to me that seems to be a pretty terrible way to construct an economy.
The $700 billion bailout was just the final nail in the coffin for the Wall Street/Washington alliance. People are just sick of this stuff.
I am writing about this because it is amazing to me how all it takes is a rally to get everybody switched from being afraid of going bankrupt to being afraid of missing the “New Bull Market”. People are addicted to price moves!
What most concerns me now is what does Obama do? Does he take the easy road and continue the game, only to see yet another bubble blow up in 8 years? Or does he do the heavy lifting and change the economy for the betterment of the next generation.
If Obama picks another former CEO of Goldman Sachs to be his Treasury Secretary, then I know nothing has “changed” in Washington and all we will be stuck with is a bunch of Socialists with a redistribution agenda and a willingness to manipulate asset prices to further their agenda. Then, the only thing that will have “changed” is the tax rate I pay.
I hope he really is different, because we need it.
That got me thinking about the President’s Working Group on Financial Markets and as I read some articles today, all the pieces finally fell together for me.
I started to realize what a policy tool asset price appreciation has become. I started to see how prices going up made it easy for the government to avoid the tough public policy decisions required to create jobs domestically and get us back to real economic growth.
I’m not here to debate whether or not the “Plunge Protection Team” exists. I am merely going to quote a gentleman who was around when the “Working Group” was formed and opined about how the Fed could use their powers to manage the stock market, former Federal Reserve Governor Robert Heller.
A few days after the October 1989 market crash, Mr. Heller wrote the following in an op-ed, “Have Fed Support Stock Market. Too” in the Wall Street Journal (10/27/1989) –
“The stock market correction of Oct. 13, 1989, was a grim reminder of the Oct. 19, 1987 market collapse. Since, like earthquakes, stock market disturbances will always be with us, it is prudent to take all possible precautions against another such market collapse. In general, markets function well and adjust smoothly to changing economic and financial circumstances. But there are times when they seize up, and panicky sellers cannot find buyers.”
“(A)n appropriate institution should be charged with the job of preventing chaos in the market: the Federal Reserve. The availability of timely assistance -- of a backstop -- can help markets retain their resilience... The stock market is the only major market without a market-maker of unchallenged liquidity or a buyer of last resort. “
“Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole... The stock market is certainly not too big for the Fed to handle.”
“In 1987, (The Fed) pumped billions into the markets through open market operations and the discount window. It lent money to banks and encouraged them to make funds available to brokerage houses. They, in turn, lent money to their customers -- who were supposed to recognize the opportunity to make a profit in the turmoil and buy shares.”
“The Fed's stock market role ought not to be very ambitious. It should seek only to maintain the functioning of markets -- not to prop up the Dow Jones or New York Stock Exchange averages at a particular level. The Fed should guard against systemic risk, but not against the risks inherent in individual stocks. It would be inappropriate for the government or the central bank to buy or sell IBM or General Motors shares. Instead, the Fed could buy the broad market composites in the futures market. The increased demand would normalize trading and stabilize prices. Stabilizing the derivative markets would tend to stabilize the primary market. The Fed would eliminate the cause of the potential panic rather than attempting to treat the symptom -- the liquidity of the banks.”
“The old saying advises: "If it ain't broke, don't fix it." But this could be a case where we all might go broke if it isn't fixed.”
I am speechless. And that doesn’t happen often.
In his 1989 Op-Ed, Mr. Heller lays out how the Fed can use its money to keep stock markets from falling. It is a very simple formula – buy stocks futures and the prices of stocks will follow.
What scares me is how all the terminology he uses to describe the stock markets are now being applied to so many different asset classes – mortgages, money market assets, commercial paper, bank stocks...
Somewhere in the last 20 years, those in power went from using an emergency tool as a last resort to save the markets from turmoil to using the power as a policy tool to drive up asset prices to make Americans feel rich and consume a lot more they could actually afford.
These days, the Fed has become the only buyer. Period! They are buying stocks, bonds, foreign currencies and soon real estate.
I think this election is more about the construction of the economy than anything else. I think the voters have figured out that the Wall Street/Washington connection has led to an economy based only on asset price appreciation. That’s great if you have assets, but if you don’t then your future looks like you’ll be working for minimum wage at Wal-Mart. I don’t know about you, but to me that seems to be a pretty terrible way to construct an economy.
The $700 billion bailout was just the final nail in the coffin for the Wall Street/Washington alliance. People are just sick of this stuff.
I am writing about this because it is amazing to me how all it takes is a rally to get everybody switched from being afraid of going bankrupt to being afraid of missing the “New Bull Market”. People are addicted to price moves!
What most concerns me now is what does Obama do? Does he take the easy road and continue the game, only to see yet another bubble blow up in 8 years? Or does he do the heavy lifting and change the economy for the betterment of the next generation.
If Obama picks another former CEO of Goldman Sachs to be his Treasury Secretary, then I know nothing has “changed” in Washington and all we will be stuck with is a bunch of Socialists with a redistribution agenda and a willingness to manipulate asset prices to further their agenda. Then, the only thing that will have “changed” is the tax rate I pay.
I hope he really is different, because we need it.
Sunday, November 2, 2008
The Week In Review
First the Rally
Rebalancing
My understanding is that much of the rally was the result of major asset class rebalancing within the mutual fund industry.
Say you run a “balance fund” where you are supposed to own 50% stocks and 50% bonds. The first 27 days of October, the stock component of your portfolio is down 27% for the month! At the same time, your bond holdings are up a few percent. Your fiscal year ends on October 31, so you need to rebalance to close out the year.
If you started October with $100 and a split of $50 stocks/ $50 bonds, then on October 27, you had a split of $36.5 stocks/ $52 bonds. So you have to sell about $8 of your bonds to buy $8 stocks.
If this is the case, then you would expect a lot of stock buying and a lot of bond selling going into month end. Stocks rallied 15.5% (S&P 500) and bonds (30-Year US Treasury) fell -5.4% in the last 4 days of October.
The same thing occurred in October 1987, when stocks rallied and bonds sold off in the last four days of the month (S&P 500 +13.3% and US Treasury -3.5%). That was the high for the first post-1987 Crash bounce. Stocks worked their way lower for a month, finally retesting the October 1987 low in early December 1987.
Again, crashes have always had at least one retest before a final low is put in!
Bailing Out Insolvent Countries
Did you notice the 22% rally in the South Korean stock market on 10/29? The rally was the result of a US Government bailout of the South Korean Government. Call it whatever you want - a “Swap”, a “REPO”… It was a bailout. It was a lifeline to an insolvent country.
Basically what our government did was trade 30 billion US Dollars for Korean Won (their currency). We did so, because clearly nobody trusts Korea enough to buy the new Won they intended to print to inflate their way out of their once-a-decade financial calamity.
I get the feeling that Korea will end up like that strung out relative who asks you for 100 bucks on Monday and then shows up on Friday to beg for more because they already blew the first 100. I have no doubt that Korea will be knocking on the Fed’s lending window again the near future.
This stuff is going on all over the world. On 10/29, the latest bailouts were South Korea, Brazil, Singapore, Mexico ($30 Billion each) and New Zealand. Ukraine ($16.5 Billion), Belarus ($4.5 Billion) and Georgia ($2 Billion) recently got loans from the IMF (International Monetary Fund). The IMF is financed in US Dollars by the US Government via the UN. It is headquartered in Washington DC and is run by (get this) a former Communist – un-freakin believable…
The total “REPO”/”Swap”/US Government lending money to foreign governments and banks program is now at least $450 billion. The US Government is no longer the “lender of last resort”, it is the “printing press of last resort”.
Internals of the Rally
I know that the markets will bottom long before the “fundamentals” do. The Stock Market is used as a “Leading Economic Indicator” by the US Government, because it moves before the economic data comes out to tell you why it moved. That fact is a big reason why I rely on charts so heavily, instead of the opinion of some talking head on television.
Maybe the markets put in a major low this week and the Bear Market is over. I have no clue, but I want to look at what happened last week and see if I can come up with some possible scenarios for what is going on and how it will impact my money.
Where is the Volume?
If this is the end of the Bear Market, then I would expect to see massive volume on the first couple up days. Because when this Bear Market ends, the first few weeks of the new Bull will most likely experience incredibly large volume on the up days. The last few days of rally, although impressive, have been on below-average volume (Red line in bottom chart).
Even worse, the rallies are doing the same thing they have done the entire leg down – they are spiking up into declining moving averages (Blue Line). Is anybody excited about this chart? I’m looking to short any further rally.
I think that the light volume which allowed traders to ping prices around from key level to key level last month is also what is allowing for the current spike up rally. My fear is that when the sellers show up, they will be able to spike the markets down just as hard and as fast as they rose.
Rebalancing
My understanding is that much of the rally was the result of major asset class rebalancing within the mutual fund industry.
Say you run a “balance fund” where you are supposed to own 50% stocks and 50% bonds. The first 27 days of October, the stock component of your portfolio is down 27% for the month! At the same time, your bond holdings are up a few percent. Your fiscal year ends on October 31, so you need to rebalance to close out the year.
If you started October with $100 and a split of $50 stocks/ $50 bonds, then on October 27, you had a split of $36.5 stocks/ $52 bonds. So you have to sell about $8 of your bonds to buy $8 stocks.
If this is the case, then you would expect a lot of stock buying and a lot of bond selling going into month end. Stocks rallied 15.5% (S&P 500) and bonds (30-Year US Treasury) fell -5.4% in the last 4 days of October.
The same thing occurred in October 1987, when stocks rallied and bonds sold off in the last four days of the month (S&P 500 +13.3% and US Treasury -3.5%). That was the high for the first post-1987 Crash bounce. Stocks worked their way lower for a month, finally retesting the October 1987 low in early December 1987.
Again, crashes have always had at least one retest before a final low is put in!
Bailing Out Insolvent Countries
Did you notice the 22% rally in the South Korean stock market on 10/29? The rally was the result of a US Government bailout of the South Korean Government. Call it whatever you want - a “Swap”, a “REPO”… It was a bailout. It was a lifeline to an insolvent country.
Basically what our government did was trade 30 billion US Dollars for Korean Won (their currency). We did so, because clearly nobody trusts Korea enough to buy the new Won they intended to print to inflate their way out of their once-a-decade financial calamity.
I get the feeling that Korea will end up like that strung out relative who asks you for 100 bucks on Monday and then shows up on Friday to beg for more because they already blew the first 100. I have no doubt that Korea will be knocking on the Fed’s lending window again the near future.
This stuff is going on all over the world. On 10/29, the latest bailouts were South Korea, Brazil, Singapore, Mexico ($30 Billion each) and New Zealand. Ukraine ($16.5 Billion), Belarus ($4.5 Billion) and Georgia ($2 Billion) recently got loans from the IMF (International Monetary Fund). The IMF is financed in US Dollars by the US Government via the UN. It is headquartered in Washington DC and is run by (get this) a former Communist – un-freakin believable…
The total “REPO”/”Swap”/US Government lending money to foreign governments and banks program is now at least $450 billion. The US Government is no longer the “lender of last resort”, it is the “printing press of last resort”.
Internals of the Rally
I know that the markets will bottom long before the “fundamentals” do. The Stock Market is used as a “Leading Economic Indicator” by the US Government, because it moves before the economic data comes out to tell you why it moved. That fact is a big reason why I rely on charts so heavily, instead of the opinion of some talking head on television.
Maybe the markets put in a major low this week and the Bear Market is over. I have no clue, but I want to look at what happened last week and see if I can come up with some possible scenarios for what is going on and how it will impact my money.
Where is the Volume?
If this is the end of the Bear Market, then I would expect to see massive volume on the first couple up days. Because when this Bear Market ends, the first few weeks of the new Bull will most likely experience incredibly large volume on the up days. The last few days of rally, although impressive, have been on below-average volume (Red line in bottom chart).
Even worse, the rallies are doing the same thing they have done the entire leg down – they are spiking up into declining moving averages (Blue Line). Is anybody excited about this chart? I’m looking to short any further rally.
I think that the light volume which allowed traders to ping prices around from key level to key level last month is also what is allowing for the current spike up rally. My fear is that when the sellers show up, they will be able to spike the markets down just as hard and as fast as they rose.
Insurance Company Meltdowns
Several insurance companies got crushed this week. They seem to be the next shoe to drop. Take a look at how Hartford did this week. It was down -57% (Black Box and Arrow) on 500% of average volume (Red Arrow)!! That isn’t grandma selling, that is the big boys running for the hills.
This is The Hartford! As in, the 4th largest insurance company in America! They’ve been around since 1810. They look like the next US Government nationalization candidate.
Several insurance companies got crushed this week. They seem to be the next shoe to drop. Take a look at how Hartford did this week. It was down -57% (Black Box and Arrow) on 500% of average volume (Red Arrow)!! That isn’t grandma selling, that is the big boys running for the hills.
This is The Hartford! As in, the 4th largest insurance company in America! They’ve been around since 1810. They look like the next US Government nationalization candidate.
Prudential looks the same and may also be on a fast track to nationalization.
I am going to make the blanket statement that the Life Insurance Industry cannot be allowed to fail. Insurance companies were allowed to fail in the 1929 – 1932 Bear Market and it ruined a lot of people. Moreover, it stigmatized the word “insurance” in the minds of an entire generation of Americans. If the government allows even one major insurance company to fail, then many other companies will unravel as investors take their money out of the insurance companies (a “Run” on products like annuities, life insurance, defined benefit plans, pensions, 401Ks, 403Bs…) and the current financial crisis will get several orders of magnitude worse.
So watch out if you own any insurance stocks, because AIG seems to be the model for how things will be taken over and with AIG trading for $1.96, that doesn’t seem to be a profitable venture for a stock or bond holder. I would include Berkshire Hathaway in this group, because of their heavy exposure to the insurance industry.
The root cause of the demise of Hartford is either in their Commercial Real Estate holdings, their Bond holdings or a combination of both. Remember, insurance companies have incredibly large portfolios of Commercial Real Estate and Bonds. They take in your premiums and buy assets designed to pay out when your claim is expected. The best assets for this have proven to be Commercial Real Estate and Bonds.
My guess is that the insurance companies made too many promises they could not keep and they used massive leverage to back up these promises. Now leverage is killing their balance sheets as asset prices fall.
I remember reading how Modern Portfolio Theory opined that the optimal leverage for a Hedge Fund was 6.2 to 1 (620%). That leads to great performance on the upside, but when prices fall, all it takes is a 16% move down on asset prices to wipe you out. The problem with this Bear Market is that you have a lot of funds with massive leverage, who are all trying to sell at the same time to cover their margin calls!
Leverage is just borrowing to buy stuff (think a margin account on steroids). But just like with a margin account, when your equity falls below a certain level, you have to come up with new money by either selling holdings or depositing a check.
I am going to make the blanket statement that the Life Insurance Industry cannot be allowed to fail. Insurance companies were allowed to fail in the 1929 – 1932 Bear Market and it ruined a lot of people. Moreover, it stigmatized the word “insurance” in the minds of an entire generation of Americans. If the government allows even one major insurance company to fail, then many other companies will unravel as investors take their money out of the insurance companies (a “Run” on products like annuities, life insurance, defined benefit plans, pensions, 401Ks, 403Bs…) and the current financial crisis will get several orders of magnitude worse.
So watch out if you own any insurance stocks, because AIG seems to be the model for how things will be taken over and with AIG trading for $1.96, that doesn’t seem to be a profitable venture for a stock or bond holder. I would include Berkshire Hathaway in this group, because of their heavy exposure to the insurance industry.
The root cause of the demise of Hartford is either in their Commercial Real Estate holdings, their Bond holdings or a combination of both. Remember, insurance companies have incredibly large portfolios of Commercial Real Estate and Bonds. They take in your premiums and buy assets designed to pay out when your claim is expected. The best assets for this have proven to be Commercial Real Estate and Bonds.
My guess is that the insurance companies made too many promises they could not keep and they used massive leverage to back up these promises. Now leverage is killing their balance sheets as asset prices fall.
I remember reading how Modern Portfolio Theory opined that the optimal leverage for a Hedge Fund was 6.2 to 1 (620%). That leads to great performance on the upside, but when prices fall, all it takes is a 16% move down on asset prices to wipe you out. The problem with this Bear Market is that you have a lot of funds with massive leverage, who are all trying to sell at the same time to cover their margin calls!
Leverage is just borrowing to buy stuff (think a margin account on steroids). But just like with a margin account, when your equity falls below a certain level, you have to come up with new money by either selling holdings or depositing a check.
It is clear from the recent actions out of Washington, that the only entity left that is able to buy these assets is the US Government. This is because the only currency being accepted by sellers in the US Dollar. Thus all the lines of credit to companies, money market accounts and foreign governments.
How much stuff does the US Government need to buy before the economy starts to grow again? I have no clue. But the markets will tell me long before it occurs. And I will tell you what I see, when I see it.
The Bond Markets
I’ll get into Commercial Real Estate at a later time. Today I want to focus on the Bond Markets.
I have been taught to look at how stocks perform within a group to determine where the strength is. I want to show you the internals of the Bond Market to show you what is working and what is not.
I list the following charts of components of the bond market from most safe to most risky –
SHY – The 1 to 3-year US Treasury Index
TLT – the 20-year US Treasury
LQD – The Investment Grade Corporate Bond Index
HYG – The High Yield (Junk) Corporate Bond Index
In which of these would you like to have your money focused? My clients are in equivalents to SHY. It hurt last year to draw the low yield, but we avoided losing a lot of money!
All I can say is that on this spike up rally in stocks, the safe bonds (SHY, TLT) have pulled back into massive support. At the same time, the risky stuff (LQD, HYG) are rallying up into declining moving averages. Look at all the volume on LQD between 100 and 107, and on HYG between 90 and 97. It will take forever and a day to get back up through all of that stuff… LQD looks real heavy to me. It looks like a little concerted selling can take LQD back down to 80 very quickly. We’ll see.
There will be a time to swap out of the safe stuff and into the risky stuff, and I will be waiting for it when it comes.
The Deflation Trades
The Inflation trades have now become Deflation trades. TIP is the Inflation-adjusted US Treasury Index. It has been hammered lately as it is pricing in Deflation.
If my thesis is correct and inflation will be ramping up in the not too distant future, then this sell off in TIP may prove to be very profitable.
The Inflation trades have now become Deflation trades. TIP is the Inflation-adjusted US Treasury Index. It has been hammered lately as it is pricing in Deflation.
If my thesis is correct and inflation will be ramping up in the not too distant future, then this sell off in TIP may prove to be very profitable.
The vaulted “Yen carry Trade” continues to unwind as investors sell assets in Emerging Markets and cover their borrowing in Yen. This has led to massive demand for Yen and the Yen (FXY) has gone vertical the last few months. The Yen has now pulled back into big support and a key moving average. I need to keep this one on my buy list.
Notice how the Yen has pulled back into support, while the New York Stock Exchange ($NYA – bottom of FXY chart) has rallied up into resistance. That can’t be a good thing for stocks.
Notice how the Yen has pulled back into support, while the New York Stock Exchange ($NYA – bottom of FXY chart) has rallied up into resistance. That can’t be a good thing for stocks.
Remember how the Dollar was doomed and the Euro was the “New Dollar”?
Here’s the Euro (FXE). I see a broken chart with price imploding, and long term moving averages rolling over and starting to point down (Green & Blue Lines). That is the definition of a Bear Market. Maybe next summer is the time to go to Europe again…
Here’s the Euro (FXE). I see a broken chart with price imploding, and long term moving averages rolling over and starting to point down (Green & Blue Lines). That is the definition of a Bear Market. Maybe next summer is the time to go to Europe again…
What does all of this mean? The assets in Bear Markets have bounced on low volume. The assets in Bull Markets have pulled back on light volume. I think the stock market rally will end in a nasty selloff as soon as the big volume sellers decide to start liquidating again. I am building shorts in anticipation of this.
Saturday, November 1, 2008
An Article Worth Reading
Here is an article that articulates exactly what scares and frustrates me most about the current markets.
http://www.webofdebt.com/articles/manipulation.php
“…(J)ust one more egregious example of an ongoing pattern of manipulation that has become so blatant that either the manipulators have become supremely confident of their invulnerability or they are so terrified of impending doom that all pretense of plausible denial has been abandoned.”
I’ve tried to hold off on complaining about the obvious attempts by the Executive Branch of the US Government to prop up stock prices and minimize the magnitude of each leg of the decline, because I didn’t want to come off as a conspiracy wonk. But I am really nervous about where we now stand.
Two days before Bear Stearns went out of business, you had the top regulator in the country SEC Chairman Chris Cox go on TV and tell the world about how “well capitalized” Bear Stearns was. He isn’t supposed to be their cheerleader. He is supposed to be defending the public from their lies. The stock popped up into the $62 range and was ultimately bought out for $10 a share. People lost a lot of money because Cox went on TV and lied.
In July, the US Government changed the rules and made it illegal to short about 1,000 companies. That’s like the dealer telling me that my pair of aces lose to a pair of twos, because he says so. Goldman Sachs rallied $60 (70.6%) in 24 hours. Did you know that Treasury Secretary Paulson was the former CEO of Goldman? Do you think his cheating helped out a few of his buddies? And maybe his own holdings?
The author of the post says what I have been thinking – that the technocrats in Washington are either so cocky that they think they can break the law with impunity, or they are so scared by what they see, that they are breaking all the rules to keep the system from imploding.
So I am very nervous. This will not end well. Either the market will teach the cocky technocrats who is boss, or the markets will prove to be bigger than those trying to save it by manipulating it and will collapse under their own weight.
Price manipulation always ends in crashes as investors lose confidence in they system. I fear that we have unfinished business to do to the downside.
http://www.webofdebt.com/articles/manipulation.php
“…(J)ust one more egregious example of an ongoing pattern of manipulation that has become so blatant that either the manipulators have become supremely confident of their invulnerability or they are so terrified of impending doom that all pretense of plausible denial has been abandoned.”
I’ve tried to hold off on complaining about the obvious attempts by the Executive Branch of the US Government to prop up stock prices and minimize the magnitude of each leg of the decline, because I didn’t want to come off as a conspiracy wonk. But I am really nervous about where we now stand.
Two days before Bear Stearns went out of business, you had the top regulator in the country SEC Chairman Chris Cox go on TV and tell the world about how “well capitalized” Bear Stearns was. He isn’t supposed to be their cheerleader. He is supposed to be defending the public from their lies. The stock popped up into the $62 range and was ultimately bought out for $10 a share. People lost a lot of money because Cox went on TV and lied.
In July, the US Government changed the rules and made it illegal to short about 1,000 companies. That’s like the dealer telling me that my pair of aces lose to a pair of twos, because he says so. Goldman Sachs rallied $60 (70.6%) in 24 hours. Did you know that Treasury Secretary Paulson was the former CEO of Goldman? Do you think his cheating helped out a few of his buddies? And maybe his own holdings?
The author of the post says what I have been thinking – that the technocrats in Washington are either so cocky that they think they can break the law with impunity, or they are so scared by what they see, that they are breaking all the rules to keep the system from imploding.
So I am very nervous. This will not end well. Either the market will teach the cocky technocrats who is boss, or the markets will prove to be bigger than those trying to save it by manipulating it and will collapse under their own weight.
Price manipulation always ends in crashes as investors lose confidence in they system. I fear that we have unfinished business to do to the downside.
Wednesday, October 29, 2008
It's Fed Day
Every now and then I need to take a step back, look at history and reset my brain. I think it is important right now to review the writings of the Fed Chairman Bernanke. Because what he has written about in the past is having a big impact on the present.
Deflation: Making Sure "It" Doesn't Happen Here
I want to start with the speech that put Ben Bernanke on the map. The first time I read it, I knew that it was a seminal event and I knew that this guy was going to be the next Chairman of the Federal Reserve.
I actually printed copies of this speech, highlighted the important parts and mailed the copies out to clients. I refer back to it often, because it layed out the tools the Fed might use to fight deflation over what I assumed would be the years 2002 - 2016/2018.
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
Do you even need to ask yourself where we are in history, when the expertise of the Chairman of the Federal Reserve is studying “The Great Depression”?
(Unless otherwise cited, all quotations are lifted directly from this Bernanke speech)
“It” is deflation.
Deflation is far and away the greatest threat to our economy. If you recognize this and learn about what tools policy makers may use to prevent or cure deflation, then you are way ahead of the game at figuring out how to position money.
“Deflation is defined as a general decline in prices, with emphasis on the word ‘general’.”
“Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.”
“Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.”
Why is Deflation Such a Risk?
Deflation is such a risk to the US Economy, because the real value of debt actually increases during periods of deflation. If you owe $100,000 and have a deflation rate of -10%, then the real value of what you owe is $110,000 in year 2! So, by definition, deflation increases the cost of borrowing and of holding debt. Increased borrowing costs decrease economic activity.
When you get an economy with massive debt and you get deflation, what you end up with is what is called a “Deflation Death Spiral”. All this means is that deflation causes the cost of borrowing to increase, which leads to decreased demand, which leads to companies lowering prices to increase sales, which leads to deflation, which leads to the cost of borrowing – lather, rinse, repeat…
So deflation is causes by falling demand and deflation leads to falling demand. In the US Economy, the real cost of borrowing must diminish each year as the value of depreciating asset diminishes. This is done via inflation. In an economy which is designed to use borrowed money to purchase depreciating assets, deflation is incredibly destructive.
“In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.”
Deflation “impose(s) an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value."
“The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. … massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.”
How Do You Fight Deflation
This is the most important part of the speech. Remember, this speech was in November 2002. The tools he discusses were brought up as potential solutions 6 years ago! These guys knew this was coming and have been positioning things in preparation. for the inevitable.
The goal for defeating deflation is to “expand aggregate demand”. This phrase shows up a lot in his writings, so I think it is the key driver for all of Bernanke’s policy decisions. More on this later.
Cut Interest Rates
The Fed’s best tool for controlling demand is increasing or decreasing short term interest rates. They lower rates to increase demand, by making borrowing cheaper. However, sometimes rates get to effectively zero. Right now, the 3-month US Treasury yield is 0.565%. It is effectively zero right now!
Deflation: Making Sure "It" Doesn't Happen Here
I want to start with the speech that put Ben Bernanke on the map. The first time I read it, I knew that it was a seminal event and I knew that this guy was going to be the next Chairman of the Federal Reserve.
I actually printed copies of this speech, highlighted the important parts and mailed the copies out to clients. I refer back to it often, because it layed out the tools the Fed might use to fight deflation over what I assumed would be the years 2002 - 2016/2018.
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
Do you even need to ask yourself where we are in history, when the expertise of the Chairman of the Federal Reserve is studying “The Great Depression”?
(Unless otherwise cited, all quotations are lifted directly from this Bernanke speech)
“It” is deflation.
Deflation is far and away the greatest threat to our economy. If you recognize this and learn about what tools policy makers may use to prevent or cure deflation, then you are way ahead of the game at figuring out how to position money.
“Deflation is defined as a general decline in prices, with emphasis on the word ‘general’.”
“Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.”
“Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.”
Why is Deflation Such a Risk?
Deflation is such a risk to the US Economy, because the real value of debt actually increases during periods of deflation. If you owe $100,000 and have a deflation rate of -10%, then the real value of what you owe is $110,000 in year 2! So, by definition, deflation increases the cost of borrowing and of holding debt. Increased borrowing costs decrease economic activity.
When you get an economy with massive debt and you get deflation, what you end up with is what is called a “Deflation Death Spiral”. All this means is that deflation causes the cost of borrowing to increase, which leads to decreased demand, which leads to companies lowering prices to increase sales, which leads to deflation, which leads to the cost of borrowing – lather, rinse, repeat…
So deflation is causes by falling demand and deflation leads to falling demand. In the US Economy, the real cost of borrowing must diminish each year as the value of depreciating asset diminishes. This is done via inflation. In an economy which is designed to use borrowed money to purchase depreciating assets, deflation is incredibly destructive.
“In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.”
Deflation “impose(s) an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value."
“The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. … massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.”
How Do You Fight Deflation
This is the most important part of the speech. Remember, this speech was in November 2002. The tools he discusses were brought up as potential solutions 6 years ago! These guys knew this was coming and have been positioning things in preparation. for the inevitable.
The goal for defeating deflation is to “expand aggregate demand”. This phrase shows up a lot in his writings, so I think it is the key driver for all of Bernanke’s policy decisions. More on this later.
Cut Interest Rates
The Fed’s best tool for controlling demand is increasing or decreasing short term interest rates. They lower rates to increase demand, by making borrowing cheaper. However, sometimes rates get to effectively zero. Right now, the 3-month US Treasury yield is 0.565%. It is effectively zero right now!
The Fed “can no longer use its traditional means (rate cuts) of stimulating aggregate demand”, but it has by no means “run out of ammunition” for fighting deflation.
“When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.”
Expand Aggregate Demand
“(A) principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero.”
The 2002 Recession and “Preventing Deflation”
“(T)he best way to stay out of trouble is not to get into it in the first place.”
“(W)hen inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.”
In 2002, the Fed implemented strategies to prevent deflation. Greenspan cut rates to 1%, thus making money cheap to boost consumption and they removed virtually all regulation from the mortgage industry to make sure that real estate prices increased.
“A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.”
And thus we had the Bush Tax Cuts.
So deflation was avoided for several years – (Greenspan & Bush)) kick the can down the road, so the next guy (Bernanke & Obama) would have to worry about fixing things.
Curing Deflation
We are now knee deep in price deflation for assets – real estate, stocks, bonds. This has ground the economy to a halt. Moreover, we now have huge systemic risks which were not present in 2002. Look at what Bernanke was saying about the economy in 2002 –
“I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small…”
“A particularly important protective factor in the current environment is the strength of our financial system … our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape.”
Things have clearly changed, as the banking system is now insolvent and the average consumer has too much debt, while the assets they own are losing a lot of value.
What I am concerned about now is what policies will Bernanke use to “Cure Deflation” and how do I defend money and try and make money as these policies are implemented.
The Goal!
The goal of Bernanke is to “expand aggregate demand” at all costs. Carve that like backwards into your forehead so you read it every time you look in the mirror.
Let me explain “expand aggregate demand”. There is a difference between Real and Nominal Demand. Real is what you can buy next year versus this year based on the effects of inflation on your purchasing power. Nominal is the actual price you pay.
So if you bought something for $100 this year and inflation is 10%, then your Real purchasing power next year is effectively 91% of this year, as you have $100, but now must pay the Nominal (Inflation-adjusted) price of $110.
When Bernanke discusses “expand aggregate demand”, what he means is that he wants to make sure that on a Nominal basis, the economy is always growing year over year.
Bernanke gave a speech in the past 6 months (I can’t find it right now) where he defines his goal for the economy. He wants the economy to grow in nominal terms, so that we do not have debt deflation. Here is his math –
In 2008 you sell 10 widgets for $1 each, or a total of $10
In 2009 you sell 1 widget for $11, or a total of $11
You have $100 in debt and need to pay $10 per year in interest.
So by driving prices up 1000%, you are able to make enough money to service your debt. Production is down and inflation in through the roof, but you were able to pay your debts and that is all that seems to matter to Bernanke.
The Printing Press
“… (U)nder a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.”
“DEFLATION IS ALWAYS REVERSABLE UNDER A FIAT MONEY SYSTEM”
Print enough money to cause enough inflation to make sure that the Nominal economic output goes up, regardless of how badly Real economic output falls.
“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
“If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”
This is pretty sobering stuff, isn’t it?
Buying Assets Outside the Fed’s Mandate
“Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys.”
“Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.”
How many programs have we seen in the last 12 months to buy assets from banks -
Money Market Investor Funding Facility (MMIFF) $250 billion
Term Auction Facility $476 billion
Commercial Paper Funding Facility $900 billion (not a typo)
Bear Stearns Bailout $30 billion
Freddie Mac Bazooka $100 billion + $25 billion per month
Fannie Mae Bazooka $100 billion + $25 billion per month
AIG Nationalization $85 billion +$35 billion
The Paulson Plan $700 billion
Do you think they are making this up as they go along?
You can check the Fed's balance sheet here -
I think the Fed's Balance Sheet is now at over $4.5 trillion ($2.5 trillion to foreign banks). Did you see where Paulson decided that they would keep this $4.5 trillion off the books of the US Government (can you say Enron and "off balance sheet" accounting).
They know that the year they decide cut the accounting games, they will have to declare the number as a deficit for the year. How would you like to be running for office the year you pass a $2.5 trillion budget with a $4.5 trillion deficit?
Cap Interest Rates
“So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.”
“Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951. Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8% to 1.25% and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill.”
Take a look at the chart of the 30-year US Treasury Yield ($TYX = yield x 10) and you can see how the Fed has artificially held interest rates down in an effort to stimulate demand. At some point this changes and you had better not hold long-term bonds.
Here is a chart of the Price of the 30-year US Treasury. When the cap is lifted off of interest rates, the price of the 30-year bond will get smoked.
Buy Foreign Debt
“The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.”
The US just bought Money Market Instruments for the Korean
The Fed has now injected money into 14 foreign markets and has REPO agreements (at least $450 billion and counting) with Brasil, Mexico, South Korea, Singapore, New Zealand, Japan, Switzerland, England, European Central Bank, Australia, Denmark, Norway, Sweden and Canada. the list grows each day.
Yesterday, the Fed announced the possibility of loaning $25 billion to a Korean Sovreign Wealth Bank...
Fiscal Policy
Outside of the Bush Tax Cuts of a few years ago, the next President will seek some sort of massive new stimulus plan. My guess is that it will be an Alternate Energy/Electric Automobile version of the Kennedy Man on the Moon mandate.
“(I)n lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets.”
Also look for the government to buy a lot of vacant Real Estate to prop up prices.
Japan
People wonder why Japan has done things so poorly for the last 20 years. Did you see that the Nikki hit a new 26-year low this week? So EVERYBODY who bought the Nikki since 1982 is DOWN!! Holy cow…
“Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt.”
The US has massive financial problems. We are overleveraged and insolvent.
“Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems.”
“(C)omprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy.”
Japan is still in their funk, because they never allowed the bankruptcies to occur and they never let unemployment spike. These are necessary pains in a nasty recession. If you have excess capacity, then you need to close it down – that means close factories and lay off employees.
I think that means we are in for nasty unemployment and a lot of companies going out of business.
My Point
The Fed has been taking action for at least 6 years to fix the current problem we face. I have been out of stocks for a long time, but I’m here to tell you that we are closer to the end than we are to the beginning of the Bear Market. Moreover, the economy is a long way into working through this mess.
I’m actually getting pretty optimistic that things will bottom in 2009. Because I think the policy makers get it. You will probably look back at the 2008-2009 bottom as a Once-In-A-Generation entry point for stocks. We’ll see.
Their goal is to increase spending. That means earnings go up and stocks go up with the.
Their goal is to increase asset prices via the printing of a lot of money. Again, that means asset prices go up.
It also means that inflation goes up and so will interest rates. So bond prices will fall and fall hard.
It’s amazing what you can figure out when you do a little homework…
Fiscal Policy
Outside of the Bush Tax Cuts of a few years ago, the next President will seek some sort of massive new stimulus plan. My guess is that it will be an Alternate Energy/Electric Automobile version of the Kennedy Man on the Moon mandate.
“(I)n lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets.”
Also look for the government to buy a lot of vacant Real Estate to prop up prices.
Japan
People wonder why Japan has done things so poorly for the last 20 years. Did you see that the Nikki hit a new 26-year low this week? So EVERYBODY who bought the Nikki since 1982 is DOWN!! Holy cow…
“Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt.”
The US has massive financial problems. We are overleveraged and insolvent.
“Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems.”
“(C)omprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy.”
Japan is still in their funk, because they never allowed the bankruptcies to occur and they never let unemployment spike. These are necessary pains in a nasty recession. If you have excess capacity, then you need to close it down – that means close factories and lay off employees.
I think that means we are in for nasty unemployment and a lot of companies going out of business.
My Point
The Fed has been taking action for at least 6 years to fix the current problem we face. I have been out of stocks for a long time, but I’m here to tell you that we are closer to the end than we are to the beginning of the Bear Market. Moreover, the economy is a long way into working through this mess.
I’m actually getting pretty optimistic that things will bottom in 2009. Because I think the policy makers get it. You will probably look back at the 2008-2009 bottom as a Once-In-A-Generation entry point for stocks. We’ll see.
Their goal is to increase spending. That means earnings go up and stocks go up with the.
Their goal is to increase asset prices via the printing of a lot of money. Again, that means asset prices go up.
It also means that inflation goes up and so will interest rates. So bond prices will fall and fall hard.
It’s amazing what you can figure out when you do a little homework…
Sunday, October 26, 2008
Market Review at Multiple Timeframes
I wanted to break the markets into multiple time frames and show you a couple indicators to give you an idea of what I will be looking for when I deploy money for the next 2 to 4 years.
Here is my “Roadmap”. If the markets are above the Red and Blue lines, then I am selling over-extended rallies and buying pullbacks into the Red and Blue lines, because we are by definition then in a Bull Market and I want to be on offense.
If the markets are below the Red and Blue lines, then we are in a Bear Market, I am on defense and I am looking to short rallies into the Red and Blue lines and buy over-extended crashes.
I have been telling anybody who would listen that when price closed a month below the Blue and then Red lines, that it was time to raise cash, because I was afraid that this would be a replay of the 2000 – 2003 Bear Market. Pretty good call, eh?
See those green lines”? That is the bottom of the last Bear Market and the price range is proving to be a magnate, sucking prices down into them. I would be very surprised if price does not go below those levels before this Bear Market is over. I believe this, because it would scare the heck out of the unprepared and induce them to sell at a very bad time.
The bottom of the chart is the “Bullish Percent Index”. This essentially measures the percent of companies in uptrends. Panic bottoms have extremely low readings in this indicator. This is the lowest I have ever seen the indicator. But when it reverses up, it will confirm a rally that may be profitable to own. I will discuss this indicator in detail as a bottom appears to form.
http://www.investopedia.com/articles/trading/04/080404.asp
One more thing about his chart – see the Green Circle? That is the bottoming process of the last Bear Market. This Bear Market will also end in a bottoming process. So don’t go jumping out the window if you miss getting fully invested on the first decent bottom. The odds are real high that it will be revisited, and maybe undercut, at least once.
You may be asking yourself why I was so convinced that we would replay the 2000 – 2003 Bear Market. It is because we are now replaying the 1966 – 1982 Secular Bear Market.
See how the market trades in long rallies followed by extended periods of consolidation (violent sideways trading)? The rally phases (Secular Bull Markets) are characterized by increasing multiples and decreasing inflation and interest rates. The consolidation phases (Secular Bear Markets) are characterized by compressing multiples and rising inflation and interest rates.
We are just replaying the 1966 -1982 timeframe. I’m not a rocket scientist. I just study a lot and recognize what the markets have to tell me. The endgame to all of this is really nasty inflation and a huge spike up in interest rates designed to kill that inflation (ala Paul Volcker).
So we are in a Crash leg of a Secular Bear Market. I will do a detailed post tomorrow on potential bottoms for this Crash leg. I am not telling you these numbers will be fulfilled, but if we get down to them I will be on alert for a potential big rally. And this is really all I can do is try and figure out high-probability situations and be on my toes if they materialize.
Now I want to look at the daily action of the New York Stock Exchange ($NYA). This index is a broad representation of what is going for the average stock. On Friday, the $NYA closed below the -35% band (Black Line) for the first time in this plunge (Red Arrow). What I see here is a 13-day consolidation after the plunge of late September and early October. Friday may have been the first day of the next plunge. Or it could be a retest of the October 10 low. We’ll see. The next few days will tell me whether I should be shorting or buying.
I am concerned about the chart – the Volatility Index ($VIX). Call it a fear gauge – the higher the number, the more expensive insurance becomes (Put Options).
What concerns me is that the VIX just broke out (Green Arrow) of a multi-day consolidation (Green Lines). It is bad for stock prices if the VIX has another leg higher. I will be watching this closely.
Here is the Dow Jones since the October 10th bottom. I keep bringing this chart up to show how the markets are being driven intra-day.
The Pink Line is -1 Standard Deviation below the 260 period moving average. See how it has capped trading the last few days, where rally has topped at the Pink Line (Pink Arrows)?
The Purple Line is -1.5 Standard Deviations away. It has served as support for each bought of selling (Purple Arrows).
The Fibonacci Levels (Blue Lines) have also come into play as I mentioned they would last week.
I added the -1.25 Standard Deviation (Black Line) to show how it has been the key pivot for all intra-day trading the last 3 days.
The last few days I have done some short term trades to try and take advantage of massive intraday volatility. I have done this for myself and for a handful of clients.
The majority of my clients are in cash. For long-term allocations, I will be using the Daily, Weekly and Monthly charts to give me areas of potential reversals. Unless you can just sit there and watch things all day long, I would use the longer-term charts and a combination of volatility bands, standard deviations and indicators to determine when to try and enter stocks. I’ll keep you posted.
Here is my “Roadmap”. If the markets are above the Red and Blue lines, then I am selling over-extended rallies and buying pullbacks into the Red and Blue lines, because we are by definition then in a Bull Market and I want to be on offense.If the markets are below the Red and Blue lines, then we are in a Bear Market, I am on defense and I am looking to short rallies into the Red and Blue lines and buy over-extended crashes.
I have been telling anybody who would listen that when price closed a month below the Blue and then Red lines, that it was time to raise cash, because I was afraid that this would be a replay of the 2000 – 2003 Bear Market. Pretty good call, eh?
See those green lines”? That is the bottom of the last Bear Market and the price range is proving to be a magnate, sucking prices down into them. I would be very surprised if price does not go below those levels before this Bear Market is over. I believe this, because it would scare the heck out of the unprepared and induce them to sell at a very bad time.
The bottom of the chart is the “Bullish Percent Index”. This essentially measures the percent of companies in uptrends. Panic bottoms have extremely low readings in this indicator. This is the lowest I have ever seen the indicator. But when it reverses up, it will confirm a rally that may be profitable to own. I will discuss this indicator in detail as a bottom appears to form.
http://www.investopedia.com/articles/trading/04/080404.asp
One more thing about his chart – see the Green Circle? That is the bottoming process of the last Bear Market. This Bear Market will also end in a bottoming process. So don’t go jumping out the window if you miss getting fully invested on the first decent bottom. The odds are real high that it will be revisited, and maybe undercut, at least once.
You may be asking yourself why I was so convinced that we would replay the 2000 – 2003 Bear Market. It is because we are now replaying the 1966 – 1982 Secular Bear Market.
See how the market trades in long rallies followed by extended periods of consolidation (violent sideways trading)? The rally phases (Secular Bull Markets) are characterized by increasing multiples and decreasing inflation and interest rates. The consolidation phases (Secular Bear Markets) are characterized by compressing multiples and rising inflation and interest rates.We are just replaying the 1966 -1982 timeframe. I’m not a rocket scientist. I just study a lot and recognize what the markets have to tell me. The endgame to all of this is really nasty inflation and a huge spike up in interest rates designed to kill that inflation (ala Paul Volcker).
So we are in a Crash leg of a Secular Bear Market. I will do a detailed post tomorrow on potential bottoms for this Crash leg. I am not telling you these numbers will be fulfilled, but if we get down to them I will be on alert for a potential big rally. And this is really all I can do is try and figure out high-probability situations and be on my toes if they materialize.
Now I want to look at the daily action of the New York Stock Exchange ($NYA). This index is a broad representation of what is going for the average stock. On Friday, the $NYA closed below the -35% band (Black Line) for the first time in this plunge (Red Arrow). What I see here is a 13-day consolidation after the plunge of late September and early October. Friday may have been the first day of the next plunge. Or it could be a retest of the October 10 low. We’ll see. The next few days will tell me whether I should be shorting or buying.
I am concerned about the chart – the Volatility Index ($VIX). Call it a fear gauge – the higher the number, the more expensive insurance becomes (Put Options).What concerns me is that the VIX just broke out (Green Arrow) of a multi-day consolidation (Green Lines). It is bad for stock prices if the VIX has another leg higher. I will be watching this closely.
Here is the Dow Jones since the October 10th bottom. I keep bringing this chart up to show how the markets are being driven intra-day.
The Pink Line is -1 Standard Deviation below the 260 period moving average. See how it has capped trading the last few days, where rally has topped at the Pink Line (Pink Arrows)?
The Purple Line is -1.5 Standard Deviations away. It has served as support for each bought of selling (Purple Arrows).
The Fibonacci Levels (Blue Lines) have also come into play as I mentioned they would last week.
I added the -1.25 Standard Deviation (Black Line) to show how it has been the key pivot for all intra-day trading the last 3 days.
The last few days I have done some short term trades to try and take advantage of massive intraday volatility. I have done this for myself and for a handful of clients.
The majority of my clients are in cash. For long-term allocations, I will be using the Daily, Weekly and Monthly charts to give me areas of potential reversals. Unless you can just sit there and watch things all day long, I would use the longer-term charts and a combination of volatility bands, standard deviations and indicators to determine when to try and enter stocks. I’ll keep you posted.
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