by Tim Knight
Aug. 20, 2012 5 p.m.
Analysis: U.S. corporate earnings point to further gloom
Earnings season is drawing to a close and the results raise a number of worrying questions about the economy's direction.
For the second quarter, the percentage of companies beating revenue forecasts was the lowest since 2009. For every company that gave a positive outlook, nearly five companies gave negative outlooks, Thomson Reuters data showed.
Third-quarter earnings estimates are down sharply, and now show a year-over-year decline of 1.8 percent, which would be the first quarter of negative growth in three years.
This is a REAL Crisis to Be Afraid Of
08/21/2012 13:06 -0400
We need to address a MAJOR situation that is developing: the drought in the US and its impact on US crops.
The US is experiencing its worst drought since 1956. Altogether 63% of the lower US 48 states are experiencing a drought. As a result of this, the USDA has said that 50% of the US’s corn crop will be in poor to very poor condition.
What does this mean? That the US will have a very VERY low corn crop. This in of itself is bad. But when you consider that corn supplies are at their lowest levels in 17 years, you’ve got a recipe for a serious corn shortage.
Few people understand how large a part of the US industrial food chain is tied to corn.
Corn feeds the chickens, pigs, cows, turkeys, and lambs that are the primary sources of meat in the US. It also now feeds the most common fish in the US diet (catfish, tilapia, and salmon), all of which have been genetically engineered to eat the vegetable.
Corn feeds the chickens that provide us with eggs. It also feeds the cows that provide us with dairy products (butter, yogurt, milk, cheese). Even if you avoid milk and drink soda or beer, you’re still drinking corn in one form or another: virtually all sodas contain high fructose corn syrup, while the alcohol in beer is fermented from glucose that originated in corn.
Corn is in margarine, coffee sweetener, icing, gravy, hot sauce, mayonnaise, soups, cake mixes, snacks foods, salad dressings, frozen waffles, and on and on. If you eat produce in any form, it’s likely got corn in or on it: corn was in the pesticide, the cardboard in which it was shipped, even the wax applied to its surface to give it a sheen.
Step away from the food section in a supermarket and you’re still surrounded by corn. Corn is in toothpaste, disposable diapers, matches, trash bags, disposable batteries, make up, even magazines covers (again the sheen).
According to Michael Pollan, author of The Omnivore’s Dilemma, corn is in roughly 25% of all items located in your average grocery store. So a corn shortage means BIG TROUBLE for the US when it comes to food.
The situation is equally gloomy for soybeans, the second largest produced crop in the US: today inventories are at their lowest levels in 32 years. And the current drought has resulted in 39% of this year’s soybean crop being in poor to very poor condition.
What does this all mean? That we’re likely heading into a food crisis in the US regarding corn and soybeans.
and an article from Der Spiegel...
The Cost of Hunger: Drought Only One Factor Behind High Food Prices
The severe drought in the US has been blamed the rising prices of agricultural commodities. But that is only part of the story: Biofuels, financial speculation and changing dietary habits are also playing a role. The global food supply faces pressure from all sides.
The American Midwest is experiencing its worst drought since the 1930s. One-sixth of the corn crop has been lost and the soybean plants and wheat stalks don't look much better. Shortages and rising prices for essential commodities are the result.
Some prices have soared by almost 50 percent within just 10 weeks, and grain warehouses are beginning to empty out. Other important supplier countries also anticipate poor harvests. Because of a prolonged dry period in Russia, wheat exports are expected to be only half of what they were last year. Brazil, on the other hand, has had too much rain, which is bad news for sugar-cane farmers. "The latest crop predictions suggest that we should fear the worst," the United Nations World Food Programme warned last week. It is the third such warning in recent years, following similar crises in 2008 and 2011. Catastrophe, it would seem, is becoming the norm.
Sudden spikes in the prices of wheat, soybeans and corn threaten the wellbeing of every individual. Economists warn of "agflation," or inflation triggered by a rise in the price of agricultural products. Poor nations, however, are disproportionately affected because people there spend a larger share of their income on food. But consumers in the industrialized world will also feel the effects.
Some in the markets think that the Fed effectively targets equity prices, meaning that to predict Fed policy, one merely needs to track the US stock market. There is a curious circularity to this view, however: the Fed will not launch QE3 so long as stock prices are high, yet the stock market is high because it anticipates QE3. BofAML's chart-of-the-day is intrguingly similar to our 'QE Hopeyness' chart as it shows that stock and bond prices have decoupled since the summer, as QE3 expectations overwhelmed the weaker macroeconomic data to buoy equities. Now that recent data have improved, yields have risen - but so too have stocks. This "heads I win, tails you lose" aspect of stock prices rising regardless of the macro backdrop, BofAML believes, makes them a far less useful signal for Fed officials. Moreover, it creates the risk that the equity market could sell off after the 12-13 September FOMC meeting if the Fed disappoints.
BofAML: The Fed-Equities Nexus
Stocks as a signal for policy makers...
The stock market is just one component of financial conditions, and financial conditions are just one driver of the outlook for growth and inflation. The Fed wants to be forward-looking in light of the transmission lags of monetary policy. In the words of Dallas Fed President Richard Fisher, quoting hockey legend Wayne Gretzky, the Fed must “skate to where the puck [ie, the outlook] is going to be, not where it has been.” Financial conditions can signal where the outlook is going to be, but that role breaks down when financial markets are largely driven by policy expectations. No central banker wants to tie policy to a financial variable that itself is driven by policy expectations.
As Chart 1 above shows, financial conditions more broadly are not very far from where they were ahead of QE2. Chart 1 plots three measures produced by Fed researchers: a National Financial Conditions Index from the Chicago Fed and two Financial Stress Indexes, one each from the St. Louis and Cleveland Feds. All three are normalized measures in which higher values indicate more stress. The Chicago and St. Louis indexes co-move quite closely (95% correlation coefficient) despite their different construction and units; the correlation of the Cleveland measure with the other two exceeds 70%. Even though rising stock prices are indicative of better financial conditions, in some sense the equity market appears to have it right: broader financial conditions are not so strong to price out QE3.
...but not as a policy goal
On the other hand, the Fed is not targeting the stock market. True, the Fed wants to see financial conditions improve because this is a channel through which monetary policy has a positive impact upon the economy, including wealth effects and confidence. But Fed officials do not see targeting equity prices as even an intermediate goal of policy, let alone an end in itself. Despite market speculation about the strike price of the so-called “Bernanke put,” one never finds Fed officials themselves talking up stock prices or mentioning a specific target value. Rather, Fed officials are focused on their dual mandate — price stability and maximum sustainable employment — to the point that they augmented their statement in June with “sustained improvement in labor market conditions” as well as “a stronger economy recovery” as policy objectives that would potentially warrant additional accommodation.
On the inflation front, the data for the headline personal consumption expenditure (PCE) deflator — the Fed’s preferred measure — have softened to just a 1.5% annual inflation rate after running at 2-3% for a year (from March 2011 to 2012). This measure bottomed out at 1.4% ahead of QE2 in 2010. That said, core PCE inflation is running higher now (1.8%) than prior to QE2 (1.2%). But both headline and core inflation are not only below the Fed’s 2% long-run inflation target, but Fed officials expect them to remain there for some time. And although the Fed’s preferred computation of 5-year, 5-year forward breakeven inflation (Chart 2 above; FED5YEAR in Bloomberg) had not reached its 2010 low, it has remained in the range that preceded QE2. A little more weakness in the inflation data is probably necessary to make a compelling case for QE3 in September.
Conversely, many Fed officials have acknowledged that they are significantly underperforming the other part of their dual mandate: the unemployment rate has crept back up to 8.3% in July, where it stood in January, while the employment-topopulation ratio has shown no net improvement for the past several years (Chart 3 below). Even a positive surprise of 163,000 on July payrolls is unlikely to impress most Fed officials: in a normal recovery, in which job growth exceeds 200,000 for a while, 163,000 would be considered a modest disappointment.
What if the Fed disappoints?
This mixed data outlook makes the Fed call for the September meeting especially close. There is little doubt for us that if the data resume sliding to the downside, the Fed will step in and ease further this year. Right now, however, we are in an anti-Goldilocks period in which the data are too hot for clear-cut Fed easing, but too cold to support a sustained rebound — anything but “just right”.
Meanwhile, discussions with investors suggest that the equity markets have not yet priced in the fiscal cliff or resumption of risks from Europe once policy makers there return from vacation. Our equity strategists have highlighted downside risks to the equity market, now that the S&P 500 index is within striking distance of their year-end target. Another on-hold Fed meeting — or even an extension of the forward guidance when the market really wants QE3 — could be a catalyst that begets a sell-off, in our view. Look out below.
Back in April, he laid out a roadmap for stocks, which assumed a mid-year rally before a major collapse.
In his July note, he reminded us that his call was unfolding. And he does so again in his note today:
"In terms of markets, the route map I set out in early April and which I affirmed in early June continues to play out extremely well. After correctly calling the late March/early April 1420 high in the S&P500, and also the early June (1270) low, we have also now fully captured the risk-on rally in stocks and credit that began in early June…"
So, what's next?
Well, this is when things start to get ugly.
"I now think the correct thing to do – as I also said in April and June – is to prepare for a serious risk-off phase between August and November," he reiterated. "Over the August to November period I am looking for the S&P500 to trade off down from around 1400…by 20% to 25%...to trade at or below the lows of 2011."
He argues that the key drivers of this sell-off will be disappointment at next week's Federal Reserve Jackson Hole speech and realization that the ECB won't be be able to deliver on their promises.
In his note -- titled Time For Action, Warning Over -- Janjuah writes that the beginning of the big sell-off is imminent: "While in the extreme short term – days – we think more risk on is possible, we now feel comfortable in flipping from risk on to risk off and positioning for this major risk-off phase."
However, he does hedge himself a bit:
"Just in case something genuinely new and unusual is happening – we note that the risk-on phase has extended for a few more days than we had originally forecast – and in the interests of prudence, my stop loss on the risk-off call effective immediately is a consecutive weekly close on the S&P500 at or above 1450."
In spite of weak corporate earnings within the S&P 500 list companies, the market continues to grind its way higher. However, this chart shows the S&P 500 could be forming what is referred to in technical analysis jargon as a "Triple Top Reversal Pattern."
The below is a three-year chart of the S&P 500. Those blue circles to the right of the chart represent the rough equivalent high price points that the S&P 500 has reached since the beginning of the year; notice that the S&P 500 has reached this level three times.
According to technical analysis, a Triple Top Reversal forms over a period of three to six months. Any Triple Top Reversal that forms over a period of time greater than six months is said to be indicative of a major top.
As is evident by the above S&P 500 chart, this current Triple Top Reversal pattern has been forming for six months. In technical analysis terms, the other characteristics of a Triple Top Reversal pattern are that there must be a previous trend to reverse and overall average volume must be lower at the three tops.
From December 2011 to the first blue circle on the S&P 500 chart above, or March 2012, the S&P 500 has been in an uptrend or moving higher on a consistent basis. This satisfies the criteria of there being an uptrend to reverse, which means that if this Triple Top Reversal pattern plays out, a downtrend will follow.
The red line at the bottom of the chart running across the volume box indicates average volume. When volume falls below this red line, then volume is said to be lower than average in technical analysis terms. If the volume surpasses the red line, then volume is said to higher than average volume.
Draw a visual straight line from each of the blue circles, dear reader, to the bottom of the chart until you reach the volume box. Notice that, in all three cases, volume is below the red line, which signifies that volume is lower than average. Notice as well that the third blue circle - where we are trading today - exhibits volume that continues to decline. The criterion of overall average volume being lower at the three tops is satisfied.
Now the S&P 500 could continue to climb higher, but technical analysis would say that, if volume continues to be lower than average with a new high, this is suspect and prone to a reversal, which means the Triple Top Reversal pattern would still be in play.
As well, if the S&P 500 begins to trade lower, technical analysis says the pattern is not confirmed until the next major support line is violated. In the chart above, that line has been drawn in and is roughly 1,346. This means that if the S&P 500 closes for the week below 1,346, then the Triple Top Reversal pattern is complete and a major top is in place.
Be careful with that complacent stock market, dear reader. First there were economic warnings. Now, technical analysis tells us a major market top could be forming.
It is any wonder that, with a near-record 46.5 million people on food stamps in this country and the jobs market being so weak, the poverty rate is on track to hit the highest level since 1965? (Source: Associated Press, July 23, 2012.)
The official census figures will be released this fall to confirm this number, but studies are concluding that almost one-in-six people in the U.S. fell beneath the poverty line last year.
It is amazing that investors wonder why consumer spending is not rising in this country.
The Georgetown Center on Poverty, Inequality and Public Policy noted that, with so many discouraged workers in the jobs market, unemployment benefits eventually expire, leaving them destitute. The institute noted that it is hard for these people to find opportunity in such a weak jobs market.
It cited another problem with this jobs market: the stagnation in wage growth is another factor leading to poverty. The institute believes that the poverty rate will continue to climb in the next few years because of what it sees as a very weak jobs market.
With the unemployment reports, dear reader, I have been stressing that the jobs market is worse than it is, because there are many discouraged workers that are not counted. These discouraged workers are removed from the jobs market report and are sadly finding themselves included in the poverty statistics. (See: "Number of People Not Working Hits Second Highest Level Ever.")
The institute noted what I have been harping on for some time about the weak jobs market and that is, if real discretionary income does not rise, people cannot make ends meet. This is why consumer spending is going to have a difficult time rising when incomes and the jobs market are so weak.
Just last week, I wrote in these pages about how, for the first time in its history, Social Security is paying out less than people have put in during their working lifetimes. This is a testimony to the loss of purchasing power equivalent to real discretionary incomes not rising in this country due to the weak jobs market. The result is the inability of consumer spending to rise and the inability of the average American to make ends meet.
The situation is so bad that the push is on with one aspect of life insurance called "life settlements." (Source: New York Times, August 10, 2012.) You may not want to know, dear reader, that life settlements take place when a living person sells his/her life insurance policy to another entity for an immediate cash payment.
The living person gets cash today, which helps them pay for medical bills and other everyday expenses...maybe their stock portfolio got severely crushed in the financial crisis or Social Security and/or incomes cannot keep pace with expenses in this weak jobs market.
The entity becomes the new beneficiary in return. When the person dies, the money does not go to his/her heirs, but to the entity the person sold the life insurance policy to.
There are so many headwinds against consumer spending as more people sadly enter poverty. The jobs market needs to start creating jobs in this country or more people are going to fall into poverty. How this backdrop points to strong consumer spending is beyond me. If consumer spending makes up 70% of the economy and the jobs market is showing no signs of strength, the economy cannot improve.
There is not much else I can say about the stock market that I haven't said above. The economic situation continues to deteriorate each passing day. Europe's credit crisis and China's economic slowdown (see: "Chinese Economy Showing Signs of Severe Slowdown") will sit heavily on America's shoulders.
I continue to believe the stock market is in the process of putting a top in. That bear market rally that started in March of 2009 is slowly coming to end.
Submitted by Tyler Durden
on 08/23/2012 - 16:14
Volume? Check. Spanish Spreads wider? Check. Maria B Saying "Wall-of-Worry"? Check. Sure enough, all the pieces were there for a sell-off today as the S&P saw its largest drop in a month as volumes have resurged in the last three days (of fading markets) and average trade size has gradually fallen from its peak (at the multi-year highs on Tuesday). Cross-asset-class correlations picked up notably and equities caught down to risk-assets (after yesterday's 'rally'). VIX rose once again - back above 16% - with the biggest 3-day rise in a month. Gold has rallied 1% per day for the last three days (something we haven't seen since OCT11) up near $1675. 10Y Treasury yields have now dropped 5 days in a row (something we haven't seen since APR12), down over 20bps from their highs/200DMA. Oil stumbled on the day, now down 0.3% on the week, even as Silver is up almost 9% on the week (and Gold 3.3%) - even as the USD is down 1.4% on the week (leaking lower still on the day after its gap overnight). Materials underperformed by the most today (which smells like QE-off) and was followed by Energy and Financials. Stocks underperformed (though HYG was modestly bid - we suspect on convergence trades) as stocks caught down to credit once again.
Since June of this year, the Dow Jones Industrial Average has gained about nine percent. Meanwhile the S&P 500 and NASDAQ have gained about 11% each.
I recently wrote about a possible “triple top formation” on the S&P 500 chart and how technical analysis suggests that the key stock indices might be heading south. I dug a little deeper and found what I believe is more evidence the S&P 500 is bound to go south.
Sucker’s rally! Bear trap! What do they have in common? They lure people into believing that the economy and stock market are doing well so investors are enticed back into buying stocks. Keep in mind that near a market top, investor confidence is high and the ‘buy now or you will miss it’ greed factor is very convincing.
Technical analysis would suggest that there is “triple top formation” in the S&P 500 chart (see: “Beware “Triple Top Reversal Pattern Almost Complete”), but there is more to it.
On Wednesday, August 15, 2012, the volume of shares traded on NYSE totaled 2.64 billion. This is roughly 29% below this year’s average. (Source: Market Watch, August 16, 2012.) Stock market trading volume has been suspiciously weak all of August.
When key stock indices climb higher or turn sour, there is lots of participation—more volume, not less. The current rally looks to be running on nothing but thin air.
Can volume alone prove the recent rally in S&P 500 and key stock indices is a bear trap? Of course not. But there is more…
Short interest (a measure to gauge professional investors’ sentiment about certain stocks or a market) in S&P 500 futures by commercial traders (banks and investment firms) has been rising sharply. The professionals are betting the market is headed lower.
The rising short interest by commercial traders in S&P 500 futures is something that should worry small investors like you and me. Either these commercial traders are trying to protect their positions or they are simply trading the S&P 500 futures for gains.
Since 2005, when short interest (betting the stock market will go down) activity is greater than long interest (betting the market will rise), we’ve witnessed a subsequent downturn in the markets. Currently, short interest is rising and long interest is falling.
The increase of short interest in S&P 500 futures is suggesting that the sentiment of commercial traders seems to be changing towards bearishness. Don’t forget; they are big banks, funds and firms that invest significant amounts of money in the markets—they can’t afford to be wrong.
Dear reader, there is enough evidence out there to give credence to the theory the current rally in S&P 500 and other key stock indices is nothing but a sucker’s rally. The sentiment by big banks and funds is quickly turning towards bearish territory. As I reported yesterday, stock advisors (who are amateurs) are increasing their bullishness on stocks—a contrarian indicator.
Trading volume is extremely low—there’s not a lot of market participation. Are the S&P 500 and other key stock indices going much higher? I have reasons to believe they won’t.
Even the most amateurish of an economist knows consumer spending increases when consumer confidence is high. Unfortunately, the current dire state of the economy has taken a toll on both consumer spending and consumer confidence.
Recent reports show that the U.S. birth rate has plummeted to a 25-year low. The birth per woman in 2007 was 2.12 children. It has now fallen to 1.87—a decrease of 12% in five years. (Source: Daily Mail, July 26, 2012.) The main reason for this: bleak consumer confidence in the economy. As a good friend of mine likes to say, “No money, no funny.”
What got my attention about these just-released statistics: during the current economy, the birth rate has fallen to a level below the birth rate of the Great Depression.
The number of children was 2.3 per family on average in 1933, according to U.S. Centers for Disease Control Prevention. (Source: Bloomberg, August 21, 2012.) Could consumer confidence be so weak that people are hesitant to make decisions that can lead them into more financial distress?
In general, when the population increases, consumer spending rises. Similarly, when consumer confidence is high, consumers spend more. The birth rate affects sales of thousands of products and services in the economy…not only diapers and food, but also others items such as housing and education.
Consumer confidence today is bleak. Parents are not having kids at the rate they used to, because it can be costly. According to U.S. Department of Agriculture, a middle income family having a baby in 2011 will spend about $234,900 over 17 years on that child for food, shelter, transportation, and child care.
American companies are complaining about families not having children like they used to. The CEO of Kimberly Clark Corp. (NYSE/KMB) said that the company is “feeling the full effects of three years of low birth rate declines.” (Source: Bloomberg, August 21, 2012.) Kimberly Clark makes diapers and training pants.
Now to back track a bit, I have been writing about the high unemployment rate and its negative effect on consumer confidence. Though it abolishes consumer spending due to low disposable income, it may also discourage people to start a family, buy a bigger car, or buy that bigger house with more green grass.
There are more hurdles in boosting consumer confidence. The cost of tuition is rising. More students are in debt, and when they graduate, they have student loan payments to make. With the job market in the doldrums, it discourages consumer spending and slumps consumer confidence.
The economy is showing more and more reasons to go against those politicians and economists who say “we are seeing economic growth.” This economist only sees the economic situation getting worse.
High unemployment and skyrocketing student debt were enough on their own to push consumer spending lower. But the current decline in the birth rate is another big long-term economic negative. It not only illustrates just how weak consumer confidence is, but also helps us predict future consumer spending—which doesn’t look good right now.
Where the Market Stands; Where it’s Headed:
Taking a break from my regular rant on the stock market, I wanted to share this excellent quote from NRH Research’s just released 2012 Ranking of Gold Mines & Deposits:
“…a gold mine or deposit is an asset no different than a farm, commercial property, or financial security. Yet when it comes to gold, there are only 439 assets that meet the industry perceived economic threshold of 1 million ounces. Last year, we compared this figure to the tens of thousands of commercial real estate properties in the world or the nearly 72,000 financial securities. While the crustal abundance of gold is fixed, and discovery grades continue to decline, there is no limit to the creation of financial securities and plenty of land and building materials to construct more property. Simply put, a gold mine or deposit with over 1 million ounces is a very rare asset.”
There are only 439 gold mines in the world with deposits equal to one million ounces or more of gold. Of those 439, only 189 are currently producing gold. Food for thought if you haven’t already gotten into the 10-year old gold bull market yet.
Back in February when the DOW crossed the 13,000 mark, Dennis Gartman said he had made a mistake reducing the size of his long position.
He said, "you make it sound like I'm short of equities. Not on your life. Not right now"
Now Gartman, publisher of the Gartman Letter, who cut his long position by half earlier this week, has exited stocks entirely.
In his investor note he writes:
"Stock prices are weak as our proprietary International Index has fallen 62 “points” or 0.8% in the past twenty four hours. Having traded to 7805 earlier this week, this index is now down sharply from its highs... yet; but we are more and more fearful that it shall be, and having cut our long position in half earlier this week, and further having noted how rather badly the market responded to the belief that QE III was on the way, and noting that far too many individual stocks and one or two important international broad indices posted “reversals” earlier this week, we are exiting the other half of our long positions this morning upon receipt of this commentary.
Yes, we do indeed understand that this is a shift in sentiment; and yes we do understand that we had said that stock prices might “melt up,” and yes we further understand that we may look foolish in the weeks ahead for standing down, but call it trader’s intuition or call it what you will, but we wish to move quietly to the sidelines trust we are clear."
Gartman, who says he is bullish of "simple things", said earlier this week that the plunge in steel shares had signaled a buy.
But after receiving a report from a friend in a "small but influential broking firm in New York" downgrading the steel industry, Gartman writes, "we’ll 'bet' in its favour once again in the not too distant future, but not now given that we are standing down from our previous bullish posture this morning."
August 28, 2012
by Patrick Watson
The S&P 500 will soon be overtaken by its children, at least in terms of trading volume. Bloomberg News tells us this in the article entitled 'ETFs Poised To Exceed Trade in S&P 500 As Spiders Beat Apple'.
Combined dollar volume in SPDR S&P 500 (SPY), iShares S&P 500 Index Fund (IVV), and Vanguard S&P 500 ETF (VOO) averaged $28 billion a day in the past year. This is only slightly less than trading in the index's constituent stocks. If current trends continue, S&P 500 ETFs will soon be more popular than S&P 500 stocks. And these are only three of the 20 ETFs included in the Large Cap Blend category of the ETF Field Guide. Add in the rest, and there's a good chance ETF trading already surpasses that of the underlying stocks.
The motivation seems to be trading convenience. The indexed ETFs are the easiest and quickest way to get broad market exposure. If no such vehicles existed, the goal could be achieved only with baskets of individual stocks. That method is far more expensive and requires far more capital, so smaller institutions and individual investors would be left out – as they were prior to S&P 500 funds.
To look at it another way: if all other factors could be held constant, S&P 500 stocks like Apple (AAPL) and ExxonMobil (XOM) would need an additional $28 billion in daily trading value to overcome the absence of ETFs. Clearly, ETFs matter to the markets.
ETF convenience also has a dark side. High frequency algorithmic trading systems occasionally run wild, with the recent incident at Knight Trading only the most recent example. Such trading was not necessarily enabled by ETFs, but is certainly related. The growth trend for ETF shows no sign of slowing, and its impact on market functioning continues to evolve. Even stock investors who never use ETFs need to keep their eyes open.
Disclosure: Long AAPL. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.
RISK ON....GOLD +$31
Fed Chairman Makes Case, in Strong Terms, for New Action
The Federal Reserve chairman, Ben S. Bernanke, delivered a detailed and forceful argument on Friday for new steps to stimulate the economy, reinforcing earlier indications that the Fed is on the verge of action.
Calling the persistently high rate of unemployment a “grave concern,” language that several experts described as unusually strong, Mr. Bernanke made clear that a recent run of tepid rather than terrible economic data had not altered the Fed’s will to act, because the pace of growth remained too slow to reduce the number of people who lack jobs.
Mr. Bernanke said that the Fed’s efforts over the last several years had helped to hasten economic recovery, that there was a clear need for additional action and that the likely benefits of new steps to stimulate growth outweighed the potential costs.
Today's first story is from yesterday's edition of The New York Times
published September 9th, 2012
by Clive Maund
Our 4-year chart below, which shows the uptrend from the 2009 lows in its entirety, makes plain that the market is in the late stages of a huge strongly converging, and thus strongly bearish, Rising Wedge, which results from a steady diminishing of buying power. As we can see it must soon break out from this pattern and if the breakout is to the downside it is likely to plunge, which is likely given the looming Fiscal Cliff which will ravage corporate profits – if it succeeds in breaking out upside it will buy it more time, but this is considered a much less likely outcome.
Our long-term 20-year chart shows that the market has risen up into a zone of strong resistance approaching its 2000 and 2007 major highs – so much for the great breakout. Looks more like a great place for it to turn tail and start another bearmarket.
So what has been happening elsewhere while investors in US markets have been led to the edge of the cliff by the QE pied piper? Investors in Chinese markets do not seem so enthralled with the future outlook at all, as our 4-year chart for the Shanghai Composite index makes clear. It is incredible to think that while the US markets have wafted higher by about 26% since the start of 2010, the Chinese market has slumped by 36%.
So which group of investors is right about the outlook for the global economy? – before you go ahead and place your bets you ought to consider the following chart for the Baltic Dry Shipping Index…
…and we can put this all together on one disturbing chart that enables us to make a direct comparison between these 3 elements…
This Baltic Dry Index is a truly frightening chart, as it is already at the dismally low extremes plumbed during the depths of the 2008 market crash. If it is a reflection of the true state of affairs it means that world trade is imploding – and that means that the US stockmarket is hanging on a thread, with investors smoking the QE hopium pipe. Don’t believe it? – before you go off searching for evidence that this chart is somehow skewed and no longer functioning as a true reflection of the state of the world economy, you might like to take a look at the following 2 charts, and then try your hand at finding an excuse for them too…
The 1st is a chart for the US trash index, and while there is scope for distortion here as this is trash carried by rail freight, it is certainly not encouraging, and as we can see it nosedived around the time of the 2008 crash and is plummeting again right now.
Before you dismiss the previous chart as a load of rubbish take a look at this next chart which shows the Velocity of Money going back many years, as we can see it has recently slowed to an alarmingly low level – well below its lows at the depths of the 2008 market crash. Are you starting to get the picture yet? – is the penny starting to drop?? Knock knock – is there anybody in there???
A big reason for the US stockmarket’s rally last week was nothing to do with the economy and everything to do with the steep decline in the dollar, so it was just rising to compensate for the dollar drop. The main thing about the dollar is that it has been written off by many commentators as “toast” – and every time that has happened in the past it has made a comeback. Could it be different this time? – Could it really be toast this time round? – anything is possible but the probability of a rebound here is high for reasons that we will now examine.
The entire uptrend in the dollar from the lows of July last year can be seen to advantage on a 14-month chart. On this chart we can see that it appears to have broken down from the main uptrend, a development presaged by the earlier weaker impulse wave that took it up to about 84 in July. This may mark the start of a breakdown from a bearish Rising Wedge, or the channel may be becoming less steep as shown, but with adjusted channel support and support from earlier highs and a rising 200-day moving average close by, it is believed to be too soon to write off the dollar. We see also on this chart that the dollar index is at its normal oversold limit for this uptrend. All this means that the dollar could turn up soon.
With 90% of investors in US markets now looking to the Fed to save the day by waving its magical QE wand, the scope for disappointment is now huge – and there may be nothing to look forward to after the FOMC meeting on the 13th – and what if they do a big QE immediately? First of all it would take time to take effect, and there is no more time. Secondly, even if the banks stopped greedily sitting on all of the QE cash and let it out into the real economy, the result would be roaring inflation, and inflation is already high enough in the real economy, given that it is teetering on the verge of collapse. This inflation would impoverish consumers who would then spend less, thus adversely impacting corporate profits, resulting in falling stockmarkets - so they are damned if they do and damned if they don’t.
Given that stockmarkets generally discount the economy 6 to 9 months ahead, it is clear that the situation for the market is already extremely dangerous – the only reason that it hasn’t started down already is false hopes over a QE rescue.
The great thing about the current situation is that the latest new high by the market is giving us an opportunity to offload stocks at generally very favorable prices and to reverse position into bear ETFs and Puts, so that we can then feast on the ensuing severe decline while others are losing their shirts.
What will happen to gold and silver if the stockmarket goes into the tank? – well, past experience demonstrates that things could get ugly, although this time we have to factor in that before too much longer the bond market could tank too. Right now after a near vertical ascent silver has become super critically overbought on a short-term basis, meaning that there is a very high probability of it burning out, at least temporarily, very soon.
The latest COTs show Commercial short and Large Spec long positions for silver are at levels that in the past have marked reversal points. Could these readings get even higher? – anything is possible, they could fly off the scale, but this is clearly becoming an increasingly dangerous trade on the long side on a short-term basis at least.
It is suspected that Smart Money, well aware of the trap that has been set, will be taking profits ahead of the FOMC speeches on the 13th, leaving the news orientated little guy holding the bag as usual, so prices could start to come off the top even ahead of this date. It is therefore considered prudent to ditch the vast majority of any remaining long positions in the broad market early this coming week, and also to take positions in bear ETFs and Puts, according to personal preference. If prices rise after the statements any such rally is expected to be short-lived once reality sets in – with so many now bullish, there can’t be many left to buy whatever comes out of the Fed.
One erroneous theory doing the rounds is that the markets “won’t be allowed” to drop before the election, because this might damage Barack Obama’s chances of re-election. There are 2 points to make regarding this. One is that the Democratic and Republican parties are 2 heads of the same hydra, and they are both controlled by the same ruling elites, so that the US elections are a farce. The second is that Israel is known to like Mitt Romney, the Republican candidate, so a market crash to get him in would suit them, although either candidate would serve equally well.
Now that their coats have grown back, it’s time for US investors to get fleeced again…
Monday, September 10th, 2012
By Mitchell Clark
In a sense, it is difficult to imagine the stock market going up on bad economic news, but that’s the way it is. The stock market and Wall Street compose a system that only serves itself and its participants. I’d never fight the Federal Reserve in terms of investment strategy, but the stock market betting on a third round of quantitative easing (QE3) illustrates the real problems that the U.S. economy and the eurozone are facing. It is an age of austerity, and there’s very little economic growth to be had.
There are lots of near-term beneficiaries of the current hype; gold and silver stocks are soaring, and it’s a well-deserved turnaround in the precious metals sector. The near-term action in the stock market is good, but it’s even better for gold stocks. The U.S. dollar is under pressure, but that’s what the Federal Reserve wants: increasing money supply, artificially low interest rates, and a weaker U.S. dollar. It’s all in the name of economic growth; but at the end of the day, the business cycle still wants to play itself out and the subprime mortgage-induced bubble is still a force to be reckoned with. Economic growth, as we used to know it, is now a thing of the past.
Intel Corporation (NASDAQ/INTC) is a benchmark stock that I follow regularly, and the company’s third-quarter revenue warning was significant. The company cut its third-quarter revenue expectation to $12.9–$13.5 billion, down materially from the previous range of $13.8–$14.8 billion. The company cited weak economic growth in the U.S. economy and the eurozone, which has consumers holding onto their wallets, for the cut. Tellingly, the company withdrew all other quarterly and full-year expectations. This is definitely not good for both Intel and the stock market.
So while the stock market may still be ticking higher and the Federal Reserve will likely appease Wall Street, the underlying economic data is still weak, and this is why I feel that the stock market will soon top itself out. (See “The Fed Can’t Help the U.S. Economy Anymore.”)
It is likely that 2013 will be a very difficult year; economic growth over the rate of inflation is highly unlikely.
Corporations have pulled out all the stops to keep their earnings afloat, and they’ve done a good job of it over the last couple of years. But with little in the way of economic growth in the U.S., no economic growth in Europe, and declining economic growth in Asia, American corporations are about to feel a blow to revenues. Intel is the perfect example. Earnings in the third quarter can still beat consensus, but that’s only because these expectations have already come way down. The most important number this upcoming earnings season is revenue and we could be in for a nasty surprise.
I want to be bullish going into 2013, but it’s difficult, given minimal economic growth. I had a more positive outlook just a little while ago, but Intel’s news is like a canary in the coal mine. Stock market investors need to be extremely cautious going forward. I repeat my view that a conservative investment stance is warranted, and there’s no reason for long-term investors to be buyers in this market.
Throw all the indicators and analysis out the window. The only thing you need to know is that central bankers are committed to more asset purchases. It is a global liquidity love fest and a super charged “risk on” environment. Investors are understandably bullish, but a single dollar or Euro has yet to be printed. There have been lots of announcements, but little substance. Next week, the FOMC meets and investors will get to see how much Bernanke intends to put the “pedal to the metal”. Hope of QE has turned into reality of QE, and investors better be careful what they wish for as one has to wonder what will happen when the rumor becomes the news.
So here we find ourselves at the intersection of more QE, which has been highly anticipated for months by market participants, and an overbought and over bullish market. I still believe this is a market top, and I am basing this upon the indicators, which I am suggesting to throw out the window for now as central banker interventions distort markets and market signals. Hey, no reason to become roadkill in what might become a short covering stampede that will catapult prices higher. This week’s FOMC meeting is the obvious catalyst for that upside follow through. The meeting could also lead to investor disappointment. So who knows? As stated last week, price is the final arbiter, and a weekly close above 1426.68 on the SP500 will likely lead to an acceleration in price as shorts expecting a reversal cover their positions. A weekly close below 1398.04 on the SP500 is a double top.
The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator is bearish, and just above the extremely bullish level.
Figure 1. “Dumb Money”/ weekly
Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “We continue to see moderately high levels of selling across the market but as we noted last week, from a historic perspective the volume of activity is not particularly egregious. Nonetheless, there is obviously far greater conviction amongst sellers as compared to buyers as the quality of buying events has been generally poor over the past several weeks. “
Figure 2. InsiderScore “Entire Market” value/ weekly
Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 71.55%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 72%.
Figure 3. Rydex Total Bull v. Total Bear/ weekly
The 30 percent gains since last October have been largely driven by one catalyst -- the Fed. The Federal Reserve is pumping huge amounts of money into the market. This is a Federal Reserve rally. The money has to go somewhere and its going into the stock market and the commodity market. It’s going to end terribly. - ~~ Jim Rogers
There is one big problem with the Fed's announcement of Open-Ended QE moments ago: it effectively removes all future suspense from FOMC announcements. Why? Because the Fed has as of this moment exposed its cards for all to see from here until the moment it has to start tightening the money supply (which may or may not happen; frankly we don't think the Fed tightens until hyperinflation sets in at which point what the Fed does is meaningless). It means easing is now effectively priced into infinity. Now rewind back to that one certain paper by the New York Fed, which laid it out clear for all to see, that if it wasn't for the expectation of easing in the 24 hour period ahead of the FOMC meeting, the market would be 50% or lower than where it is now, and would have been effectively in negative territory in the aftermath of the Lehman collapse. What Bernanke did is take away this key drive to stock upside over the past 18 years, because going forward there is no surprise factor to any and all future FOMC decisions, as easing the default assumption. It also means that Bernanke may have well fired his last bullet, and it, sadly, is all downhill from here, as soaring input costs crush margins, regardless of what revenues do, and send corporate cash flow to zero. Unfortunately, not even in the New Normal can companies operate without cash flow.
This is the chart.
Than you Fed for telling us what comes next.
Guest Post: Janet Tavakoli: Understanding Derivatives and Their Risks
(worth listening to)
Submitted by Adam Taggart of Peak Prosperity,
Global financial markets are awash in hundreds of trillions of dollars worth of derivatives. By some estimates, the total amount exceeds one quadrillion.
Derivatives played a central role in the 2008 credit crisis, as they had a brutal multiplying effect on the magnitude of the carnage. As a bad asset was written down, oftentimes there were derivative contracts written against it that resulted in total losses 10x greater than the initial write-down.
But what exactly are derivatives? How do they work?
And have we learned to treat these "weapons of mass financial destruction" (as Warren Buffet colorfully coined them) any more carefully in the aftermath of the global financial crisis?
Not really, claims Janet Tavakoli, derivatives expert and president of Tavakoli Structure Finance.
But the danger behind derivatives doesn't lie in their existence, she stresses. They play and important and constructive role in a healthy financial system when used responsibly.
But when abused, derivatives can create massive damages. So at the root of the "derivatives problem", Tavakoli stresses, is control fraud - the rampant unchecked criminal action by influential players on Wall Street. (This is the same method of fraud we've explored in past interviews with Bill Black  and Gretchen Morgenson ). Derivatives contracts are too often constructed in favor of these parties, who if they end up on the losing side of the trade, are able to socialize their losses. Until we address this root problem of corruption, says Tavakoli, derivatives (as well as other securities: stocks, bonds, etc) will continue to subject investors and our makets, overall, to unacceptable risk.
Derivative just means “derived from.” It’s just referencing another obligation, like a bond or an equity, or you can even reference an option. You can have options on futures, as an example. So a derivative is just like handing out fifty photocopies of a model; you know it’s a derivative of something that actually exists.
Let’s take an example. Goldman-Sachs used derivatives they used to help supply money to mortgage lenders by creating securitizations. And those securitizations were simply packaging up loans that were made by people like Countrywide. Countrywide of course was sued for fraud and settled for $8.3 billion with a number of different states for their predatory lending practices.
So you take these bad loans, you package them up in securities, and if you can combine them with leverage, it will always look like you are making a lot of money. That’s classic control fraud, as William Black so eloquently keeps explaining to the market and as our financial media keeps ignoring. Now, how do you combine it with leverage? Well, derivatives are a very handy item if you want to lever something up. So as an example, the Wall Street Journal looked at a $38 million dollar sub-prime mortgage bond that Goldman created in June of 2006, and yet Goldman was able to leverage that up to cost around $280 million in losses to investors.
Now how did they do that? They did that with the magic of derivatives.
Because with a derivative, you can reference that toxic bond, that $38-million-dollar bond can be referenced, you can say If that bond goes up or down in value, the value of your securitization will change as that bond goes up or down in value. So you don’t actually put that bond in a new securitization; instead you use a derivative – a credit derivative, in this case – to reference that bond. And so with the credit derivative, you can basically create as many of those referenced entities as you want. Now, they stopped at around thirty debt pools; they could have done a hundred and thirty.
Because with a credit derivative, all you’re doing is saying you are going to look to the value of that bond and we’re going to write a contract that your money is going to change when that bond goes up or down in value. That’s a derivative. You’re not actually putting the bond in; you’re just referencing that bond. You are basically betting on the outcome of something. And you don’t actually have to own its physical security. Now that’s a derivative. And that’s how derivatives were used to amplify losses and to magnify losses to make a bad situation much, much worse.
The root cause of it is control fraud - people in the financial system being able to do whatever they want and remain unchecked.. Where you have a group of individuals who are well rewarded for this kind of behavior and yet there is no punishment for this kind of behavior. As long as we keep that in place, you will just see more of the same. The way the Fed and regulators have chosen to deal with it is to pretend it’s not happening and just continue to print money. And, as I say, it acts as a neurotoxin in the financial system,
When you most need liquidity, it isn’t there. And that’s always true of leveraged products, by the way. You know, the thing that people overlook is – and this is why fraud is such a potent neurotoxin – when the market freezes, when you end in combination with that, when you have a liquidity event, then you see even good assets deteriorate in value quickly, as people need to sell them into a market that has no liquidity. So you get sucker punched a couple of different ways. So if you can’t stand low liquidity, again, you shouldn’t be playing with credit derivatives.
Now, if you custom tailor your contract, it will be more difficult to offload that contract because people will have to take the time to read the contract, if they bother to read it at all. But that said, that’s not a reason not to re-write the language. With the ISDA standard documentation, the hype was, take our language, because if everyone accepts it, it will make it easier to trade these securities. And that was true, until credit events happen and then everyone pulls out their documents and says Oh my god, what did I sign?
Counterparty risk is the biggest risk.
And if you’ve been reading the Financial Times, you see a lot of people who are dismissive of gold. Well, here’s an interesting thing: The Derivatives Exchanges accept gold in satisfaction of margin calls.
We had credit derivatives traders who wanted to have contracts on credit derivatives on the United States that would settle in gold. Because if obviously the United States is in credit trouble, what would you want? You would want gold.
You don’t want euros, you don’t want any other currency; you want gold.
The thing about gold is that you don’t have counterparty risk. And if you look at the rebuttal for people who are saying that gold isn’t money, well, I’m sorry, but gold is being used as money already on derivatives exchanges around the globe. Now that wasn’t true five years ago. It’s true today. J.P. Morgan itself, around eighteen months ago or two years ago, said it will accept gold as collateral in satisfaction of margin calls. So they’ve de facto said gold is a currency.
Click the play button below to listen to Chris Martenson's interview with Janet Tavakoli (54m:27s):
Posted Sep 15, 2012
On Thursday, the Federal Reserve initiated QE3 and this prompted a big rally in risky assets. As you know, we were expecting Mr. Bernanke to unleash ‘stimulus’ but even we were taken aback by the extent of the easing.
During his press conference, Mr. Bernanke stated that the Federal Reserve will buy US$40 billion worth of agency mortgage-backed securities every month until the US job market improves. Furthermore, he confirmed that the Federal Reserve will continue with its Operation Twist 2 program, keep interest rates at near zero until mid-2015 and maintain an accommodative monetary policy well into the economic recovery! When a reporter asked Mr. Bernanke whether he could elaborate until when the Federal Reserve will continue to create US$40 billion every month ‘out of thin air’, he evaded the question.
There can be no doubt that the Federal Reserve’s move is unprecedented and it is astonishing that the American central bank is openly debasing its currency! More importantly, if the US job market does not improve soon, it is probable that QE3 will continue for several months or even years! In terms of morality, the Federal Reserve’s latest policy initiative is questionable at best because an open ended QE will diminish the purchasing power of money and penalise savers. Nonetheless, from an investment perspective, QE3 will probably trigger a massive rally in global stocks and commodities.
For our part, we have allocated capital to some of the strongest companies and sectors which are in an ideal position to benefit from QE3. Furthermore, we have also re-invested capital in precious metals and it is our belief that both gold and silver will appreciate significantly over the following months.
Turning to the stock market, it is notable that major US indices have climbed to multi-year highs and it is conceivable that the S&P500 Index will break out to an all-time high over the following months. As we have been stating for several months, Wall Street seems to be in the final innings of its secular bear market and a new high in the S&P500 Index will confirm the next primary uptrend. In terms of sectors, as long as QE3 is in force, consumer discretionary, technology, biotechnology, financials and precious metals miners are likely to outperform and the defensive industries will probably underperform the broad market.
Looking at commodities, the CCI Index has climbed to a multi-month high and hard assets are likely to inflate over the following months. It is notable that both copper and crude oil have reclaimed the 200-day moving average and this is a bullish development. From our perspective, we continue to believe that industrial commodities will continue to underperform precious metals. Accordingly, we are not initiating any positions in the industrial hard assets.
Over in the precious metals arena, both gold and silver are soaring and at the very least, this rally is likely to continue until next spring. On Thursday, silver was the big beneficiary and we believe that over the following months, silver will outperform gold by a wide margin. Interestingly, the junior gold miners are also coming back to life and today, we are allocating some capital to this sector. If our assessment is correct, the following months will be very bullish for the junior miners and this is the time to join the party. After today’s allocation, approximately 15% of our equity portfolio will be invested in precious metals.
In the currencies patch, the US Dollar has embarked on a new downtrend and further weakness is on the cards. Given the fact that the Federal Reserve is debasing its currency, the greenback should depreciate significantly against other forms of paper money. In terms of the technicals, the US Dollar Index has slipped below the 200-day moving average and that line should now act as a source of major overhead resistance.
Finally, QE3 is already having an impact on bond yields and it is probable that long-term US interest rates will rise and the yield curve will steepen. Conversely, bearing in mind the ongoing rally in risk, we believe that peripheral European bond yields will decline and high yield corporate bonds will also appreciate over the following months. Thus, this is the time to liquidate US Treasuries and allocate capital to high yield bonds.
The above ‘Weekly Update’ was sent out to subscribers of Money Matters on 14 September 2012