As suggested here earlier this month, the volatility index VIX was indeed at a turning point as suggested by a chart with a positive "second derivative" (slowing rate of descent), soaring on limited news during the week to levels of much earlier this year, when the stock averages were much lower. I have reviewed prior post-recession periods (assuming the "banana" has ended) where the VIX has turned up suddenly. The best info I can find is that it has been unwise to buy the dips on the theory that the bottoming process in the VIX will be orderly. Certainly, nimble traders will look at short-term "oversold" numbers and step in to buy the steep drops such as we saw Friday. If over coming weeks truly awful news appears, I'd be careful. If the news is merely disappointing, such as occurred in 2003 with some weakish establishment employment numbers, while stocks succumb to profit-taking, that would be a different matter.
Meanwhile, the DoctoRx approach is to be out of almost all common stocks except those that are income plays or ETFs in precious metals. This decision occurred last week when the VIX started confirming the pattern described 2 weeks ago.
The gold chart is orderly and structurally is much stronger than the stock averages. Gold has begun to go mainstream, but for now the articles I have seen are as much about sellers as about buyers. If there is a sell-off of more major proportions in the stock market, the prior pattern during th bear market is for gold to fall only when there is panic selling/liquidation. The all-gold ETF GTU has a strong chart that is just now breaking out. It trades at a lower premium to net asset value than the much better-known CEF (Central Fund of Canada). CEF is basically Silver Bullion Trust, which trades near NAV, plus GTU in a certain ratio. In other words, there is no speculation in a physically-backed gold ETF located in Canada. If and when gold embarks on a wild bull market, rest assured that GTU will trade well over NAV, and CEF will trade more than its current 9% or so over NAV.
Meanwhile, Gallup.com's hiring/not hiring numbers have shown a minimal bump up lately, but today fell back to zero -- workers seeing the same number of firms that are hiring vs. those that are laying off. Of course, it is possible that layoffs per "not hiring" firms is smaller and hires per "hiring" firms is greater than before. However, the current 1:1 ratio is horrible.
Historically, major surges off an oversold bear market-recession bottom such as has occurred this year pause and trend down for some months. In 1975, the downturn was sharp and severe, but the rally into 1976 was to new nominal highs in the stock averages, but inflation was so high that the inflation-adjusted Dow did not come close to its 1965 high; and, 1977-8 were very poor ones even for nominal stock prices.
So far, nothing has occurred to change the central case that expectations are low, which is somewhat bullish, but asset bulls have gotten too jiggy too soon. Again, historical precedent suggests a strong possibility of all sorts of whipsawing and trend reversals. The failure of stocks with improving fundamentals, reasonable valuations, good dividend yields and the like to make any progress suggests that stocks continue in a secular bear market. Long-term holdings should provide dividends and be financially very strong. Under those circumstances, returns better than Treasuries appear likely, but that may not be apparent for many years.
There are no easy places to hide. GTU and SIVR may be amongst the safest.
Copyright (C) Long Lake LLC 2009
Saturday, October 31, 2009
Friday, October 30, 2009
Trick, not Treat for Stocks as the VIX Soars
The stock market is way down, the VIX has for now had at least a short-term bearish trend reversal, and gold continues its pattern of accumulation. Once again, it is going down less than stocks on down days, while rising about as much on up days for stocks. Furthermore, the weak rebound in the dollar today has affected the price of gold as follows, per Kitco:
Gold price down $7.40;
$2.10 of that decline was calculated to be due to intrinsic selling; the other $5.30 decline was directly due to their calculation of the amount the dollar declined against a basket of major foreign currencies.
In other words, the major stock indices are, as I write, down 2+% (intrinsic selling), but intrinsic selling in gold is only 0.2% of its price, and total percent price decline is about 0.7%.
Stocks are farther above their 200 day moving average than gold and are also percentagewise farther from their 12-month lows than gold; and are vastly farther above their year-to-date lows than gold.
In other words, the current message of the markets is that owners of gold are less motivated to sell than are owners of stock, as there is less selling pressure on down days; but when there is buying pressure on stocks, there is about as much buying urgency toward gold.
Gold can rise in nominal terms even if the economy is going down (think the past 2 years). Silver is much less likely to do so. If silver (or the more-difficult-t0-buy platinum) drops a lot and you believe that cyclical and other factors will make the real global economy grow, then silver will have more upside.
As an aside, one of my friends is a commodities trader who, let us say, retired young and lives and breathes markets so much that he keeps more than one TV on during the trading day in his house. He was bullish on silver from the first time we met about 7 years ago. Silver was then well under $5. He told me that his long-term chart analysis suggested an ultimate target of $100/ounce. Since then we have seen the first 5X move to over $20 with consolidation for many months. If we have a major pullback in silver without a major economic downturn, then investors/speculators interested in tangible assets may want to consider it, but only with pure risk capital.
Given my greater optimism for real global economic growth than for real rise in U. S. financial asset prices (stocks and bonds), my risk capital is increasingly oriented to real things than financial assets that I believe in my heart of hearts are at best fairly valued (think McDonald's).
Back to the VIX. Short-term, I believe it's too late to sell. Look for a snapback rally unless Citi goes under or something else fundamental makes the headlines.
Copyright (C) Long Lake LLC
Gold price down $7.40;
$2.10 of that decline was calculated to be due to intrinsic selling; the other $5.30 decline was directly due to their calculation of the amount the dollar declined against a basket of major foreign currencies.
In other words, the major stock indices are, as I write, down 2+% (intrinsic selling), but intrinsic selling in gold is only 0.2% of its price, and total percent price decline is about 0.7%.
Stocks are farther above their 200 day moving average than gold and are also percentagewise farther from their 12-month lows than gold; and are vastly farther above their year-to-date lows than gold.
In other words, the current message of the markets is that owners of gold are less motivated to sell than are owners of stock, as there is less selling pressure on down days; but when there is buying pressure on stocks, there is about as much buying urgency toward gold.
Gold can rise in nominal terms even if the economy is going down (think the past 2 years). Silver is much less likely to do so. If silver (or the more-difficult-t0-buy platinum) drops a lot and you believe that cyclical and other factors will make the real global economy grow, then silver will have more upside.
As an aside, one of my friends is a commodities trader who, let us say, retired young and lives and breathes markets so much that he keeps more than one TV on during the trading day in his house. He was bullish on silver from the first time we met about 7 years ago. Silver was then well under $5. He told me that his long-term chart analysis suggested an ultimate target of $100/ounce. Since then we have seen the first 5X move to over $20 with consolidation for many months. If we have a major pullback in silver without a major economic downturn, then investors/speculators interested in tangible assets may want to consider it, but only with pure risk capital.
Given my greater optimism for real global economic growth than for real rise in U. S. financial asset prices (stocks and bonds), my risk capital is increasingly oriented to real things than financial assets that I believe in my heart of hearts are at best fairly valued (think McDonald's).
Back to the VIX. Short-term, I believe it's too late to sell. Look for a snapback rally unless Citi goes under or something else fundamental makes the headlines.
Copyright (C) Long Lake LLC
JFK Adviser Compares Afghanistan to Viet Nam
This financially-oriented blog has focused on the Pak-ghanistan war(s) because of my belief that escalation there could lead to as much inflation at home as the guns-and-butter strategy of LBJ led to with his escalation in Viet Nam. An informative, interesting and brief post has appeared by John F. Kennedy's closest adviser, Theodore Sorenson, titled America's Next Unwinnable War. I recommend it is a good read from a variety of standpoints.
Mr. Sorenson makes the case that Afghanistan is close to being Barack Obama's equivalent of Lyndon Johnson's Viet Nam.
The U. S. historically has only had significant inflation during major wars or in the aftermath of the few losing ones, such as Viet Nam.
With the entire force of government and its creation the Fed committed to steadily destroying the real purchasing power of the dollar you have in your wallet, gold cannot lose nominal value in the very long run unless they fail miserably in that goal; but gold can be a poor investment nonetheless.
If the U. S. ramps up much further in Afghanistan, and continues to bribe/coerce Pakistan to do the same internally, look for domestic price increases to exceed expectations.
Copyright (C) Long Lake LLC 2009
Mr. Sorenson makes the case that Afghanistan is close to being Barack Obama's equivalent of Lyndon Johnson's Viet Nam.
The U. S. historically has only had significant inflation during major wars or in the aftermath of the few losing ones, such as Viet Nam.
With the entire force of government and its creation the Fed committed to steadily destroying the real purchasing power of the dollar you have in your wallet, gold cannot lose nominal value in the very long run unless they fail miserably in that goal; but gold can be a poor investment nonetheless.
If the U. S. ramps up much further in Afghanistan, and continues to bribe/coerce Pakistan to do the same internally, look for domestic price increases to exceed expectations.
Copyright (C) Long Lake LLC 2009
Thursday, October 29, 2009
Market Comment
Once again, gold is performing at least as well as the Standard and Poor's 500 index. It's rather incredible that 9+ years into that outperformance, not only has it been continuing almost daily, but that the ratio of the gold price vs the S&P index is about at a "normal" 1:1.
Given that the administration is simply supporting the FIRE economy with debt-based gimmicks such as "Clunkers" and nothing-down FHA loans, plus considering Carter-era gimmicks such as paying firms to create "jobs", this cycle is looking more as though there has been a 1974 major stock market bottom with a strong rebound, but with the likelihood of new lower stock market values adjusted for the general price level.
Except for the few income stocks that offer international diversification and adequate income and where management is outperforming the economy and its competition, such as McDonald's, it's getting harder to justify stock markets investments when you can invest in your home that you get to use, and alternatives to overvalued financial instruments that might pull an AIG over permanent assets such as gold or its riskier "precious" colleagues, platinum and silver.
Copyright (C) Long Lake LLC 2009
Given that the administration is simply supporting the FIRE economy with debt-based gimmicks such as "Clunkers" and nothing-down FHA loans, plus considering Carter-era gimmicks such as paying firms to create "jobs", this cycle is looking more as though there has been a 1974 major stock market bottom with a strong rebound, but with the likelihood of new lower stock market values adjusted for the general price level.
Except for the few income stocks that offer international diversification and adequate income and where management is outperforming the economy and its competition, such as McDonald's, it's getting harder to justify stock markets investments when you can invest in your home that you get to use, and alternatives to overvalued financial instruments that might pull an AIG over permanent assets such as gold or its riskier "precious" colleagues, platinum and silver.
Copyright (C) Long Lake LLC 2009
U. S. Pushing Pakistan Toward Chaos as Dollar Traders See Policy Incoherence in Washington
The U. S. has been forcing an essentially bankrupt Pakistan to accept money to stay afloat on the condition that it fight our war for us by attacking their internal Taliban in South Waziristan. These Taliban are somewhat like our rural Appalachian citizens. The feeling I get from Pakistan's press is that it is a sophisticated country far more worried about India than what they regard as their hillbillies. Now there is carnage in town, all in retaliation for the civil war U. S. forced Pakistan to wage. A civil conflict is brewing there. Mrs. Clinton has just arrived. The trajectory is that of Viet Nam. Advisers, etc. The U. S. is widely unpopular in Pakistan.
For a view on the subject from der Spiegel in Germany, click HERE.
The French Government thought it had pulled off a big win when it went heavily into debt to help the fledgling United States gain independence from the British. What of course actually happened is that soon enough, language, historical and cultural ties won out and the special relationship between the U. S. and England was formed. As for the French, a financially-strained country soon turned to internal terror. A system of government that had been stable for centuries--which is how they got so many Louis's--was torn apart, leading to decades of turmoil.
It can't happen here . . . can it?
In its current time of economic difficulty, when Citigroup may be entering receivership one way or another, the U. S., as with any country, needs to be certain that it can afford to wage and win a war in a remote part of the world, even if that war is justified (no comment on that part). I am skeptical that both of those conditions are true, much as I disapprove and more than disapprove of the Taliban and of course al Qaeda. And I am disappointed that Barack Obama--who should in good conscience refuse the Nobel Peace Prize given that he has ramped up wars in two countries only months into his first year as President--has pursued policies in Pakistan that have already led to the deaths of hundreds of innocents, probably with many more to come.
Al Qaeda is gone from Pakistan, but we remain despite being greatly disliked. U. S. strategy is to rebuild Afghanistan on China's dime while we have more and more homelessness in this country. It's not a coherent strategy-just like Cash for Clunkers and homebuyer's tax credits. Any wonder why the dollar is sinking against trade partners that are not wasting money on foreign wars?
Copyright (C) Long Lake 2009
For a view on the subject from der Spiegel in Germany, click HERE.
The French Government thought it had pulled off a big win when it went heavily into debt to help the fledgling United States gain independence from the British. What of course actually happened is that soon enough, language, historical and cultural ties won out and the special relationship between the U. S. and England was formed. As for the French, a financially-strained country soon turned to internal terror. A system of government that had been stable for centuries--which is how they got so many Louis's--was torn apart, leading to decades of turmoil.
It can't happen here . . . can it?
In its current time of economic difficulty, when Citigroup may be entering receivership one way or another, the U. S., as with any country, needs to be certain that it can afford to wage and win a war in a remote part of the world, even if that war is justified (no comment on that part). I am skeptical that both of those conditions are true, much as I disapprove and more than disapprove of the Taliban and of course al Qaeda. And I am disappointed that Barack Obama--who should in good conscience refuse the Nobel Peace Prize given that he has ramped up wars in two countries only months into his first year as President--has pursued policies in Pakistan that have already led to the deaths of hundreds of innocents, probably with many more to come.
Al Qaeda is gone from Pakistan, but we remain despite being greatly disliked. U. S. strategy is to rebuild Afghanistan on China's dime while we have more and more homelessness in this country. It's not a coherent strategy-just like Cash for Clunkers and homebuyer's tax credits. Any wonder why the dollar is sinking against trade partners that are not wasting money on foreign wars?
Copyright (C) Long Lake 2009
The VIX in Relation to the Stock Market
Empirically, it is observed that volatility of stock price movements correlates positively with declining prices and negatively with rising prices. The mathematics do not make it necessarily so, but the relationship keeps on holding cycle after cycle. A common measure of the volatility of stocks is the volatility index, symbol VIX. In typical bull markets following bear markets, volatility declines below 20 and if the bull is sustained, may reach or drop below 10. In the turbulence of the late 1990s through 2003, the VIX was however range-bound between 20 and 40. Last year, the VIX went to an ultra-high level above 60. The peak of the recent rally took it almost to 20. I noted recently on this blog that the famed second derivative of the VIX had turned positive, meaning that the rate of decline was continuing to slow. Above are one-year and long-term views of the VIX.
What my eye sees from the one-year chart is unfavorable for the stock market, except that short-term, the rapid move up on the VIX the past 2 days is "too far, too fast" and "deserves" a pullback, implying a rally in stocks. The long-term chart is also worrying. Correlating with geopolitics and the economy, the volatility at the end of the 1980s (not shown) and into the recession of 1990 and Iraq War of 1991 was followed by a decade of peace and prosperity. The average stock peaked in 1997-8 concomitant with the then-current global financial crisis. The Fake Recovery that began after the 2001 recession ended also had a massive drop in the VIX, followed by an even more massive record sustained rise in it.
The VIX over the past few months is making the same sort of bottom that many stocks and markets have made this year. Of course, one never knows, I respect evolving trends, especially ones that the media do not discuss. As a guidepost, I have noted the past 2 years that for some reason, 25 is a VIX number to respect. Under 25, stocks do poorly. Over 25, look for a bounce.
Because I believe that the charts suggest that stocks are in a structural bear market, I am inclined toward the hypothesis that the VIX has entered another multi-year period similar to 1998-2003. There were two single-best investment strategies in that time period. One was to buy Treasuries when yields rose. The other was to go with the hot sector that appeared to have good fundamentals. That meant buying not value but the breakout to new highs, whether it was the tech sector in early 1999 or the Russell 2000 in 2002. The safer and simpler approach was to avoid stocks and stick with gold, bonds and cash. I am still mostly doing that now, though that was a time of governmental fiscal restraint following the Perot movement.
People who own more stocks than they would be comfortable owning if the stock market dropped another 10-15% from here may want to lower their exposure the next time the VIX drops under 25.
Copyright (C) Long Lake LLC 2009
Tuesday, October 27, 2009
More on Bonds, with Insights from Bill Gross
In Midnight Candles, PIMCO's Bill Gross says what EBR has been saying all year, which is that virtually all conventional financial instruments are overpriced in aggregate: stocks, bonds, and cash. PIMCO presents an interesting analysis that comes to the conclusion that all paper "wealth" in the U. S. is in aggregate overvalued by 100% vs. 50 years ago. Without getting quantitative, I agree. That's the underlying why gold has made sense to me all year. The authorities are making heroic efforts to keep the paper ship afloat. His brief missive is worth a read, philosophizing about getting old notwithstanding, especially when one looks at his photo on the Web page and realize that it took some serious plastic surgery for a 65-year old to look like that.
Specifically because all classes of paper "wealth" appear overvalued, it continues to make sense to yours truly to run with the hypothesis that a Japanese solution could be in our future: very low inflation for long enough to allow Treasury rates to drop further or at least to stay where they are, thus allowing banks to make money on their "carry trade" and allow the Fed to dispose of all its Treasuries and mortgage-backed at no worse than breakeven. The Fed is notoriously stingy and does not like to lose.
In the prior post, we discussed some rationale for Treasuries: if the underlying principal is no good, then we have bigger troubles, and one could at least own gold (and canned goods?).
For retirement accounts, owning a no-current income Treasury can make a lot of sense. This "zero coupon" or "stripped" par bond is purchased at a discount to the ultimate payback price of 100. The rate is computed by a simple compound interest program. A price of 50 for the zero coupon bond will give a higher rate of return the sooner it is paid off at 100. There are three benefits of the zero coupon bond. Here are the advantages:
1. No reinvestment decision with small amounts of interest (at today's rates). If you spend $10,000 to purchase a 4.5% 30-year standard bond at par, every six months you will receive $225 dollars. Try reinvesting that!
2. If rates drop, the mathematics of the bond mean that the price moves up faster than a standard bond that provides current income. So, a "zero" can be bought with the possibility of speculation in mind.
3. Stated yields are about 10% or more higher for zero coupon Treasuries than for par bonds; i.e., a 3.5% standard Treasury bond rate (which is what the media report) is often correlated with a 3.85-4.0% rate for a zero. Why is that? One reason is that it just is that way; the other is the following disadvantage of zeros:
The built-in appreciation is taxable even though one receives no current income. So more people only buy them in tax-deferred accounts.
This can be avoided by finding zero coupon municipal bonds. Another way to avoid this is to find a mutual fund that owns zeros on behalf of fund owners; but yield to maturity is notably lower with these vehicles than with bonds you directly own. American Century is the fund I use; one security of theirs to look at has the symbol BTTRX.
Strangely, the standard bonds that pay interest every 6 months are much safer should interest rates soar than are zeros. Let us say that you buy a 10-year Treasury and rates soar from 3.5% to 20% in one year. Yes, the market price of both bonds will plummet. If you invested $10,000 in a standard bond, you will receive $350 per year. If interest rates go to 20%, you at least can earn $70 per year off of that $350 (excluding taxes). It's not a lot, but that extra $70 can compound at very high interest rates for the life of the bond. With a zero, the value can go near zero.
Zeros are also less liquid than standard par bonds.
Overall, the less well-known zero coupon bonds are the simpler, higher-yielding bonds that also offer better profit potential should rates drop a lot. The path less taken in this case is the better one for people who do not need current income and are confident that they can afford to hold the bond till maturity.
Zeros are one way that yours truly is dealing with the highly abnormal financial environment.
Copyright (C) Long Lake LLC 2009
Specifically because all classes of paper "wealth" appear overvalued, it continues to make sense to yours truly to run with the hypothesis that a Japanese solution could be in our future: very low inflation for long enough to allow Treasury rates to drop further or at least to stay where they are, thus allowing banks to make money on their "carry trade" and allow the Fed to dispose of all its Treasuries and mortgage-backed at no worse than breakeven. The Fed is notoriously stingy and does not like to lose.
In the prior post, we discussed some rationale for Treasuries: if the underlying principal is no good, then we have bigger troubles, and one could at least own gold (and canned goods?).
For retirement accounts, owning a no-current income Treasury can make a lot of sense. This "zero coupon" or "stripped" par bond is purchased at a discount to the ultimate payback price of 100. The rate is computed by a simple compound interest program. A price of 50 for the zero coupon bond will give a higher rate of return the sooner it is paid off at 100. There are three benefits of the zero coupon bond. Here are the advantages:
1. No reinvestment decision with small amounts of interest (at today's rates). If you spend $10,000 to purchase a 4.5% 30-year standard bond at par, every six months you will receive $225 dollars. Try reinvesting that!
2. If rates drop, the mathematics of the bond mean that the price moves up faster than a standard bond that provides current income. So, a "zero" can be bought with the possibility of speculation in mind.
3. Stated yields are about 10% or more higher for zero coupon Treasuries than for par bonds; i.e., a 3.5% standard Treasury bond rate (which is what the media report) is often correlated with a 3.85-4.0% rate for a zero. Why is that? One reason is that it just is that way; the other is the following disadvantage of zeros:
The built-in appreciation is taxable even though one receives no current income. So more people only buy them in tax-deferred accounts.
This can be avoided by finding zero coupon municipal bonds. Another way to avoid this is to find a mutual fund that owns zeros on behalf of fund owners; but yield to maturity is notably lower with these vehicles than with bonds you directly own. American Century is the fund I use; one security of theirs to look at has the symbol BTTRX.
Strangely, the standard bonds that pay interest every 6 months are much safer should interest rates soar than are zeros. Let us say that you buy a 10-year Treasury and rates soar from 3.5% to 20% in one year. Yes, the market price of both bonds will plummet. If you invested $10,000 in a standard bond, you will receive $350 per year. If interest rates go to 20%, you at least can earn $70 per year off of that $350 (excluding taxes). It's not a lot, but that extra $70 can compound at very high interest rates for the life of the bond. With a zero, the value can go near zero.
Zeros are also less liquid than standard par bonds.
Overall, the less well-known zero coupon bonds are the simpler, higher-yielding bonds that also offer better profit potential should rates drop a lot. The path less taken in this case is the better one for people who do not need current income and are confident that they can afford to hold the bond till maturity.
Zeros are one way that yours truly is dealing with the highly abnormal financial environment.
Copyright (C) Long Lake LLC 2009
Monday, October 26, 2009
On Longer-Dated Treasuries as an Investment Choice: Part 1
Probably the most detested asset class is Treasury bonds. That is why they are worth a look. That, and the chart. Click HERE and HERE for 1-year and long term views of the 10-year T-note. After every recession, people have tried to pick the low in rates. Of course, in the 1950s and perhaps even into the 1970 recession and beyond, people were thinking that rates could go lower, remembering the Depression.
Historically, rates are volatile coming out of a recession; less so coming out of a depression. Since the peak in rates in the early 1980s, there have been new cycle lows in rates during every downturn and lower highs in the upturns.
While there are great arguments about why Treasury yields should now head upward, perhaps fast and high, one generally not-discussed argument for why they may stay low and even head lower is that a slow-growth, moderate inflation scenario could allow the Fed and the banks to make money on their current troubled assets. Perhaps the free market will take mortgage rates to 4.5% on their own, and the 10-year Treasury to 2% if the prevailing inflation rate is 1.4%. So I continue to respect the downtrend that is in force.
As stated above, Treasuries are detested by individual investors, who tend to believe that the world owes them a higher yield. Thus, Treasuries are bought and held by "smart money": governments, banks, insurance companies.
What might have happened last year was the beginning of an end to the secular trend toward low interest rates in non-governmental debt. It might be that Treasuries will experience a rally spurred by public buying that could have a blow-off top similar to that which occurred in the tech sector in the late 1990s into 2000, lunatic though we now see it to have been.
In addition, Louise Yamada has demonstrated that over the history of the U. S., creating a bottom in rates has been a longer process than coming off a peak. So, even if we have seen a long-term bottom in rates, they might meander in the 3-4% range for longer than one might think.
Leaving inflation-linked bonds aside, there are two different basic types of debt, zero coupon (the purer type) and conventional par bonds.
Tomorrow, I intend to go into some basic and unexpected considerations regarding the risks and benefits of zero coupon vs. par Treasuries.
Copyright (C) Long Lake LLC 2009
Historically, rates are volatile coming out of a recession; less so coming out of a depression. Since the peak in rates in the early 1980s, there have been new cycle lows in rates during every downturn and lower highs in the upturns.
While there are great arguments about why Treasury yields should now head upward, perhaps fast and high, one generally not-discussed argument for why they may stay low and even head lower is that a slow-growth, moderate inflation scenario could allow the Fed and the banks to make money on their current troubled assets. Perhaps the free market will take mortgage rates to 4.5% on their own, and the 10-year Treasury to 2% if the prevailing inflation rate is 1.4%. So I continue to respect the downtrend that is in force.
As stated above, Treasuries are detested by individual investors, who tend to believe that the world owes them a higher yield. Thus, Treasuries are bought and held by "smart money": governments, banks, insurance companies.
What might have happened last year was the beginning of an end to the secular trend toward low interest rates in non-governmental debt. It might be that Treasuries will experience a rally spurred by public buying that could have a blow-off top similar to that which occurred in the tech sector in the late 1990s into 2000, lunatic though we now see it to have been.
In addition, Louise Yamada has demonstrated that over the history of the U. S., creating a bottom in rates has been a longer process than coming off a peak. So, even if we have seen a long-term bottom in rates, they might meander in the 3-4% range for longer than one might think.
Leaving inflation-linked bonds aside, there are two different basic types of debt, zero coupon (the purer type) and conventional par bonds.
Tomorrow, I intend to go into some basic and unexpected considerations regarding the risks and benefits of zero coupon vs. par Treasuries.
Copyright (C) Long Lake LLC 2009
Saturday, October 24, 2009
Hex and the Citi Revisited
On Jan. 10, 2009 I wrote Hex and the Citi, focusing on Robert Rubin and the mismanaged, probably insolvent Citigroup (C). I warned that the then-ongoing Obama stock rally was in great danger of failing, which it did by dropping about 23% in the next 8 weeks. It took exactly 6 months for the averages to rise above their Jan. 9 level, by which time green shoots had truly been spotted. Then on Oct. 20 I pointed out that Citi was the only one of the major banking companies I could find with a downsloping 200 day moving average. Citi is the only one of the mega banks to have a down chart in 2009, joining some large troubled regionals such as SunTrust (STI).
There is now more concern that recent actions on Citi's part presage serious problems. Mish has a post on this with interesting links titled Citigroup's "Hail Mary Pass": How To Know Citigroup Is In Serious Trouble. I recommend it.
Citi remains a sort of hairball. The stock chart had an obligatory jump likely due to short covering plus a rise in commercial real estate securitization pricing off of very depressed lows. These prices have sunk 20% this month and are far off their highs; the A-rated tranches have dropped percentagewise a bit more than the AA or AAA tranches. Click here for Markit's web page on this data. A continuing drop in CMBS pricing and other issues, details of which are nonpublic, could force Citi into full receivership.
On Friday the ECRI announced a drop in a key measure of the rate of growth of the economy. In the past, peaks and troughs in the growth rate cycle have marked good sell and buy points. Most of the good news may be out and all of it may be priced into stocks and low-quality bonds for months of good headlines ahead.
A catastrophe with Citigroup could easily tip off another bear market, though perhaps just a pause that refreshes.
Just as it would have been hard to imagine that the stock market would jump 60% in 7 months, who could have imagined that Rasmussen Reports would find that:
For the first time in recent years, voters trust Republicans more than Democrats on all 10 key electoral issues regularly tracked by Rasmussen Reports. The GOP holds double-digit advantages on five of them.
Is anything making sense any more?
Well, maybe something. Here is what I wrote about gold on Jan. 6, 2009:
It makes sense to own gold as a hedge. This should be a bullion equivalent such as a Krugerrand.I own gold and root against its "success".
Gold was around $852 then and is about 25% higher in price as "quantitative easing" e.g. debt monetization has been introduced by the inflationists at the Fed and the Bank of England, and as no serious financial reforms have been introduced by the Obama administration. This move in the price of gold would be more dangerous if it had not already exceed $1000 per ounce early in 2008.
Watch Citi. If its stock price moves sharply down, the general stock market, which is looking toppy on technical grounds, could be ready for a sharp move down as well.
Copyright (C) Long Lake LLC 2009
There is now more concern that recent actions on Citi's part presage serious problems. Mish has a post on this with interesting links titled Citigroup's "Hail Mary Pass": How To Know Citigroup Is In Serious Trouble. I recommend it.
Citi remains a sort of hairball. The stock chart had an obligatory jump likely due to short covering plus a rise in commercial real estate securitization pricing off of very depressed lows. These prices have sunk 20% this month and are far off their highs; the A-rated tranches have dropped percentagewise a bit more than the AA or AAA tranches. Click here for Markit's web page on this data. A continuing drop in CMBS pricing and other issues, details of which are nonpublic, could force Citi into full receivership.
On Friday the ECRI announced a drop in a key measure of the rate of growth of the economy. In the past, peaks and troughs in the growth rate cycle have marked good sell and buy points. Most of the good news may be out and all of it may be priced into stocks and low-quality bonds for months of good headlines ahead.
A catastrophe with Citigroup could easily tip off another bear market, though perhaps just a pause that refreshes.
Just as it would have been hard to imagine that the stock market would jump 60% in 7 months, who could have imagined that Rasmussen Reports would find that:
For the first time in recent years, voters trust Republicans more than Democrats on all 10 key electoral issues regularly tracked by Rasmussen Reports. The GOP holds double-digit advantages on five of them.
Is anything making sense any more?
Well, maybe something. Here is what I wrote about gold on Jan. 6, 2009:
It makes sense to own gold as a hedge. This should be a bullion equivalent such as a Krugerrand.I own gold and root against its "success".
Gold was around $852 then and is about 25% higher in price as "quantitative easing" e.g. debt monetization has been introduced by the inflationists at the Fed and the Bank of England, and as no serious financial reforms have been introduced by the Obama administration. This move in the price of gold would be more dangerous if it had not already exceed $1000 per ounce early in 2008.
Watch Citi. If its stock price moves sharply down, the general stock market, which is looking toppy on technical grounds, could be ready for a sharp move down as well.
Copyright (C) Long Lake LLC 2009
Friday, October 23, 2009
If the Peak in the First Derivative of Economic Growth is Here, Will Investor Sentiment Cool?
The fine forecasters at the Economic Cycle Research Institute more or less rang the bell at the bottom of the market when their publicly-disclosed growth index cycled to a new low. Has it peaked, and is it the start of a "correction"?
US Recovery to Gain Strength Through New Year
Reuters
October 23, 2009
Slower housing activity pulled a weekly index of future U.S. economic growth lower in the latest week after it touched a record high the week earlier, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 127.9 in the week to October 16 from 128.1 in the the previous week.
"Despite a dip, WLI growth remains close to the previous week's record high, suggesting that the U.S. economic recovery will continue to gain strength through the New Year," said ECRI Managing Director Lakshman Achuthan.
The index's yearly growth rate fell to 27.2 percent from the previous week's revised 27.8 percent, which was originally reported at 27.9 percent.
The index has shown annualized economic growth at record highs since September. That's a turnaround from earlier this year, when the growth rate was sharply negative.
As suggested here, mathematically the mature U. S. economy may well have seen the first derivative of growth prospects peak. The stock market may follow in a typical post-end of recession rally correction.
Meanwhile, the often-correct, often-early Nouriel Roubini has resurfaced singing the same song, warning of irrational exuberance with an interview subtly titled Nouriel Roubini: Big Crash Coming (not that he writes the title of the report). A sense of cyclicality suggests that since "no one" pays attention to him because of asset price inflation in the stock market, perhaps it's time to listen.
He dislikes gold and has been wrong on this asset class throughout the past two years, whereas he has been prescient on the more important economic matters.
While NBER will officially date the end of the economic banana a long time from now, it is likely that absent government incentives, it wouldn't be so clear that it has ended (if it has). Witness the U. K.'s third quarter economic report in U.K. Economy Unexpectedly Shrinks in Longest Slump:
“This is desperately disappointing news, especially given that it was hoped that a modest recovery had begun,” said John Philpott, chief economist at the Chartered Institute of Personnel and Development. “The U.K. economy is continuing to shrink, with six quarters of contraction in output making this recession look more like a depression.”
A few bloggers, such as Ed Harrison of Credit Writedowns and I have used the "d" word to describe the U. S. downturn. The higher-profile Paul Volcker has used the euphemism "Great Recession", which means the same thing but is more politic. It is good to see the reality of what has happened and is still happening be acknowledged, gradually, in the MSM. It's a start to the healing process. But only a start.
Copyright (C) Long Lake LLC 2009
US Recovery to Gain Strength Through New Year
Reuters
October 23, 2009
Slower housing activity pulled a weekly index of future U.S. economic growth lower in the latest week after it touched a record high the week earlier, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 127.9 in the week to October 16 from 128.1 in the the previous week.
"Despite a dip, WLI growth remains close to the previous week's record high, suggesting that the U.S. economic recovery will continue to gain strength through the New Year," said ECRI Managing Director Lakshman Achuthan.
The index's yearly growth rate fell to 27.2 percent from the previous week's revised 27.8 percent, which was originally reported at 27.9 percent.
The index has shown annualized economic growth at record highs since September. That's a turnaround from earlier this year, when the growth rate was sharply negative.
As suggested here, mathematically the mature U. S. economy may well have seen the first derivative of growth prospects peak. The stock market may follow in a typical post-end of recession rally correction.
Meanwhile, the often-correct, often-early Nouriel Roubini has resurfaced singing the same song, warning of irrational exuberance with an interview subtly titled Nouriel Roubini: Big Crash Coming (not that he writes the title of the report). A sense of cyclicality suggests that since "no one" pays attention to him because of asset price inflation in the stock market, perhaps it's time to listen.
He dislikes gold and has been wrong on this asset class throughout the past two years, whereas he has been prescient on the more important economic matters.
While NBER will officially date the end of the economic banana a long time from now, it is likely that absent government incentives, it wouldn't be so clear that it has ended (if it has). Witness the U. K.'s third quarter economic report in U.K. Economy Unexpectedly Shrinks in Longest Slump:
“This is desperately disappointing news, especially given that it was hoped that a modest recovery had begun,” said John Philpott, chief economist at the Chartered Institute of Personnel and Development. “The U.K. economy is continuing to shrink, with six quarters of contraction in output making this recession look more like a depression.”
A few bloggers, such as Ed Harrison of Credit Writedowns and I have used the "d" word to describe the U. S. downturn. The higher-profile Paul Volcker has used the euphemism "Great Recession", which means the same thing but is more politic. It is good to see the reality of what has happened and is still happening be acknowledged, gradually, in the MSM. It's a start to the healing process. But only a start.
Copyright (C) Long Lake LLC 2009
Thursday, October 22, 2009
Stocks for the Long Run
The financial markets had an interesting day yesterday that were consistent with the hypothesis that a correction is underway. The late-day sinking spell in stocks was unexpected and had no real obvious cause, though a report from the "why does any care what he thinks" personality and "analyst" Richard Bove is said to have sparked selling in the financials. EBR however has been noting early signs of weakness in the financials and has been more than hinting about a change of leadership. The late-day price drops are just the opposite of what started happening in the winter when stocks were ready to be taken upward.
It is routine to have a correction in a strong end-of-recession (depression) rally. The deeper the recession low from the high, the more likely the post-rally recession is to undergo a more severe drop. 1975 saw such a downturn, and adjusted for the inflation of the time, the rally to the 1975 high was about as good as it got until the markets blasted off in 1982 when Mr. Volcker eased up on Mr. Reagan, having achieved both the crushing of inflation expectations and the securing of a strong midterm election for the Democrats less than three months later.
Nonetheless, there are always investment opportunities on the long side in today's markets, where one can go long a "short" fund or short a "long" fund. Within stocks, here are three that were mentioned months ago as having strong fundamentals, recession-resistant qualities, and, importantly, strong long-term charts.
One way to look at these charts is to open a second window and click for the charts in that window, keeping this one open throughout.
Click for the 2-year and max charts for Ross Stores (ROST; discount clothing), with the 2-year showing the 50 and 200 day moving averages. The long-term chart hardly shows the depression. The stock went to an all-time high this year. It is now correcting. Fundamentally, it may have problems getting enough cheap inventory, as general clothing stores are ordering very conservatively. This is one that I would not buy yet unless it were for a multi-year period.
The 2-year and max charts on Teva (TEVA; generic drugs) are similar but the stock looks different than ROST to me. The brand drug-makers have been regaining pricing power, which helps Teva. Teva had much less of a run off the bottom than Ross, which more than doubled. Teva is almost immune to the inventory cycle. If it meets consensus 2010 estimates, it is trading at about 10.5 X earnings. This stock could easily trade at 16-18 X earnings. I own Teva but not Ross.
Finally, I admire the business discipline of the little-known stock National Presto (NPK; diversified), and mentioned it this spring. Click for the 2-year and max charts. The max chart is difficult to interpret casually because the company is cash-rich in an old-fashioned way and pays huge dividends once a year. Thus, the total return is far greater than the chart suggests. The stock simply looks ahead of itself, but it has strong support at 80. Not shown is NPK's fundamental problem, which is that traditionally it sells down every now and then to book value, which is far below the current price. I am out of NPK for now.
The working hypothesis here is that the well-publicized penalizing of Citi and BofA is not quite a death sentence but could easily put the kibosh on their over-hyped, over-traded, over-priced stocks. Every bubble ends up frustrating the bulls in the field of the prior bubble. This cycle and these stocks are expected to follow the script.
Junk may well have had its day for a while. The stocks highlighted above, and the pharmaceutical sector in particular, may be relatively immune if all we are facing is a correction within a cyclical bull move; granted that in the style of Churchill's comment about Russia, this is probably all happening within a secular bear market that may be just passing the halfway mark.
Copyright (C) Long Lake LLC 2009
It is routine to have a correction in a strong end-of-recession (depression) rally. The deeper the recession low from the high, the more likely the post-rally recession is to undergo a more severe drop. 1975 saw such a downturn, and adjusted for the inflation of the time, the rally to the 1975 high was about as good as it got until the markets blasted off in 1982 when Mr. Volcker eased up on Mr. Reagan, having achieved both the crushing of inflation expectations and the securing of a strong midterm election for the Democrats less than three months later.
Nonetheless, there are always investment opportunities on the long side in today's markets, where one can go long a "short" fund or short a "long" fund. Within stocks, here are three that were mentioned months ago as having strong fundamentals, recession-resistant qualities, and, importantly, strong long-term charts.
One way to look at these charts is to open a second window and click for the charts in that window, keeping this one open throughout.
Click for the 2-year and max charts for Ross Stores (ROST; discount clothing), with the 2-year showing the 50 and 200 day moving averages. The long-term chart hardly shows the depression. The stock went to an all-time high this year. It is now correcting. Fundamentally, it may have problems getting enough cheap inventory, as general clothing stores are ordering very conservatively. This is one that I would not buy yet unless it were for a multi-year period.
The 2-year and max charts on Teva (TEVA; generic drugs) are similar but the stock looks different than ROST to me. The brand drug-makers have been regaining pricing power, which helps Teva. Teva had much less of a run off the bottom than Ross, which more than doubled. Teva is almost immune to the inventory cycle. If it meets consensus 2010 estimates, it is trading at about 10.5 X earnings. This stock could easily trade at 16-18 X earnings. I own Teva but not Ross.
Finally, I admire the business discipline of the little-known stock National Presto (NPK; diversified), and mentioned it this spring. Click for the 2-year and max charts. The max chart is difficult to interpret casually because the company is cash-rich in an old-fashioned way and pays huge dividends once a year. Thus, the total return is far greater than the chart suggests. The stock simply looks ahead of itself, but it has strong support at 80. Not shown is NPK's fundamental problem, which is that traditionally it sells down every now and then to book value, which is far below the current price. I am out of NPK for now.
The working hypothesis here is that the well-publicized penalizing of Citi and BofA is not quite a death sentence but could easily put the kibosh on their over-hyped, over-traded, over-priced stocks. Every bubble ends up frustrating the bulls in the field of the prior bubble. This cycle and these stocks are expected to follow the script.
Junk may well have had its day for a while. The stocks highlighted above, and the pharmaceutical sector in particular, may be relatively immune if all we are facing is a correction within a cyclical bull move; granted that in the style of Churchill's comment about Russia, this is probably all happening within a secular bear market that may be just passing the halfway mark.
Copyright (C) Long Lake LLC 2009
Wednesday, October 21, 2009
American Cancer Society Now Going My Way: "Overdiagnosis is pure, unadulterated harm"
The NYT is reporting on an impending important change, one with which I am quite sympathetic: see In Shift, Cancer Society Has Concerns on Screenings. It is worth a read. The single most interesting part to me is the finale:
“The issue here is, as we look at cancer medicine over the last 35 or 40 years, we have always worked to treat cancer or to find cancer early,” Dr. Brawley said. “And we never sat back and actually thought, ‘Are we treating the cancers that need to be treated?’ ” (Ed: She also obviously means, "Are we finding the cancers that we need to find?")
The very idea that some cancers are not dangerous and some might actually go away on their own can be hard to swallow, researchers say.
“It is so counterintuitive that it raises debate every time it comes up and every time it has been observed,” said Dr. Barnett Kramer, associate director for disease prevention at the National Institutes of Health.
It was first raised as a theoretical possibility in the 1970s, Dr. Kramer said. Then it was documented in a rare pediatric cancer, but was dismissed as something peculiar to that cancer. Then it was discovered in common cancers as well, but it is still not always accepted or appreciated, he said.
But finding those insignificant cancers is the reason the breast and prostate cancer rates soared when screening was introduced, Dr. Kramer said. And those cancers, he said, are the reason screening has the problem called overdiagnosis — labeling innocuous tumors cancer and treating them as though they could be lethal when in fact they are not dangerous.
“Overdiagnosis is pure, unadulterated harm,” he said.
I had a patient in the 1990s who was competing for the Nobel Prize with his research into breast cancer and other topics. His publications filled a number of large books. He refused to be tested for prostate cancer for the above reasons. He felt that cancers are always forming and being killed by the body's natural defences.
On behalf of "doing healthcare", the President has argued that more preventative medicine would save money. In this blog, I pointed out that the medical data did not support this claim. Presidents can talk all they want, but talking can't make it so.
Here's a true, tragic example that from a doctor's standpoint tells the inside story of much of cancer screening.
A young man saw multiple family members die young of colon cancer. He became a gastroenterologist in response. At a very young age, he began to have yearly colonoscopies performed on himself. All were normal. One day, he woke up and noticed that his liver was enlarged. He had cancer that had spread to the liver. A biopsy showed it was colon cancer. How could that be? Well, his number had been called. He had a primary tumor in the only part of the colon that cannot be screened by colonoscopy. He had primary cancer of the appendix--invisible to the colonoscope--which silently spread to the liver and killed him soon after.
Don't smoke, get enough sleep, exercise, eat a balanced diet free of the bad stuff, don't be fat, have good genes, have a happy committed relationship, and be lucky. Those are the sorts of things that doctors know are the secrets to having the best shot at a long healthy life. And laugh a lot.
Regarding screening, nothing here is a recommendation for therapeutic nihilism. But low-risk, asymptomatic people should discuss the risks and benefits of screenings with a medical professional and do that screening, if any, with which they are comfortable. People should be aware that there truly is a huge industry making a huge income from screening low-risk people for cancer, sometimes with little or no evidence of benefit.
For example, women under age 50 should ask their doctors for any evidence that routine mammograms are of any known health value in the absence of risk factors such as fibrocystic disease, family history etc. Click HERE for a reference on this topic.
In my prior practice of clinical cardiology, in my later years I almost completely stopped giving people screening stress tests. I knew without a computer-generated risk profile if they needed a statin, other medication, or testing if asymptomatic. When I retired, I heard from patient after patient who felt well that they had been shot up with some radioactive scanning agent to find out if they had a problem. Invariably, this test was a highly reimbursed one that the doctor did in his private office. Cancer screening is too often analogous, in my view.
It's about time that the ACS calmed down. We need more data before we create or perpetuate large medical-industrial complexes and scare people unnecessarily about something as terrifying as cancer.
Copyright (C) Long Lake LLC 2009
“The issue here is, as we look at cancer medicine over the last 35 or 40 years, we have always worked to treat cancer or to find cancer early,” Dr. Brawley said. “And we never sat back and actually thought, ‘Are we treating the cancers that need to be treated?’ ” (Ed: She also obviously means, "Are we finding the cancers that we need to find?")
The very idea that some cancers are not dangerous and some might actually go away on their own can be hard to swallow, researchers say.
“It is so counterintuitive that it raises debate every time it comes up and every time it has been observed,” said Dr. Barnett Kramer, associate director for disease prevention at the National Institutes of Health.
It was first raised as a theoretical possibility in the 1970s, Dr. Kramer said. Then it was documented in a rare pediatric cancer, but was dismissed as something peculiar to that cancer. Then it was discovered in common cancers as well, but it is still not always accepted or appreciated, he said.
But finding those insignificant cancers is the reason the breast and prostate cancer rates soared when screening was introduced, Dr. Kramer said. And those cancers, he said, are the reason screening has the problem called overdiagnosis — labeling innocuous tumors cancer and treating them as though they could be lethal when in fact they are not dangerous.
“Overdiagnosis is pure, unadulterated harm,” he said.
I had a patient in the 1990s who was competing for the Nobel Prize with his research into breast cancer and other topics. His publications filled a number of large books. He refused to be tested for prostate cancer for the above reasons. He felt that cancers are always forming and being killed by the body's natural defences.
On behalf of "doing healthcare", the President has argued that more preventative medicine would save money. In this blog, I pointed out that the medical data did not support this claim. Presidents can talk all they want, but talking can't make it so.
Here's a true, tragic example that from a doctor's standpoint tells the inside story of much of cancer screening.
A young man saw multiple family members die young of colon cancer. He became a gastroenterologist in response. At a very young age, he began to have yearly colonoscopies performed on himself. All were normal. One day, he woke up and noticed that his liver was enlarged. He had cancer that had spread to the liver. A biopsy showed it was colon cancer. How could that be? Well, his number had been called. He had a primary tumor in the only part of the colon that cannot be screened by colonoscopy. He had primary cancer of the appendix--invisible to the colonoscope--which silently spread to the liver and killed him soon after.
Don't smoke, get enough sleep, exercise, eat a balanced diet free of the bad stuff, don't be fat, have good genes, have a happy committed relationship, and be lucky. Those are the sorts of things that doctors know are the secrets to having the best shot at a long healthy life. And laugh a lot.
Regarding screening, nothing here is a recommendation for therapeutic nihilism. But low-risk, asymptomatic people should discuss the risks and benefits of screenings with a medical professional and do that screening, if any, with which they are comfortable. People should be aware that there truly is a huge industry making a huge income from screening low-risk people for cancer, sometimes with little or no evidence of benefit.
For example, women under age 50 should ask their doctors for any evidence that routine mammograms are of any known health value in the absence of risk factors such as fibrocystic disease, family history etc. Click HERE for a reference on this topic.
In my prior practice of clinical cardiology, in my later years I almost completely stopped giving people screening stress tests. I knew without a computer-generated risk profile if they needed a statin, other medication, or testing if asymptomatic. When I retired, I heard from patient after patient who felt well that they had been shot up with some radioactive scanning agent to find out if they had a problem. Invariably, this test was a highly reimbursed one that the doctor did in his private office. Cancer screening is too often analogous, in my view.
It's about time that the ACS calmed down. We need more data before we create or perpetuate large medical-industrial complexes and scare people unnecessarily about something as terrifying as cancer.
Copyright (C) Long Lake LLC 2009
Tuesday, October 20, 2009
Surveys of Real People Rather than of Economists Unfortunately Paints an Ugly Picture
The news from real people about the economy just refuses to turn upward in any consistent fashion, despite massive government spending that has to goose up the economic numbers. Apparently larger companies have such high profit margins and those that are international see growth prospects out of the U. S. as more exciting than here that they are currently unwilling to invest for growth; and smaller companies have difficult access to financing and even the ones that carry health insurance are confused about the future cost.
Today (Oct. 20) we had a sudden relapse in two of the Gallup.com poll numbers that I watch daily. The 3-day average index of job creation (hiring/letting go), collapsed after looking stronger the past week, to a dismal -2. This is the number which represents the % of employees seeing their company adding other employees minus the % seeing them shrinking the workforce. Thus, a negative number sees more shrinkage than adding. Zero is not anywhere close to labor force equilibrium, though. When the number was strongly positive--such +20, unemployment was increasing. After all, the workforce is increasing. No matter what massaging of the data the people at the Bureau of Labor Statistics do, the employment situation is miserable. Very likely it will get better, but you know that objectively, the economy is a lot stronger early on in recessions than it is early in significant recoveries.
The other Gallup data with movement in the wrong direction is the U. S. Economic Outlook. Improvement in this number correlated very closely with the stock market up-move in March. The % seeing the economy as worsening has jumped to 60% from a recent low of 50%. The amount seeing it as improving has fallen to 34% from a recent high of 43%.
Separately, the ABC News weekly report of a poll the Consumer Comfort Index came out today and was subtitled "Back in the Dead Zone". Also, click HERE to go straight to the charts.
Last week, I noted that the S&P 500 had finally filled the gap on the chart at 1100 from the major collapse early last October. This theme was picked up by at least one analyst who has had a superb track record the past two years. Given the failure of average people to see any real improvement in the economy essentially two years out from the peak of the economy (most people thought the U. S. was in recession or worse more than 2 years ago), and given the floundering of the recent leading stocks, we are now in a classic time for what is politely called consolidation of gains.
If you click HERE on the two-year chart of GE, you will see that the panic bottom notwithstanding, an obvious downtrend is in force. The rule is that trends continue until they do not. Click HERE, HERE and HERE for similar charts of BofA, Nokia and a 5-year chart) Ford. These are charts that accurately reflect the changing business fortunes of the companies.
Click HERE for the 2-year chart of the S&P 500 (or its ETF = SPY as you prefer). This is the best of the bunch but the 2, 5 and 10 year charts taken together show no trend. Given a dividend yield of 2%, who needs it?
On all of these, the eye can see the downtrend. For all of these, business prospects simply appear to be worse than they were perceived to be in the past. The naked eye can easily see the loss of inventor support revealed by the downtrends.
If you adjust either for gold or for two or ten-year Treasuries, the downtrends are steeper (though in fairness, Nokia pays a good dividend).
Marty Zweig popularized the term, "Don't fight the tape". He was correct.
Yes, I will bravely predict that the above surveys will show rampant optimism in the future. But for now, business conditions are compatible with stock averages much lower than they are now. Federal finances are compatible with interest rates ranging from Japan-style on the low end to much higher. That Team Obama is apparently now planning yet another stimulus package makes me withdraw any optimism for lower rates in the near-term. Things are far too fluid to guess, even forgetting market manipulation.
In the days ahead, we will discuss technical patterns and some fundamental thinking about different asset classes, including individual stocks that may be poised to outperform if past is prologue.
Copyright (C) Long Lake 2009
Today (Oct. 20) we had a sudden relapse in two of the Gallup.com poll numbers that I watch daily. The 3-day average index of job creation (hiring/letting go), collapsed after looking stronger the past week, to a dismal -2. This is the number which represents the % of employees seeing their company adding other employees minus the % seeing them shrinking the workforce. Thus, a negative number sees more shrinkage than adding. Zero is not anywhere close to labor force equilibrium, though. When the number was strongly positive--such +20, unemployment was increasing. After all, the workforce is increasing. No matter what massaging of the data the people at the Bureau of Labor Statistics do, the employment situation is miserable. Very likely it will get better, but you know that objectively, the economy is a lot stronger early on in recessions than it is early in significant recoveries.
The other Gallup data with movement in the wrong direction is the U. S. Economic Outlook. Improvement in this number correlated very closely with the stock market up-move in March. The % seeing the economy as worsening has jumped to 60% from a recent low of 50%. The amount seeing it as improving has fallen to 34% from a recent high of 43%.
Separately, the ABC News weekly report of a poll the Consumer Comfort Index came out today and was subtitled "Back in the Dead Zone". Also, click HERE to go straight to the charts.
Last week, I noted that the S&P 500 had finally filled the gap on the chart at 1100 from the major collapse early last October. This theme was picked up by at least one analyst who has had a superb track record the past two years. Given the failure of average people to see any real improvement in the economy essentially two years out from the peak of the economy (most people thought the U. S. was in recession or worse more than 2 years ago), and given the floundering of the recent leading stocks, we are now in a classic time for what is politely called consolidation of gains.
If you click HERE on the two-year chart of GE, you will see that the panic bottom notwithstanding, an obvious downtrend is in force. The rule is that trends continue until they do not. Click HERE, HERE and HERE for similar charts of BofA, Nokia and a 5-year chart) Ford. These are charts that accurately reflect the changing business fortunes of the companies.
Click HERE for the 2-year chart of the S&P 500 (or its ETF = SPY as you prefer). This is the best of the bunch but the 2, 5 and 10 year charts taken together show no trend. Given a dividend yield of 2%, who needs it?
On all of these, the eye can see the downtrend. For all of these, business prospects simply appear to be worse than they were perceived to be in the past. The naked eye can easily see the loss of inventor support revealed by the downtrends.
If you adjust either for gold or for two or ten-year Treasuries, the downtrends are steeper (though in fairness, Nokia pays a good dividend).
Marty Zweig popularized the term, "Don't fight the tape". He was correct.
Yes, I will bravely predict that the above surveys will show rampant optimism in the future. But for now, business conditions are compatible with stock averages much lower than they are now. Federal finances are compatible with interest rates ranging from Japan-style on the low end to much higher. That Team Obama is apparently now planning yet another stimulus package makes me withdraw any optimism for lower rates in the near-term. Things are far too fluid to guess, even forgetting market manipulation.
In the days ahead, we will discuss technical patterns and some fundamental thinking about different asset classes, including individual stocks that may be poised to outperform if past is prologue.
Copyright (C) Long Lake 2009
None Dare Call It Stimulus
Time is out with the news that a second stimulus package is going to be passed soon, but for some reason or other it will be the stimulus that dare not speak its name. Also, the article alleges that the President does support another round of homebuyer tax credits; whether the very recent revelation that this program has been riddled with fraud would affect his views is not discussed.
Here is the link to The White House Readies a Stealth Stimulus.
They are making it hard to be long the T-bond!
Copyright (C) Long Lake LLC 2009
Here is the link to The White House Readies a Stealth Stimulus.
They are making it hard to be long the T-bond!
Copyright (C) Long Lake LLC 2009
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