Monday, June 20, 2016

Fractal Condition of Several Key Markets At Mega Turn Points

Recently I wrote an article on gold's fractal dimension showing that it had built to a high level not seen for at least 10 years. Well you may be scratching your head asking "fractal what?" I briefly explained that it is a "high math" way of quantifying any moving object's reversion-to-mean force after it has been in a trendless state for awhile.

For something that can be charted, like a market, there are two dimensions. The fractal dimension at any point is a mathematical summation of something's behavior as either something that can be described with one dimension (a strong, straight-line trend) or by two dimensions (a meandering, chaotic range). Thus the dimension is calculated as being between 1.0 and 2.0 (between one and two dimensions).  We typically just take the decimal portion and refer to it like basis points.  So a fractal dimension of 1.35 is just called "35".  This "line vs chaos" thing in theory happens at all different time scales, minutes, years, what have you, and you have to divide all this rightly for it to mean anything in the scale that's significant to you.  The guiding mantra of all fractals is always "same thing, different scale". 

This also applies to the geometrical rescaling and repeating that markets tend to do.  Back in early February, I wrote an article, "Gold's Bull/Bear Status" on gold's apparent "new" bull market, which is likely just a repetition of a rescaled, typical, and oft repeated bull market fractal that is really all one bull market

Anyway, enough math.  After looking at gold, and seeing that it currently has a very unusual fractal condition, I looked at several other key markets and found that there is a similar fractal abnormality in them as well. First, let's look again at gold: (click on image to view)

As the graph shows, gold is currently at 55, highest in 10 plus years, presaging a very strong trend coming, either up or down.

Gold is linked to many other markets, so let's take a look at the US dollar with this measure:

"Historically unstable" would be a good description of the dollar's fractal behavior since the 2014 power move up and subsequent chaotic range. The peg-to-peg gyration from 30 to 60 is very unusual for a major index, especially a supposedly stable currency, even on the weekly scale as this fractal dimensioning is calculated.

Of course gold is also supposed to be an inverse play to the stock market, although I beg to differ with that take as there have been extended periods with both rising gold and stocks, with 2002 to 2007 being a prime example.  But historically, and especially lately, gold is inversely related.  So let's look at stocks via the Russell 2000, because it is a broad stock market and it is a leading group. Let's calculate some fractal dimensions:

Amazingly, we find that the stock market is also jam packed with the highest fractal energy level in over 10 years.  But just from this, we don't really know which way it wants to go, up or down, from looking at these graphs as they just show its fractal condition.  Is there something that we could check that could be more suggestive of the direction ? 

Consider copper.  "Every bull market has a copper top" is ancient wisdom, noting that copper puts in a top somewhere in the late stages of a bull.  And it is referred to as Dr. Copper because it has a PhD in economics.  It did indeed peak clear back in 2011 before the transports, European banks or any other leader.  Copper has put in attempts at bottoming ranges amidst a pronounced decline, and recently it has attracted attention to the $2.00 level as a major line in the sand.

There is the technical read where $2.00 is a Fibonacci level.  But then there is the basic fact that the world's biggest trafficker in dangerous derivatives, Deutsche Bank, is highly levered to Glencore, and Glencore is very highly levered to copper staying above $2.00 a pound.  An article, from Business Insider recently explained "Barclays: Glencore Is In Big Trouble If Copper Gets $0.30 Cheaper".  Copper was $2.34 at the time. The article states at the top:
Glencore is a strange hybrid company, both a commodities trader and a mining company, and it has a complicated balance sheet loaded up with different kinds of debt.  There are a lot of different ways to analyze the company but perhaps the best way to think of it is like a bank that's hitting a crisis, like Lehman Brothers ... if the price of copper falls below $2/lb, you begin to get some seriously sweaty palms in Glencore's finance department
If this level gives way, it will be a serious debt problem with the banking system.  And because $2.00 is also a psychological level, breached only in the March, 2009 and January, 2016 market debacles, it would also involve a confidence shock to all the other markets.  In fractal terms, this is how copper looks now:

Each of the ranges in the decline where the fractal dimension went to over 50 resulted in a sharp collapse downward.  The $2.00 per pound line in the sand is right at the red arrow I've drawn illustrating the current range.  And currently we have copper at a fractal dimension of 55, the highest of the entire decline, strongly suggesting another sharp drop, this time through the $2.00 barrier.  Of course, the direction could be up from here, but there is a very strong primary trend at work with copper, so the more likely outcome of the fractal situation is a continuation of this primary trend. It's showing no signs of reversal.

Oil is in a similar but much less profound state of weakness.  It went to an extreme fractal dimension of 60 (monthly) in mid 2014 with oil seemingly stable at around $105.  The massive move to $45 in just 6 months that followed sent the fractal dimension to below 40 in a flash.  On the weekly scale, the fractal dimension went to 52 in mid 2015 with oil steady at $60, went back down to 30 as oil plummeted to $28, and is swiftly going back up as oil struggles in the $40s.  It is a similar plateau and plummet progression as copper, but not nearly as fractally strong, and with the primary down trend in question as oil is trading well above its 200 day moving average.

But there is yet another market index with a once-in-10 year fractal event going on where the direction is probably more clear.  Let's take a look at the VIX:

The fractal dimension reacted strongly to the 2008 event with a big build to 53, then a big dissipation clear down to 34.  It didn't seem to react as strongly to the 2011 Greece scare, as if it knew it was just a passing cry of "wolf".  But it has again gone to an extreme level, being violently pegged at 60 for some time now.  So there would seem to be an extremely large move coming. But if it were down, it would be to an absurd VIX level of around 10 or less. 

Not that this hasn't happened before.  We were cruising into 2007 up until March with the VIX at 10-12 before hardly anyone was worried about housing, or anything.  But in our day, this would imply that stock markets will sudden go to a PE of 30, or an unprecedented burst of earnings will suddenly materialize from a weak economy seemingly beyond the resuscitation of monetary policy, the rising debt defaults will suddenly stop from the mountain of shaky loans, interest rates will "normalize", the lion shall lie down with the lamb, and pigs will fly.

It may not be just your imagination that the global economy, markets, and interest rates are going into some kind of twilight zone. The cold science of fractal analysis backs you up on that.

The collective fractal wisdom is saying buckle your seat belts, and the VIX is saying a big move will either be another big decline in stocks or a sudden trip to nirvana. I guess we could be going to nirvana, but until the evidence is convincing, it may be wise to make some preparation the other way.

If you would like more information on the fractal dimension in markets, you can read the works of Benoit Mandelbrot, who discovered and wrote about this phenomena in all areas of science. He coined the label "fractal" and founded the Chaos Theory approach to analyzing markets.  His book The (Mis)Behavior of Markets has been called "the deepest and most realistic finance book ever published".  There are a few product offerings that give you an FDI (fractal dimension index or indicator) along with the RSI and other technical indicators. One is from QUANTSHARE  Trading
Software.  If you are a programmer, there is code written for this calculation by AmiBroker and others.  You can also use someone's code at MetaStock with their Indicator Builder feature.

A word of caution about the FDI - there is no one formula for calculating it from Mandelbrot or anyone. It is a math concept and, for use with the markets, it is only as good as the talent of the writer of the program.  And I have found that, when using one of these, it takes a lot of practice to use effectively.  You have to learn to think like the algorithm, learn the different scales it calculates in, and make it play nice with the other good indicators.  Fractal thinking is a little warped relative to conventional chart reading.

Monday, June 6, 2016

Gold's Direction - The State of the Trend vs Wave Countng

If you pay much attention to the wave analysis, Fibonacci, Elliot, what have you, the next significant move in gold is surely down to $1150ish.  You can sample some of what these types are saying now herehere, and here.  I am a kindred spirit with the wave people in that I am mostly a technical analyst. The chicken scratching means all the world to me.  But the fib levels and other cycling methods usually don't interest me much.  But when there seems to be a lot of these practitioners saying the same thing - well, you ignore them at your own peril.

There seems to be a difference of opinion now on gold between trend analysis and the wave counting.
I have found that one of the most consistent means of looking at the health of a trend is simply by moving averages.  Of course you've probably heard of the "golden cross" or "death cross" when there is a crossing of the 50 day moving average with the 200 day, either up or down.  But one good way of seeing if a trend is intact or changing is by looking at what I call MAPS - Moving Average Pair Support.  This is the 140 day ema (exponential moving average) compared with the 200 day ema.  It is the best divider I know of between a bear and a bull market.

Major market averages typically obey the MAPS division pretty well, but gold in particular obeys it very consistently.  Let's look at how gold has behaved in its bull/bear transitions since the late '90s by viewing them with MAPS: (click on images to enlarge)

Here we see that the moving average pair was down-sloping and acting as resistance in the bear market, then a violent breaking out above MAPS followed by a cross between the moving averages.  From then on, MAPS acted very consistently as support in the new bull market.  There was something of a breakdown of this in early 2003 as the MAPS slope switched to negative and gold went well below this negative slope.  But if you will recall, there was a lot of unusual stuff going on in the world at the time.  The US was getting ready to invade Iraq, which we thought was chock full of bio-weapons, and gold went on a tear, bending the moving averages sharply up.  Then the war was quickly won, and gold overshot a bent MAPS to the downside.

The second bear/bull transition was 2009:

The Financial Crisis of 2008 put gold into a one year decline.  This changed with a MAPS cross, after which the MAPS support was consistently obeyed for years.  Which brings us to the present:

MAPS has switched from resistance in the four year bear market, to a cross, and now to support in a new bull.  If past MAPS behavior is any guide, the persistent obedience gold has with it has begun a new chapter and the severe bounce we saw on Friday smack on the MAPS bound will probably wind its way up to new post cross highs. The cycling move to the mid $1100s would be well below MAPS, hence the difference of opinion between the state of the trend and the cycling.

If gold does in fact go to around $1150, the cycles have it there for just a month or less before flying back into the bull climb. So is it worth trying to trade a portfolio around this short term movement?  That depends on your commissions, taxes, your tolerance for aggravation, and whether you own mostly gold or the miners.  If you have a line up of quality miners (not ETFs) they can be more independent of the short term gold price than you may think, being moved by positive company developments while you have them traded to the sidelines timing a gold price blip:

As this chart shows, over the month of May, we saw a $100 move down in gold, but trying to trade a gold miner portfolio around this would have been very dicey.  So if we go another $50 down to the $1150 level, will that trading turn out any better?  Maybe, who knows.  The miners, especially South Africans, led the turn at the start of the year, and they seem to be strongly leading now.  It may be advisable to just watch gold's behavior on this bounce off  MAPS, and if it clearly weakens below it, maybe take some profits here and there.

Saturday, May 28, 2016

The Fed Is Entering A New Bull Market In Confusion

The Federal Reserve these days seems to want to focus on employment as a reason to justify rate normalization, hinting just this week about an "active" June meeting coming up.  Of course, there are many reasons put forth to dismiss the reported numbers as being phony as a three dollar bill, with Shadowstats reporting a real unemployment rate at around 23%. 

There are many variations of how to track the "unemployed", but according to founder John Williams, there has been a migration in headline reporting away from those who quit looking for jobs and the "marginally attached" workers who are the part time job holders, who can be almost migrant workers - like the farm workers the "nonfarm payroll employment" numbers are supposed to factor out.  Williams puts out stats that reflect more the days of yore (pre '80s) when you had a job if you were loyally attached full time to a company and expected to retire from there.  The BLS government reporting has an unemployment measure where they include part time (U-6) which is much higher than headline, but Williams prefers "the U-6 rate as it was calculated until December 1993" according to the Wikipedia report on his methods.  In the '90s, he claims, some fudging in the sampling took place to deemphasize the inner cities.

But let's take the government reporting at its word for a moment and view this current employment recovery in the context of past employment recoveries from past recessions, apples to apples: (click on images to enlarge)

This chart is from Calculated Risk per a 6/25/15 update comparing the 2001 recession's recovery with our current jobs recovery.  It shows that there seems to be some growing problem with each subsequent employment recovery that slows it down from what a normal downturn and recovery in the economy should look like.  What has been growing in recent decades with regard to economic downturns?  I'll give you three hints - "F" "E" "D" - and its middle initial is Federal Reserve Board.

What's the problem with these ever slowing recoveries?  With our high-powered Fed, now more high-powered than ever, you would think we could snuff out a nagging problem like this.  But maybe that's just the problem.  Our Fed has been busy snuffing out problems for so long that it has created a problem that can't be snuffed out - the mountain of debt left over from all the snuffing:

If you compare the above charts, you can see that the sharply growing employment lag back to normal in each recession recovery from 1980 onward in chronological order correlates well with the sharply growing debt level.  As we attempt to normalize from our last recession, we appear to be going up against some kind of wall with real employment as measured by Shadowstats actually  climbing even as the Fed frantically mashes its machinery into a screaming over-heated condition.

We hear a lot about all the Fed's largess going to repair the mortgage ravaged balance sheets of banks, making them hesitant to lend. But the mortgage ravaging was the left-over of the Fed's previous snuffing project, loose money home ownership. I guess these repairs get to be a bigger job each time.

For all the trouble the Fed's debt creation causes, we are getting less and less bang for the debt dollar as the decades roll by:

This Marc Faber chart formulated 15 years ago shows the diminishing positive effect of each debt dollar on GDP growth.  Clear back then, he projected "zero hour" - when piling on new monetary debt gets us nothing but pathetic real economic growth.  This was projected to come at around the year 2015.   Fifteen years ago, few could find fault with the wonderful help from the Fed's activity.  Here in 2015ville the feeling is quite different.  This out-of-control debt dynamic is nothing new in history.  A fascinating article over at Zerohedge points out the math of debt creation vs the math of economic growth and how previous civilizations have had to deal with this diminishing return on debt path.  We may be approaching such a point now in America.

What we need to normalize isn't interest rates, that appears to be impossible now.  What we need to normalize is the economic cycle, where blundering managements have their properties taken away from them and handed over to whole new teams in bankruptcy courts.  Jim Rogers has been saying this for a long time, and he is finding lots of company these days.  We need to stop subsidizing incompetence.  Capitalism can't work this way.  Bankruptcy and banishment of the foolish was the way it worked for hundreds of years before the Fed, and no sword of Damocles debt burden swept over the world.  It was just isolated countries going through the debt binge/bust exercise with limited global collateral damage. Now the eight major central banks have extended this to the global village.

The Fed is talking higher interest rates to cool down this overheating economy while we suffer at nano% growth with virtually every reliable lead indicator pointing down:

  • The ECRI Weekly Lead Index chart
  • The transports
  • The small caps
  • The banks, especially Europe
  • Aggregate corporate SPX revenue
  • Copper 
And there are more, but you don't have to look very far beyond the dismal fact that 20% of Americans are on food stamps and similar aid, up 25% since 2004, and most are living paycheck to paycheck - the worst real economy since the Depression.  The Fed is confusing a lot of investors, raising rates against this backdrop.

In case you haven't noticed, there is a growing resentment against the Fed's business as usual.  The Tea Party this time was a revolt not against England's meddling with our colonies, but against another foreign entity meddling with our freedoms - the Federal Reserve System.   I always used to think Jim Rogers' call for abolishing the Fed to be a little extreme.  Now I see a poll out from 2010   with the stunning title "More Than Half Of Americans Want The Fed Reined In Or Abolished". 

Since then, this feeling has only grown with several recent presidential candidates, including one still in the race right now, calling for public disclosure of full FOMC transcripts within six months, not the secretive five years now being done.  This current candidate claims that if we had made this change in the early 2000s, Americans would have been dismayed by the housing bubble well in advance of the financial crisis, perhaps in time to avert it.  I won't say who this candidate is because I am Disenchanted Voter and I do not approve of their message.  

This same person, by the way, is the only serious candidate for the presidency ever to advocate reinstating Glass-Steagall.  This banking run inspired safeguard from the 1930s would put a serious crimp in the bankers' dangerous toying with depositors' money that is returning to the scene of the crime today.

One thing is certain, the Fed is not viewed the same as in years past.  Most Americans don't want too-big-to-fail anymore, and they don't want too-big-to-bail either.  The Fed model has run into the ditch, and we may not be too excited about pulling it back onto the road.

This is raising chatter about just bypassing all the Fed's complication and debt creation and resorting to helicopter money - just printing money supply and mailing it to each citizen - at the risk of instability and inflation. This radical move would be an embarrassing admission of failure of the Fed.

Taking all the federal debt created by measures of the Fed over the last 5 years of economic resuscitation and dividing it by the number of households in the US, you get some $14900 per household.  The proceeds were given to Wall Streeters. They bought Mercedes, yachts, Rolexes, and stocks with it. That temporarily benefited the makers of the yachts, and the market of course, and then we have the same old zero growth economy suffocating in taxes to pay for all the central planning.

If the helicopter changes its targeting away from the 1% to a direct, debtless gift to the 99%, the $14900 would be spent on bars, casinos, cigarettes, roller derbies, and vacations to Las Vegas. Studies noted by the Wikipedia account  have found that after the last episode of direct check mailing from the government to fix the economy, the January, 2008 stimulus checks, consumer spending was goosed by 3.5%.  One study noted that almost a third of that, 1.1% apparently went to increased emergency room visits for alcohol and narcotics related issues.  It is unclear exactly how much of the boost went to finance bad habits.  And it did wonders to avert a recession, didn't it? A new helicopter blast would temporarily benefit Joe Six Pack's lifestyle, and then we would again have the same old zero growth economy suffocating in taxes to pay for all this brilliant central planning.

If you look at a historical chart of what the helicopter charity is supposed to save, personal consumer spending, you find that it really doesn't need much saving:

In past recessions, even before the Fed's almighty hand was so dominate, personal spending pretty much went on as before, with or without destabilizing debt creation or currency debasement.  That's simply because the vast majority of people spend most of their money on the things they have to have - rent, soap, and electricity, which are typically going up no matter how the economy is doing.  In a weak economy, a graph like the one above can just be a reflection of how fast the average American is becoming poorer.
All the above mentioned federal debt creation of $14900 per household from all the extreme, convoluted monetary measures of the last five years, by far and away the biggest in history, amounts to about 3.5% of all annual personal spending - the same as the spending boost in early 2008.  After the foolish waste, it apparently doesn't amount to much of a lasting economy saver.  It didn't in 2008, and it probably won't again.

If you want a good, clear, scientific explanation of all this, I refer you to something just out this month at  A Scientific Economic Paradigm Project  (  called "Helicopter Money In Operation".  They point out that the only thing modern about it is the reference to a helicopter coined by Milton Friedman:
The new idea to avoid increasing government debt, which is actually centuries old, is simply to create helicopter money. The idea is to create spending money (“out of thin air”) and freely distribute it to consumers without at the same time creating government debt or future debt servicing obligations. This idea of printing money and spending it without future obligations is as old as paper money itself. Helicopter money only sounds new because flying helicopters around has been possible for less than one hundred years
They point out that going clear back to the Yuan Dynasty of the 1300s, many governments have utilized this. They state that,  "All past fiat currencies were abandoned eventually due to hyperinflation caused by helicopter money".  We are in an accelerating dash to that conclusion now in AmericaIn essence, we have already been doing helicopter money for years:
... QE is defined as the central bank printing money to buy private or public debt securities, a procedure also known as debt monetization. While QE injects base money as liquidity into the economy and substantially expands the balance sheet of the central bank with debt securities, the intention always has been to retract the liquidity later by selling those securities back into a stronger economy, particularly through repurchase agreements (Repos). But several years after the initial QE in 2009, central bank balance sheets remain distended and growing.
Should the government debt sit permanently on the central bank’s balance sheet, then it is de facto MFFP or helicopter money because government spending has been financed by printing money ... Another way to see that the central bank’s government debt is helicopter money is to note that in theory, if not in practice, the US Federal Reserve can cancel or write-down to zero the US Treasury securities it has purchased. It would be a “debt jubilee” of the government to itself. ... A “debt jubilee” would make it obvious that the US government is printing money purely and simply.
But it's really missing the point to argue over what to do with all the debt.  The David Stockman point about The Great Deformation (the title of his book) in Debt World resulting from years of interest free money certainly applies to the problem in general.  But as for the federal chopper money, whether financed or free, what government managed money does is wreck the economic cycle:
At the risk of over simplification, we conclude that government budget deficit spending and helicopter money will not work because they increase consumption and inflation, without increasing economic production. It is an enduring Keynesian fallacy that stimulating consumer demand leads to higher economic growth
They point to IMF data that show the clear inverse relation between government over meddling and poor economies, not just in the US but globally:

I have added the green line in the global map as my fit of the data - running from Singapore (where Jim Rogers fled to) on down to the hero of the socialists, Greece. 

What government needs to give a helping hand to is the business owner, instead of doing everything they can to destroy them. You have to wonder what kind of confidence build would transpire if the Fed radically turns from interest rate normalization this June to the extreme check mailing of the dark past.  In 2008, those checks were a message from our government saying, "the economy is in deep trouble and we don't know what to do".  Now after many years of complicated monetary Fed maneuvers, if they do any check mailing again, the message would be, "We give up. We are clueless as to how to really fix the economy".  All the confidence based activity  (hiring, investing, taking on loans, planning of all sorts) could be very badly influenced.  A new bull market in confusion would surely be underway.

Sunday, May 15, 2016

The New Socialism vs Bull And Bear Markets in History

Complaining about our presidents in the US of A is maybe second only to baseball as our national pass-time.   So allow me to indulge in a rant.  I want to take a somewhat spiteful look at the financial market history of our presidents since John Kennedy - an era that I think of as a Comedy of Errors, one of the Bard's great plays.   But it isn't so funny.  Then we will look at our upcoming election in the light of all this.

John Kennedy gave us a free market administration, with low taxes and a business friendly slant.  He felt that the tax and regulation burden on business was an economy killer.  His policies extended the great bull market from the late 1940s to 1966, the post depression recovery.  Perhaps his most famous wisdom was "Ask not what your country can do for you.  Ask what you can do for your country". This saying has a lot of significance in our present heated debate over what our government should be doing for our mess as opposed to removing over-taxing, over-regulation, and other short-term government fixes so that individual businesses can do their thing for our country.  It would have been a good Tea Party slogan had it not already been used by Kennedy.

Unfortunately, Kennedy's VP didn't have his partner's key wisdom very near to his heart.  Lyndon Johnson was probably best known for his Great Society programs, which were an over-done version of some of Kennedy's initiatives to help the poor.  Under Johnson, they became big government helping hands in a War On Poverty, as if it were government's job to regulate the economic status of individuals.  Some of these things survive to this day, like Medicare, and are a big help.  But many were bureaucratic boondoggles - and all began to be a tax problem.  By the time LBJ left office in 1968, the great secular bear market of 1966-1982 had begun.  You can't blame that whole bear market on one president, but an age of asking what your country can do for you had begun.

Then came Nixon.  A normal paper/hard asset cycle turn had begun away from paper investment and to hard assets (commodities).  The turn away from the 20 year stock bull market to the 16 year commodity bull market that began in 1966 was perhaps triggered, or at least abetted, by the bad business policy that came after John Kennedy.  Economy friendly government seems to have died with JFK's murder in 1963.  The commodity bull market had inflation running at around 4% in Nixon's time.   His reaction? - wage and price controls.  Was he a student of the Soviet Union?  This socialist intervention was a dismal failure.  It was a government engineered fix to a government engineered problem.  Sound familiar?  The economy truly went into the ravine under his socialist guidance.  And he took us off the gold standard in 1971 for good measure.  This was to facilitate the government's "helping" hands and loosen up its wrist for the dollar's printing press to follow.  By the time Nixon left office in 1974, the stock market had lost about 50%.  He was bounced out of office for lying before he could do any more damage.

Then came Ford and Carter.  Ford served only briefly and sadly, Carter was a damper on the economy.  His forte was, and is to this day, international peace negotiation.  He put together the Camp David Accords easing Mid-East problems for quite awhile.  But on the economy, he seemed to want to continue the post Kennedy legacy of bigger government, bigger taxes, and more departments (he added two right off the bat) and was the first bail-out president when he bailed out Chrysler in 1979.  Before Obama-care, there was "Carter-care", a government-run health-care system that went nowhere in Congress.  He created the massive Superfund to clean up chemicals in the ground wherever they could be found.  If there was a problem with the economy, government could fix it.

All of this string of socialist presidents, Johnson, Nixon, Ford, and Carter spanned the 15 years of the great secular bear market in stocks from 1966 to 1982, which saw the Dow unable to break 1000 and lose a lot of ground to stagflation. Then came the Reagan Revolution.  And it was just that - a very fundamental change in government, the first real change since Kennedy died.  Whereas LBJ declared war on poverty, Reagan declared war on big government.  Many presidents' worth of government helping hands had the Reagan campaign's "misery index" at such an unbearable high that he was swept into office in one of the most one-sided elections in history.  Reagan declared war on big government and big spending and was the first real business friendly president in 20 years.  And the markets picked up on it, sending us roaring into a secular bull stock market and economic growth.

If you look at a history of US budget deficits and surpluses, you can see this changing tide of socialism playing out:

Detractors of Reagan like to point at the continuing deficits of 1981-1989, Reagan's time in office, as if the preceding stagflation trend had done any better.  But as this article points out, Reagan had to do massive tax cuts, win both the war on inflation and the Soviet Union, before the economic boom finally put surpluses back on the board.

The next chain of presidencies, when you think about it, was 5 terms covering 3 men and 20 years. They all pretty much sought to continue the Revolution. The Clinton terms in the middle wound up being free market and business friendly, not to mention, with the help of a good economy, budget balancing.  Clinton, either by the mandate of the mid-term elections or by a change of philosophy, or a combination of both, put together a pretty fair economic team by the time he left office.

But in the biggest socialism blight ever, we had a banana republic regime of central bankers imposing the greatest mountain of debt of all time on all of us.  All the presidents occupying the White House from 1981 to 2008 turned a blind eye to this fifth column as "market stuff" that they didn't need to worry about.  A new tyrant had taken over the bull/bear cycle, and the 1982-2000 secular bull was killed not by over-interventionist presidential socialism, but by financial weapons of mass destruction.

With Bush II and Obama, we have gone back to the post-Kennedy and pre-Reagan socialist world. Bush did not exactly have a revolutionary, business friendly congress, and Obama would confiscate every private business in the land if he could get away with it.  A secular bear market in stocks and all non-debt fueled paper assets began in the 2000s.  Robust economic growth now seems to be a thing of the past.  Obama is responding to these problems with the socialism of Nixon, and the government helping hands of LBJ and Carter.

As the over arching socialism of central bankers puts debt and currency issues front and center, the old fashioned president/economy relationship is fading.  The "socialist" Bernie Sanders is the only major US presidential candidate I know of to advocate reinstating Glass-Steagall.  This was the safeguard necessitated by Depression banking collapses that barred banking fools from gambling with depositors accounts in stocks or anything but the business forming loans they had been doing before the Roaring 1920s led them astray. 

We had many decades of banking peace after this 1933 Act.  Then came the banker inspired repeal of Glass-Steagall in the roaring 1999, and we have had one financial crisis after another ever since.  Fully reinstating Glass-Steagall is an issue in the election as detailed in an article at NerdWallet "Glass-Steagall Act: 1933 Law Stirs 2016 Presidential Race". Sanders' reinstatement would take away the $20 + trillion of speculation toys (all our bank accounts) from big banking.  But even this would perhaps be too little too late.  The point to consider is this: the era of the power of the president over our financial cycles has ended.  Getting it back may involve more radical upheaval than a US president can muster.

We would have to have a Reagan Revolution in every major country in the world, but even that would not solve the massive delevering cycle and global debt resolution problems we now must endure.  This problem did not exist in 1982.  So the unruly Trump/Sanders hoards are now a budding revolution not so much against big government, but against the new socialism of big "Wall Street" - the perversion of what free market capitalism used to be.  Main Street is becoming incensed by it, and this election campaign is showing it.

Saturday, April 30, 2016

Apple and Tech and the Market, Oh My

(Note: I initially published this article a week ago, before Apple's report.  Since then, their results moved the stock strongly along the bear leadership path I outlined - from $105 to $92)

This Tuesday evening, what is arguably the biggest, most successful, most loved, and most widely held company on earth gives us its quarterly report.  I speak of Apple and, while I don't own it or even pay much attention to quarterly reports in general, I will be watching this one.  I am mostly a technical analyst, and AAPL is at an interesting place right now.

I don't pay much attention to quarterly eps for several good reasons.  Most all of the "financial engineering" and creative bookkeeping that goes on is focused on quarterly eps numbers, because that's what most people care about.  But that also makes them the least telling about how the company is really doing, in my view.  I look at multi year patterns in cash flow, EBITDA, revenue, and the market's technical opinion on a stock.

As for the direction of the broad market, I look at technicals, of course, but I also look at leader groups, because they are a very trustworthy tell. Like clockwork, certain leaders turn ahead of the broad market.  For the last couple years, as I have shown in previous articles, key leader groups have been doing a pronounced bearish turn - the financials (European banks in particular), the Russell 2000 small caps, high yield debt, etc.  These groups all confirm what things like aggregate corporate revenue and successful forward looking summations like the ECRI lead indicators all show.  All this reliable data is carefully avoided by the hard working men and women at the Fed:

Getting back to Apple, they could be considered a "lead group" just by the shear reach of their products.  Although I am not a stockholder, I plan on my next computer being an Apple.

This company has not just made the best communication devices in the world, but they have been a very well run business for 20 years now.  If you look at how the stock behaved during the last bear market, you see a remarkable leadership to the upside:

The 140/200 day ema is a good divider of bull and bear markets, and when they cross, we should pay attention.  Apple didn't do the bear cross until October, 2008 and sprang back to a bull market way ahead of the broad market, hitting new highs before 2009 was done with.

So what's up with this leadership now?  Well - not so much:

Charging into October, 2014, the broad market was hit hard, but it barely phased AAPL.  But then a subtle change began taking shape.  When the SPX formed a roll-over top in mid 2015, AAPL went meekly along for the ride.  It snapped back from the August panic better than the market, but since then, it has, for the first time in over a decade, begun to be a drag on the SPX.  It did not go anywhere near a new high in the November rally nor in the current rally.

Does this technical take have any roots in Apple's fundamentals?  I refer you to an overview at TalkMarkets where this change in leadership is presented in eps numbers:

The article, saying in its title that Apple is to be the "biggest drag" on SPX tech,  shows a phase change from Apple (blue bars) pulling up the tech average (green bars) to Apple pulling down the tech average.  The current blue bar is estimate.

As for top line, if the anticipated revenue (anticipated by Apple) of around $52 billion materializes, it would be the first quarterly sales decline in 13 years.  Think of how crude our phones were in 2002. 13 years is essentially the modern era of Apple.  If that quarterly rate of sales were to persist for the next three quarters, it would be a drop of nearly 12% from the last full fiscal year.  For a company that has more than doubled its sales over the last four years, that would be a bitter pill for investors to swallow.  Unless the global economy picks up quickly, it's hard to imagine a snappy return to big sales growth.

Having said all that bad stuff, the stock is not an overpriced balloon in search of a pin, like so many these days.  For the aforementioned revenue growth of the last four years, you are paying a price-to-sales multiple of just 2.6 - very cheap compared to the industry average (as defined by Morningstar) of 2.0, and the PE is just 11 for the disappointing earnings.  Even if you believe we are heading into a bear market for awhile, you could put this on your short list of longs to hold while waiting for better conditions if you don't care to try to time the possible bear.  This is especially true since Apple installed a dividend of around 2% - quite competitive in our new NIRP world.  Apple will live to fight another day.

I, for one, am going to be interested in the behavior of AAPL this week.  The stock has already clearly broken down out of the current rally.  If the quarter doesn't propel the stock back up through $115, its bear leader status won't change.  It really will be in limbo if it doesn't go through $130 and retake the baton of leadership.  And even if it were to do that, it would be one leader group saying "bull" while all the others continue to say "bear".  But maybe Apple will be the first to change its tune.

Thursday, April 7, 2016

Are We At A Fear Fatique Juncture In The VIX ?

We've all heard a steady drumbeat of negative developments about oil, bad debt, sluggish economies, blah, blah for well over a year now.  And we've seen some unsettling rallies in the VIX associated with all this, but now the AAII Sentiment Survey has just a 24% bearish reading.  The mean is about 30% with one standard deviation from the mean being 21%.  So we are nearing this extreme level of lack of fear in the stock markets right now.  The last time it was one standard deviation or more too low was back in November - when we should have been very afraid.

Have all these problems that have gradually edged the average value of the VIX up for many months now, magically gone away?  No, if you bother to check, they are actually getting worse, as I
have discussed in some of my recent articles.  Are we in denial? Are we inebriated?  Just what is our mental state? (click on images to enlarge)

As for substance and keen analytical insight, we tend to think of the fear index like we think of a manic-depressive teenager in love.  But can the behavior of the VIX really signal anything about the forthcoming behavior of the market?  Looking at a VIX vs SPX chart such as the one below from The Palantir Blog, one could surmise just that by simply paying attention to the slope of the VIX:

Here we see that the VIX will change to an up-slope in its base or support values between spikes as we approach important market tops.  And what's really bizarre is that the VIX collapses out of that up-slope just before the really bad market thrashings begin.  More on that later.

Even better than the stock market at foretelling recessions is the ECRI  (Economic Cycles Research Institute)  Weekly Lead Index, which looks at the economic cycle components that turn before the rest.  This index has a remarkable record if you just look at the trends it makes:

The trend breaks come months before the stock market turns and the recessions.  How do these trend changes compare with the above VIX trend changes?  Since the VIX wasn't invented until 1993, we will just look at the last two great bear turns - 2000 and 2007:

The VIX changes in trend preempt even the ECRI changes in trend, suggesting an even better economic information discounting ability than one of the most respected economic predictors around.

Why do we typically see a collapse of the VIX below its long, slow uptrend just in front of the main collapse in a bear stock market as mentioned above?  The only thing I can figure is a kind of fear fatigue where investors know there are serious problems developing for the market, but they are just tired of hearing about them.  They maybe just start viewing it all as the wall of worry that seems to permeate markets most of the time.  That justifies investing in bull markets, which climb the proverbial wall of worry, but it also seems to be a repeating pattern in approaching bear markets.  We are seeing a repeat of the VIX reaction to the approach of the 2002 market collapse and the 2008 episode:

The upward sloping support line shows a gradually increasing unease with investors over a period of many months, then a massive VIX spike into the classic pennant formation.  Then there follows a break of the pennant back down to the more gradual encroachment of fear.  Here the market becomes tranquil, sentiment is rosy, and investors are tired of hearing "wolf".  This Sounds a lot like the present.

But this appears to be the danger point when a turn back up in fear begins.  In 2002 and 2008, there is one more fade of the VIX back to the support trend before the major stock collapse begins.  We are at the first touch of the trend line now in the 2016 version of this pattern.  There is certainly no guarantee of a repeat of the past, but markets do tend to move in repeating patterns controlled by human psychology.  And the fear index is certainly one of the most psychological of them all.

James Picerno just published an article "US Financial System Risk Eases After Reaching a 4-Year High" summing up the current "stress test" the Fed regional banks publish.  I want to focus on the one done at Cleveland:

He shows some of the other banks' indices in this article, which do not show as dire a run-up currently as this one.  But if you examine those other graphs, you see that nearly all of the severe run-up they did in the last recession was well after the start of the recession, providing essentially no early warning. The Cleveland tabulation seems to be a little more excitable and ahead of the curve, even if it did give a false signal in 2011.

Picerno also recently posted "Macro-Markets Risk Index Signals New US Recession" where this markets based economic lead indicator shows its first recession signal since 2007:

Note this is also a lead indicator, shooting up over the 50% tipping point before the start of a recession.  It gave a false signal in 1997, signaling only the stock crash, but no recession. However, it was not faked out in the 2011 troubles, not even going anywhere near the 10% mark.

And if you like trouble indexes that weren't faked out in 2011, consider another fear index besides the VIX.  Credit Suisse has what they call the Credit Suisse Fear Barometer:

Despite all the PIIGS stress on the global financial system, this fear index remained unperturbed and, in fact, went down during this time.  But as we go into 2016, this index has gone the opposite direction of the VIX.  Note that, since mid 2014, this also seems to lead the VIX in fear spikes as in the October, 2014 market sell-off and the August, 2015 sell-off.  Could it be front running the next sell-off ?

It is worth noting that the Fear Barometer is a much braver fear index than the VIX, having thumbed its nose at all the 2011 dangers and remaining more unruffled in the sell-off of last August.  In fact, if you take a longer view of this index versus the VIX and compare for bravery, as in this piece from Phil'sStockWorld, you see this:

Not even the horrors of 2008 could run this fear index up.  But now, it's more afraid than ever before.  The above article, by Tyler Durden "Goldman Questions Rally, Fears Looming Event Risk Amid Record VIX Longs" explains two differences between the VIX and the CS index.  The Fear Barometer measures the relative put/call volume whereas the VIX just measures total volume.  And the Fear Barometer is geared to a 3 month outlook whereas the VIX is pummeled by every wind of rumor every minute.

Whether you go by the brave Fear Barometer or the slopes of the jumpy VIX, the market's fear gauges are registering danger in concert with the best economic cycling tools available (this does not include Fed Speak).  Adjusting appropriate hedging screws in portfolios would be wise.

Wednesday, March 30, 2016

The State Of The Rally

The 13% rally of the SPX and Dow from the "Dimon bottom" of February 11 has been most impressive and has converted a lot of bears into at least neutrality.  This week's NAII Sentiment Survey: 34% bullish, 42% neutral, 24% bearish.  Of such are tops made.  But the market is chugging along with the rally still intact, isn't it?

Well, if you believe, as I do, that our markets are being led by the big banks and their derivative troubles, especially in Europe, you better take a look at the following.  Things are going from bad to worse with the banks.  NIRP is crippling a beast already wounded by the quantum leap lower in commodity prices.  An article at Seeking Alpha states "NIRP Is Absolutely Crushing Big Parts Of The Finance World".

Negative interest rates are the antidote to a normal, healthy free enterprise system.  Banks are forced away from giving savers a return and making their money loaning to economic activity with a normal yield curve.  What are they forced toward?  They now have to devote their full attention to what Glass-Steagall bared them from doing after the banking fiasco of the 1930s, "investment banking", playing with commodity and all manner of toxic derivatives, which is what got us into this very mess to begin with! Yes, that's just what we need.

As I pointed out before back in October, the key outfit to watch for clues as to what might happen next is Deutsche Bank, the lead bank of Germany, the lead economy in all of Europe, the leader as we go into a socialist style banking takeover of our global economy.  They have replaced the Swastika with the Derivative Pricing Model.  Our entire free capitalist world is held captive to how these models play out, and, in particular, how they control our currencies.

My fellow militant Austrian economist, Jeffrey Snider, just wrote an article at SA called "Credit Suisse And Deutsche Bank Still At The Forefront (Just Where They Don't Want To Be)".   Here he quotes a mea culpa from Credit Suisse on their sipping of the Bernanke Kool-Aid with heavy bets on returning to normal economic growth in the Emerging Markets after the 2008 crisis. Tiajane Thiam, CEO of Credit Suisse, is giving a euphemistic review of Q4 that is paraphrased by Snider thusly:
In other words, the bank is admitting that it messed up in chasing high yield and EM credit and all the activities that surround them, vowing now to leave those areas as quickly as practical.  It isn't so easy, though, as Thain's most recent ante in more lost investment banking jobs suggests.

Credit Suisse is also joined in that regard by the others that followed this policy success vision.  Deutsche Bank, for example, was just put on negative ratings watch by Moody's. The ratings agency sees the same as Credit Suisse - that the strategy once followed and having been done leaves only further pain to undo it.
 "At the forefront" as Snider says, is indeed where DB is leading us ever onward: (click on images to enlarge)

The state of the rally with our leader is not good.  The rally off the Dimon banking bottom of February 11 did not go anywhere near a new high as has the Dow, and didn't even make it to the top of the bear megaphone progression, and now it is clearly breaking the rally to the downside.  As with the Dow, this rally has no buy volume with sell volume dominating.  I did a study on this bear megaphone progression pattern, which most of the big banks are now following. It has been the defining feature of every major US bear market since 1850.  If we follow DB's lead in this rally, it will soon roll over into a major new down leg.  As for Credit Suisse, our co-leader, it is even worse:

It is worth noting that nearly all these major banks peaked way before all other major averages.  And they actually look more like the CRB commodities index than anything else.  In any rally in this day and age, you want to see strong leadership from the financials.  If you check the other banks, you don't see a much brighter picture of where we're headed.

Make no mistake, we are getting into a market situation where the money flows of the big banks are taking over from GDP numbers, earnings, employment reports and the things that are supposed to operate markets.  Many would argue that the aforementioned numbers have already been removed from the real economy anyway. But the derivative kingdom has staged a coup and is now calling the shots in the stock market, superseding economic numbers, real or fraudulent.  This is a point Jeffrey Snider is making pretty clear in tracking the dollar shortage mess now getting to very dangerous levels. I wrote an article on this and its relation to gold and showed this amazing correlation Snider points out between the goings on at the big banks and our recent market selloffs:

The repo chart Snider shows has the dollar shortage recently doing a moon shot to the highest level since Lehman, 2008.  The sloshing around of currencies at the big banks seems to be controlling the value of your favorite stock more than the employment report or about anything else these days.  The out-of-control complexity of our credit based currencies and derivative linkages is what mostly matters anymore.  The dollar shortage is beginning to seriously disrupt business in many countries, mainly the heavy commodity exporters, as this CNBC piece details.  The list of such dollar shortage crises is growing.

The causes for this mushrooming menace in the currency markets are many, complex, convoluted, not understood well or reported by many.  And I certainly don't understand all the mechanisms involved.  But allow me, as someone who is viewing the forest, not the trees, to make an observation.

Our "money" over the last few decades has become purely a complicated series of credit transactions among banks, not based nowadays on much else besides creditworthiness.  As JP Morgan is famous for saying, back in the sensible days of sound currency, "Gold is money.  Everything else is credit".  Thus the Moody's talk of downgrades for Deutsche Bank and the like is naturally having a jarring effect in the credit-crazed currency markets.  The $700 trillion derivatives "bomb" that was partially detonated in 2008 may see more fireworks in this latest counterparty risk obsession in currencies.
Deutsche Bank, our fearless leader in the technical condition of the stock market, is also the world leader in derivatives.

Nearly a hundred years ago, after many years of looking the other way with the creeping policy of appeasement, it took a horrendous world war to stamp out the socialist rats enslaving the German people.  Now, a computer algorithm version is taking over our growing taxes, the bills in our wallet, and our right to a growing economy.  As I showed in Gold And Derivatives these Gestapo goons are even in the process of laying claim to your bank account to pay for their derivative indiscretions in the future.

In 1943, the Nazis were winning the war.  After Pearl Harbor, Japan ruled the Pacific and we were bracing for an invasion at California.  Hitler had drawn up the recently discovered construction plans for death camp locations in a divided America, the west half governed by Japan and the east half, with all the Jews, governed by Hitler.  IBM was developing the first computer that would be used by the Navy to calculate its gunnery.  Without the undivided focus and outrage of the world in the war effort, with every company making war parts and nearly every mom helping while her man was away fighting, the tide may not have been turned in 1943.  Now, our global socialists with reckless derivatives as their main weapon are looking to enslave, not just the German people, but anyone who must pay taxes and has a bank account connected to a computer.  They are farther ahead than the Nazis were in 1943, only with the world fast asleep.  What's it going to take this time to stamp out these cyber socialists?

Let's all hope the all-knowing, super-hero Derivative Pricing Model continues to solve all our problems for us.  It has gotten us this far.