Planet Yelnick

The Baton is Passed from CleanTech to the Social Mobile Web

Interesting meme racing around the tech blogosphere on this cybermonday: that one of the most respected venture firms, Kleiner Perkins, is switching gears from cleantech to the new social mobile web or whatever it should be called. John still expects some billion-dollar cleantech IPOs next year, but he has been talking up the new sFund and it has sparked speculation about where he sees the next big thing. 

CleanTech had a bit of a bubble, and is off the peak, both in values of many deals and in pace of investing. Certainly some deals have done well, in particular Tesla, which in recent days has traded up above the levels of the initial pop after IPO. (Note: I have a small indirect interest in Tesla.) Yet there has not been a green IPO that spawned a rush to the category. It has not had its Netscape Moment. As GreenBeat summarizes:

Basically, cleantech needs a facebook

The social mobile web has its Facebook, and its Twitter, Zynga, LinkedIn, Groupon, etc. While many are awaiting for a series of social mobile web IPOs in the next two years, the market has already treated Facebook private shares like IPO candy. SecondMarket reports that Facebook shares are now trading at $50B market value. This makes it worth more than Yahoo or eBay, closing in on Amazon ($80B), and within 1/4th of Microsoft and Google. 

John may be a bit wistful, having so strongly promoted the sFund he has cast a shadow on his cleantech investing. We can see where this is going with a recent funding round of his firm and Accel partners (who just made a killing selling Facebook shares) into an energy efficiency deal, OPower, a deal that crosses over between the Internet and cleantech. 

Where John leads, we should not be afraid to follow. The SuperAngel phenom has now crossed over itself into mainstream venture capital. The game is on! The next tech boom is emerging, 

A Thanksgiving Moment for the World

Street music made into a marvelous video that captures the modern Thanksgiving spirit of standing by the ones you love in troubled times (hat tip to Barry Ritzholz):

Stand By Me | Playing For Change | Song Around The World from Concord Music Group on Vimeo.

Bubble Trouble

Funny juxtaposition. The media cannot get the story straight. First the WSJ publishes a Serious Editorial that Few Businesses Sprout, With Even Fewer Jobs, especially from a dearth of venture-capital startups. They added a nice chart (below), and made this assertion:

Venture-capital firms that typically invest in young companies, as well as angel investors that focus on early-stage start-ups, are pulling back as they struggle to sell the companies they already own.

Then the NYT opines As Technology Deals Boom, the Talk Turns to Bubbles, which makes this assertion:

Is the world ready for another Internet bubble?  Ready or not, it appears to be coming. In fact, it may already be here. And it seems to look, not surprisingly, like the last Internet bubble.

The NYT is tracking a storyline emerging from Silicon Valley, of the SuperAngel bubble that I have been reporting on. Last week at the Web 2.0 conference in SF two leading venture capitalists faced off for a discussion of whether this was a bubble or not. The facilitator hoped for a SuperAngel smackdown, and instead got a fairly good discussion of what is bubbling in Silicon Valley (and Silicon Alley in NYC). 

On the SuperAngel side, Fred Wilson of Union Square Ventures said he had seen irrational bidding up of deals, and was worried. He had blogged that he was seeing Storm Warnings of too much capital pouring into deals:

I think the competition for "hot" deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I'd be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.

On the traditional VC side, John Doerr of Kleiner Perkins, the very model of a modern venture capitalist, sees this as the beginnings of a new tech boom, not the blowoff top of irrational exuberance as in 2000. He concludes with:

Booms are good!

While it comes across as a Gordon Gecko sort of comment, I think John has the better of this argument. The reason the SuperAngel bubble is not showing up in the WSJ stats is that it is a very small phenom right now, nothing like the dot-com bubble.  A bubblet, not a bubble. This is how new tech booms start, and it adds more support for a coming tech boom that will rival the PC craze from 1978-83 and the dot-com mania from 1995-00. 

Monday Should Give An Important Market Tell

When QE2 was pre-announced at Jackson Hole, the market took off in the September-to-Remember rally. The fundamentalists touted its advantages to keep rates low, spur stocks to rise, and improve the economy via a cheap Dollar; they also anticipated a Republican victory in the mid-terms. When the election happened as expected, and QE2 was formally announced, markets began major reversals. Was this simply a matter of buy-on-rumor, sell-on-news, or something more?

Fundamental analysis does little good at this point. After the reversals, the fundamentalists changed their tune: QE was ineffective, was leading to currency wars, was driving rates up on inflation fears, etc. 

The reason it might be something more comes from Sy Harding, the keeper of the seasonal pattern (buy in Nov, sell in May). His weekly post comments that the seasonal pattern may have started early this year, at the end of August; or perhaps something else is happening: bullish sentiment got to extremes normally seen at a major top, and so perhaps the whole Nov-to-May pattern got compressed in a short two months. As he puts it:

Interesting enough, the market experienced a big triple-digit rally on Thursday that carried the S&P 500, Dow, and Nasdaq back up almost to their 21-day moving averages in one day. But the rally stopped just short of those resistance levels. So the question is still out there. Normally, market analysts would not be focused on such short-term considerations. But a situation is also in place that might have intermediate-term implications, thus making how the market deals with the short-term support and resistance levels more important.

Wave Theory is most useful at these points, to give guidance or at least signposts as to what comes next. Since technical analysis is probabilistic, this guidance is odds-adjusted. Some calls are high confidence, others are low. At those times, best to make no calls at all.

The lack of confidence in the punditry is why I have been off stock predictions for a bit. The pundits have to bravely carry on anyway, and so let's look at them: 

• Prechter in his monthly Theorist concurs with Sy Harding that this could be the start a something big, although the better odds are we make one more run at the 1227 level. He has been on an All-The-Same-Market view for a while, that global markets are linked, primarily to the Dollar. He lays out a convincing case that global markets all topped and reversed between Nov 5 and Nov 10, as the Dollar bottomed. At that time bullish sentiment hit extremes typical of a top. 
• Neely has called for a new short position, with stops, indicating high enough odds for a drop from here, although not a major move down. 
• The STU sees two choices, and believes how the market opens on Monday will provide a huge tell as to direction over the next few weeks: will it turn down and break below Sp1173, indicating a deeper correction, or continue up back to the 1227 range, indicating a sideways move?

Fractal Finance also provides a useful description of the past three months. Markets are order-seeking mechanisms and when they find order they move quickly in a thrust, anticipating the future gains before they arrive. When they reach the limits, they pause to seek order again, driving the market into a sideways move which can often seem volatile. The reversals we have seen so far are the choppiness from being on the edge of chaos, seeking order. The market spiked up to 1227 and came back down into a prior trading range, but has not yet bifurcated out of the range. This suggests a period of sideways motion. The bifurcation out of the range will be the confirmation of a new thrust beginning. They usually come after a triple test of the top or bottom of the range. 

Let me illustrate with this chart from Wave Principle. It shows the plateau that formed after the thrust from the end of August. The green lines mark the general zone of chaos in the plateau. We then came above it and have now fallen back into it. We are sitting right on the upper end of the plateau, waiting for a break one way or the other. As you can see, we have so far tested the bottom twice, once before the jump above the plateau, and the second time earlier this week:

Pulling back to the larger picture, we have a much larger plateau that stretches back to January 2010 (and arguably even farther back) and so far has had two tops at the 1220 level. A third test in the 1220-1235 range would be expected, although not required. Prechter thinks it will come in January. Sy Harding would have expected it in May under the normal seasonal pattern.

Let me marry wave theory with fractal finance. The move up since Jackson Hole seems to have ended at 1227, but the not the whole primary wave since the low in July. The recent top likely only reflects an end of wave 3 and we are now in a wave 4 with a higher high ahead above 1227 in wave 5. If we break below 1173 on Monday, that indicates a sharp correction characteristic of 1227 being a major top (although it doesn't confirm it, just increases the odds). If instead we move sideways, that suggests that we are in a wave 4.

Let me illustrate the choices with the next chart from EWTrends, showing the market since July: 

If we count the action since the low in July as the primary wave, wave 1 (red) went up for six weeks into early August, and wave 2 (red) fell for three weeks into the end of August. Wave 3 (red) ran up for over 7 weeks into mid-October, where it started a plateau. That plateau was a short sideways action that didn't retrace much of the prior wave, which makes it more likely to be merely a minor wave 4 (blue) of wave 3 (red), and not a major wave 4 (red) of the primary wave. The subsequent spike up to 1227 was also relatively short and brief, again making it more likely to be a minor wave 5 (blue) rather than a major wave 5 (red).

You can see that the chart leaves it a ? which way to count that sideways move, but the STU believes the odds favor it being but a minor wave inside of wave 3 (red). Prechter in the Theorist (EWT) agrees:

We can also count the rally as done, with barely discernible fourth and fifth waves, like the last rally into 2007. But on the basis of form, this must be considered an alternative interpretation.

Wave 4 of the primary wave should go for weeks, to be followed by wave 5. Wave 2 (red) was a sharp correction, so this wave 4 will be sideways, either a flat or a triangle. Possibly we stay sideways into mid-December and then have the proverbial Santa Rally into a January top; but sideways corrections tend to take an annoyingly long time, and could put the triple top out into Q2. Here is what to look for:

• a sharp drop Monday below the 1173 level suggests a flat, which could then rise ABOVE the 1227 level, emboldening the bulls, before falling back down again for that triple test of the low
• a rise towards 1227 Monday suggests a triangle, which is likely to bounce between 1173 at the low end and 1227 at the high, coming to an apex before the final thrust up in wave 5 (red)

Since this short stub week before the two-day Thanksgiving holiday in the US tends to be up on light volume, I favor the triangle case. Also be on guard for the two edge cases:

• a continued drop below 1130 (the dotted line in the chart above) and the top is in 
• a sharp rise above 1227 and these pundits have a lot of explaining to do

GM IPO Driving Short Interest in Tesla

Tesla is by far the most shorted stock in the Russell 1000 at 64% of its public float sold short. This is incredibly high. The next highest are half this level. The chart below from Bespoke speaks loudly. What gives? 

Tesla appears to have run up in the wake of the GM IPO and its hyped car, the Chevy Volt. Tesla even popped above $30, getting back to where it peaked after its IPO. The shorts are betting this is short-lived.

GM offering priced today at the top of its range, which had been revised upwards. Much of the excitement surrounds the Volt, which is winning car of the year awards. I find the Volt to be the most interesting car in the world right now. 

The last time a big IPO like this came out to such accolades, it marked the 2007 top. The cheeky site ZeroHedge ran a poll and found 35% expected the IPO to trade below its offer price within 24 hours. Another 35% thought it would take no longer than a week. The WSJ also ran a poll, and 56% thought it would be below within three months.

I hope the Volt proves them all wrong ... but the offering seems over-hyped. Never forget your are buying a stock, not a company, nor a car!

QE2 Sinks Munis - Time to Buy?

Muni bond investors felt that sinking feeling last week as their longer-term munis were swamped in the wake of QE2. "Munis in Trouble" headlined this jaw dropping chart of PIMCO's muni fund (courtesy The Big Picture):

A quick scan of the blogosphere will show boatloads of doom & gloom prognostication for the muni market. The collapse continued today and shows no sign of abating. Advisors are recommending an exit strategy, out of munis. 

Out here in the Left Coast of Cali-for-nia, the morning stories were about how the deficit is widening to over $25B, a number previously thought inconceivable. The exiting governator, Arnold Schwarzenegger, is trying to call a special session to deal with it, but the Democrat legislature would rather wait for the second coming of Jerry Brown. Maybe he can find a way to save their pensions and government salaries by cutting, well, what exactly? The Golden State has no defense budget to slash. Muni advisors look this way and see Greece. 

Yet munis are one of the few markets left with real investors, and only modest speculative interest. An attempt to turn the staid muni market into a feast for rapacious financial innovation fell apart during the past two years. The muni buyer may have heartburn but is unlikely to roll out quickly. The Muni ETFs are more likely to suffer as investors take to the lifeboats.

I own California munis, and think it will soon be time to buy more. Let me lay out my four reasons:

1. Seasonal factors are softening rates
2. Buying interest remains strong
3. Munis trade on technicals, and track Treasury changes most closely
4. Fundamentals are trickier than normal but do not presage defaults

QE For Kids

Hat tip to Mish for this. He says he especially likes the part about Bernanke being so dumb as to want to raise prices in a recession.

Update: an economist deconstructs the cartoon bunnies' arguments here.

QE Stumbles at the Starting Blocks

Global interest rates are rising, which is not what Bernanke had in mind with QE. The US 30-year auction went poorly yesterday, reflecting a change in psychology of the Treasury markets the opposite of what QE is supposed to engender: according to this morning's WSJ, fear of inflation is trumping the Fed's buying power, and rates are rising.

Bond buyers have bought ever-lower yields expecting they could bail out if rates began a persistent rise. The spread between the 30-year and the 10-yr has increased in one of those parabolic curves which tend to end badly:

PragCap observes that this means bond buyers are eschewing the long bond so as not to be locked into rates close to the 10-yr, which means the market is expecting rates to rise and the 30 Year Bond Bull to end. Since the QE pre-announcement at the end of August, the long bond has gone from below 3.6% to above 4.2%, a huge move. Can owners of large positions get out fast enough? This is PIMCO's nightmare come to life.

The Dollar continues to firm while the Euro seems in trouble. The sovereign debt problems of the PIIGS have returned. The Euro is close to $1.365, a level which could trigger a dump of the Euro. The AUD remains above parity after ticking below $1 yesterday, and it too might get a sell-off if it breaks 99.5c. 

To follow this more closely, note that EWI is offering their forex services for free this week. Click here if interested. 

Even stocks are not reacting as Ben expected. Recall that his stated reason for QE2 is to drive stocks up, creating a wealth effect that restores confidence to the economy and spurs more business activity. It is not just that stocks have flatlined since the QE announcement, but insider selling is way up:

• MIsh congratulated Cisco insiders for getting out ahead of the earnings debacle last night, which sent shares initially down 15%: over the past six months, the Cisco scorecard is 6.6M shares sold, 0 share bought
• ZH reports that insider selling hit an all-time record last week:

Contrarian footnote: while insiders are selling and global markets are reversing, bullish sentiment soars! Small investor bullishness is back to 2007 levels! This is what happens around a top. 

Big Reversals Prior to G20

The drumbeat of criticism of QE2 is getting louder as we approach the G20 meeting later this week in Seoul, and it have spilled over into big reversals in global markets:

• On QE2 Day last week, the Dollar bottomed (DX75.63) and the Euro peaked ($1.43)
• Since then the Dollar Index has been on a run, getting to 77.87 (so far)
• The Euro has plunged to $1.375
• Silver in this period shot up in a parabolic blowoff to over $29/oz.
• After the pits closed today, silver fell 10% and the CME raised margin requirements

Here is a chart of a silver ETF right BEFORE the 10% fall in the overnight market. You can see the QE2-inspired run up and then the classic parabolic blowoff:

Maybe that errant missile off LA was silver taking off (hat tip to EvilSpeculator for that)? Or some wit said it was Jerry "Moonbeam" Brown taking off. Zerohedge gave a handy chart by the Air Force on how to identify unkown flying objects:

Most likely it was a normal contrail misidentified. 

In the same sense, we should be cautious not to jump to a conclusion about these big moves. We are very close to the levels where a reversal is confirmed. The STU put out a special bulletin tonight to note the potential reversal. Still, these big moves may reflect interventions by central banks as they pre-position for what should be a pretty volatile set of meetings on the global currency imbalances. The next few days should prove interesting.

 

QE For Dummies

There is lots of confusion over quantative easing (QE), so much so the markets may have over-reacted. I have been following PragCap's analysis, which is very good, but dense and lengthy to read, so let me try to simplify:

The Treasury sells bonds to Primary Dealers (banks), who resell to the public.

• In QE, the Fed steps in and buys many of those bonds.

Where does it get the money from?

• It creates it out of thin air

Isn't this inflationary?

• No, since the new money goes into the reserve accounts of the banks. 

What are these "reserve accounts"?

• Deposits the banks keep at the Federal Reserve (see where the name came from?) 

Why isn't this inflationary?

• Because the money sits in the Fed rather than circulating in the wild

What a minute. Didn't the Treasury get new money, and won't they spend it?

• Of course, that is why they sold the bonds to the primary dealers

So why isn't that inflationary?

• This happens all the time when Treasuries get floated, but the buyers have to pull money out of someplace else to buy the bonds

Yes, but this time the Fed is creating money out of thin air, instead of the prmary dealers (banks) pulling it out of the economy

• Right, but again it ends up in reserves not in the economy

Here is a chart which shows the before and after picture. You can see the new bonds bought by the banks (primary dealers) are swapped for reserves.

Why don't the banks use those reserves to lend, putting the new money into the economy?

• THAT would be inflationary, but they are not doing that 

This is the crux of the confusion. Cause and effect are the other way around:

• Banks don't lend because they have more reserves; they lend when they can make money on the deal

For a long time banks have not been reserve-constrained. They can easily borrow from the Fed when they need liquidity. This is why the current crisis is NOT a liquidity crisis like the 1930s. History shows that bank reserves go up AFTER they increase lending, not before. 

Why won't QE make the climate for investment by banks better?

• Unlikely. QE is trying to reduce longer term rates, but banks make money by borrowing short term and lending long term at higher rates. When the spread is decreased, lending stops.

What is the Fed up to?

• Bernanke has stated that he hopes stocks go up, creating a wealth effect, and the extra wealth gets spent, propping up consumption

Does this make sense?

• No, since it does not create extra money - the stocks you sell are bought by someone else, so the net money is the same. At best you get a little boost due to margin accounts - the buyer could use debt to buy more and not use as much cash. The real hope is stock sellers spend more and invest less; but then stocks will stop going up

Here is CNBC on the QE2 wealth effect:

Then what is he really up to?

• Lots of speculation on this. Maybe he is worried that the amount of government debt that we need to finance - both new debt and old debt rolling over -  is about to overwhelm capital markets. We would either need to raise taxes or interest rates - both of which would short circuit the recoveryless recovery. 

What about all the signs of inflation?

• The market in its confusion expects inflation. Commodities are way up, and the inflation-adjusted bonds (TIPS) are showing higher signs of inflation

This chart from Calafia Beach Pundit shows how the long bonds are not behaving as Bernanke wants. Their yields are going up, not down, signaling inflationary expectations:

We could end up in a bad place: commodities go up, squeezing middle class families and compressing business margins, as their inputs get more expensive but they lack the ability to raise prices.

Well, aren't stocks a good place to be? 

• Japan's recent experience with QE says be careful. As PragCap concludes:

[I]n Japan ... QE caused a brief 17% rally in equities as speculators leveraged up, jammed prices and then later realized that the slightly lower yields hadn’t really changed anything.  What happened next?  Their equity market fell 40%+ over the next two years.  QE was a great big “non-event”.  All it did was manipulate markets temporarily and cause a huge amount of confusion.

History of the Tea Party

A quick and funny video from Slate (tricorn hat tip to Barry Ritzholtz).

The Last Bear Hangs In There

Contrarians are waiting for capitulation by the final few bearish analysts before picking a top. Most have gone silent after the market broke the April highs this week. The WSJ trumpeted today that the Dow has now recovered all the loss since the Lehman debacle two years ago (see chart, courtesy Bespoke):

A number of traders like to fade the most popular bear, Bob Prechter, and thus are waiting to see how his monthly service, the EWFF, explains the new highs. Rather than turn into a latter-day bull, the EWFF remains firmly bearish, but had to jump through an analytical contortion to get there. They now see the Hope Rally as a large ABC zigzag with the first leg running all the way to the April highs. In a zigzag, waves A and C break as impulsive five-wave structures. In order to get there, they had to concede that that wave A was a five-wave move even though they admit it lacks a clear five-wave structure in its impulsive waves (1-3-5) and lacks alternation in its two corrective waves (2-4). Tony Caldaro should be smiling, since he was the first major wave analyst to call it that way. The mea culpa from the EWFF is "there are times when lower probability outcomes occur, and this was one of them." Somehow this is very unsatisfying from what normally are tough analysts.

In contrast, the third major wave analyst, Glenn Neely, has stayed true to his methodology. He has a different wave structure for the Hope Rally, where he ends the first wave up a year ago amidst that choppy Sept-Nov action, calls the Nov-Feb period last year a corrective X wave, and counts the action since as a large corrective pattern where wave A went to April highs, wave B is the flash crash and its aftermath, and we are now in the final wave C. He thinks odds favor a short right now. No ewaverer he. 

Interesting is that both major pundits are coming to a similar near-term outlook. Neely expects a down wave 4 and a final up wave 5 to complete his C wave. Prechter sees wave A ending in April, wave B ending at the July low of Sp1011, and wave C has breaking so far as a 1-2-3 pattern where we are in 3. He too thus is looking for a wave 4 down and a wave 5 up to complete the pattern. He leaves open an alt count where the July low is but wave (a) of B, and we are in wave (b) of B with a (c) to go. This might get confusing with all the waves but it implies that after the little waves 4 and 5, we have a correction to Dow9500 and then a final rally.

Martin Armstrong, still in jail, has restarted his own market numerology, which pegs a major turn point to June 13, 2011. So far all the wave prognostication has prematurely called tops. Perhaps Martin's date will be closer to when the Hope Rally truly fades. 

How should contrarians play this? Turns out the net bullish sentiment (bulls less bears) is at its highest of the whole Hope Rally - indeed a three year high (ie since the 2007 top). Futures traders are 94% bullish, the highest since January 2007. How much upside is there when bullish sentiment is higher than at all prior tops, including the all-time high in 2007?

My take: continue to watch the Dollar. It broke below the three-year support level yesterday, but has come back above. The bullish case in stocks is based on a bearish Dollar. A Dollar bottom reverses all the recent trends driven by belief in QE and the Bernanke Put. If it remains above it may have put in the bottom. 

QE2 Off to a Bumpy Start

QEII first looked like the Love Boat, but may turn out to be the Titanic - Art Cashin at UBS.

You would have thought that with three months warning and boatloads of commentary, the Fed's QE2 announcement would have settled in by now. The Dollar took a dive, not a surprise, but bonds fell too (rates rose), which was a surprise, as QE was supposed to lower rates on longer term bonds. The 30-year yields jumped 20 bp to go back over 4% as the market was surprised that the long bond was not targeted by QE this time around. Last time around, during QE1, rates also rose.

PIMCO, the big bond fund, is worried that QE2 will backfire.

"Doubts grow over wisdom of Bernanke's 'super-put' " intoned the headline by Ambrose Evans-Pritchard at the UK Telegraph:

It is the clearest warning shot to date that global investors will not tolerate Ben Bernanke's openly-declared policy of generating inflation for much longer.

Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason: because they are a safer asset class than bonds at the start of an inflationary credit cycle.

Tinkering with markets risks losing control. Is Bernanke already in trouble? Markets are getting disorderly, worldwide. The impact of QE seems to be exporting US inflationary pressure to overseas markets. India hiked rates to quell inflation, as China also did recently. The chorus of criticism from around the world is increasing. China, Brazil and Germany in particular have complained that QE without other measures to turn the US economy will do no more good than literally throwing Dollars out of helicopters.

Global inflation is clearest in commodities. Besides all the metals, oil rose. The Saudi's expanded their budget, expecting to reap windfall profits. Many inputs in products besides petroleum have risen dramatically since August. Cotton is a striking example, showing the signature of a parabolic bubble that will end very badly:

Bernanke is trying to create a general monetary inflation in prices in the US. The inflation indicators (GDP Deflator and CPI) are showing only modest levels of 1-2%. His challenge is daunting in that banks create money in the US and they are not increasing lending in any serious way while the shadow banking system is still deleveraging. Another surprise today is that M2 actually dipped ahead of QE, not what should be happening for his inflation pump to work. Instead of inflation, Bernanke is risking margin compression: the inputs rise, but prices of end products remain about the same, squeezing margins. 

He is also trying to drive the Dollar down in an ill-guided attempt to increase US exports. Exports of commodities respond quickly to changes in relative currency rates, but end-products are much stickier. The impact of a lower Dollar will be higher inputs (imports) and less return on about the same exports until the expectations of cheaper end-products causes sales and pre-existing contracts to adjust. This means the "net export" component of GDP is likely to be hammered as imports rise (in price) and exports fall (in value). 

The Dollar Index broke a critical trendline today, plunging below a support level that had held for three years. As you can see from this chart, a day before the QE announcement the Dollar Index was sitting on the line:

Breaking it is bad news for the buck. What usually happens with a break is a retest from below. If the Dollar can recover back above, it was a False Break, largely driven by getting caught in the turbulence of the QE announcement as central banks adjust. If the retest fails, we may see the Dollar kiss that trendline goodbye for a while. You can read more analysis at Slope of Hope. 

The macro forex environment will now become even more turbulent. Many Asian countries rely on pegs to the Dollar to keep their currencies cheap, and they will now have to intervene. This puts them in an awful trap, as intervention risks importing inflation, but letting their currencies rise risks slowdown of their export-driven industries. 

In all of this, stocks rose today. Perhaps it was but a momentary spike, as Neely opined in a special bulletin. If so, we shall find out shortly, as stocks should reverse down. Yet it might instead be a Bernanke Put (see next chart). There has been some suggestion that he is purposely targeting stocks, perhaps in the hope of generating a wealth effect to pull more spending into the economy. This is quite a change for a one-time monetarist, watching stocks and not the money supply or surrounding indications of inflation, such as commodity bubbles. 

Market After the Mid-Term Election

Uncertainty is now behind the market. The R's accomplished the biggest wipeout of the party in power since 1938, a fitting year given all the macro similarities. The Fed's QE2 announcement at $600B was pretty much as expected. And Jerry Brown as the governator of California again somehow seems fitting.

You can understand California's economic dynamic as Era of Growth vs Era of Limits, or as Pre-Brown and Post-Brown. For those of you who are Back To The Future fans, it is his "density" to preside over the consequences of his decisions 30 years ago. Optimists in the once Golden State hope he takes on the unions. What does he have to lose? And only Nixon could go to China. Pessimists are preparing to leave. Will California be the next bailout? We'll probably get a read on this pretty quickly. 

We should get a pretty quick read on this market as well. The STU is hanging onto their ending diagonal, which would be in its final spike up. Recall that it should not get above Sp1208. Their alt count is the thrust out of a triangle, which could go higher, but should not breach the April high of 1219, or their whole model is wiped-out as much as the D's yesterday. Given that the Dow has already broken above, the Election QE Wave may roll over their wave count. For a clue, watch the Dollar Index. It was supposed to retest its recent low at 76.14, but held up last week. Today the QE2 moment got it back down near there at 76.22, hitting the trendline that has provided support for the past three years (70.70 in Mar08, 71.31 in Jul08, 74.19 in Dec09). The last time it bottomed (Dec 2009) it had a sharp thrust down, then a retest that fell short, then a huge up move in a short time. 

Question of the Day: Are Markets Waiting to Fade the Election Rally?

There is a general trader view to let the election come, then fade the market. This is no more profound than "buy the rumor, sell the news." More likely, the market stays a bit longer, waiting for the Fed's QE2 announcement the day after, since there is a well-known FOMC pattern: the market usually rises into a FOMC pronouncement, then falls. The question du jour is, does the market follow a simlar pattern during mid-term elections?

Bespoke provides a wealth of data for elections and markets, worthy of baseball-statistician-turned-political-poll-watcher Nate Silver and his 538.com. Stocks normally do well on election day and the days after: a gain of 53 bp (0.53%) since 1970. Before 1970 the market was closed on election day, and looking at the day after as a surrogate, markets have been up 28 bp since 1900, vs. the average of 3 bp for all trading days. Over election week the mid-term election gain has been almost 1%:

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The fundamentalist point of view is that QE2 will not do much to help the economy, especially when the expected Tea Party victory will turn fiscal policy towards austerity. Trader's Narrative reports that the word from the pits in Chicago is that the average response from the primary dealers is to expect $930B of QE, but very few expect anything beyond $500B to be announced, setting up the market for a missed expectation and a drop Wed.

The technical point of view is that the market is nearing a top of sorts, even from the bulls such as Carl Futia. The ever bearish STU sees the S&P in the final throes of an ending diagonal, which requires one more sharp move up - perhaps the election day rally. This structure limits the rally to below Sp1209 (or wave 3 would be shorter than wave 5). Their alt count is a running triangle (which has a large second leg) that also means a sharp rally to come. (The current waves do not meet Neely's definition of a running triangle, since leg D failed to finish above leg B.) Normally the thrust out of a running triangle goes at least the widest part of the triangle, which would target 1214.

Under Fractal Finance we have just had a double top at 1196, and a triple top would normally be expected before a change of trend. This would be consistent with an election rally that holds below 1200 and fades. If instead we break and hold above 1196, Fractal Finance would remain bullish, as it has been since mid-Sept.

Another technical issue is an increasing divergence among the leading sectors, typical of a top. Tech stocks have been leading, and quite strongly, having run from a one-year low in relative strength (not price) to a one-year high in just two months (chart courtesy Bespoke):

The fomer leading sector of the Hope Rally, however, financial stocks, have lagged badly in the same period, and are on the verge of breaking to a new one-year low as well as breaking below a support level at 42.5 (chart courtesy EWTrends):

The irony of this divergence is that QE2 is largely designed to shore up the banks, especially in the face of a pending foreclosure-gate disaster. The banks manage the primary dealers of Treasuries, and would be beneficiaries of a concerted program of QE. They could use it to continue to swap toxic stuff out and good stuff in. For some reason the expectations of QE are not rallying the prime beneficiaries. The risk of a second wave of bank issues is trumping the QE bailout. 

The Chevy Volt is an Interesting Car

Who woulda thunk that the most interesting car in the world would come from GM, and a Chevy to boot. Motor Trend test drove the Volt, and liked it more than the flashy Tesla. The Volt is in fact the first practical electric vehicle, one that fits more than a niche market.

Unlike the Tesla, or the Nissan Leaf, the Volt can be driven as far as a regular car without running out of juice. It is the first true electric (vs a hybrid like the Prius that relies heavily on the gas engine) with a range extender that kicks in to recharge the battery when the all-electric driving has drained it.

The Volt is the first electric to fulfill the American dream of driving with no limits.

The trade press is wrestling with this. Is it really an electric? Or a disguised hybrid? Silly question. The allure of electrics is in normal commuting (say, 40 miles), the car can run all electric, be plugged into the grid at night, and be good to go in the morning. The Prius cannot do this; if it is lightly feathered in the morning commute, it gets perhaps 13 miles on battery and then the engine kicks in. But who does that? In everyday driving, the engine kicks in all the time. It gets over 40 mpg, but so does the new Jetta diesel with "Prius-humbling thrust". 

The Volt is designed to run 25-40 miles on batteries without needing the range extender. Motor Trend trucked around LA and got 36 miles before the range extender kicked in. The car kept going, and drove the same way, since the small engine was charging the battery, not clutched into the drive train like a hybrid. They drove 120 miles with the AC on, and even pushed the Volt to 100 miles an hour and up steep inclines. Driving hard, they got 75 mpg. Driving to and fro their office, they got 127 mpg.

They also pushed it up the mountains outside LA. Above 70 mph, the engine clutches to the drivetrtain, giving extra power.

The Volt also has a "mountain mode" to stay at a steady 70 mph on electric power and pass those annoying 18-wheelers heading up steep grades. This is especially useful when on a ski trip. 

It may not win the Indy 500, but it won't slow you down. Again, no limits.

The Volt is the best advertisement for the potential of all-electrics. The American driver has nothing to fear of an electric future. 

And none too soon, either: on the very day the Volt launched, JD Powers issued a report throwing cold water on the hot electric vehicle category, expecting them to sell poorly, especially when the subsidies run out. The Washington Post picked up the story, with an op-ed that concluded:

[T]he Obama administration's commitment of $5 billion in loans and grants for electric cars is the biggest taxpayer rip-off since corn-based ethanol. It benefits no one but a few well-to-do car buyers and politically connected companies. Any "green" jobs these rent-seeking firms create will vanish when consumers reject their products and/or the subsidies cease.

The Volt may prove JD Powers wrong, if it sells well; and even if it doesn't, this op-ed is a bit over the top. Cars are never just about the money. When I was working in LA, even the assistants and secretaries had BMWs. A car is much more than mere transport. The Volt may never have the sex appeal of a Tesla, but it says something about the driver that the comparable Chevy Cruze never could. 

Even if Volt doesn't sell well, it provides a lesson about innovation that is far more important than the car itself: 

Amidst bankruptcy, bailout, dealer triage and brand reduction, how could a ragtag team at GM pulled off the best-engineered electric to date?

The lesson is this: it was not in spite of all the turmoil, but because of it, that GM finally got freed from the hangover of Ralph Nader's Unsafe At Any Speed, a book which stifled innovation at GM for over 40 years. The real story here is a how a team unleashed from regulations, lawsuits, intimidation and public excoriation could put the US car industry back in the forefront of innovation.

In Silicon Valley, we celebrate the success of Tesla to show the world how the Silicon Valley approach can revitalize a mature industry. We know small furry mammals can run ring arounds the big dinosaurs. With the Volt, a fossilized elephant has learned how to dance. 

Motor Trend thinks it would make a great movie.