Planet Yelnick

Yves on the Trump Trade

We are at a critical junction in markets, and our favorite guest blogger Yves Lamoureux advises on the change of trend. He has made recent prescient calls in other markets too, such as Japan. Earlier this year he called a change in stocks, and predicted the current blow-off run to new highs. Here is his view on the bond market:

In nature, there are seasons. In the affairs of men, there are seasons. And seasons in finance? Mentioning cycles in markets hurts the fragile sensibilities of so-called objective investors, however.

A wise investor knows it is not wise to follow the herd. We have come across what we believe represents the crystallization of crowd consensus on interest rates. The cover of The Economist dated September 22 shows the Fed on a small legged horse with the headline “Living in a low-rate world.”

It caught our eye, having correctly presented our case of the next wave of a credit event on July 5 at the very top of the bond market

We maintain our view that coming bond losses will be brutal, and we timed the bottom of real rates on the 10-year to perfection late 2012 (see our appearance on Yahoo Finance on 22 January 2013). Consider this chart:

Fear not, stockholders, because this time the Fed will come to the rescue by buying shares, a prediction we put forth more than one year ago.

A few will remember our track record on these matters. One year before the Fed started buying bonds, we predicted that the Fed would do so. Our business is one of making correct predictions, not endorsements.One year ago we predicted a Trump win and to wit that he was going to be credited by jump starting the economy.

Hope you are following the big picture of debts accumulation.

It is all part of the big picture. Bonds are going to continue to tumble past 2020, like we said back in the interview with Jeff Macke. As you see, our work often has a big lead time. It is advantageous to big money managers who need time to adjust and prepare. We have been bullish on stocks for a long time. In essence we have been front-running the market waiting for that point in time when the Fed starts buying our stocks.

For regular readers, it’s been on our radar for a long time and just recently did the Fed say that buying stocks is in its toolbox.

The same was done on the bond front. One year earlier, our forecast of the Fed buying bonds was met with a yawn because we were alone in this view. We were long bonds and they rallied strongly while everyone was outrageously calling for coming high interest rates that did never materialized.When the Fed started buying bond with their operations it was easy to unload our bonds at much higher prices.

On to the more technical aspects of our work

Our view has been that from 2011 onward, there’s compressing fear regarding bonds in terms of sentiment. In other words, each price drop is met with less reaction as we move forward in time.

It is at odds with price and behavior that are always coincident.

The apex of such behavior merits the cover of The Economist, and the timing was perfect. Away we go!

Consensus seems to be surprised by the strength of the rise in interest rates, or inversely, the drop in bond prices. Most observers admit being caught off guard but will willingly offer the view that this is a bottom.

Unbelievable. We strongly dissent!

Note that from late 2012 up to today we have traced a perfect wave 1 and wave 2 in 10-year real rates. It appears we have begun the cycle of a wave 3.

For fans of wave talk, this represents the most dynamic of waves, and it will lead in our view to substantially higher rates coming in 10-year and 30-year bonds.

We had written in June of 2015 about the term premium and showed how abnormally compressed it was because of the intervention of central banks. You can hold down anything for long time, but when the uncoiling comes it is more devastating and equates to actually what is unfolding with bond prices.

Our attempt to describe what is going on is simple: the cost of money is going up, or to say it in another way, real rates are going up. We will not hide that we have been a staunch bull on the US dollar as one of the implications of rising rates.

Precious metals saw an echo bubble and have resumed their bear market.

Our Trump prediction did re-enforce the view of how things will continue to shape up: Main Street may finally see some economic gains at the expense of Wall Street!

Yves Lamoureux

@yveslamoureux

Battling the Great Recession: More Powerful Weapons, Much Bigger Mistakes

Guestblog - enjoy!

Bad times have a scientific value. These are occasions a good learner would not miss. – Ralph Waldo Emerson

For years, the Great Recession has affected a number of families in the United States.

The economic meltdown has forced private sectors to reduce their workforce. That, or employees have decided to find jobs elsewhere. The recession, though considered “a period of dark times”, is a wake-up call.

With the rising unemployment rate, what else is in store for you? How will you survive?

Recession and Weapons of Mass Destruction

Although the war with Iraq did not directly cause the recession, it had somehow magnified its degree.

According to the Center for Economic and Policy Research (CEPR), while the war did impose serious costs on the economy of the United States, it cannot be entirely blamed for the Great Recession.

The root cause is the collapse of the housing sector.

However, continually spending for ammunition and other military equipment had added to the economic meltdown. This drastic move has gradually drained resources, and has reduced the number of jobs available.

Now that America is slowly building itself from the recession, though the job market has not fully regained itself, the possibility of the employment rate dwindling may discourage you to look for jobs.

What do you now do in the midst of the crisis?

The answer cannot be more obvious: You go back to your roots, do what you love best, and earn from it. Simply put, be an entrepreneur.

Thrive in your Business, Survive the Great Recession

Despite the improvement in the economy, you cannot deny that the recession may still be pulling down the employment rate. You can save your money, cut back on resources, and then you can get by. But then, a more positive approach lies in learning from what happened.

It now becomes clear for families that unemployment lingers.

Don Peck, in his article “How a New Jobless Era will Transform America”, laments the fact that people might not yet feel a sense of normalcy even if the Great Recession seems to be taking a backseat.

However, he says that innovation can allow an economy to rise and create more jobs.

Tiffany Meyers of Entrepreneur shares the same sentiment. Instead of feeling low, change the way you think.

Use the aftermath of the recession as your springboard to create your startup business and make innovations.

As Emerson said, learn from the bad times. Julie Meyer, one of the most influential women in Europe, believes that entrepreneurs can lead a country out of recession.

She says that “there’s a new social contract emerging which is around the individual” and that “everybody is aware of the high unemployment in the group coming out of universities.”

Stephanie Johnson, 32 and a mother of three, was displaced from her job as a graphic artist for a local newspaper.

During the recession, her problem was how to feed her children. She did save what was left of her earnings, and she refrained from shopping online.

However, she figured she could not live that way forever, especially when her kids were growing up.

After the recession, Stephanie used a portion of her savings as capital and made organic bath products. It used to be a hobby for her, but the recession prompted her to become a fulltime entrepreneur.

Ultimately, the recession has taught her to use her capacity to fight against unemployment.

It is not a question of how the Great Recession will transform America, but of how you will transform your nation.

Wrapping Up

The decision to start your own business may seem intimidating at first, and you might even think of investing in IPO’s to create your brand and establish your credibility.

Do not be afraid. Remember that you are more powerful than the Great Recession and that through your efforts; you can emerge from the economic rubble.

Who knows?

You might even save America from another recession in the future.

About the Author

Bill Achola is a financial publisher who owns a fast-growing, dynamic and innovative investment blog that empowers investors to make the right decision. Check out his blog where he writes and talks about best investing strategies at http://traderushreview.us.com.

 

Interest Rate Hike - Will They or Won’t They?

This is a guest blog by Farnsfield Research on of the most critical issues to investors, what will the Fed do? Enjoy!

With the numbers showing close to full employment, the Federal Reserve may be preparing to move on raising short-term interest rates in June. The short-term interest rate has been near zero since 2008.  The Labor Department reported an increase of 295,000 non-farm payrolls in February, and the past four months have seen fast-paced job gains, dropping the unemployment rate to 5.5 percent. The question on everyone’s mind is “Will they or won’t they raise interest rates in June?” Let’s take a look at what leaders are saying.

Janet Yellen
Federal Reserve Chairwoman Janet Yellen is still exercising caution about raising rates. She reported that the March 17-18 meeting of the Fed will see a patient approach even though robust numbers seem to signal a rate increase is coming. She talked about hints, but no significant wage growth when addressing the Senate Banking Committee recently. Officials are concerned about inflation running under their two percent inflation target and want to see what happens with output, employment, and inflation before any changes are made.

Scotiabank Economists
Scotiabank economists are saying the Fed will hike rates in June in spite of concerns about inflation. They say the risks that market watchers are citing, such as collapsing oil prices, are not a big enough threat to the U.S. economy to delay a mid-year rate increase. Scotiabank feels lower fuel prices could actually help inflation by encouraging consumer spending, creating more incentive to raise rates.

John Crudele
New York Post columnist John Crudele disagrees that the indications point to a mid-year interest rate increase by the Fed. He says the economy isn’t doing as well as the newer numbers might seem to indicate. He warns that because the dollar has recently risen against a range of currencies, companies doing business overseas will struggle and the U.S. government will have to pay more to borrow money. CNBC commentator Ron Insana agrees with Crudele and doesn’t think the Fed will raise rates at all this year because of a weakening world economy.

John Williams
San Francisco Federal Reserve Bank President John Williams urges a rate increase, saying that waiting too long is riskier than starting a gradual increase now. He says mistakes now could mean the need for a bigger sudden rate hike later, which would have dire consequences on economic recovery. He supports his position by pointing to the 1965 economy, which had similar low inflation and economic growth as today and led to an economic boom.

This is in stark contrast to Chicago Fed chief Charles Evans’ call for delaying rate hikes another year. And chief market analyst at Phoenix Financial Services Wayne Kaufman says he doesn’t think the Fed wants to go against the trend of central banks around the world lowering interest rates.

The Real Debate
The real debate about the rate hike revolves around moving too quickly and risking harm to the recovery, or waiting too long and risking inflation or a financial bubble. Federal meeting minutes have indicated officials are more inclined to wait, not willing to upset a still-fragile economy or go against a weak global economy.  

Amherst Pierpont Securities economist Stephen Stanley’s impression is that the Fed is remaining intentionally non-committal to when a rate hike would happen out of concern that financial markets could overreact. Deutsche Bank Securities chief U.S. economist Joseph LaVorgna feels the Fed is being much too cautious about markets.

Employment numbers seem to be pointing to stronger economic recovery, but economists are looking more closely. Trim Labs, CEO Charles Biderman, says the Federal Reserve won’t be able to raise interest rates this year at all because even though there’s been rapid employment growth, it’s not real growth. It was due to the end of extended unemployment benefits pushing people into minimum wage jobs.  

Do you think interest rates will be raised this June?

Author Bio:
Max D. - Max is a technical writer who regularly contributes financial topics to Farnsfield Research and other investing blogs. Max spends his time running multiple companies in the financial sector. This allows him to have a constant finger on the pulse of the industry.

Yves Guestblogs on Shock & Awe, Again?

Shock and Awe Again?

It's been quite an interesting challenge to keep re-inventing models that work as precursor of market moves. It is a reflex of ours to quickly dismiss models that do not satisfy our high level of expectations. If you have followed our work you know we have kept up with our batting average.

By now most talking heads that had been screaming about a market crash have effectively made you lose sight of a great bull run. What ever the market projection you can find on the web will relate to a crash of a large magnitude ahead. We are not surprised to read one bearish view after another. It is a reflection of the current mood. Our thesis had been different as we still forecast further gains ahead once we complete a refreshing long pause.

In the context of a wave count, we favour a large 4th wave ahead for the S&P. We are at the most defensive point we have been in over a little more than one year. We carried a 90% stock allocation in 2013. After extensive selling in January, on a rise of our holdings, we sold enough to bring us to a 50% cash allocation. Our aim is not to beat the market but to perform in line with the market on the upswings. Where we aim to distinguish ourselves is in the downswings We are rather quick on the trigger to leave the market as we seek dynamic hedges to hide in a storm.

Market manipulation is alive and well. We have found quite astonishing the changes occurring in wave structures. Many patterns frequently seen at key levels have simply vanished or been replaced by patterns observed at a different level of an unfolding wave. Corrective waves seen in wave 2 now appear in wave 4. Rare corrective patterns such as running flats are now common occurrence. In other word when a big player such as a central bank sits on the other side of the market one should expect the patterns to be truncated in other words to not be able to unfold normally. It is what we are seeing today from gold to stocks. Of course, the flip side of stocks is to prevent them from running into bear territory.

We have understood these to be facts of life in our daily trading. Playing with such a new set of rules is required from investors today to be on the winning side. Be warned, we still think it is a temporary affair that will eventually run its course. We think the market stand to see a mini panic event this year. In our opinion, we could see a much larger stampede next year. This would coincide with our equity multiple expansion model that looks to contract soon until June 2015.

We have built this as money velocities vary greatly. This model had kept us into mega bull territory all of last year with no regrets. We did issue a call to sell all S&P position by the 6th August and managed to keep up with the market by changing our geographic allocations. We love to buy cheap and sell dear. Emerging markets today are more than disliked. Once they come back with a vengeance and they will, the retail investor will have again taken a hit on the chin and not have learned any lessons whatsoever.

Talking heads that have constantly presented gold as the best safe haven by now are fully discredited. We love gold but can be agnostic at times such as 2013. There, is a perfect example of manipulation and truncated waves recently. Our latest gold view was of a tradable bottom in December. We made a few pretty pennies on the recent rally. However it failed to meet the full extension of the rise as we expected a move between 1,400$ and 1,500$. This was a projected intrinsic value based on real rates. The bond market did deliver on our expectation of a fast and hard rise. We suspect that commercial banks started to sell precious metals early in the rally and prevented the full development of the wave to take place. Any real good safe haven should not be influenced or manipulated by exterior forces that have a different agenda. In other words as you trade gold or other assets your goal is to discover the intent of the other participants.

Under a specific set of rules we are now short in the precious metals arena. This link describes our new forecast as the bounce we expected materialized.

http://www.marketwatch.com/story/gold-clings-to-halloween-highs-despite-dip-2014-02-26

Our proprietary fear composite model shows the lowest fear level in over two years in gold and silver. We expect lower prices ahead.

We are watching events in Japan with much greater interests than Russia and Ukraine. Our adjusted demographic model for Japan rolls over sooner than most. It is why we have issued a call to sell all Japanese stocks. We think this rally was a counter trend rally. Our view of a prolonged bear market does not augur well for large money who is betting on Japan to turn the corner. Our view is to find the bull markets and avoid the rest.

Yves Lamoureux

http://lamoureuxandco.com/

A Look Back at Predictions 2013

Looking back at Predictions made for 2013, Glenn Neely did very well for traders, and the infamous Martin Armstrong did well for big picture thinkers. My favorite pundit was Yves Lamoureux, who had a number of bold calls, on Gold topping and China bottoming (at least momentarily).   

I didn't post a list of predictions, but did show how post-election years normally turn out - weak. 2013 however did very well for stocks. In contrast, 2012 was very true to normal patterns. Several posts of mine hit the nail on the head: that the cleantech bubble had burst, and that AAPL had peaked. 

I will take a stab at 10 predictions for 2014 in my next post. 

Looking back farther, we can say that stocks bottomed in March 2009 just as the Powers That Be relaxed the ill-advised Basil requirements to mark-to-market - do that with toxic mortgages and the whole banking sector is insolvent.

That wasn't the start of our faux recovery - that appears to have begin in Oct 2011, after the biggest stock drop since 2008. Credit QE (pun intended). The turn is clear in this chart from Business Insider, showing stocks over gold (stocks in real money):

How long will this continue? A lot call for a top in 2014, but Martin Armstrong looks out to late 2015. The current tech boom we are should go at least into 2015 if not 2016. 

The 1929 Meme – Don't Believe It

I like to run comparison charts, that this is 1987, or 2007, or 1937, etc., that often get passed around on the Internet. Some have plausibility due to similar historical and economic conditions - 1937 for example matches 2015 if we analogize the 1915-1919 auto bubble to the tech bubble of 1994-99, and then the credit bubble of 1925-29 to the recent housing bubble of 2004-08. In that case the crash of 1929 matches the crash of 2008. The attempt to reflate the economy in 1933-37 due to revaluing gold would be analogized to the Fed's QE from 2010-now, attempting to keep interest rates low to reflate the economy. Plausible, maybe. 

Most of these comparisons, however, are simply eye-candy, pattern matching of little predictive power. Some are simply bogus. Here is one of a high level of bogosity:

This comes from a seemingly credible source, Tom McClellan of the McClellan Market Report, and it was brought to his attention by well-known chart diviner, Tom Demark. The bogosity is in the two axes: the 1929 axis covers a 100% range, from 200 to 400 (right axis), whereas the current Dow covers a relatively minor 25% range, from 12400 to 15600 (left axis). On a fair comparison (100% to 100%), the red chart should be only 1/4th the slope of the 1929 chart, and wouldn't match it at all. It would show a much more anemic rise, meaning it would be much less likely to have a dramatic fall.

Don't believe it. Whatever correction we are in is not the big one.  

Is-This-1937 Meme

For fun I post the pattern comparisons to past crashes.  Recently bears tried to compare this relentless up market to 1987 (fail) and 2007 (fail). The latest is to 1937, which at least has an historic logic to it: we are in a new Great Depression, which is following a different path but may end up even worse for cumulative loss of GDP. 

More to 1937, the sequester led to the Budget Control Act, which has remarkably lowered actual Federal spending for two straight years (that hasn't happened in a long time) and reduced the deficit both in nominal Dollars and as a percent of GDP. This reduction of Federal stimulus has made Keynesians nervous, since they worry that it is similar to what happened in 1937 to throw us back into a Depression after the New Deal seemingly had brought us out. 

At a broader level, comparisons are often made to 1929=2000 but it seems 1929=2008 is more apt.  Looking to the period before 1929, we find a curiously comparable story:

- a tech boom in 1914-1919, the auto bubble (vs. the dot-com bubble 1994-99)

- a sharp recession (1921, 2001) followed by a classic credit bubble (Roaring '20s, Housing Bubble)

- a banking crisis followed by GDP drop and persistent high unemployment (1930s, 2009-now)

Now today the Fed is back to talking of Taper, which could spook equities. 

Enjoy the stock chart eye-candy.  

The Is-This-2007 Meme

I have seen an increasing number of chart comparisons to 2007, right before we entered the Global Financial Crisis and suffered the 2008 crash. PragCap has a good discussion of this, here, with this chart:

Jeff Saut gets credit for first popularizing this meme.  John Housmann has also picked up the thread. One upcoming event that may spook the market is the GDP report. Predictions have been sinking, now below 1%, essentially stall speed.  The first shot across the bow may be around August 7. 

Is Japan Signaling the Beginning of the End?

Since The Bernank spoke last week, the Japan markets have been in turmoil. Stocks have fallen over 12% in just a few days, and, most troubling, bond rates have risen sharply. See chart, courtesy Zerohedge:

Is the Bank of Japan losing control over rates? The theory of QE is that the central bank can manage rates down by purchasing bonds, but the bond vigilantes in Japan are pushing back.

In the US the fear is that the Fed will be unable to taper off QE. The Bernank's remarks last week were of a taper, and yet in the US the 10 year has spiked above 2%. There is a concern that if rates go above 2.2-2.25%, the biond portfolios will begin to rotate their mix of long and short bonds, essentially causing a spike in the ten-year which might shoot it to 2.5% - the so-called Bond Convexity. If this happens, expect the Fed to stop the taper and jump back in with (say) two months of QE in one month, to drive rates down. 

This would be quite a good buying opportunity of the ten year. It also may signal that even the Fed will face issues in trying to taper and avoid losing control over rates. 

GOLDENFREUDE: Gold as the Next Bitcoin

Amazing drop in gold this morning. First Bitcoin last week, now Gold. It hasn't declined this sharply since the prior all-time peak in 1980. One of the major goldbugs, Dennis Gartman, has written that in four decades of gold trading, he has never seen such a bloodbath.

Of course, if you follow this blog, you were well prepared, as Yves called this months ago.

It now is entering what Prechter calls free-fall territory, as it has has busted below a support level (first chart) and a technical level (second chart):

 

Goldenfreude is the pleasure of seeing goldbugs lose their shirts. A lot of prosaic punditry trying to explain this, and getting it worng. Most of the immediate selling was out of Asia, and was caused by Abenomics, the shock and awe of massive QE by the Bank of Japan. Buyers of Japanese bonds may have been leveraging their purchases by using gold as collateral, and now are liquidating to cover as the Japanese bonds plunge. The proximate cause for the two-day rush to the doors is likely Friday's China GDP report, showing a slowdown. Commodities are also taking a bath.  

This should not have been "unexpected", the common word used by mistaken punditry. We had two large gold sell-offs during the Great Recession, both driven by expectations of massive central bank intervention:

1) July 2008, right before the Lehman debacle and following on the heels of a parabolic blow off top in oil

2) September 2011, as the Euro crisis hit and central banks intervened

You cna see what the gold plunge is predicting: another bout of central bank intervention to keep the wheels from flying off the global ecopnomy. The first out of the blocks is the Bank of Japan's QE. The punditry expects the massive BOJ QE to respark inflation. Gold is signaling the opposite, of deflation.

Milton Friedman got the punditry thinking that inflation was due to the increase in base money (central bank money and reserves), but this is too simple:

1) The Quantity Theory of Money had inflation as based on quantity times velocity of money. Velocity has plummeted in the Great Recession to levels BELOW those of the Great Depression. 

2) Modern Monetary Theory has popularized the view that the quantity of money is not based much on base money, but on bank lending, as banks create the quantity of money. Put another way, banks do NOT lend out of reserves; they lend out of opportunity and then scramble to find reserves if needed.

The striking increase of bank reserves, and QE, have done little to spur bank lending; the reserves sit in the vault so to speak. Instead, QE has spurred excessive speculation in assets, what Minsky called the Ponzi Finance stage. Asset bubbles rage back and forth across commodities (oil! corn! coal! Bitcoins!), debt and margin are used to juice returns, and as each bubble collapses the velocity of money shrinks and the speculators fall back. 

Japan is now (as John Mauldin aptly puts it), a "bug in search of a windshield." Abenomics is leading to money washing back and forth across the globe, much as Hoover wrote in his memoirs about the sovereign debt crises of the 1930s. Is Cyprus the new CreditAnstalt?  This is not how a real recovery begins, but how a false recovery ends. 

Funny: Bitcoin ATM Shows Up in Cyprus

The only way to get your money out?? Thanks to AllAboutTrends for this:

China's First Debt Default - Harbinger of End of Credit Bubble?

For the first time, a mainland Chinese company has defaulted on its bonds. Shocklingly, it is a high-flier solar panel maker that trades in the US market - Suntech Power.  Its stock shot up in a classic parabolic FOMO pattern (FOMO = Fear Of Missing Out), and has now fallen like a broken windmill blade below the parabolic liftoff. The irony is that Chinese solar makers have used easy credit to scale up, and throwing the solar cell market into a huge glut, crushing Western manufacturers; and now it is coming back to bite the Dragon by its own tail. 

Sure, it could be a one-off, but Chnia's corporate bond market is much larger (adjusted for GDP) than the US equivalent and is highly misallocated due to easy credit and political malinvestment. While unconnected to the Euro crisis, coming so swiftly after Cyprus, it may be another harbinger that the wheels may be slowing coming off the global credit train.

Cyprus Crisis Pushes Global Economy to the Tipping Point

The EU decison to sweep 10% of deposits may signal the beginning of the end for kicking the can down the road. Cyprus itself is small, but its banks have been attracting deposits and lending to high risk countries like Greece in amounts much beyond the Cyprus economy - and attracting foreign depositers (particularly Russians) with high interest. (In the US this is restricted - as a bank gets into trouble it is not supposed to be able to issue high-yields on deposits.)

Banks runs have swept Cyprus, and the government has called several days of bank holidays to get a vote on the bailout through before depositers can get their cash out. It is not clear the votes are there.  

Sunday evening in the US, currencies are racing to "risk off" (ie out of the Euro and into the USD). The S&P is approaching the point of the Triple Top, and is certainly close enough that any drop from here may signal the end. Technical signals are sending warning signs, such as this chart from Zerohedge that shows stocks again at nosebleed levels vs. forward earnings, just like the prior two tops of this Triple:

The Cyprus bank-runs are eerily like the beginning of the sovereign debt crises in 1931-2 that drove the global economy off the edge. The same sorts of events seem to be unfolding, but in slow motion as central banks dump liquidity to stem the crises.  

You might think that it can't happen here in the US, but it did, in 1933: FDR confiscated gold in exchange for paper Dollars, then re-valued the gold ratio from $20/oz to $35/oz - effectively confiscating 40%, well beyond the Cyrpus action. Because transactions in the US stayed priced in Dollars, it appeared to be a wash, but inflation began as US prices re-marked to real money.

Martin Armstrong, a student of financial history, looks at this and conjectures that when the Fed faces a similar crisis, for example when it begins losing control over interest rates and has to get more buyers of Treasury debt at low rates, Treasury may issue Savings Bonds and Congress pass a law to force purchases of them. This acts like a gold swap or deposit sweep in that the forced savings are likely to be traded into an illiquid and below-market asset, the savings bond. He calls it Patriot Act II - a good patriot woud buy the bond. 

Short term, however, this may be bullish for the US as money races to US assets as a safe haven. After an initial jitter in stocks, the on-rush of foreign capital spikes the S&P to new highs. Looking at the market since 2000, it appears to be in a trading range, but over-shot below the bottom in 2009; typically it would now over-shoot above the top of the range before the end.

 

Post Election Dow

I ran a series of charts on the election year stock market trends, and this year was pretty much to form.  What about the post-election market?  PragCap provided this chart of the day, which shows it tends to underperform normal years.

Green Energy Falls Off the CleanTech Cliff

This is really sad for those who believe in a future of green energy, but for investors has sent a clear message: the Green Bubble has burst. Solar City delayed their IPO, Solyndra and others are wrecks of a solar bubble, and Tesla may become the only electric car company standing as Fisker is now in deep financial trouble. The renewable energy stocks are down an astounding 98% from their peak, showing the signature of a parabolic rise into a bubble and a fast linear collapse:

Yves Sees The End of the Great Bond Bull Market - With a Risk of Hyperinflation

I have posted a number of articles of Yves Lamoureux, President at Lamoureux & Co.. In Oct 2009, he predicted the 30 yr would fall to 2.5% when most pundits - including the then-inestimable Bill Gross -expected a rise to 5%. Yves was right, and I christened him the New Bond Guru. On Friday he published his new prediction, that the Great Bond Bull Market from 1982 is now over.  Summary:

Bonds have tended to act as expected as risk preference shifted. However, bonds now have neither a credit risk premium and nor an inflation risk premium. Our proprietary model is clear: treasury paper of 30 years has the correct valuation of 3.50% and above. That is the level we would feel confident as buyers.

He makes an intriguing additonal observation, of a type of hyperinflation, but not the type that is commonly bantered about, a Wiemar-Republic style inflationary collapse. Instead, as we risk more of a deflationary environment from too much debt (deflation arising as that debt gets written off or washed out faster than central banks can print), this time it will emerge from increased credit risk in what heretofeore have been the most risk free instruments - US Treasuries. 

The harbinger of this may be Japan, which (as John Mauldin has put it) is a "bug seeking a windshield." The expected new Prime Minister wants to go to extremes of monetization to reinflate their moribund economy. As money has bailed out of Europe, it has found Japan, and the Yen has risen. Now it is being purposely weakened, and has hit a seven month low with the USD.

As the WSJ puts it:

Investors have been selling the yen since Japan's prime minister announced last week that an election will be held Dec. 16. Polls show Shinzo Abe, leader of the opposition Liberal Democratic Party, as the leading candidate to emerge as prime minister. Mr. Abe has been calling on the Bank of Japan to enforce bolder policies, including unlimited printing of money and setting reserve interest rates at zero, or even in negative territory to stimulate lending. 

The MMT view has circulated in financial circles, with the core belief that a currency issuer never need to default. This of course flouts history, where fiat currency after fiat currency has gone down in the sort of credit collapse envisioned by Yves. While it seems almost unimaginable that the USD might suffer such a fate - and it is years away from such a crisis - the Yen may become the first major currency to test the MMT approach of extreme monetization.  

Financial observers spend undue attention on stock markets.  Bond markets are an order of magnitude bigger.  It is now time to watch the bond market.  

This Year IS Remarkably Like Other Election Years

From Raymond James. 

Election Year Rally : Watch for the Divergence

The election year pattern charts I have been showing have a variety of bases; recent elections only, for example; or dividing between a re-election year vs. an open election year. The broadest look, in the chart below, going back to 1904, shows three patterns: all elections (black line), incumbent wins (green line), and incumbent party loses (red line). We are now at the moment when a divergence should emerge between the stay-the-course elections (black/green lines) and the change-elections (red lines):

Election Year Rally at the Junction Point

I have been following the Election Year pattern with a sereis of posts here and here.  It typically bottoms aroudn October 10 and then rallies, usually signaling that the winner is now pretty well known. It seemed to take that path over a week ago, when Obama surged ahead, but the debate has thrown a monkey wrench in. Here is the chart a week ago:

 

Election Year Pattern With a Twist

I have been following the election year pattern and it remains on track, with a 2 - 3 day lag (see chart, courtesy PragCap).  There is an interesting twist this election, but first a discussion of the general situation. The prognosis, per PragCap:

Looking ahead, this version of the Presidential Cycle Pattern says that we should expect to see a choppy uptrend continuing toward election day, perhaps with some significant “texture” along the way.  The strong correlation up until now suggests that this pattern is working reliably.  Once we see how the election turns out, we can then figure out which pattern to follow starting in November.

What is interesting is that this version of the chart has taken out the 2d terms and only focused on first term Presidents, a more true comparison to this election. The generic chart that we showed in the prior post combines first and second terms and the behavior is different in each term. Per PragCap: 

As a rule, [new Presidents] all typically spend the first year in office “discovering” that conditions are even worse than we were told during the campaign, and that the “only solution” is some urgent package of tax changes, spending, regulations, etc. ...

When a first term president wins reelection to a second term, then he typically does not spend much time in the first year telling us all about what a lousy job his predecessor did.  That lack of a persistent negative message seems to work out to bring slightly better market performance right after a reelection.

But with a new president from a different party, investors tend to get discouraged hearing that things are worse than expected, and so the market’s performance during the first few months with a new party president is on average slightly worse than if an incumbent wins reelection.  Over time, though, it tends to average out to be just about the same.

This chart shows the comparison of first term vs second term Presidents:

What is different this time is the pattern has not worked well in the last three elections, perhaps because we hit a secular bull market peak in 1999 and have been in a secular bear through the past three elections. The pattern broke in 2000 and 2008 when we had market crashes; it also didn't hold in 2004. 

This time there is a lot of can-kicking going on to push the problems to after the US election.  A lot of commentary over the past week out of Eruope thinks the latest ECB moves can buy 3 months, and of course the fiscal cliff doesnt rear until after the lection. The one stinker is that we may hit the debt ceiling limit faster than expected, before the election. 

Election Year Rally Following Historic Pattern

This chart from Bespoke made the rounds a few weeks ago, and it is interesting to note that it continues to work as a predictor of this year's election rally. We have continued higher, and now may be in the final blow-off stage into early September.

It is mildly interesting to note that late August/early Sept tops happen in big turns years (1929, 1987 etc.); and also happen in relatively normal years. It is just that in an election year, the summer rally seems to last longer. The correction in Sept usually denotes uncertainty over the election. When it becomes clear who will win, the market rallies again. In 2008, the post-correction rally waited until the end; of course a lot was going on in Sept 2008.

The normal seasonal pattern is a rally commences in mid Oct to early November, and continues into late April or early May, with a mild correctiion in late Jan/early Feb. The market then has a June Swoon and Summer Rally, but essentially meanders sideways into Oct, until the seasonal rally takes off again.

The Election Year pattern shifts the swoon to later, usually after the Conventions, and starts the seasonal rally earlier, unless the election is a cliff-hanger (1980, 2000, 2008).  

Of course, this is an average of many different years and circumstances, so don't take it to the bank. Just note that almost every election is said to be critical, that the country is in crisis, that This Time It's Different, and then it isn't. 

Transiting Through Narita

I just posted on Narita, the Nukes and United over in my travel blog. Take a look. If typepad asks for a sign-in, cancel and you will be in. It is a glitch on their site. Feel free to continue the discussion in this post.

You Can Skip the Game and Still See the Commercials

Ah, SuperBowl Sunday! And a really promising game to boot! But for those of you who watch the game just to see the commercials, now you don't have to! Mashable has pulled together all the commercials that have already leaked into YouTube.  Isn't the Internet cool?

Some are just teasers, like this Motorola "1984" ad which is trying to one-up the classic Apple 1984 ad. Sadly, it reminds me more of the awful Apple "Lemmings" ad that showed at the 1985 SuperBowl and ended Apple's career of SuperBowl ads.

I think Doritos will win this year. Check this out. Predictable, yes, but funny.

Most shocking, no cats. The Internet loves cats. TV is a dog medium I guess. 

You Know Global Warming is Over When ...

MSNBC (not Fox!) blames the food riots in Egypt on "speculation" not Global Warming (ie. food shortages due to unusual weather such as the Russian summer heat wave):

Visit msnbc.com for breaking news, world news, and news about the economy

One of my predictions for this year is that blaming every funky weather event on global warming will now get a mocking roll of the eyes not a knowing nod of the head. Happening faster than I thought it would.

Coincidently, I am in a heated debate with a reader over this issue. He blames the food inflation on a series of unusual circumstances that are causing shortages, whereas I ask him why almost all commodities took off in a parabolic surge (a signature of a speculative bubble) just after The Ben Bernank announced QE2 in August. Hard to argue that recent floods in Queensland (coal) or last summer's heat wave in Russia (wheat) or whatever all caused a spike in commodities of all sorts at the same time.  Sure, these events contribute to spikes in particular commodity prices as they occur, and corn jumped a bit after the Russian heat wave, but the parabolic run-up began after the QE2 announcement:

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.

Stocks in a Coiled Spring, Fundamentalists in a Fetal Position

Scott Adams (Dilbert) had a priceless column in the WSJ on why it is smart to put your money on companies you hate. He of course picked BP (which he argued is at a bottom) and Apple, which he says he has hated for five years and should have gone in then. In the course of it he trashes most investment approaches, including Technical Analysis:

Technical analysis involves studying graphs of stock movement over time as a way to predict future moves. It's a widely used method on Wall Street, and it has exactly the same scientific validity as pretending you are a witch and forecasting market moves from chicken droppings.

Wonderful satire, but sometimes the real world is dumb and dumberer - such as today, where the pundits asserted one cause of the market's rise and the same cause for its later fall:

• the market went up on the Fed's remarks that the recovery was still on but the improvements in employment were only "modest"
• the market fell on the Fed's Beige Book which showed that the recovery is still on but in some areas growth is "modest"

This reminds of a recent day when in the morning the fundamentalists stated that the market went up due to higher oil prices, which pointed to improving demand; then later in the day when the market fell back said that the market fell due to higher oil prices. which pointed to a future slowdown. 

The fact is these sorts of justifications du jour are simply nonsense delivered in ponderous tones of authority and have no better weight than astrology. Scott Adams take note!

To push this point home, simply note that the fundamentalists are all over the map on what happens in the next few days, and if anything are a bit bullish since we have tested the Dow9835/Sp1045 (the Feb low) now four times and not sustained a break below. 

The STU notes we are now in a coiled spring of a triple nested 1-2 which typically precedes a major move, in this case hard down. Whereas during the run up the right move was to buy dips, this time it is to sell blips, as the market is unable to sustain a rally: "Each near-term rise is swatted back." While investors are watching the Feb5 intraday low, we have now had two days closing below the close that day, and the two lowest closes since seven months ago, last November 4 at 9802. 

We could fall off the cliff tomorrow, or fall after a little more sideways action to swat back another bullish attempt and wear out the bullish interest with a fifth probe of the 9800 level. In either case the chicken droppings and all that are forecasting a coming fall. Let's see what contradictory and hopelessly shallow pontification the fundamentalists concoct when that happens. 

Gulf Explosion's "Fire-Boom-Gate"

You would think that after Katrina the Feds would be at least as prepared as Boy Scouts. Since 1994 they have had a plan to contain spills in the Gulf using fire-booms, and the former coordinator of Gulf response was scathing in his criticism of the response as not executing on that. It turns out they didn't have any fire-booms in stock, and the fastest they have gotten one in is eight days late. This might come back to bite the Obama Administration:

Representatives from the Obama administration emphatically maintain that from "day one" preparations were in place to handle accidental oil spills. Maybe the administration can explain to the residents of Louisiana why not one fire boom was available when an actual crisis took place?

Gulf Oil Rig Explosion LInks

One of the Yelnick readers, nspolar, comes from the oil patch and shared some of the sources he is following on the disaster in the Gulf. I added to his, and note that the points of criticism are emerging even before we know what happened:

• A detail timeline comes from a social network for oil & gas professionals
• An oil pro who was on the rig tells of his experience and speculations
• A scathing criticism from the former NOAA head of Gulf response that the Feds failed to execute the pre-approved plan & made things worse
• Another scathing criticism over why shut down all the other rigs? 
• A milder criticism from the NYT of the slow response
• The WSJ focuses on the rig owner cutting corners, and shows the "fix" graphic below
• Most inexplicable is why send in the lawyers? To "keep the boot on their throat" as White House spokesman Gibbs oily spilled about BP? 
• Already a hoax has emerged of sabotage by a Cuban-launched North Korean mini-sub
• An Oil Slickonomics summary, with the bad, the worst and the ugly scenarios
• BP announced they have significantly cut the flow through the pipe
• Follow-up on the failure to pursue the pre-approved plan shows they failed to stock fire-booms

 

First we need to understand what happened and how to improve future drilling, then we can assess blame and politicize. Nspolar adds a number of insights below the fold, and this important cautionary note: 

In the end we do not know all the facts and at this point it is possible for events to have been misreported. The investigation as to determining the chain of events that led to the explosion and blow out will likely take weeks, before concluding.

Volcano Plume Turning Towards Canada UPDATED AGAIN

NEW UPDATE: When this first posted, I used a graphic from Information is Beautiful which compared Co2 emitted by the unpronounceable volcano to the Co2 not being emitted by grounded airplanes. My first update corrected their info, and this update corrects their graphic. Also, the NYT has tried to let us know how to pronounce "Eyjafjallajokull" using this guide: 

• “Eyja” is the Icelandic word for island
• “Fjalla” means mountain
• “Jokull” is glacier

Icelandic sticks a few t and g sounds in there, so just say: Hey-ya, fergot ya, Yokel!

Amazing animation from ZH shows the swirling volcano plume covering Northern Europe, spreading to Russia, and spiraling backwards towards Newfoundland. We probably all know people stranded in Europe, waiting to get out - or trying to return. A friend looking for opportunities in Sierre Leone just got back to London before flights shut down. Another friend was flying back from a vacation in Ireland as the volcano erupted, and could see it from the left side of the airplane. Lucky timing. Eurocontrol has updates. Apparently if you can make it to Rome or other Club Med cities, you have a chance of flying home. 

  

Troubling implications from this. Everyone thinks this blows over quickly. What happens if this eruption continues for 13 months, as the last eruption (in 1822) did? Lufthansa sent 10 jumbo jets up to see what the effects would be, and found no harm. KLM is also reported to be testing flights near the ash layer, to see if it is thin enough to allow flights to recommence. If not, routes have to be reconfigured and the economic dislocation will mount. 

Curiously, while this should cool the planet if it continues due to putting aerosols in the upper atmosphere, it is also reducing Co2 emissions!  Volcanoes do put out a lot of Co2, but planes over Europe put out more. Original chart from Information is Beautiful, updated chart here:

 

 
UPDATE 4/20: The original chart above turns out to be misleading. The small pyramid above should be increased to be about the size of the inverted pyramid of saved emissions. It is still less than total Euro airplane emissions, although note that that many planes around the Club Med part of Europe are still flying. 

The estimate of Co2 is too low by an order of magnitude: estimates from the UK place it at between 150,000 and 300,000 tonnes/day, not the original chart's 15,000, based on a prior eruption in Iceland. (A metric tonne is very close to the same as a British ton and slightly larger than a US ton.)

To put these Co2 amount in perspective, the Herald Sun in Australia commented it is more than the Rudd government is trying to save in carbon limits. Australia emits around 400M tonnes a year, or a little over 1M tonnes/day, meaning the volcano is spewing about 1/4 of Australian emissions a day.

This Too Shall Pass - Healthcare Bill Edition

The ultimate Rube Goldberg legislation meets the ultimate Domino video:

Face The Music Videos

From the last Great Depression, we bring you an updated Pennies From Heaven (courtesy SlopeofHope). To top it off, from the last Great Recession (the '70s) here is Bohemian Bankruptcy.  Enjoy.

 

The Economy Is So Bad That ...

The economy is so bad, the mafia is laying off judges .. and more one-liners below. The economy is so bad, time to enjoy it!