I have intentionally avoided the seemingly comical issue of last week's discovery of bearer bonds. You see, $137 Billion of these things are simply not supposed to exist. So when two allegedly Japanese businessmen were caught trying to cross the Italian border into Switzerland with a briefcase full of these things, the rational thing to do would be to laugh it off and stash the thought in the back of one's mind along with crop circles, ghost sightings and time travel allegations.
But it is difficult to do that when the issue refuses to die, and that further investigations point to their validity rather than the inverse.
Zero Hedge has a fairly concise summary of the 3 possibilities, which she correctly suggests are:
1) All the bonds are fake
2) Some of the bonds are fake
3) None of the bonds are fake
Of course in the case of either #2 or #3, we have a serious problem. In the case of number #1, we have a lot of unanswered questions, such as:
a) why has the issue not died yet with a simple declaration of their illegitimacy by the treasury?
b) who in their right mind would think that any bank (or any person) would accept something with such large denominations without first checking their authenticity?
c) how do you get stopped at the Swiss border? I personally have waltzed into the country unannounced on numerous occasions. The borders are unoccupied at EU crossings. The only way you could be stopped is if someone had a specific reason to stop you. And that implies that option #1 is not the case.
For those interested in learning more about this question that keeps on giving, reading the full summary from Zero Hedge, An Open Letter To Tim Geithner, shall prove intriguing.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
Sunday, June 14, 2009
Technical Update 22.09
It was a fairly uneventful week from a technical standpoint. Volatility is taming, volume is becoming anemic and negative divergences are deepening. That said, price (the most important arbiter) fails to indicate any intention that it wants to correct. Typically, markets that don't want to go down resolve upwards. And "overbought" conditions can either work their way off via time or price.
In other words, one could interpret the information as bullish or bearish depending on their perspective.
A number of weeks ago I outlined a few of clumps of technical resistance that one could use in timing the end of this rally. The first clump was in the 940-950 area (basis S&P 500). The next was sitting just above 1000. And the final levels seemed to reside around 1075-1100. One should always be wary of an irrational market to persist longer than initially believed possible. And it should also be mentioned that corrective waves have a tendency to last a minimum of 1/3 the duration of the preceding secular trend. Marking the beginning of the trend as Oct of 2007, the first wave lower was 17 months in duration, meaning that this corrective rally should last at least into the end of the summer. Sharp pullbacks, however, can easily interrupt this path. And that is my primary expectation - that we see a sharp pullback of 10-20% in the near term, followed by a late summer challenge of, and perhaps exceeding of, the recent highs (S&P 956).
It is possible, though, to mark the "beginning of the nightmare" as May of '08 if looked at in real dollar terms. The May highs came very close to matching (and for some indices exceeded) the highs of October '07, when normalized for the dollar's coincident collapse during this period. In this case, the decline lasted only 9.5 months (42 weeks) and our current rally (of 14 weeks) makes for a precise 1/3 retracement in terms of duration. As I mentioned, one can always manipulate the data in favour of their prevailing opinion and one must be aware of the "confirmation bias" that this sort of analysis can provide.
Perhaps most concerning for the bullish case, is the persistence of negative divergences in market internals. Advance/Decline ratios, volume, RSI and the number of stocks above their 50 day MA are all displaying weaker numbers than they were in early May when the S&P was a full 4% lower than last week's highs.
The 50 day MA of Advance/Decline stocks is below.
One would surmise that amid all of the talk of "green shoots" in the housing market that the homebuilders would be displaying strong characteristics considering that they were the sector most heavily hit in '08. However, upon further review we see that the hommies are displaying relative weakness over the last 6 weeks. If we were to believe the pollyannas in the media that an economic recovery was imminent, residential investment is one of the leading indicators to be watching - and this would be visible in the homebuilder stocks. This is not the case.
And pray tell, what is one to make of the continuing non-confirmation of perhaps the most important sector any recovery would be dependent on? I'm obviously referring to the banking sector. Without an organic recovery, which would obviously take years to liquidate, reallocate funds and begin production, the only hope for the middle part of a "W" shaped recovery would be a continuation of the insane lending practices of the middle part of this decade. If this lending were indeed taking place and it was perceived to be profitable for the banking industry, bank shares should be massively outperforming the major indices. Again, not the case.
In conclusion, I do not find it difficult to conceive of enough reasons to believe that the present rally is over, or at least poised for a very sharp correction in the near term. However, we should not forget that the specter of quarter-end looms and performance anxiety of major fund managers is a force to be reckoned with. This could easily push the aforementioned divergences to new extremes as managers tinker with their portfolios, playing to their fairly P.O'd client base. That is, managers may decide to switch out of underperforming sectors into the outperforming in order to make themselves "look smart" when the time comes for them to begin writing "Dear Investor" letters.
I'm officially on the fence. I've allocated 50% of my intended capital to short positions and will add the other half at higher prices or not at all. Do note that this is not an explicit recommendation to get short. For those interested, my preferred vehicle for shorting is LEAP PUTS with a Dec '10 expiry on the S&P. This gives me more than enough time to realize my expectation. After learning the hard way in '07 that a market can climb a "wall of worry," the time premium is a price I'm willing to pay. Just thought I would share.
Have a great week!
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
In other words, one could interpret the information as bullish or bearish depending on their perspective.
A number of weeks ago I outlined a few of clumps of technical resistance that one could use in timing the end of this rally. The first clump was in the 940-950 area (basis S&P 500). The next was sitting just above 1000. And the final levels seemed to reside around 1075-1100. One should always be wary of an irrational market to persist longer than initially believed possible. And it should also be mentioned that corrective waves have a tendency to last a minimum of 1/3 the duration of the preceding secular trend. Marking the beginning of the trend as Oct of 2007, the first wave lower was 17 months in duration, meaning that this corrective rally should last at least into the end of the summer. Sharp pullbacks, however, can easily interrupt this path. And that is my primary expectation - that we see a sharp pullback of 10-20% in the near term, followed by a late summer challenge of, and perhaps exceeding of, the recent highs (S&P 956).
It is possible, though, to mark the "beginning of the nightmare" as May of '08 if looked at in real dollar terms. The May highs came very close to matching (and for some indices exceeded) the highs of October '07, when normalized for the dollar's coincident collapse during this period. In this case, the decline lasted only 9.5 months (42 weeks) and our current rally (of 14 weeks) makes for a precise 1/3 retracement in terms of duration. As I mentioned, one can always manipulate the data in favour of their prevailing opinion and one must be aware of the "confirmation bias" that this sort of analysis can provide.
Perhaps most concerning for the bullish case, is the persistence of negative divergences in market internals. Advance/Decline ratios, volume, RSI and the number of stocks above their 50 day MA are all displaying weaker numbers than they were in early May when the S&P was a full 4% lower than last week's highs.
The 50 day MA of Advance/Decline stocks is below.
One would surmise that amid all of the talk of "green shoots" in the housing market that the homebuilders would be displaying strong characteristics considering that they were the sector most heavily hit in '08. However, upon further review we see that the hommies are displaying relative weakness over the last 6 weeks. If we were to believe the pollyannas in the media that an economic recovery was imminent, residential investment is one of the leading indicators to be watching - and this would be visible in the homebuilder stocks. This is not the case.
And pray tell, what is one to make of the continuing non-confirmation of perhaps the most important sector any recovery would be dependent on? I'm obviously referring to the banking sector. Without an organic recovery, which would obviously take years to liquidate, reallocate funds and begin production, the only hope for the middle part of a "W" shaped recovery would be a continuation of the insane lending practices of the middle part of this decade. If this lending were indeed taking place and it was perceived to be profitable for the banking industry, bank shares should be massively outperforming the major indices. Again, not the case.
In conclusion, I do not find it difficult to conceive of enough reasons to believe that the present rally is over, or at least poised for a very sharp correction in the near term. However, we should not forget that the specter of quarter-end looms and performance anxiety of major fund managers is a force to be reckoned with. This could easily push the aforementioned divergences to new extremes as managers tinker with their portfolios, playing to their fairly P.O'd client base. That is, managers may decide to switch out of underperforming sectors into the outperforming in order to make themselves "look smart" when the time comes for them to begin writing "Dear Investor" letters.
I'm officially on the fence. I've allocated 50% of my intended capital to short positions and will add the other half at higher prices or not at all. Do note that this is not an explicit recommendation to get short. For those interested, my preferred vehicle for shorting is LEAP PUTS with a Dec '10 expiry on the S&P. This gives me more than enough time to realize my expectation. After learning the hard way in '07 that a market can climb a "wall of worry," the time premium is a price I'm willing to pay. Just thought I would share.
Have a great week!
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
Wednesday, June 10, 2009
Of Pitchforks and Torches
For those that follow the socionomic principle that social mood is causal, rather than consequential of social action (personified by the buying and selling of stock, willingness to take credit risk, consumer time preferences, etc), some of this weeks headlines should be of interest.
It is often found that financial crises and the uncovering of fraud tend to often coincide. This does not mean, however, that the fraud in question is some shocking revelation, only discovered by the work of a heroic detective. To the contrary. More often than not, the specific fraud was well known for years, even decades, before it became an issue of public outrage. So it is not necessarily the precise nature of whatever fraud has been exposed that is of concern to us. Rather it is the social reaction to it that provides clues to the overall state of social mood, and therefore to potential repercussions this may have for the financial markets.
Social mood was ambiguous to fraud in our financial markets in recent decades. Even the high-profile cases we are all familiar with (Enron, WorldCom, Barings Bank, etc) were mere blips on the radar. The stock market barely reacted. People didn't really care. And unless they were holders of those particular companies' stock, most people's net worth was higher 6 months later. Unemployment was low, wages were rising and they could obtain a mortgage by fogging a mirror. They felt better off. So why complain?
Such is not the case today. Even with a 45% rally in the stock market off the March lows, the average person is still invariably worse off than they were six months ago. And much worse off than they were a year ago. Those who are lucky enough to still have a job see their wages falling or overtime being slashed. Their home's market value is still falling. And the only saving grace of last year - falling mortgage rates and gasoline prices - are now rising again. They are being squeezed at both ends.
So it is only natural that closer scrutiny is paid to those who can be blamed for their plight.
Ron Paul's Federal Reserve Transparency act (HR 1207) appears to be one such manifestation of the common anger. Of course, the Federal Reserve's meddling in the economy is nothing new. Dr. Paul has been warning of its interventionist economic policies since the early 70s. Entire economic schools of thought have railed against the Fed since its inception in 1913, arguing that their interventionism magnifies the business cycle, rather than smoothes it. So why is it that now, all of a sudden this bill has obtained 213 cosponsors stretching across both parties? Democratic Party skepticism of central banking is showing its first signs of life since the days of Grover Cleveland. There was no organized public outrage against the Fed after the Dot.com collapse, nor after the S&L crisis. So what has changed? Only the social willingness to go after those who can be blamed for causing the bubble.
Another revelation we have learned of is that former CEO of subprime lender Countrywide Financial, Angelo Mozilo is being charged with fraud by the SEC for insider trading and failure to disclose pertinent information to shareholders. Mozilo sold $139 million worth of stock in 2006 and 2007 while it was obvious that the subprime business model was kaput. Nevertheless, Mozilo and Countrywide continued using company profits for share buybacks - the same stock he was selling. Again, this is hardly surprising. Share buyback announcements were almost a daily occurrence in early 2007 and many of the buybacks coincided with executive exercise of stock options or outright dumping of shares. This was pointed out on numerous occasions by many market analysts and shareholder advocacy groups. Yet the cries fell on deaf ears. Until now. A pertinent snip from a MarketWatch article dated June 5th reads that the defense lawyer "...also accused the SEC of bringing the case in response to political pressure to repair its reputation, which has taken hits from the agency's failure to detect the Bernard Madoff fraud." (emphasis added)
Political motives for covering one's own tracks will likely prove to be fuel for the insatiable fire of public rage. Inquiries and fraud charges like these will in turn reveal more fraud and negligence by regulators. In the last week we have learned that another Countrywide executive, John McMurray tried to blow the whistle on the company's potential systemic risk at a conference hosted by the Federal Reserve Bank of Chicago in 2006. He was promptly ignored.
On April 15th, however, we received perhaps our most telling bit of evidence on the state of social mood. More than a million Americans participated in tax day TEA (Taxed Enough Already) Parties, expressing various grievances they have with their government's handling of the credit crisis. The second round of these events will be held on July 4th and are being organized in over 1100 US cities. Will the calls for political action add to the positive feedback cycle of seeking out scapegoats which upon new revelations further intensify public anger, calling for more inquiries, etc...?
It is more than a slight possibility that the countertrend wave of investor optimism persists for longer than most bears are able to stand, while social pessimism builds in the background. But my suspicion is that as the summer wears on, social mood will prove too much for the stock market to handle, and opportunistic traders will take their profits at the first sniff of a turnaround.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
It is often found that financial crises and the uncovering of fraud tend to often coincide. This does not mean, however, that the fraud in question is some shocking revelation, only discovered by the work of a heroic detective. To the contrary. More often than not, the specific fraud was well known for years, even decades, before it became an issue of public outrage. So it is not necessarily the precise nature of whatever fraud has been exposed that is of concern to us. Rather it is the social reaction to it that provides clues to the overall state of social mood, and therefore to potential repercussions this may have for the financial markets.
Social mood was ambiguous to fraud in our financial markets in recent decades. Even the high-profile cases we are all familiar with (Enron, WorldCom, Barings Bank, etc) were mere blips on the radar. The stock market barely reacted. People didn't really care. And unless they were holders of those particular companies' stock, most people's net worth was higher 6 months later. Unemployment was low, wages were rising and they could obtain a mortgage by fogging a mirror. They felt better off. So why complain?
Such is not the case today. Even with a 45% rally in the stock market off the March lows, the average person is still invariably worse off than they were six months ago. And much worse off than they were a year ago. Those who are lucky enough to still have a job see their wages falling or overtime being slashed. Their home's market value is still falling. And the only saving grace of last year - falling mortgage rates and gasoline prices - are now rising again. They are being squeezed at both ends.
So it is only natural that closer scrutiny is paid to those who can be blamed for their plight.
Ron Paul's Federal Reserve Transparency act (HR 1207) appears to be one such manifestation of the common anger. Of course, the Federal Reserve's meddling in the economy is nothing new. Dr. Paul has been warning of its interventionist economic policies since the early 70s. Entire economic schools of thought have railed against the Fed since its inception in 1913, arguing that their interventionism magnifies the business cycle, rather than smoothes it. So why is it that now, all of a sudden this bill has obtained 213 cosponsors stretching across both parties? Democratic Party skepticism of central banking is showing its first signs of life since the days of Grover Cleveland. There was no organized public outrage against the Fed after the Dot.com collapse, nor after the S&L crisis. So what has changed? Only the social willingness to go after those who can be blamed for causing the bubble.
Another revelation we have learned of is that former CEO of subprime lender Countrywide Financial, Angelo Mozilo is being charged with fraud by the SEC for insider trading and failure to disclose pertinent information to shareholders. Mozilo sold $139 million worth of stock in 2006 and 2007 while it was obvious that the subprime business model was kaput. Nevertheless, Mozilo and Countrywide continued using company profits for share buybacks - the same stock he was selling. Again, this is hardly surprising. Share buyback announcements were almost a daily occurrence in early 2007 and many of the buybacks coincided with executive exercise of stock options or outright dumping of shares. This was pointed out on numerous occasions by many market analysts and shareholder advocacy groups. Yet the cries fell on deaf ears. Until now. A pertinent snip from a MarketWatch article dated June 5th reads that the defense lawyer "...also accused the SEC of bringing the case in response to political pressure to repair its reputation, which has taken hits from the agency's failure to detect the Bernard Madoff fraud." (emphasis added)
Political motives for covering one's own tracks will likely prove to be fuel for the insatiable fire of public rage. Inquiries and fraud charges like these will in turn reveal more fraud and negligence by regulators. In the last week we have learned that another Countrywide executive, John McMurray tried to blow the whistle on the company's potential systemic risk at a conference hosted by the Federal Reserve Bank of Chicago in 2006. He was promptly ignored.
On April 15th, however, we received perhaps our most telling bit of evidence on the state of social mood. More than a million Americans participated in tax day TEA (Taxed Enough Already) Parties, expressing various grievances they have with their government's handling of the credit crisis. The second round of these events will be held on July 4th and are being organized in over 1100 US cities. Will the calls for political action add to the positive feedback cycle of seeking out scapegoats which upon new revelations further intensify public anger, calling for more inquiries, etc...?
It is more than a slight possibility that the countertrend wave of investor optimism persists for longer than most bears are able to stand, while social pessimism builds in the background. But my suspicion is that as the summer wears on, social mood will prove too much for the stock market to handle, and opportunistic traders will take their profits at the first sniff of a turnaround.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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