Monday, November 24, 2014

Market Participation Flagging


Sunday, November 23, 2014
Cantor Fitzgerald: Market Participation Is Flagging, Setting Up For Top (Peter Cecchini)

Cantor Fitzgerald's Peter Cecchini told CNBC on November 21, 2014 (last Friday) that he thinks the market is setting up for a top because: 1) market "participation is flagging" (market breadth, or the advance/decline line in this case, is diverging with price); 2) the "very steep skew is associated with market tops" (volatility); 3) we're at very important resistance levels on charts (technicals); and 4) he's not bullish on earnings next year and believes profit margins, which are near historical highs (10%), will revert to the mean.

Global business confidence plunges


Global business confidence plunges to post-crisis low
CNBC.com

Worldwide business confidence slumped to a five-year low, with company hiring and investment intentions at or near their weakest levels in the post-global financial crisis era, according to a new survey.

"Clouds are gathering over the global economic outlook, presenting the darkest picture seen since the global financial crisis," said Chris Williamson, chief economist at Markit.

The number of companies expecting their business activity to be higher in a years' time exceeded those expecting a decline by just 28 percent. This was below the net balance of 39 percent recorded in the summer, the Markit Global Business Outlook Survey showed.

Sunday, November 23, 2014

A quick update on UGAZ at 6:53 pm Sunday night


The bears have driven NG to 4.05. That should conclude correction. Look for buying opportunity on Monday. GL

Friday, November 21, 2014

NUGT--Stay bullish?

As I read the chart below, we have a bullish scenario: 5 waves up, a little correction, which may not be over, and off we go to new highs.  The NUGT speculators are leading the way on this one, and so far they have been right.  GOLD should get to 1255 shortly.  There's just too many bears out there, who, hoodwinked by the master of illusion--the market--can't believe GOLD can go up without inflation.  My chart says up--who cares why?  Besides, nobody actually knows, including the fiction writers in the business press.  GL

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UGAZ--Breakout and Correction?

We've had our breakout and the market corrected.  Confusing?  That's the market, the master of illusions--what shell is the pea under?  My reading of the chart below is very bullish: I see a series of 1s and 2s.  The next wave--AS SOON AS THIS ONE IS OVER--will be up, a rip-roaring up.  So don't get rattled if they drive this thing down next week.  Hedge funds are still bearish and we have a little warm up coming this weekend--but Thanksgiving looks COLD.  GL

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How does Global Credit Expansionary Bubble End?



How Does Our Global Credit Expansionary Bubble End?
Nov. 20, 2014 8:00 AM ET

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Summary
•We are nearing the end of the global expansionary bubble.
•Major currency devaluations (wars) already underway are primary indicators.
•Investors should prepare for rising volatility and rising interest rates worldwide.

We are nearing the end of the longest credit expansionary bubble in modern history, or said another way, nearing the end of a 35-year secular decline in interest rates. A secular decline from the ultra-high interest rates of the Stagflation Era of the late 70s (Carter) to the early 80s (Reagan) - and into the near Zero Percent Interest Rate Era of today. In response to the Great Crisis of 2008-9, monetary and fiscal stimulus as a percentage of GDP in the US is now well over 5 times what was put into the system after the Great Depression.

This unprecedented and unsustainable credit expansionary bubble is not only a US phenomenon - it is a global phenomenon, occurring simultaneously in the advanced economies of the eurozone and Japan.

After 35 years, it is becoming increasingly obvious that our monetary and fiscal stimulus policies of perpetually low interest rates and "borrow and spend" are having little-to-no effect on the real global economy. Asset inflation and rising stock prices have been the primary beneficiaries, but the broad economies of the developed world are suffering. Like never before, the wealth gap is rapidly expanding as the rich are become much richer, with everybody else falling farther behind economically each and every year.

With Europe and Japan teetering in recession, emerging markets slowing, and the USA carrying the burden of pulling forward the global economy alone - we are reaching the endgame of the Keynesian credit expansionary schematic. The Law of Diminishing Returns has run its course as the Law of Unintended Consequences quietly approaches. We have been pulling forward all of the demand from the future to boost the economy of today for simply too long. There is no "there there," as it is said. All the signs of a classic "Global Liquidity Trap" are right in front of us.

Definition of "Liquidity Trap"


A situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings (hoarding) because of the prevailing belief that interest rates will soon rise.

Source: Investopedia

In the 1990s, it was the technology stock market valuations of the Dotcom Era that eventually ran away from the economy's ability to sustain the lofty valuations. In the 2000s, it was the real estate and housing market valuations of the Subprime Lending Era that eventually ran away from the borrowers' ability to pay the mortgage.

Today, we are entering the final stages of the Government Bond Era. Global economic growth is slowing, while at the same time global public and private debt growth is exploding. It is estimated that total debt-to-GDP levels of the advanced economies have risen from 150% in 2002 to nearly 375% today. Clearly an unsustainable trajectory.

How does our credit expansionary bubble end? What is an investor to do to prepare and protect wealth from the unintended consequences of the end of another major cycle?

I have moved away the Keynesian failing playbook to find the answer. It was Ludwig von Mises (1881-1973), the founder of Austrian Economics, that we believe gave us a perspective for what lies ahead. Von Mises famously predicted many decades ago:


There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later, as the final and total collapse of the currency itself.

It is said that financial crises happen slowly at first, and then all at once. Hiding in plain sight, we are now witnessing the onset of von Mises' directive. We have major currency devaluations, also known as "currency wars," occurring across the globe. Specifically, both the euro (-10%) and the Japanese yen (-15%) have experienced major declines against the US dollar over just the last six months in an attempt to kick-start their respective economies.

The problem with everyone devaluing their respective currencies at the same time is best summed up by economist Paul Krugman, quoted from a New York Times editorial in 2011:


And we can't all export more while importing less, unless we can find another planet to sell to.

In a broader context, world history is riddled with examples of currency wars that lead to trade wars; and trade wars that lead to real wars. That said, economic history suggests that collapsing currencies eventually lead to rising inflation. Rising inflation eventually leads to higher interest rates. Higher interest rates eventually leads to a massive reallocation of investor assets and major volatility.

Global investors should be taking action to prepare for the end of the secular credit expansionary bubble. We have been experiencing major asset "busts" and financial crises virtually every 6-7 years since 1973. Now, six years post the Great Crisis of 2008-9, we are in the late innings of yet another major cycle.

We suggest taking to heart legendary investor Benjamin Graham's time-honored advice:


There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently.

For the prudent investor, rising global volatility and massive international capital flows during financial crisis periods can present enormous opportunity. Investors can learn from hockey superstar Wayne Gretzky's keys to success in his sport; "Figure out where the puck is going... not where it's been."

Kirk D. Bostrom, Managing Partner, Strategic Preservation Partners LP

Wednesday, November 19, 2014

UGAZ--Breakout?

I thnk so.  If this is wave 3, which it looks like it is, then expect more more upside.  Maybe tomorrow's build number will propel things.  Be careful, this is a commodity under all sorts of pressures--so it will be volatile; however, don't forget--as traders bash this thing around--NG is in a bull market--just keep buying those lows.  GL

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NUGT--Correction over?

With gold down about 38% of previous rally, this correction could very well be over.  If not, it will soon be over.  The negativity surrounding gold is so thick that there is more upside to go.  GL

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Credit Risk Rose Yesterday Across The Board

Credit Risk Rose Yesterday Across The Board

Tuesday, November 18, 2014

TVIX--Signs of hope

At least technically TVIX seems to be making a bottom here.  If it doesn't happen tomorrow, many of you will scream, but we are getting there.  GL

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UGAZ--How deep the correction?

UGAZ is clearly in an uptrend, but is the correction over?  I don't know; however, this is a powerful bull.  There may be a little more downside, which, if it happens, is a gift to bulls.  GL

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NUGT--Still pumping higher

NUGT is still in wave 3--though we are approaching a temporary top.  GL

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Are we rolling over?

According to chart below we are on the cusp of change.  With every technical extreme screaming Uncle, at least we can expect a respite--if not an outright debacle.  The dogs bark and the caravan moves on.  GL

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Hussman on Extremes



John Hussman: These Go To Eleven
Nov. 17, 2014 2:24 PM ET | 6 comments | Includes: DIA, IWM, QQQ, SPY

Excerpt from the Hussman Funds' Weekly Market Comment 11/17/14:

The current market environment joins the full range of ingredients that have characterized the most extreme market peaks – and preceded the deepest market plunges – in more than a century of history. On the basis of measures that are best correlated with actual subsequent market returns (and plenty of popular measures are not), we observe the richest market valuations in history with the exception of the 2000 peak. Even then, current levels on the best performing measures are only about 15-20% below the 2000 extreme. Current valuations now exceed those observed in 1901, 1929, 1937, 1972, 1987, and 2007. The 5-year market advance from the 2009 low, encouraged by yield-seeking speculation, now places the S&P 500 at more than double the level that we would associate with historically normal returns. Put another way, we presently estimate S&P 500 prospective nominal total returns of just 1.4% annually over the coming decade, with zero or negative average total returns out to roughly 2022. These valuations are coupled with extremely overbought conditions and the most lopsided bullish sentiment since 1987. Bearish sentiment is now down to 14.8% (Investor’s Intelligence), close to the low of 13.3% reached in September. Prior to this year, the last two times sentiment was nearly as lopsided were the April 2011 peak (just before a near-20% dive), and the October 2007 peak.

Of particular note, extreme overvalued, overbought, overbullish conditions – which we’ve observed sporadically for quite some time now – have more recently been accompanied by widening credit spreads and deterioration in broad market internals. We have entered an environment in which extraordinarily thin risk premiums have been joined in recent weeks by a subtle shift toward increasing risk aversion. We don’t rule out the potential for market internals to improve in a way that could defer our concerns about immediate downside risk (though such a deferral would not imply that valuations were any less extreme), but the short-squeeze over the past month has not materially reversed the deterioration. As a result, present conditions couple every essential component of historically extreme and vulnerable market environments.

As Nigel Tufnel of Spinal Tap described the volume knobs on his guitar amplifier – “You're on ten here, all the way up, all the way up, all the way up, you're on ten on your guitar. Where can you go from there? Where? Eleven. Exactly. One louder. These go to eleven.”

...

As I noted in Air Pockets, Free-Falls and Crashes the lessons to be drawn from the recent market cycle are not that historically overvalued, overbought, overbullish extremes can be dismissed. Rather, the lessons to be drawn have to do with the criteria that distinguish when such extremes have little near-term impact from periods where they suddenly matter with a vengeance. Those criteria have a great deal to do with measures of market action that capture subtle shifts risk aversion, such as widening credit spreads and deteriorating market internals. Sometimes those subtle shifts are all the warning you get, and while the 1987, 1998 and 2011 instances were expressed rather quickly in market losses that then subsided, it’s just as typical for downside consequences to be sustained over a couple of years. The market has been dodging boomerangs, not bullets, and they are likely to come back harder for it.

Importantly, rich valuations here cannot be “justified” by appeals to current interest rates or profit margins unless that justification carries with it the assumption that both zero interest rate policy and cyclically-elevated profit margins will be sustained for decades, coupled with the assumption that economic growth will proceed at historically normal rates. Even 3-4 more years of zero-interest rate policy would only be “worth” a 12-16% increase in valuations over and above their historical norms. No, this is a market that is priced for utter perfection, reflecting the Potemkin Village that Fed-induced speculation has built on Wall Street, even as Main Street struggles in its shadow.

Could this time be different? There are numerous factors that aren't in place here, such as overt Fed tightening, but we also know that those factors have not historically been necessary for steep market retreats to occur (indeed, the 2000-2002 and 2007-2009 plunges occurred in an environment of persistent and aggressive Fed easing). Still, some features of the present environment can't be observed historically. For example, none of the market crashes in history occurred in an environment of quantitative easing and zero short-term interest rates, because such an environment never existed prior to the present half-cycle. As a result, one has to make a judgment about how zero interest rates should be expected to impact an overvalued, overbought, overbullish market. From a valuation standpoint, we can quantify the justified impact on valuations from the expectation of T years where short-term interest rates are at L% rather than N% [one can show using standard discounting methods that to a strong approximation, the impact is just T*(N-L)]. What’s harder to quantify is the psychological impact of zero interest rates. That’s really what quantitative easing has exploited: the willingness of investors to speculate, regardless of historically elevated valuations and extremely lopsided bullish sentiment, because of the discomfort that zero interest rates seem to offer “no other choice” but to take risk.

...

We’ve got no interest in convincing anyone to adopt our views. Our responsibility is to those who trust us to identify and adhere to a value-conscious, historically-informed discipline, and to address what needs to be addressed when the need arises. We are confident that we’ve done so (See Formula for Market Extremes for an overview of the key lessons and adaptations that have emerged from our own work in the half-cycle since 2009). Meanwhile, as we learned back in 2000 and 2007, the full course of the market cycle was far more convincing about the validity of our concerns than any argument that we could have advanced at the peak.

Again, an improvement in market internals would not make stocks any less richly valued or overextended, but because such an improvement would signal a resumed tendency toward yield-seeking speculation, the immediacy of our concerns would dial down considerably. Given present conditions, however, the dials do not move higher, and these go to eleven.

Monday, November 17, 2014

Unexpectedly?


Futures point to moderate opening losses • 7:01 AM
Stephen Alpher, SA News Editor
• Major U.S. stock index futures are all lower by about 0.25%, with Japan unexpectedly falling into recession and the associated 3% overnight decline in the Nikkei making headline writers' jobs a little easier.

Six years later


"Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy," David Cameron writes in a Guardian op-ed. "As I met world leaders at the G20...the problems were plain to see. The eurozone is teetering on the brink of a possible third recession. Emerging markets...are now slowing down...while the epidemic of Ebola, conflict in the Middle East and Russia’s illegal actions in Ukraine are all adding a dangerous backdrop of instability and uncertainty."