Signs of The Times
Perspective
The stock market has not been the only boom. There has been the US mania in
financing run-a-way buying of used and new cars. Both on the "never-never".
It seems to be similar to the frenzy in houses in 2006-2007.
Manias are momentum driven and can't survive stalling out. Financial plateaus
just don't happen. The Auto Assemblies number for August marks the sharpest
decline since 2008. This type of plunge has only occurred at the start of or
within a recession.
Quite likely, this is the peak in US auto assembly. It was preceded by car
sales in China peaking in May and recording three consecutive months of decline.
In 1929, US car sales peaked in that fateful April.
And then there is the boom in real estate. We intend to update the story about
the $500 million spec-house being built in Los Angeles. In the meantime, the
following WSJ headline is a big caution.
"A shortage of glass is taking a toll on the nation's commercial building
boom, adding millions of dollars to the cost of new skyscrapers."
In 2011, the big concerns in base and precious metal mining were shortages
of supplies such as tires for huge trucks. Diamond drills and drillers were
also scarce. No problems now.
Stock Markets
The author of Anything Goes was Cole Porter. The author of this week's
financial excitement is Janet Yellen and her thesis might just as well be "Anything
Goes". Produced in 1934, the plot is about a young stock broker and the lyrics
include:
"The world has gone mad today
And good's bad today"
Which pretty well sums up central bank policies and anticipation of FOMC wisdom
has sparked the markets. Well actually, the Communists juiced the market in
the last hour of Shanghai trade. As Zero Hedge put it:
"China Plunge Protectors Unleash Berserk Buying Spree in Last Hour of
Trading"
That was going into the Wednesday open in NY.
And as we like to repeat. At important market turns since the 1873 bubble
the senior central bank has been months behind the critical turns in market
rates of interest. So there is little point in one conjecture, let alone conjecture
without end.
What has been needed has been the rebound from the initial hit to put on some
momentum. Yesterday's ChartWorks updated the CCI on the S&P and it reached
the target number.
Once rolled over, the target is Black Friday's low at 1867, which needs to
be tested.
Our July 23rd edition concluded that the bull market had ended.
Taking out the August lows would set a cyclical bear market.
The summer set peaks for most stock exchanges.
TSE Industrials (ZIN) and Shanghai (SSEC) set their highs in June. US banks
(XBD) set the high on July 23. The S&P set its high in May.
For an overall view we have charted the NYSE Composite with the Vanguard All-World
Index. The correlations on the major swings is impressive and prompts a question.
Is this due to brilliant coordination by the senior central banks, or does
it indicate that there is no such thing as a national economy?
Our outlook was for the hottest exchanges and sectors to complete speculative
surges around June. After the initial hit some recovery into September was
possible.
Providing some help this week, crude and copper would likely rally into mid-
September. Also, out of the August 24th panic credit spreads were likely to
find relief for two weeks, at least. This is Week Two.
Credit Markets
Monday's attempt by credit spread ETFs to reverse did not make it. Instead,
the street choose to get excited about the FOMC Circus. Attached is the "P.T.
Barnum" cartoon we commissioned a few years ago. Policymakers continue to be
so gullible about discredited theories.
On the actual spread, the widest was 224 bps on August 24th. It narrowed in
to 221 bps last week and Monday's number was 222 bps. Now it's at 220 bps.
Will the relief last for another week?
This is uncertain, but this correction could be similar to the one in September
2007 and 2008.
Seasonal forces accomplished the reversal in June as well as the key breakout
in July. This relief could also be seasonal. Overall, the reversal has been
likely to be cyclical. As was the reversal to the good stuff in the first part
of 2009.
Junk's failure was from 39.62 in late April and the low was 35.83. The jump
was to 37.11 last week. Of interest that this week's "Risk-On" button is finally
hooked up for JNK.
But Junk could soon test the August disaster.
We have been out of lower-grade stuff since June 2014. Our ideal position
has been in 3 to 4-year US higher-grade corps. The pickup in yield from a firming
dollar could kick in towards the end of the year.
The long bond (TLT) spiked up 128.64 on August 24th. Over fifteen years, this "flight
to quality" game has worked three times. We have considered that it might not
be the same outstanding game on the next slump in the stock markets.
The advice in August was that traders should flatten positions.
The lyrics for Anything Goes are rather tricky and Sinatra's recording
of Nelson Riddle's arrangement is outstanding: https://www.youtube.com/watch?v=wYahz6VIpIM
US Auto Assemblies
- Note the spike up and then down in September 2008.
- Also note the spike up to July of this year.
- The August number clocks the sharpest month over month decline since 2008.
- Technically, it breaks the trading range that prevailed since 2013.
- Looks like a cyclical peak has been accomplished.
- It follows three consecutive months down for China's auto sales.
Concept of a National Economy is Elusive
- Red is the plot of the Vanguard All-World Equity Index (VEU).
- Excluding the US.
- Black plot is the NYSE.
- The establishment considers the stock market to be a leading indicator.
- In each country the central bank operates on the concept of a national
economy.
- Nonsense from the start.
Ecstatic Homebuilders Index
- The cyclical low was 9 in January 2009.
- The September number is 62, up from 61
- Comments included "concerns about the availability of building lots and
labor".
- Homebuilder stocks (XHB) set the high at 39.22 on August 17th.
- The plunge was to 31.70 and now it is at 37.50.
