Signs of The Times
Good at any time:
Perspective
It is one thing to see trouble developing in the credit markets and it is
something else to conclude that the consequence of the trend is calamity. That's
the term the establishment used described the 2008 "unpredicted" contraction.
Even with today's unprecedented distortions of the credit markets, markets
are doing generally what they should be doing. When outgo exceeds income there
is default and defaults are becoming noticeable.
Another consistency is that the financial boom can run for some 12 to 16 months
against a flattening yield curve. The reversal to steepening indicates that
speculative demand for short-term funds is diminishing, which says that the
boom is failing.
For us, this has worked well. In January 2000, we counted it out to around
that fateful March. In 2007, it counted out to around that fateful May. In
both cases, the contraction turned severe later in the respective years. It
is worth noting that the count was into a window of around 3 months.
Flattening ran for a year into early 2015 and the reversal preceded the stock
market high in May.
This flattening has run for a year and is now trying to reverse, which is
a warning on the latest stock rally. Flattening need not run to inversion.
Stock Markets
Reliable calculations place the P/E for the S&P at 25, which is very high.
And as noted last week, the plot is at the upper right-hand corner of the chart.
This reminds of "back in the day" when we plotted by hand on K&E graph
paper. When starting a new graph one had to estimate just how far the trend
would run. Then you had to choose the scale, hoping it would accommodate the
trend.
Inevitably, the observation would be, "Hey, this rally can't go any
further."
Why?
"It's at the top of my page."
Well, the plot is at the top of the page now and last week's conclusion was
that the fun could run into August.
But, we will stay with the non-confirmation by the Transports on the old Dow
Theory. Also, Banks and Broker/Dealers are well-below last year's highs. Last
week we noted that Banks could firm up with the initial phase of curve steepening.
They have.
On the overall thrust, the widely-publicized "Fear & Greed" indicator
has soared into the low 90s on the Greed reading.
Things to watch continue to include spreads, the curve, the dollar and crude
oil.
Things to not watch continue to be Fed announcements and speculation about
such announcements. Perhaps the move to have Russian athletes "Banned for Doping" should
be applied the Janet Yellen?
Commodities
Our general theme for commodities through August is a trading range.
Crude's rally from very oversold at 26 to 51.76 was outstanding. The decline
has been to 44.56, which seemed to be enough for the correction. The upside
which could run through August could be limited by resistance at the 50 level.
Taking out the 200-Day at 41 would trash the trading range.
It was poorly performing gasoline prices that supported our negative view
on crude in mid-2014 and in mid-2015.
Gasoline reached 1.67 in May and declined to 1.35 a couple of weeks ago. That
was right at the 200-Day and the rebound made it to 1.45. Yesterday's low was
135 and the moving average is at 136.
Today's weakness in crude is concerning. A sharp decline would impair wide
spread euphoria.
We haven't reviewed the thermal coal price since earlier in the year. It firmed
slightly to 43.8 at the end of May and it is now at 39.5, a new low for the
bear. The cyclical high was close to 80 in 2011.
So far, the correction has been to 249 and today's rally seems to be based
upon the decline in the general stock market.
Our November study reviewed the conditions needed to end the bear and set
up a cyclical bull market. All, hopefully, in place by around January.
One of these was that gold stocks would begin to outperform the bullion price.
US Industrial Production
- Tenth straight month of decline.
- Recession?
Linn Energy bond 8.625%, due in 2020
- The full price drop appears to be from 99 to 1.80 (no typo).
- Is it over?
- Can it be contained?
- The report with the chart included: "The default rate could continue
to climb, but the impact on the markets will be negligible."
US Car Sales
- Boomed into mid-2015.
- Close to breaking down.
Global Corporate Defaults
- The number for 2015 exceeded that for 2008.
- Will it be resolved quietly or in a panic?
Speculative Grade Default Rate
- Note the lag from the turn up in the default rate to the onset of the recession.
- Except in 2008, when typical of the end of a great bubble, the economy
collapses with the stock market.
- In the "normal" cycle for business and stock certificates, stocks lead
the economy by around 12 months.
- "Normal" is not on.
Link to July 22 Bob Hoye interview on TalkDigitalNetwork.com: https://www.youtube.com/watch?v=V0irmQTvF-Y&a...eature=youtu.be
