Signs of The Times
Perspective
One could not deliberately contrive the conditions behind some of the above
headlines. The headline writer at the FT must have enjoyed the irony about
the worst productivity number and market highs. We did and we don't think it
is an example of the stock market climbing the "Wall of Worry".
It is another example of bureaucratic madness such as buying bonds in the
late 1940s in a futile attempt to keep long-dated Treasuries from rising above
3 percent. Then stepping up the effort in the belligerent attempt in the 1960s
to keep them from rising above 6 percent. At the high yield of 15 percent the
price of their bond holdings was down hugely.
And then there was the central banks compulsion to sell gold right down to
253 dollars. That is per ounce.
Now senior central banks are buying corporate bonds at unprecedented low yields
and stocks at extreme valuations.
Why?
Because they think it will stimulate the economy.
Beyond this, there is the possibility that, underneath it all, they are down
to just trying to prove that intervention works. Well, it must work because
that's what the theory says. In 1989, most folks in Eastern Europe finally
understood that command central planning was not working.
In the same year, best-selling US economics textbooks were celebrating the
wonders of central planning in Communist countries. Well, they had full-on
command central planning and it was assumed by American professors, such as
Blinder, to work. The 1936 German version of Keynes' masterpiece included a
preface that boasted that his theories would work best in an authoritarian
political system:
Ironically, ambitious US statists have used Keynes to make America more authoritarian.
Whew!
Stock Markets
Senior stock indexes are flying at 70,000 feet in an airplane designed for
30,000. There is not enough oxygen to sustain intelligent life.
We have been mentioning, the "old" Ted-Spread, which has been trying to break
above the level reached with the last financial crisis in Europe. Another way
of monitoring money market risk is through Libor, which is moving in a concerning
direction.
A sharp increase in Libor has preceded important market peaks. A chart follows.
In 2007, the increase began on August 1st and jumped 40 bps by September 4th.
The high for the S&P was on October 11.
On 2008, the increase started on March 17th and by April 21st it was up by
38 bps.
The "jump" began from a low of .315 last October and reached .60 in December,
which signaled the severe hit into January-February. A move of only 28 bps
did some damage.
The most recent "jump" began in late June at .62 and now it is at .83, up
21 beeps.
At higher-rates in 2007 and in 2008 it took an increase of some 40 bps to
force a significant decline in the S&P.
At today's lower-rates, of which there has been only one example, 28 bps was
needed to prompt a decline.
Perhaps 28 or so bps will do it again?
The beeps will tell us.
In the meantime, Ross has had a "model" that called for one more rally and
this is it. This page has been calling for positive vibes for the senior indexes
through August. (The NDX took off and set the best Daily RSI since 2014.)
And not-so-positive for key sectors such as the Transports and Banks.
The TRAN worked for us going into last year's peak and it has not (repeat
not) been confirming the new highs in the senior indexes. The rally out to
April reached 8148, the rally into July reached 8048 and the latest reached
7951 on Tuesday. Today it is down .50 percent while the senior indexes are
unchanged.
BKS reached 71.53 in May and has rallied to almost 71 this week. The high
in July 2015 was 81.
The April high for XBD was 172 and the next rally has made it to 168. The
peak in July last year was 203.
Europe Financials (EUFN) seem to be working on a "Round Trip". The low with
the last European crisis was 11.71 at the end of 2011. The bull market high
was 24.23 in 2014. The low in February was 14.31 and the bounce made it to
18.69, right at the 40-Week ma. Brexit drove it down to 14.31 and the recovery
has made it to 17.10. This is shy of the 40-Week at 17.50.
On the broad US market, the NYA had made it to 10892 in the middle of the
month. This has been a well-corrected rally but it is up to resistance. Last
year's high was 11255.
Outstanding sectors such as Utilities (XLU) and Base Metal Miners (XME) reached
technical excesses in July and have rolled over. XLU took out the 50-Day early
in the month. XME was down 5 percent yesterday, breaking below the 50-Day.
Clearly, the bps are getting the Base and Precious Metal Sectors. These were
the big performers on the way up. Are they leading on the way down?
Yes, indeed!
Credit Markets
The world is again in love with junk interest rate instruments. Will the love
be requited or unrequited?
The history of interest rates is a record of costly disappointment. Ironically,
that was the case in 1981 when everyone hated long-dated Treasuries. At 15
percent.
That was at the end of a serious phase of CPI inflation and the beginning
of inflation in financial asset prices. That financial assets could inflate
was controversial.
Now it is equally controversial that prices for financial assets can deflate.
The long Treasury prices became inflated enough in early July to register
some rare technical excesses. The high on the TLT was 143.36 when the world
believed that the rate would replicate the decline to Germany's "Zero" level.
However, the decline has again worked its way to the 50-Day ma, which has
provided support. A good test of the high seems likely.
Germany's bond market is small compared to that of the US. Our view is that
with so many diverse players in the game, Treasuries are vulnerable to market
forces.
The ECB "owns" the European corporate market.
Excesses noted some weeks ago in the High-Yield market have not been corrected,
but have continued to build. The rebound for VWEHX has now clocked the biggest
swing in the Weekly RSI since the rally to 6.17 in June 2014. This rally has
been from 5.28 reached in dismal February and the high has been 5.85 this week.
There is resistance at this level.
The US corporate market is not owned by the Fed and is mightily vulnerable
to the next decline in crude oil.
Currencies
What a struggle!
Archaic theories compel the Fed to drive the dollar down. Market forces are
always current and have been resisting policy. Can you imagine that?
For us, the DX is a technical pattern on a chart. That is working towards
another sensational rally.
The "One more" rally for stocks and crude has been accompanied by a decline
in the DX. For the last week it has been stabilizing at 94.5.
On the longer term, the pattern is similar to the bottom set in the first
half of 2014 at the 80 level. The trade was either side of the 20-Week ema
and the breakout was getting above the line at 81 in that fateful August.
Now the trade is at 94.50 and the ema is at 95.50.
Later in September, it could breakout and the initial target becomes the 98
handle.
It could be disquieting to central bankers.
LIBOR: Stock Market
- In 2007, the lead from the "jump" to the S&P high was some six weeks.
- In 2008, the lead was some 3 weeks.
- In each case the "jump" lasted around 4 weeks.
LIBOR: Stock Market Now
- The "jump" has been on for 7 weeks.
- The hit to the general stock market could become effective in a few weeks.
- Note the "jump" in November.
