Signs of The Times
Obviously, the rich harvest of headlines continues. It is worth adding that
they only occur with the culmination of great financial manias. The problem
is that each soaring bull market, sensational has become the norm. Stock
pickers think that certain stocks and their ability to discover them are
unassailable. On Business News Network, there was a fund manager boasting
that while the Hang Seng index was down 20% his picks in Hong Kong were unchanged.
The notion that outstanding management and the genius of the Fed are proof
against major setbacks is so 1929.
It has been convenient for interventionist economics to assume that the central
bank is the perfect instrument for imposing policy. In the early 1930s, most
understood that the abilities of the Fed were overwhelmed by the fury of
the crash. Most also understood that the boom caused the bust, which prompted
the passing of the SEC and Glass-Steagall Acts. These were designed to prevent
another bubble. So that there would never be another crash.
If one reviews the newspapers of the day one would read that when the Fed
raised the discount rate to 6% in August 1929 it intended to tighten funds
to Wall Street, but also intended to ease funds for Main Street. In the crash
the NY Fed bought bonds out of the market to inject liquidity. It exceeded
its authority by a factor of six. Early in 1930, a Fed official noted that
they had met the crisis in the usual way by discounting liberally.
In the 1960s, as econometrics and computers ascended, intrusive economists
needed the policy instrument to be perfect. Thus the argument that the guys
at the Fed were deliberately tight and that caused the Great Depression.
How naïve.
Thanks to the permanency of the internet record, all of the reckless extension
of Fed credit can never be buried. And now with the massive efforts made
by Chinese policymakers so well publicized, the record of this massive failure
will be permanently visible.
The 2007 Bubble and Crash generated some despicable policy utterances. One
was that in December 2007 the establishment boasted that nothing could go
wrong. The Fed had a
"dream team" of economists. A crash was impossible and only two years later
they were boasting that without the Fed's magnificent efforts the crash would
not have ended.
China's recent contributions to official folly would include the following:
If in April, China had approved only 10 IPOs would the rally would have continued?
Policy intrusions, no matter how well rationalized, are mainly nonsense.
Our determinants for the peak in the SSEC needed another set of Upside Capitulations,
hopefully accomplished in June ().
Commodities
Last week, we observed that the main commodity sectors, such as base metals
and grains, were oversold. We wondered about the possibility of another "rotation" and
decided against it.
Some commodities were oversold, but deterioration in the credit markets was
getting concerning.
The key item this week is crude oil dropping to new lows and while getting
oversold, in this market normal oversold may have little influence. Instead,
we should look at recent seasonal forces. Over the past 15 years, there has
been a tendency for crude to set serious lows in December to January.
Much the same holds for the gasoline contract.
Our view from last year remains and that is the popular notion that falling
petroleum prices would help the consumers' gas tank was not the issue. The
issue was commodity price deflation.
And generally commodities remain weak, driving the DBC down to 15, which takes
out the low of 16.71 set in April. All the "rotations" out of last December
have been wiped out.
The cyclical peak was 32 set in April 2011, and the peak in 2008 was 45.
One of the features of the typical post-bubble condition is weakening commodities.
Today's pop to 15.18 seems tied to the setback in the DX. A relief rally
that could be brief.
Lines in the Sand
In looking at the concerning issues over the weekend, on Monday the "Lines
In The Sand" list was put together, as in "Hey!" through this level would
mark a failure.
The most persuasive one would be the breakout on spread widening. Yesterday's
number was 220 bps, which is more than the breakout, it is becoming dramatic.
The next one would be the NYSE A/Ds taking out the last low. This was accomplished
this morning. The decline is now longer than the one that completed last
October. The chart follows.
Another would be the SPX taking out the 200-Day ma, which would be Step Two.
Today is working on a big bar down, all of it below the key moving average.
Complacency has had remarkable popularity and showing change, the VIX has
jumped from 10.88 to 17. Getting above the July high of 20 would formally
end complacency.
On our Friends of The Bull Market, last week's advice was that their shelf-life
and guidance had expired.
