Signs of The Times
Perspective
Some of the stand-out headlines are showing interesting contrasts.
China's wealthy are still leveraging up in financially-engineered confections.
Connecticut's wealthy are becoming "maddenly frugal", in no longer buying high-end
houses and cars. The headline in between was about Consumer Confidence (Conference
Board) reaching the highest reading since August 2007. Numbers for the report
were cut on September 15th. The NYSE Comp set its high on September 6th.
In looking at the credit markets, sobriety is knocking at the door and policymakers
may not be able to keep the party going.
Credit Markets
As outlined in Tuesday's "Special", spread-narrowing has reached the RSI target
of 25. From more than 20% as the panic ended in January the CCC spread has
come into 11.55%, which is clocking an outstanding rush. The momentum target
has been slightly exceeded.
On pattern, the Sequential (13) Buy has been registered. In this case the "Buy"
means the turn to widening.
Both technical measures suggest there is enough excess to set up the reversal.
This could take a week or so.
Some 14 months of flattening ran the Treasury curve from 1.79 to .71 in late
August. The initial move to .97 was turned back by the 200-Day ma. The test
seems to have been accomplished at .81. Now at .870, rising through resistance
at .97 would set the new trend.
As noted in August, initial steepening would help bank stocks, but trend extension
will not.
Quite likely, the rest of the credit world will turn with the US market.
Similar timing on the reversal worked for us in early 2000 and in May 2007.
We have been watching the Municipals (MUB) since March when the action last
became overbought. Reversal needed to take out the 20-Week ema. It didn't then,
but the next rally was outstanding. Outstanding enough to accomplish the highest
Weekly RSI in four years.
Primed for reversal, all that was needed was to take out the 20-Week ema.
It has and the line has been tested. Yesterday's drop took out the 200-Day
ma, which is significant.
The most corrupt municipalities and counties have endowed their union employees
lush pension benefits. Pensions have been greater than the wages of working
taxpayers. The "City of Bell Scandal" is the example.
Something similar in price action holds for the long bond.
Our study in early July concluded that the big zoom was "Ending Action". Meaning
the end of the great bull market that began in 1981 when the yield soared to
15 percent. Technicals were opposite to that momentous reversal.
The high for the TLT was 143.62 in July and the initial decline was to 133
in the middle of September, which was just under the 20-Week ema. The bounce
made it to 139 last week, which was above the ema. At 134 now, it is well below
the line and taking out 133 would be a significant break. It's possible.
Over in Emerging Bonds (EMB), the action has been very good. The lust for
yield has overwhelmed prudence, which has accomplished a huge swing in the
Weekly REI. Momentum was high for some weeks.
The price soared from 102 in the January panic to 118.14 at the first of September.
The initial decline was to the 20-Week ema at 115. The bounce made it to 118.
Now at 116.25, taking out the ema and support at 115 would also be a significant
break.
The action seems to be a few weeks behind that of Munis and Treasuries.
Governments have found financial manias very profitable in tax collections
and the ability to fund state ambition as well as the appearance of prosperity.
They have never wittingly done anything to deliberately end them. That is from
the first one, the South Sea Bubble of 1720, to the most recent classic bubble
that completed in 2007.
This has been the only great bond bubble in history and it will be followed
by an irresistible and massive contraction.
This could be discovered when all classes of bonds break down.
Recording conditions in the money market, the distinctive increase in the
Libor rate corrected briefly and broke out yesterday. And Wall Streeters still
continue to speculate about Fed policy, which usually follows important changes
in market rates of interest.
Municipals: Game Over!
- The attempt to take out the 20-Week ema in March did not work.
- The next rally into late June accomplished the highest Weekly RSI in four
years.
- By stages the decline could amount to some 15 points.
- Municipalities with no fiscal discipline could suffer a serious decline.