The bears have driven NG to 4.05. That should conclude correction. Look for buying opportunity on Monday. GL
Sunday, November 23, 2014
Friday, November 21, 2014
As I read the chart below, we have a bullish scenario: 5 waves up, a little correction, which may not be over, and off we go to new highs. The NUGT speculators are leading the way on this one, and so far they have been right. GOLD should get to 1255 shortly. There's just too many bears out there, who, hoodwinked by the master of illusion--the market--can't believe GOLD can go up without inflation. My chart says up--who cares why? Besides, nobody actually knows, including the fiction writers in the business press. GL
We've had our breakout and the market corrected. Confusing? That's the market, the master of illusions--what shell is the pea under? My reading of the chart below is very bullish: I see a series of 1s and 2s. The next wave--AS SOON AS THIS ONE IS OVER--will be up, a rip-roaring up. So don't get rattled if they drive this thing down next week. Hedge funds are still bearish and we have a little warm up coming this weekend--but Thanksgiving looks COLD. GL
How Does Our Global Credit Expansionary Bubble End?
Nov. 20, 2014 8:00 AM ET
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
•We are nearing the end of the global expansionary bubble.
•Major currency devaluations (wars) already underway are primary indicators.
•Investors should prepare for rising volatility and rising interest rates worldwide.
We are nearing the end of the longest credit expansionary bubble in modern history, or said another way, nearing the end of a 35-year secular decline in interest rates. A secular decline from the ultra-high interest rates of the Stagflation Era of the late 70s (Carter) to the early 80s (Reagan) - and into the near Zero Percent Interest Rate Era of today. In response to the Great Crisis of 2008-9, monetary and fiscal stimulus as a percentage of GDP in the US is now well over 5 times what was put into the system after the Great Depression.
This unprecedented and unsustainable credit expansionary bubble is not only a US phenomenon - it is a global phenomenon, occurring simultaneously in the advanced economies of the eurozone and Japan.
After 35 years, it is becoming increasingly obvious that our monetary and fiscal stimulus policies of perpetually low interest rates and "borrow and spend" are having little-to-no effect on the real global economy. Asset inflation and rising stock prices have been the primary beneficiaries, but the broad economies of the developed world are suffering. Like never before, the wealth gap is rapidly expanding as the rich are become much richer, with everybody else falling farther behind economically each and every year.
With Europe and Japan teetering in recession, emerging markets slowing, and the USA carrying the burden of pulling forward the global economy alone - we are reaching the endgame of the Keynesian credit expansionary schematic. The Law of Diminishing Returns has run its course as the Law of Unintended Consequences quietly approaches. We have been pulling forward all of the demand from the future to boost the economy of today for simply too long. There is no "there there," as it is said. All the signs of a classic "Global Liquidity Trap" are right in front of us.
Definition of "Liquidity Trap"
A situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings (hoarding) because of the prevailing belief that interest rates will soon rise.
In the 1990s, it was the technology stock market valuations of the Dotcom Era that eventually ran away from the economy's ability to sustain the lofty valuations. In the 2000s, it was the real estate and housing market valuations of the Subprime Lending Era that eventually ran away from the borrowers' ability to pay the mortgage.
Today, we are entering the final stages of the Government Bond Era. Global economic growth is slowing, while at the same time global public and private debt growth is exploding. It is estimated that total debt-to-GDP levels of the advanced economies have risen from 150% in 2002 to nearly 375% today. Clearly an unsustainable trajectory.
How does our credit expansionary bubble end? What is an investor to do to prepare and protect wealth from the unintended consequences of the end of another major cycle?
I have moved away the Keynesian failing playbook to find the answer. It was Ludwig von Mises (1881-1973), the founder of Austrian Economics, that we believe gave us a perspective for what lies ahead. Von Mises famously predicted many decades ago:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later, as the final and total collapse of the currency itself.
It is said that financial crises happen slowly at first, and then all at once. Hiding in plain sight, we are now witnessing the onset of von Mises' directive. We have major currency devaluations, also known as "currency wars," occurring across the globe. Specifically, both the euro (-10%) and the Japanese yen (-15%) have experienced major declines against the US dollar over just the last six months in an attempt to kick-start their respective economies.
The problem with everyone devaluing their respective currencies at the same time is best summed up by economist Paul Krugman, quoted from a New York Times editorial in 2011:
And we can't all export more while importing less, unless we can find another planet to sell to.
In a broader context, world history is riddled with examples of currency wars that lead to trade wars; and trade wars that lead to real wars. That said, economic history suggests that collapsing currencies eventually lead to rising inflation. Rising inflation eventually leads to higher interest rates. Higher interest rates eventually leads to a massive reallocation of investor assets and major volatility.
Global investors should be taking action to prepare for the end of the secular credit expansionary bubble. We have been experiencing major asset "busts" and financial crises virtually every 6-7 years since 1973. Now, six years post the Great Crisis of 2008-9, we are in the late innings of yet another major cycle.
We suggest taking to heart legendary investor Benjamin Graham's time-honored advice:
There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently.
For the prudent investor, rising global volatility and massive international capital flows during financial crisis periods can present enormous opportunity. Investors can learn from hockey superstar Wayne Gretzky's keys to success in his sport; "Figure out where the puck is going... not where it's been."
Kirk D. Bostrom, Managing Partner, Strategic Preservation Partners LP
Thursday, November 20, 2014
Wednesday, November 19, 2014
I thnk so. If this is wave 3, which it looks like it is, then expect more more upside. Maybe tomorrow's build number will propel things. Be careful, this is a commodity under all sorts of pressures--so it will be volatile; however, don't forget--as traders bash this thing around--NG is in a bull market--just keep buying those lows. GL
Tuesday, November 18, 2014
John Hussman: These Go To Eleven
Nov. 17, 2014 2:24 PM ET | 6 comments | Includes: DIA, IWM, QQQ, SPY
Excerpt from the Hussman Funds' Weekly Market Comment 11/17/14:
The current market environment joins the full range of ingredients that have characterized the most extreme market peaks – and preceded the deepest market plunges – in more than a century of history. On the basis of measures that are best correlated with actual subsequent market returns (and plenty of popular measures are not), we observe the richest market valuations in history with the exception of the 2000 peak. Even then, current levels on the best performing measures are only about 15-20% below the 2000 extreme. Current valuations now exceed those observed in 1901, 1929, 1937, 1972, 1987, and 2007. The 5-year market advance from the 2009 low, encouraged by yield-seeking speculation, now places the S&P 500 at more than double the level that we would associate with historically normal returns. Put another way, we presently estimate S&P 500 prospective nominal total returns of just 1.4% annually over the coming decade, with zero or negative average total returns out to roughly 2022. These valuations are coupled with extremely overbought conditions and the most lopsided bullish sentiment since 1987. Bearish sentiment is now down to 14.8% (Investor’s Intelligence), close to the low of 13.3% reached in September. Prior to this year, the last two times sentiment was nearly as lopsided were the April 2011 peak (just before a near-20% dive), and the October 2007 peak.
Of particular note, extreme overvalued, overbought, overbullish conditions – which we’ve observed sporadically for quite some time now – have more recently been accompanied by widening credit spreads and deterioration in broad market internals. We have entered an environment in which extraordinarily thin risk premiums have been joined in recent weeks by a subtle shift toward increasing risk aversion. We don’t rule out the potential for market internals to improve in a way that could defer our concerns about immediate downside risk (though such a deferral would not imply that valuations were any less extreme), but the short-squeeze over the past month has not materially reversed the deterioration. As a result, present conditions couple every essential component of historically extreme and vulnerable market environments.
As Nigel Tufnel of Spinal Tap described the volume knobs on his guitar amplifier – “You're on ten here, all the way up, all the way up, all the way up, you're on ten on your guitar. Where can you go from there? Where? Eleven. Exactly. One louder. These go to eleven.”
As I noted in Air Pockets, Free-Falls and Crashes the lessons to be drawn from the recent market cycle are not that historically overvalued, overbought, overbullish extremes can be dismissed. Rather, the lessons to be drawn have to do with the criteria that distinguish when such extremes have little near-term impact from periods where they suddenly matter with a vengeance. Those criteria have a great deal to do with measures of market action that capture subtle shifts risk aversion, such as widening credit spreads and deteriorating market internals. Sometimes those subtle shifts are all the warning you get, and while the 1987, 1998 and 2011 instances were expressed rather quickly in market losses that then subsided, it’s just as typical for downside consequences to be sustained over a couple of years. The market has been dodging boomerangs, not bullets, and they are likely to come back harder for it.
Importantly, rich valuations here cannot be “justified” by appeals to current interest rates or profit margins unless that justification carries with it the assumption that both zero interest rate policy and cyclically-elevated profit margins will be sustained for decades, coupled with the assumption that economic growth will proceed at historically normal rates. Even 3-4 more years of zero-interest rate policy would only be “worth” a 12-16% increase in valuations over and above their historical norms. No, this is a market that is priced for utter perfection, reflecting the Potemkin Village that Fed-induced speculation has built on Wall Street, even as Main Street struggles in its shadow.
Could this time be different? There are numerous factors that aren't in place here, such as overt Fed tightening, but we also know that those factors have not historically been necessary for steep market retreats to occur (indeed, the 2000-2002 and 2007-2009 plunges occurred in an environment of persistent and aggressive Fed easing). Still, some features of the present environment can't be observed historically. For example, none of the market crashes in history occurred in an environment of quantitative easing and zero short-term interest rates, because such an environment never existed prior to the present half-cycle. As a result, one has to make a judgment about how zero interest rates should be expected to impact an overvalued, overbought, overbullish market. From a valuation standpoint, we can quantify the justified impact on valuations from the expectation of T years where short-term interest rates are at L% rather than N% [one can show using standard discounting methods that to a strong approximation, the impact is just T*(N-L)]. What’s harder to quantify is the psychological impact of zero interest rates. That’s really what quantitative easing has exploited: the willingness of investors to speculate, regardless of historically elevated valuations and extremely lopsided bullish sentiment, because of the discomfort that zero interest rates seem to offer “no other choice” but to take risk.
We’ve got no interest in convincing anyone to adopt our views. Our responsibility is to those who trust us to identify and adhere to a value-conscious, historically-informed discipline, and to address what needs to be addressed when the need arises. We are confident that we’ve done so (See Formula for Market Extremes for an overview of the key lessons and adaptations that have emerged from our own work in the half-cycle since 2009). Meanwhile, as we learned back in 2000 and 2007, the full course of the market cycle was far more convincing about the validity of our concerns than any argument that we could have advanced at the peak.
Again, an improvement in market internals would not make stocks any less richly valued or overextended, but because such an improvement would signal a resumed tendency toward yield-seeking speculation, the immediacy of our concerns would dial down considerably. Given present conditions, however, the dials do not move higher, and these go to eleven.
Monday, November 17, 2014
Futures point to moderate opening losses • 7:01 AM
Stephen Alpher, SA News Editor
• Major U.S. stock index futures are all lower by about 0.25%, with Japan unexpectedly falling into recession and the associated 3% overnight decline in the Nikkei making headline writers' jobs a little easier.
"Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy," David Cameron writes in a Guardian op-ed. "As I met world leaders at the G20...the problems were plain to see. The eurozone is teetering on the brink of a possible third recession. Emerging markets...are now slowing down...while the epidemic of Ebola, conflict in the Middle East and Russia’s illegal actions in Ukraine are all adding a dangerous backdrop of instability and uncertainty."
Friday, November 14, 2014
Take Cover Now—-They Don’t Ring A Bell At The Top
by David Stockman • November 14, 2014
This is getting downright stupid. After the minor 8% correction in October, the dip buyers came roaring back and the shorts got sent to the showers still another time. Earlier this morning the S&P 500 was pushing 2050——or up 12% in less than a month.
So the great con game remains in tact. The casinos run by the Fed and other central banks can’t go down for more than a few of days—until one or another central banker hints that more free money is on the way.
A few weeks ago it was James Bullard hinting at a QE extension. Next was Mario Draghi pronouncing that the whole ECB is unified behind a plan to expand its already swollen balance sheet by another $1.2 trillion. And then Haruhiko Kuroda, the certifiable madman running the BOJ, not only announced his 80 trillion yen buying scheme, but soon averred that falling oil prices—–a godsend to Japan—–were actually a threat to his mindless 2% inflation goal that might necessitate even more money printing. That is, after buying up 100% of the massive Japanese government bond market, the BOJ would not hesitate to monetize ETF’s, stocks, securitized real estate debt and, apparently, sea shells, if necessary.
Accordingly, bounteous wealth is seemingly to be had by the three second exercise of clicking “buy” on the SPU (basket of S&P 500 stocks). Indeed, for the past 68 months running, the stock market has blown through every mini-correction, and has been traversing a near parabolic rise.
Needless to say, this relentless expansion of the bubble eventually kills off the bears, the skeptics, the prudent and even the militantly incredulous. Undoubtedly, that is where we are now because the global economic news has been uniformly negative since the October dip, yet the market has resumed its relentless melt-up.
Under such circumstances, therefore, it is well to remember that we are in the middle of the greatest central bank fueled inflation in recorded history, and that this insidious inflation has been channeled into financial assets owing to the arrival of peak debt everywhere around the world.
Stated differently, households are saturated with debt and cannot borrow any more to spend on goods and services that have not been earned with prior production. So the massive tide of liquidity generated by the central banks never leaves the financial markets; it just cycles there, fueling the carry trades and every manner of speculation that modern technology-enabled bankers can concoct.
But that is the Achilles heel of the game. As the bubble takes on ever greater girth, it becomes increasingly susceptible to a negative shock to confidence. Part of the reason is technical. When markets reach their current nose bleed levels there are no shorts left; and it is also likely that the day trading gamblers have become increasingly lax about absorbing the cost of even cheap “downside insurance” (i.e. puts on the S&P 500). That is, they are “long” and “unprotected”.
So if a sharp, sustained self-off gets underway due to an unexpected blow to confidence or the arrival of the proverbial “black swan”—- there are no shorts to cover and take their profits by buying the market as it craters; and there is a simultaneous scramble among the buy-the-dip longs for downside “protection” in order to ride out the storm. But in this context, market makers who sell such protection are not in the least inclined to write insurance or puts on a naked basis. So they sell the index short in order to cover their exposure, thereby adding to the downward momentum.
That is part of the reason why central bank driven bubbles expand relentlessly for years, but then correct swiftly and violently in a few months or even weeks when the bubble finally cracks. Thus, the S&P pattern shown above unfolded in a similar manner during the 2002-2007 Greenspan Bubble—–and then crashed after the Lehman event.
During an appearance on Fox Business today, I had an opportunity to address this pattern in greater detail in response to the skepticism of the show’s free market host, Stuart Varney. Yes, you can “loose” a lot of money on the way up. The problem is, no one rings a bell at the top.
AAII Sentiment Survey: Optimism Keeps Rising, Hits 4-Year High
Nov. 13, 2014 12:54 PM ET
•Investor optimism leapt to a four-year high.
•Neutral sentiment plunged to the lowest level since March of 2013.
•Unusually high optimism with unusually low pessimism tends to precede below-average S&P 500 gains.
Optimism about the short-term direction of the stock market spiked to a four-year high in the latest AAII Sentiment Survey. Pessimism rebounded off of last week's nine-year low, while neutral sentiment plunged.
Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 5.2 percentage points to 57.9%. This is the largest amount of optimism registered by our survey since December 23, 2010 (63.3%). It is also the sixth consecutive week and the 13th out of the past 14 weeks with bullish sentiment above its historical average of 39.0%.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, plunged 9.5 percentage points to 22.8%. Neutral sentiment was last lower on March 14, 2013 (22.6%). The historical average is 30.5%.
Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 4.3 percentage points to 19.3%. This is the fourth consecutive week and the 37th week this year with pessimism below its historical average of 30.5%.
Optimism has only been higher on 57 occasions during the nearly 28-year history of our survey. The six-month return for the S&P 500 following those readings was an average of 0.0% and a median of 0.5%. This is not surprising given that unusually high levels of bullish sentiment and unusually low levels of bearish sentiment (pessimism more than one standard deviation below its historical average for the second consecutive week) have tended to be followed by below-average six- and 12-month gains, as I explained in the June 2014 AAII Journal.
Individual investors continue to react positively to the market's rebound from its mid-October lows. Also contributing to the level of optimism are earnings growth, the Federal Reserve's ending of its bond purchasing program, falling energy prices and sustained economic expansion. Some AAII members may also be reacting to the outcome of the midterm elections. Keeping other AAII members cautious are geopolitical events, a sense that prevailing valuations are too high, the pace of economic growth and worries that a larger drop in stock prices is forthcoming. It is unclear what, if any, impact the midterm elections had on investor sentiment.
This week's special question asked AAII members what, if any, global events are influencing their six-month outlook for stocks. Responses varied, with several members listing more than one event. Russia's intervention with Ukraine was cited by 17% of respondents. About 14% of respondents said events in the Middle East, particularly those involving the Islamic State group, were influencing their outlook. An equal number say both global and U.S. monetary policy, including stimulus programs in Japan and in Europe, are impacting their outlook. The midterm elections and the forthcoming change in Senate leadership was listed by 12% of respondents. About 11% mentioned the U.S. economy, either in terms of its recovery or its relative strength compared to the rest of the world. A similar percentage said they were encouraged by the drop in oil prices, though some said they would be concerned if prices fell too low. Just 6% of respondents discussed Ebola, with some seeing progress in containing it and others expressing concern about the outbreak spreading.
This week's AAII Sentiment Survey results:
· Bullish: 57.9%, up 5.2 percentage points
· Neutral: 22.8%, down 9.5 percentage points
· Bearish: 19.3%, up 4.3 percentage points
· Bullish: 39.0%
· Neutral: 30.5%
· Bearish: 30.5%
The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online here.