Friday, August 16, 2013

Bill Gross: All Asset Markets Peaking

PIMCO's Bill Gross tweets-

Gross: Pogo said, We have met the enemy & he is us. I say, All asset mkts peaking; W/o central bank ck writing we only have ourselves 2sell2.

This is as the pseudo-tapering has already begun. What will happen if the Fed pulls back on the monthly purchases? 

The Ascent of Money- A Financial History of the World

This is a long documentary. I still have not gone through it all (as of this writing) but at about an hour in it is worthwhile and interesting so far.

Rome and Inflation- A History of Money

More History of Money

Those Who Fail to Study History Will Repeat It- Monetary and the Seven Stages of Empire

You have to get through the drama and the dramatic music used to evoke an emotional response. The history presented to great.

Volume Off the High- 8/15 Trading Day or Ringing the Bell Edition

Quire a few names coming off the high with volume. This is as the market breaks support (and the market itself enters the volume off the high list) on poor earnings and outlooks from a number of bellweather companies.

High Volume High- 8/15 Trading Day Edition

There were a few names hitting new high volume highs in an extremely weak market. The relative strength in any of these companies merits watching them further.

S&P 500 Price/Volume Heat Map- 7/15 Trading Day Edition, Weakness Abounds

What a day. After weeks of weak volume at the highs (no matter what the direction change in value), volume expanded as the S&P 500 broke the support of June 11/12 and early May. All sectors declined in value on price basis in yesterday's trading with the best performers being energy and materials.

The break of support on volume (volume off the high) is a big deal. This move puts the the next swing point between 1,560 to 1,580 (156 to 158) on the S&P 500 (SPY) into play. These price range corresponds to a decline of between 5% and 7% from yesterday's closing price.

It probably is a waste of words to describe the weakness exhibited in the price/volume hear map, presented below.

Weather Myths

The moral of the story, science changes with new data, news and politicians sensationalize, and everyone is susceptible to the many aspects of behavioral interpretations of data. For instance, the availability bias and extrapolating the current conditions well out into the future.

Thursday, August 15, 2013

Guggenheim Warns- Multiple Expansion Is Not Sustainable

You may have seen this article/research posted at Zerohedge.

Multiple Expansion Driving the Rally in U.S. Equities

The P/E multiple, defined as the ratio of price to trailing 12-month earnings, has been the main driver of the rally in U.S. equities over the past two years. The S&P 500 index has increased by over 34 percent since the beginning of 2011, of which 28 percent has come from multiple expansion. During the same period, growth in corporate earnings has slowed. The trailing 12-month earnings for S&P 500 companies rose 2.4 percent in 2012 and another 2.5 percent for the first seven months of this year, registering the slowest earnings growth in non-recession years since 1998. Without renewed earnings growth, a continued rally in stocks driven by multiple expansion may be not sustainable.

This is interesting for a myriad of reasons, one of which being the implication of future returns following price appreciation generated by multiple expansions versus earning expansions. I smell some research ahead. 

Is Slowing Money Supply Signalling Another Stock Market Crash?

As stated in the EPJ

According to Austrian Business Cycle Theory, when a central bank slows its money printing that has fueled a manipulated stock market boom, the stock market is very vulnerable to a crash.

Murray Rothbard in his book America's Great Depression explained how it occurred before the October 1929 crash:

It is generally acknowledged that the great boom of the 1920s began around July, 1921, after a year or more of sharp recession, and ended about July, 1929. Production and business activity began to decline in July, 1929, although the famous stock market crash came in October of that year. [...] the total money supply of the country, beginning with $45.3 billion on June 30,1921 and reckoning the total, along with its major constituents roughly semiannually thereafter. Over the entire period of the boom, we find that the money supply increased by $28.0 billion, a 61.8 percent increase over the eight-year period. This is an average annual increase of 7.7 percent, a very sizable degree of inflation. Total bank deposits increased by 51.1 percent, savings and  loan shares by 224.3 percent, and net life insurance policy reserves by 113.8 percent. The major increases took place in 1922–1923, late 1924, late 1925, and late 1927. The abrupt leveling off occurred precisely when we would expect—in the first half of 1929, when bank deposits declined and the total money supply remained almost constant.
The remainder of the article shows some example, but as I pointed out the tapering (regardless of the rhetoric) has already began with both M2 and the monetary base showing decelerating growth if not outright declines.

The Support Is Gone On the S&P 500, Next Stop $1,556

Just looking at the chart of the SPY (S&P 500 Spider ETF) and noticed that the market has broken an apparent support level at the $167 level. The price point was initially tested a few time back in may, but retested and broken in July 11th and 12th trading, mind you on volume turnover between 104 and 135 million shares. See the chart below.

Today's trading is on track to post between 175 million to 200 million shares (as of this writing, told you it would change) exchanging hands. The broken support on volume suggests that the S&P 500 will move to the next volume support, which lies in or around the $155 to $157 price range.

Tic...Tic...Tic..... Santelli

Keep what Santelli is saying when looking at this chart of the TBT or the Proshares Ultrashort 20 year treasury bonds.

or that monetary base per dollar of GDP (see the chart from below) is so far out on the curve that a very 'normalization' in rates will increase the risks of inflation and/or a large reaction by the Fed.

How the Fed Goes Bust

I will not dwell on this, but RT's quality sure has declined since Ms. Lyster left for Yahoo. But that is not what you are here for nor is anything you probably want to hear. The relevant interview with Richard Ebeling begins at about the 2:45 mark.

The Austrian Theory of the Business Cycle

There's the Volume

The intraday chart of the SPY.

The final results will be different, but SPY volume is currently on track to turn over 340 million shares, on a time-weighted basis, versus a daily average of 21 million shares.

Volume Off the High- 8/14 Trading Day Edition

A few earnings related names moving off of highs in yesterday's trading. Some more interesting moves include SSNI, where shares fell almost $10 on no apparent news and more than 1 million shares. Additionally, TRIP declined after the company discussed summer travel trends, which were apparently poor. This may also explain the negative move in the airline stocks just two days ago, that is outside of the DOJ actions against the US Air/American merger.

High Volume High- 8/14 Trading Day Edition

Almost all earnings names in yesterday's trading, except for CCIH, where the company inked a partnership with Microsoft.

S&P 500 Price/Volume Heat Map- 8/14 Trading Day Edition

The S&P 500 lost more in the value in yesterday's trading, declining by about 50 basis points on losses across the sector group with discretionary companies losing more than 1% in value.

The price/volume heat map continues to show a weakening demand dynamic and less risk taking propensity by equity investors. All sectors shows a negative supply/demand dynamic, a worsening trend that has continued over the last few trading sessions. That said, the overall volume levels on the market remain weak.

Wednesday, August 14, 2013

Obama's False History of Public Investment

The following article originally printed in the WSJ highlights  one important and often untalked about aspects of the US' and Western World's need to rebuild and upgrade the aging infrastructure. Namely that the push to improve and upgrade the infrastructure should primarily come from the private sector, as private investment and profit seeking people will construct and operate any project far more efficiently than any government entity.

By Larry Schweikart JR. and Burton Folsom JR.
For almost five years now, President Obama has been making the argument that government "investments" in infrastructure are crucial to economic recovery. "Now we used to have the best infrastructure in the world here in America," the president lamented in 2011. "So how can we now sit back and let China build the best railroads? And let Europe build the best highways? And have Singapore build a nicer airport?"

In his recent economic speeches in Illinois, Missouri, Florida and Tennessee, the president again made a pitch for government spending for transportation and "putting people back to work rebuilding America's infrastructure." Create the infrastructure, in other words, and the jobs will come.

History says it doesn't work like that. Henry Ford and dozens of other auto makers put a car in almost every garage decades before the National Interstate and Defense Highways Act in 1956. The success of the car created a demand for roads. The government didn't build highways, and then Ford decided to create the Model T. Instead, the highways came as a byproduct of the entrepreneurial genius of Ford and others.

Moreover, the makers of autos, tires and headlights began building roads privately long before any state or the federal government got involved. The Lincoln Highway, the first transcontinental highway for cars, pieced together from new and existing roads in 1913, was conceived and partly built by entrepreneurs—Henry Joy of Packard Motor Car Co., Frank Seiberling of Goodyear and Carl Fisher, a maker of headlights and founder of the Indy 500.

Railroads are another example of the infrastructure-follows-entrepreneurship rule. Before the 1860s, almost all railroads were privately financed and built. One exception was in Michigan, where the state tried to build two railroads but lost money doing so, and thus happily sold both to private owners in 1846. When the federal government decided to do infrastructure in the 1860s, and build the transcontinental railroads (or "intercontinental railroad," as Mr. Obama called it in 2011), the laying of track followed the huge and successful private investments in railroads.

Henry Ford in his new T Ford model in 1900.
In fact, when the government built the transcontinentals, they were politically corrupt and often—especially in the case of the Union Pacific and the Northern Pacific—went broke. One cause of the failure: Track was laid ahead of settlements. Mr. Obama wants to do something similar with high-speed rail. The Great Northern Railroad, privately built by Canadian immigrant James J. Hill, was the only transcontinental to be consistently profitable. It was also the only transcontinental to receive no federal aid. In railroads, then, infrastructure not only followed the major capital investment, it was done better privately than by government.

Airplanes became a major industry and started carrying passengers by the early 1920s. Juan Trippe, the head of Pan American World Airways, began flying passengers overseas by the mid-1930s. During that period, nearly all airports were privately funded, beginning with the Huffman Prairie Flying Field, created by the Wright Brothers in Dayton, Ohio, in 1910. St. Louis and Tucson had privately built airports by 1919. Public airports did not appear in large numbers until military airfields were converted after World War II.
No matter where you look, similar stories come up. America's 19th-century canal-building mania is now largely forgotten, but it is the granddaddy of misguided infrastructure-spending tales. Steamboats, first perfected by Robert Fulton in 1807, chugged along on all major rivers before states began using funds to build canals and harbors. Congress tried to get the federal government involved by passing a massive canal and road-building bill in 1817, but President James Madison vetoed it. New York responded by building the Erie Canal—a relatively rare success story. Most state-supported canals lost money, and Pennsylvania in 1857 and Ohio in 1861 finally sold their canal systems to private owners.

In Ohio, when the canals were privatized, one newspaper editor wrote: "Everyone who observes must have learned that private enterprise will execute a work with profit, when a government would sink dollars by the thousand."

In all of these examples, building infrastructure was never the engine of growth, but rather a lagging indicator of growth that had already occurred in the private sector. And when the infrastructure was built, it was often best done privately, at least until the market grew so large as to demand a wider public role, as with the need for an interstate-highway system in the mid 1950s.

There is a lesson here for President Obama: Government "investment" in infrastructure is often wasteful and tends to support decaying or stagnant technologies. Let the entrepreneurs decide what infrastructure the country needs, and most of the time they will build it themselves.

Mr. Schweikart, a history professor at the University of Dayton, is the co-author, with Dave Dougherty, of "A Patriot's History of the Modern World" (Sentinel, 2012). Mr. Folsom, a history professor at Hillsdale College, is the co-author, with his wife, Anita, of "FDR Goes to War" (Threshold, 2011).

Gold, China, And The Austrian Business Cycle

by Olav Dirkmaat via GoldRepublic,
The Chinese account for over a third of total gold demand. We know therefore that any development in China - either positive or negative - has a rippling effect on gold, as well as other commodities that were bid up to new record heights during the Chinese credit bubble.

But the problem in China is not only an overextension of credit and an urgently needed deleveraging of its banking sector. It is, more importantly, the cleansing of a miscoordination of economic resources. The issue at hand is therefore not the total level of credit, but the micro-economic catastrophy that an inflow of excessive credit causes.

The magic of capitalism is that profit margins are driven by (derived) consumer demand: higher consumer demand leads to higher profit margins that in turn attract investors. The benefiting industries expand at the expense of other industries that experience lower consumer demand.

Excessive credit, however, provides investors with the very same signal as if consumer demand has increased. Yet this is not the case. Investors will make investments that are not sustainable and will turn into lousy investments as soon as prices throughout the economy readjust to the new amount of credit.

How does this process work?

When central banks distort the healthy clearing process between commercial banks by using their bottomless wallet, an excess of credit over savings develops. This credit ends up in the hands of entrepreneurs that bid up certain market prices: they exercise their increased buying power in some sectors of the economy. They bring about a price increase in some goods, above the level at which they would have settled without the inflow of new credit, but that remain uncompensated by a decrease in prices of other goods. They cause an increase in profit margins and free cash flow in markets to which the additional credit flows; an irrefutable micro-economic signal for investors to invest in these lines of production. A temporary boom ensues.

This boom cannot continue forever. The new credit - in the form of bank deposits - will eventually bid up prices throughout the entire economy. All prices readjust upward over time. As money trickles down, other people will bid for the goods they desired and desire with their newly obtained increased nominal buying power. Instead of entrepreneurs bidding up prices of production goods, consumers now bid up prices of consumer goods. The credit-driven demand in some sectors stalls, while all other prices rise to reflect the impact of the newly created credit on the broad money supply.

This is exactly what happened in China. Massive amounts of credit went into the real estate sector. Prices were bid up and an unsustainable boom developed. And as long as the amount of new credit outstrips the upward readjustment of prices following from the previous credit injections, the party continues. But as soon as the amount of new credit inevitably dwindles, the readjustment of prices to the new credit comes to a closure by means of a full-blown recession.

The key to understanding this theory is the fact that the real problem is not about the credit supply. It is about the miscoordination of production due to an excess of credit over savings. When banks are no longer limited in their credit expansion by the competitive clearing process, for example because of a significant increase in base money by the central bank, saved-up (unconsumed) resources have in fact not increased, but entrepreneurs invest as if saved-up resources, available to production, have increased. The boom is temporary and will inevitably burst into a recession as soon as the market readjusts prices again.

Sharp observers can see the unravelling of this process in full force in China. The CPI indicates rising consumer prices, while production slumps with a PPI revealing declining producer prices. Recent PMI-figures are also abysmal. It is an undeniable sign of a credit bubble ready to burst.

But what does this mean for future gold prices?

The Chinese demand for gold essentially comes from three segments: (1) the People’s Bank of China; (2); the banking sector; and (3) Chinese citizens.

We can count on the Chinese central bank to pursue the same steady course they have been pursuing for a while: buying additional gunpowder by increasing their gold reserves. The PBoC has been very secretive about the pace at which they expand their gold hoard. Analysts estimate that the PBoC bought as much as 490 tons gold on the market in 2011. With declining prices, who believes that they are buying less now?

In 2009 Yi Gang, Vice Governor of the PBoC, commented that Chinese gold reserves equalled about 1.000 tonnes then, and could reach 6.000 tonnes by 2013 and even 10.000 tonnes by the end of the decade. That presupposes an increase of approximately 1.000 tonnes annually. Chinese gold production is roughly 400 tonnes, so that leaves us with 600 tonnes to be imported each year. Given recent price declines, China might decide to take advantage of such an opportunity. According to the World Gold Council, gold demand equals give and take 4.500 tonnes, thus PBoCs influence on gold prices is considerable at around 13% of total gold demand.

On the other end, Chinese commercial banks themselves are of little relevance for gold. As the banking sector has to deleverage - with Chinese authorities insisting on taking some pain — banks will try to exchange their assets for hard (how ironic) currency. Yet interest rates paid for savings deposits are still pegged by the PBoC to its own benchmark.

More importantly, it is very likely that the deleveraging will be accompanied by, for instance, a significant cut in interest rates or a lowering of the reserve requirements to offer the banking sector a helping hand.

This could have a major impact on gold. We’ll see why by observing that the bulk of Chinese gold demand comes from its third source: Chinese citizens. China has one of the world's highest saving rates, and the public faces few investment options. With negative real interest rates, in case the PBoC does lower rates to support the banking system, gold seems to be an opportune alternative. In this light, it is interesting to see a close correlation between the gold price and changes in Chinese consumer prices (with the exception of the past few months). From 1993 to 2013 correlation between the gold price and the Chinese CPI was .80, while over the past ten years it equalled a stunning .97! We should nonetheless reiterate the often heard mantra that correlation does not equal causation.

The main driver of increasing gold demand from China should therefore be the general public. Gold demand of the Chinese public equates to around 800 tonnes a year, but could increase in accordance with the Chinese slowdown.

Yet we should also consider the other side of the coin. In the short run things might take another turn. Interest rates on bank deposits are capped to 110% of the discount rate offered by the PBoC. When an economic slowdown inevitably sets in, consumer prices might get dragged down in an ensuing recessionary offshoot, increasing the real return on bank deposits. Inflation and PBoC rate cuts, however, would avoid this scenario.

It will be undoubtedly interesting to see how the Chinese slowdown will unfold. Chinese gold demand will be key to gold prices in the near and more distant future due to sheer size. It is unfortunate that most pundits nevertheless choose to focus their attention on the cherished Western world.