Friday, October 25, 2013

High Volume High- Oct. 22 Trading Day Edition

More high volume highs from earlier in the week

High Volume High- Oct. 21 Trading Day Edition

Some names that made new higher highs on higher volume in last Monday's trading.

Did Monetary Policy Cause the Recovery- Hussman

Prof. Hussman discusses the relationship between the economy and monetary policy in regards to his opinion what caused the rebounding economy. Hint" it was not QE.

We can quite reliably estimate the long-term returns that stocks are likely to deliver over a 7-10 year horizon. Still, valuations often have less direct effect over shorter portions of the market cycle. The present situation is complicated by the fact that while valuations are extreme from a historical standpoint, investors are tied to a narrative that assumes a cause-and-effect link between monetary policy and market direction. The “follow the Fed” narrative certainly did not prevent the market from losing half of its value during the 2000-2002 and 2007-2009 plunges, despite aggressive monetary easing in both instances, but what matters in the short-run is not the truth of that narrative, but the perception that it is true. 

Since about 2010, normal economic relationships have taken a back seat to ever larger monetary policy interventions. The correlation between reliable leading measures of economic activity and subsequent job growth and GDP has dropped not just to zero but to negative levels (see When Economic Data is Worse Than Useless). Similarly, extreme overvalued, overbought, overbullish syndromes, which throughout history have been closely followed by severe losses, have instead been followed by further speculative gains. The question is whether this reflects a permanent change in economic dynamics, or a temporary overconfidence about the effectiveness of monetary policy.

To address this question, a proper understanding of the credit crisis is essential. Much of the present faith in monetary policy derives from the belief that it was the central factor in ending the banking crisis during what is often called the Great Recession. On careful analysis, however, the clearest and most immediate event that ended the banking crisis was not monetary policy, but the abandonment of mark-to-market accounting by the Financial Accounting Standards Board on March 16, 2009, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The change to the accounting rule FAS 157 removed the risk of widespread bank insolvency by eliminating the need for banks to make their losses transparent. No mark-to-market losses, no need for added capital, no need for regulatory intervention, recievership, or even bailouts. Misattributing the recovery to monetary policy has contributed to a faith in its effectiveness that cannot even withstand scrutiny of the 2000-2002 and 2007-2009 recessions, and the accompanying market plunges. This faith is already wavering, but the loss of this faith will be one of the most painful aspects of the completion of the present market cycle. 

The simple fact is that the belief in direct, reliable links between monetary policy and the economy - and even with the stock market - is contrary to the lessons from a century of history. Among the many things that are demonstrably not true - and can be demonstrated to be untrue even with simple scatterplots - are the notions that inflation and unemployment are negatively related over time (the actual correlation is close to zero and slightly positive), that higher inflation results in lower subsequent unemployment (the actual correlation is positive), that higher monetary growth results in subsequent employment gains (the correlation is almost exactly zero), and a wide range of similarly popular variants. Even "expectations augmented" variants turn out to be useless. Examining historical evidence would be a useful exercise for Econ 101 students, who gain an unrealistic sense of cause and effect as the result of studying diagrams instead of data. 

In regard to what is demonstrably true, it can easily be shown that unemployment has a significant inverse relationship with real, after-inflation wage growth. This is the true Phillips Curve, but reflects a simple scarcity relationship between available labor and its real price, but this relationship can't be manipulated to create jobs (see Will the Real Phillips Curve Please Stand Up). It's also true that changes in stock prices are mildly correlated with subsequent reductions in the unemployment rate and higher GDP growth. But the effect sizes are strikingly weak. A 1% increase in stock prices correlates with a transitory increase of only 0.03-0.05% in subsequent GDP, and a decline of only about 0.02% in the unemployment rate. So to use the stock market as a policy instrument, the Fed would have to move the stock market about 70% above fair value just to get 2.8% in transitory GDP growth, and a 1.4% decline in the unemployment rate. Guess what? The Fed has done exactly that. The scale of present financial disortion is enormous, and further distortions rely on the permanent belief that there is actually a mechanistic link between monetary policy and stock prices. 

We know very well the mechanisms and actual historical relationships between monetary policy and financial markets, and doubt that any amount of quantitative easing will prevent a market slaughter in any environment where investors find short-term liquidity desirable (QE only “works” to the extent that zero-interest liquidity is treated as an undesirable “hot potato”). Still, the novelty of quantitative easing, and the misattributed belief that monetary policy ended the banking crisis, has created financial distortions where perception-is-reality, at least for now. We believe that the modifier “for now” will prove no more durable than it was during the tech bubble or the housing bubble.

The Shadow Banking Crisis and the Fed's Painted Corner

A great conversation and review of QE and the shadow banking system

Volume Off the High- Oct. 22 Trading Day Edition

Some more names coming off the high on volume.... this for Tuesday's trading

Volume Off the High- Oct. 21 Trading Day Edition

Still catching up with names coming off the high last Monday

Why Is Yawning Contagious?

And yes, I yawned watching this.

Yellen Exposed, Part 2 With Peter Schiff

In once sense, I hope Yellen follows the path most think she will, as my portfolio is well positioned for such an event. That said, I don't really think she has a choice.

The Long-Term Track Record of the Fed

All the arguments aside, this is a very clear and concise argument against the Fed. 

By Simon Black of the Sovereign Man

As we’re coming up on the 100th anniversary of the establishment of Federal Reserve, one thing has become abundantly clear– these guys are horrible at their jobs.

According to the popular lie, the Federal Reserve was supposed to have been established to smooth out the economic cycle, thus preventing booms, busts, recessions, and depressions.

It hasn’t really worked out that way.

In the 100 years prior to the establishment of the Federal Reserve, there were 18 distinct recessions or depressions:

1815, 1822, 1825, 1828, 1833, 1836, 1839, 1845, 1847, 1853, 1860, 1865, 1869, 1873, 1887, 1890, 1899, and 1902.

Since the establishment of the Federal Reserve, there have been 18 recessions or depressions:

1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.

So in other words, the economy experienced just as many recessions with the ‘expert’ management of the Federal Reserve as without it.

And this doesn’t even begin to capture all the absurd panics (the S&L scare), bailouts (Long-Term Capital Management), and ridiculous asset bubbles that they’ve created.

Hardly an impressive enough track record to justify conjuring trillions of dollars out of thin air, and awarding nearly totalitarian control of the money supply and economy to a tiny banking elite… wouldn’t you say?

Kitco- Wishy/Washy Trading Needs To Consolidate

a few days old but still valid thoughts and opinions.

Price/Volume Heat Map for Oct. 24 Trading Day

I was debating providing some commentary for yesterday's trading day, but decided against, having been on the road and not watching the trading dynamics of the day.

Despite an overall gain on equity prices, the demand levels appeared lackluster, albeit outweighing the supply side.

Debt is Money and Money is Debt- Why the Fed Cannot Taper

highlights one the greatest dangers in a fiat money system, i.e. that debt/money creation has to continue or risk a systematic collapse.

Price/Volume Heat Map for Oct. 23 Trading Day

And still catching up....

The market lost some value in Wednesday's trading and the price/volume heat map fully reflects this.

Gold Surge Just Starting - Schiff

.... and Brian Sullivan won some props for me in this interview by saying he was dead wrong about the Euro. Refreshing to hear someone say they are wrong.

Price/Volume Heat Map for Oct. 22 Trading Day

Still catching up and posting for reference

The price/volume heat map suggest a rise in demand with an increase in equity prices. 

Government Unable to Effectively Provide Services- Biderman

Thinking On Long-Term Rates

The following comments are from the Street's interview with American Century's CIO and concerns long-term rates.

As you can probably guess, I think his assertion that the Fed will soon is just wrong. I am in the camp that weak economic data will likely push off any talk of a pullback in bond buying in to, at least, the second quarter next year, if not later. More so, it appears that long-term rates are more likely than not set to fall in the intermediate term. Just look at the Proshares Ultrashort 20 year treasury bond fund, whose price moves in correlation with yields on long-dated treasuries.

The fibs on this chart are suggesting that rates are likely to go lower, probably moving to the lows/high of the June/May. More so, the high volume swing point of May 22 will exert some gravity here now that a downtrend is in place. My guess is that the price of the TBT moves back into the mid-to-low 60's, corresponding with a 10-year treasury rate around the 2% level.

Obamacare in 12 Seconds

Just about sums it (and nearly all government services) up....

Greenspan Offers No Apologies

How about apologizing for thinking you are smarter than and abandoning the principals of the free market than you so eloquently professed you believed in?

Price/Volume Heat Map for Oct. 21 Trading Day

Catching up with past trading days and posting for continuity.

Generally a lackluster day with neither supply nor demand winning the day.

The Government Debt Addiction- The Mises View

Jobless Claims Offers Gold Support

Probably more of a tack on affect after the lower-than-expected jobs number on Tuesday but still a positive follow through for gold.

Australia Raises the Debt Ceiling- Where's the Outrage.

Just getting back after a few days off.......

And I have posted this before, but just for a refresher.

Tuesday, October 22, 2013

A few Days Off

I am taking a few days off from blogging to relax and to attend some conferences. Be back later in the week with updates.

Monday, October 21, 2013

Economy Never Left 2008 Recession- James Turk

Analysts Not Slashing Q4 EPS Estimates…Yet- Factset

With the economy still weak, as I and others have detailed, does this mean that estimates are too high? Maybe we will see that back-half acceleration in growth materialize.

Late Wednesday, Congress reached an agreement to end the partial shutdown of the U.S. government that began on October 1st. During the past few weeks, some companies in the index (including Citigroup, Linear Technology, and Stanley Black & Decker) have cited the negative impact of the shutdown on actual earnings for the third quarter or on projected earnings for the fourth quarter during their earnings conference calls for the third quarter. As a result, have analysts been reducing earnings estimates for the fourth quarter at a faster pace than normal due to the shutdown?

Over the first 20 days of the fourth quarter (since September 30), the aggregate dollar-level earnings estimate for Q4 has dropped 0.72% (to $266.1 billion from $268.1 billion). How does this decrease compare to recent averages?

During the past year (4 quarters), the average decline in the aggregate dollar-level earnings estimate during the first 20 days of quarter has been 0.83%. During the past five years (20 quarters), the average decline in the aggregate dollar-level earnings estimate during the first 20 days of quarter has been 1.33%. Thus, the decline in expected (aggregate) earnings for the fourth quarter during the first 20 days of the quarter has been lower than the trailing 1-year and 5-year averages. This decline is also well below the largest declines during this 20-day window over the past five years, recorded in Q1 2009 (-8.91%) and Q4 2008 (-7.56%). Clearly, analysts are not slashing estimates at a more rapid pace than normal at this point in time.

However, it is still early in the earnings season, as only about 20% of the companies in the index have reported actual results to date. More companies may comment on the negative impact of the shutdown on fourth quarter earnings during their conference calls over the next few weeks. The market will likely keep a close eye on the number and nature of these comments during the rest of the earnings season.

S&P 500: Change in Dollar-Level Earnings Over First 20 Days of a Quarter
Of the 97 companies that have reported earnings to date for the quarter, 69% have reported earnings above estimates. This percentage is below the average of 73% recorded over the past four years. In terms of revenue, 53% of companies have reported sales above estimates. This percentage is below the average of 59% recorded over the past four years. In aggregate, companies are reporting earnings that are 2.3% below the mean EPS estimate. This percentage is also well below the average of +6.5% over the past four years.

The blended earnings growth rate for the S&P 500 overall for Q3 2013 is 1.3% this week, slightly above last week’s growth rate of 0.8%. Upside earnings surprises reported by companies in the Industrials (General Electric), Information Technology (Intel), and Financials (Morgan Stanley and Goldman Sachs) sectors were partially offset by downward revisions to estimates for companies in the Energy sector (Exxon Mobil) during the week. On September 30, the Q3 earnings growth rate for the index was 3.1%. However, only three sectors have witnessed a decline in earnings growth rates since that date, led by the Financials and Energy sectors. The Information Technology and Industrials sectors have seen the largest increases in expected earnings growth since the end of the quarter.

The blended earnings growth rate for the quarter is 1.3%. Seven of the ten sectors are reporting or are projected to report an earnings increase for the quarter, led by the Consumer Discretionary (6.6%) and Industrials (5.7%) sectors. On the other hand, the Energy (-7.8%) and Financials (-2.1%) sectors have the lowest earnings growth rates for the quarter. The blended revenue growth rate for the index for Q3 is 1.9%, down from an estimate of 2.5% at the end of the third quarter.

Gold Standards- True And False

The following is a recording of the lecture given by Joseph Solerno, for the Mises Institute, on gold standards.

The Fundamental Problem Japan- Demographics

I contend that demographics is one of the greatest problems faced, in regards to past promises made, by many developed nations. More so, some of the largest economies in the world.

As Jim Rogers recently stated in a Barron's interview, "The fundamental problem in Japan is demographics. If they would let in immigrants or if they would have babies, then Japan could be very exciting. But they're not doing that, and they've got to stop spending money. Domestically, Japan is the world's largest debtor nation, and [Prime Minister Shinzo Abe] says he's going to spend even more. It's astonishing to me that in the last decade or so, politicians all over the world have said the problem of having too much debt should be solved with even more debt."

Then we have this article from The Guardian detailing the demographic morass affecting Japan.

The number of single people has reached a record high. A survey in 2011 found that 61% of unmarried men and 49% of women aged 18-34 were not in any kind of romantic relationship, a rise of almost 10% from five years earlier. Another study found that a third of people under 30 had never dated at all. (There are no figures for same-sex relationships.) Although there has long been a pragmatic separation of love and sex in Japan – a country mostly free of religious morals – sex fares no better. A survey earlier this year by the Japan Family Planning Association (JFPA) found that 45% of women aged 16-24 "were not interested in or despised sexual contact". More than a quarter of men felt the same way.

Some experts believe the flight from marriage is not merely a rejection of outdated norms and gender roles. It could be a long-term state of affairs. "Remaining single was once the ultimate personal failure," says Tomomi Yamaguchi, a Japanese-born assistant professor of anthropology at Montana State University in America. "But more people are finding they prefer it." Being single by choice is becoming, she believes, "a new reality".
Is Japan providing a glimpse of all our futures? Many of the shifts there are occurring in other advanced nations, too. Across urban Asia, Europe and America, people are marrying later or not at all, birth rates are falling, single-occupant households are on the rise and, in countries where economic recession is worst, young people are living at home. But demographer Nicholas Eberstadt argues that a distinctive set of factors is accelerating these trends in Japan. These factors include the lack of a religious authority that ordains marriage and family, the country's precarious earthquake-prone ecology that engenders feelings of futility, and the high cost of living and raising children.

"Gradually but relentlessly, Japan is evolving into a type of society whose contours and workings have only been contemplated in science fiction," Eberstadt wrote last year. With a vast army of older people and an ever-dwindling younger generation, Japan may become a "pioneer people" where individuals who never marry exist in significant numbers, he said.

Japan's 20-somethings are the age group to watch. Most are still too young to have concrete future plans, but projections for them are already laid out. According to the government's population institute, women in their early 20s today have a one-in-four chance of never marrying. Their chances of remaining childless are even higher: almost 40%.

The whole article is eye-opening. 

The Gold Standard Before The Civil War

The great Murray Rothbard discussing the gold standard and specie prior to the civil war, via the Mises Institute

Currency Crisis Ahead, It Is a Money Bubble- Alasdair Macleod

This is as the U.S. dollar has broken to 2-year lows. More on this later.

Gold, the Dollar, the Debt Ceiling, and the Fed- Paul

An interview with Ron Paul, a copy of which can be found at Birch Gold here.

Volume Off the High- Oct. 18 Trading Day Edition

The names coming off of highs with volume supports the thesis that the demand will push equity prices higher

High Volume High- Oct. 18 Trading Day Edition

A lot of names in Friday's trading making new highs supported by volume.... some are large and well known companies.