Putting the pieces together...

2CS

2CS is 222 today which is just a tiny bit above the 218 level of September 18 with the SPX 100 handles lower. I won't belabor you with all the technical data but look at good people like Carl Futia: http://carlfutia.blogspot.com/

 

The annual cycle of the Dow, also known as the "seasonal" in futures circles, has its 1928-2008 low date tomorrow, and short term tidal cycles bottomed today. Anything can happen when irrational human beings panic, but bargain buyers with cash can start to buy. Personally I'm too old to do that, so I will wait for a good rally and pullback.

 

 

The BKX (Philly Bank Stock Index) made a low today at the 1/2 level of its range as compared to the 3/8 range level in July:

 

 

Gutsy players are invited to approach the bar.

2CS Makes All-time Top 5

The simple 2CS sentimeter takes the daily CBOE VXO and daily CBOE combined Put/Call ratio, multiplies them, and sums the most recent five days' results.  At the post 9/11 stock low 2CS got to 262 and at the 2002-2003 lows 228, 246, and 165.  1998 was 237.  Today 218.  Ms. Market is in good company for a price low at this time.

 

Also do look at Helge Sundar Loekke's website which you can click to under "Blogs I Like" on the lefthand column. I have followed his work and opinions for 6-7 years and value his work highly. He has a longer term stock market cycle low due in this current two week period.

Res Ipse Loquitur

When long term US Treasury Bonds broke briefly above their 2003 high last night and this past morning, and yields below their 2003 low, the handwriting was on the wall. 2002-2003 was a new beginning of world economic growth or it wasn't.

 

Readers here know that I believe it was. This is not a nationalistic view but a world view. The commodity producing nations have done extremely well since 2002, and on a long term basis so have the developed countries. BRIC and BRIC-like shares are down on average 50% since their 2007-2008 highs. We're all in this together, folks! Forget de-coupling. During the reinflationary up phase from 1999/2002 to the 2020's the world markets are all synchronized. We all grow or die together.

 

Leverage and gambling kill. It's one thing to write insurance and annuities based on valid life expectancies of large populations. AIG and many others in the US and elsewhere began to think they could write insurance on things which have no conceivably believable  life expectancy data: corporate earnings, mortgage payment streams, and many more market-related gambles. And like the "insurance" gambles of 1987, these too proved fatal for the same reasons. If everyone is insured for unpredictable events, then no one is insured, and the insurers are out of luck and dead. But their legitimate insured clients should not be penalized. In the US, insurance reserves are largely fire-walled from corporate balance sheets. When I heard that the extremely defective New York State Government was going to allow AIG to raid reserves, I realized we were at a crucial crossroads. If insurance contracts are not sacred, neither personal nor business life can progress except in very primitive and punitive ways. Planning and budgeting would be history.

 

The recent rank gambling instinct of corporations and insurance companies has to be extinguished! Capitalism isn't about gambling. It's about making money for its investors by prudent investment and management of assets for something that is wanted or needed by customers.

 

I'll not get into blame very far except to say that Washington DC and Wall Street are populated by legislators, regulators, and adminstrators, and financiers, and I don't see any heroes anywhere. Three-fourths of the people running for president and vice-president were there in Washington DC for the past four years at a minimum, and I've heard nothing substantive ever on these important issues from them. Ever! We all listened to Alan Greenspan for many years, smiling perhaps at his inscrutability, unaware of his basic Wizard of Oz incompetence. I was fooled too.   

 

I'm a sceptic, and that has saved my portfolio this past year. Idiots and danger exist. Avoid both. But I also believe, based on long study, that we are in a long term inflationary growth era. I've repeatedly said that corrrections would occur within that trend just as they did within the disinflationary trend from 1979 to 1999/2003. This curent debacle is the equivalent of 1987 which itself was in the middle of a long term disinflationary bull market. That was a bull market for paper assets. This is a bull market for physical assets. If the ultimate paper asset--US Treasury Bonds-- has really finally topped or double topped this week, the future is almost totally predictable for the next fifteen years.

 

 

 

 

 

 

 

 

 

Long Bond Above 2003 Highs Tonight

Tonight the long bond (US, ZB) futures are just above the 2003 high which is a “natural” (Gann) sell point.* If it doesn’t sell here Mr. Market is pretty sure we are going to have a very deep world wide recession or worse.

*The CSI Data Perpetual® 3 month forward futures contract was 122 15/32 on June 16,2003, and December 2008 futures (approximately 3 months forward) have been as high as 122 28.5/32 tonight, and are still above the 2003 high right now. (Green arrow)

Emerging Marred Views?

Cyberfriend and fellow blogger Bill Luby--see "Blogs I Like" on the left-hand column down the page--really made me think a bit harder with this comment at  "Vix and More" on September  11:

 

"If emerging markets are the buffer whose continued growth is supposed to buttress developed markets in this economic slowdown, then emerging markets need to find their own firm ground and soothe anxious investors before they can be expected to lubricate the wheels of the global economy."

 

I've been thinking that the dual myths of emerging markets decoupling from the US and continuous emerging market ascendance are both exploding as many emerging markets are down double the US stock market losses in the past year. Look at CAF, EWZ, or even RSX recently.

 

Several months ago I wrote this post about bonds http://twocents.blogs.com/weblog/2008/07/bonds-galore-and-more.html

 

At that time I recommended reading Societe Generale's James Montier's and Albert Edwards' crucial interview with Kate Welling. It's a bit of a circuitous route to get to it. Go here first:
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2008/07/14/inflation-is-not-the-problem.aspx Then click through to the Investment Postcards site, and finally, if necessary, to Welling@Weeden.

 

I have just re-read that interview entitled "Inflation Not The Problem". Given what's happened in the two months since then it's an even greater shock to me now than it was then. This very thorough interview covers the gamut of markets and economics and technical analysis, and puts the emerging markets and commodities (synonymous in my view) and much else into true perspective. As my readers here know, this year I gradually but decisively cut back in  commodity exposure and was out of all emerging market stocks, mainly China via CAF and general emerging via MSF, last year. Recently I've talked about a "vacation from inflation" but the ripple effects could possibly be greater than a simple short term pullback.

 

It's even more ominous that if the growth trend emerging markets are down harder so far, the US and European markets probably have a lot farther to fall despite all the central banks' maneuvers.

 

If you cannot get to the Kate Welling key interview through the maze, email me, and I'll send you a PDF copy. It's a must read regardless what your opinion is. As always it's what the market does that's most important, but soundly reasoned opinion should always be respected.

Silver

I'd been lightening up considerably on the commodity side this year, particularly so in mid July. Although I'm a long term bull on commodities, I'm still a short to intermediate term bear. I have expected a plateau type correction with a lot of volatility for at least a year from March 2008. But we could be getting to the floor or base of that consolidation range rather soon in some commodities.

 

The silver chart shows the great bull market range from $1.29 per ounce in 1967 to the $40.5o per ounce high (nearby futures) in 1980, and it shows the divisions of that range in classic Gann or Fibonacci measurement. Just as crude oil's 2008 high was almost exactly four times the 1991 high, the 2008 high for silver was almost exactly at one-half the 1980 high. As W. D. Gann wrote and spoke extensivley, nowhere better than in his 1942 book, "How to Make Profits in Commodities", these mathematical occurences are not mere coincidences and in fact are quite common. (The 1951 edition of Gann's book is still in print.)

 

Note that as of today (the chart is through yesterday) silver is less than a dollar from its 1987 high which is also the Fibonacci  0.786 level of the entire 1967 to 1980 level. This could be a good place to cover shorts and/or take first long positions for long term investors or short term traders. This is not a recommendation, which I'm not qualified to make, just my thinking and planning for myself. I don't expect new silver highs this year.

 

Although gold broke its 80 week moving average this week, a bearish sign, silver could still make an earlier bottom as it did in the 1990's.

 

Beware Moral Hazard Fundamentalists

In the current climate of US Federal Reserve Bank and US Treasury actions to contain financial panics, we hear lots of  lips and tongues flapping about the supposed "moral hazard" of helping when panic threatens to freeze up the financial system. These are the same people who are always hoping for a good old-fashioned debilitating depression to burn out the dead wood. Or perhaps they would logically criticize a fire engine company for responding to the site of a burning hotel full of innocent people because there was some suspicion that the hotel owners or operators were negligent.

 

The following is a snippet from a short article on the subject in Financial Times nearly a year ago, written by Lawrence Summers. Due to copyright issues I won't republish the entire article here, but you can safely sign up at the FT site to read for free occasional articles you come across which they have published. This part just below was emailed to me by FT:

 

BEWARE MORAL HAZARD FUNDAMENTALISTS
By Lawrence Summers, Published: September 23 2007 19:35 | Last updated: September 23 2007 19:35
Central to every policy discussion in response to a financial crisis or the prospect of a crisis is the concept of moral hazard. Unfortunately, there is great confusion in many quarters about the circumstances when moral hazard is, and is not, a problem. The world has at least as much to fear from a moral hazard fundamentalism that precludes actions that would enhance confidence and stability as it does from moral hazard itself.
The term “moral hazard” originally comes from the area of insurance. It refers to the prospect that insurance will distort behaviour, for example when holders of fire insurance take less precaution with respect to avoiding fire or when holders of health insurance use more healthcare than they would if they were not insured.
This article can be found at:
http://www.ft.com/cms/s/0/5ffd2606-69e8-11dc-a571-0000779fd2ac,_i_email=y.html
"FT" and "Financial Times" are trademarks of The Financial Times.
Copyright The Financial Times Ltd 2008

 

 

A further snippet of the article was published Nouriel Roubini's site today:

 

"...prudent central banks will make judgments during financial crises not on the basis of “avoiding moral hazard” but rather by asking themselves three questions.

First, are there substantial contagion effects? Second, is the problem a liquidity problem where a contribution to stability can be provided with high probability or does it involve problems of solvency? Third, is it reasonable to expect that the action in question will not impose costs on taxpayers? If the answers to all three questions are affirmative, there is a strong case for public action."

Gold On Long Term Support

I am writing this on Friday afternoon just before the regular COMEX floor close for gold. Since the high in middle March, gold has given back over 25% of its bull market since 1999. At this time constant 2 month forward New York gold futures are resting on the 80 week moving average which has as excellent a record for gold as it does for the S&P500 index. Gold has not closed a week under the 80 week moving average since late 2001, and "seems not to want to" now.  A break here or next week would convince me that this is a bear market and not simply a "healthy" correction.