STALL SPEED : Any Geo-Political, Economic or Financial Event Could Trigger a Market Clearing Fall
As we reported last month, Global Economic Risks have taken a noticeable and abrupt turn downward over the last 60 days. Deterioration in Credit Default Swaps, Money Supply and many of our Macro Analytics metrics suggested the global economic condition is at a Tipping Point. Though we stated "Urgent and significant actions must be taken by global leaders and central banks to reduce growing credit stresses" nothing has occurred even after the 19th disappointing EU Summit to address the EU Crisis. Some event is soon going to push the global economy over the present Tipping Point unless major globally coordianted policy initiatives are undertaken. The IMF recently warned and reduced Global growth to 3.5%. This is just marginally above the 3% threshold that marks a Global recession. This would be the first global recession ever recorded. The World Bank is "unpolitically'projecting 2.5%. The situation is now deteriorating so rapidly, as to be impossible to hide anylonger.
MORE>> EXPANDED COVERAGE INCLUDING AUDIO & MONTHLY UPDATE SUMMARY
MONETARY MALPRACTICE : Moral Hazard, Unintended Consequences & Dysfunctional Markets - Monetary Malpractice has had the desired result of driving Investors into becoming Speculators and are now nothing more than low-odds Gamblers. There is a difference between investing, speculating and gambling. At one time these lines were easy to comprehend and these distinctive groups separated into camps with different risk profiles in which to seek their fortunes. Today investing has become at best nothing more than speculating and realistically closer to outright gambling.
The reason is that vital information is either opaque, hidden or manipulated. Blatant examples such as: the world of off balance sheet debt, Contingent Liabilities, Derivative SWAPS, Special Purpose Vehicles (SPV), Special Purpose Entities (SPE), Structured Investment Vehicles (SIV) and obscene levels of hidden leverage make a mockery out of public Financial Statements. Surely if we get our ego out of this for a moment we can see that stockholders are now nothing more than gamblers? What is worse is that the casino is rigged. With Monetary Policy now targeting negative real interest rates, it is forcing the public out of interest bearing savings and investing, and into higher risk vehicles they would have shunned historically. They have no choice as the Monetary Malpractice game is played against them.
There is an old poker player adage: "when you look around the table and can't determine who the patsy with the money is, it is because it is you." MORE>>
The market action since March 2009 is a bear market counter rally that has completed a classic ending diagonal pattern. The Bear Market which started in 2000 will resume in full force when the current "ROUNDED TOP" is completed. We presently are in the midst of of a "ROLLING TOP" across all Global Markets. We are seeing broad based weakening analytics and cascading warning signals. This behavior is typically seen during major tops. This is all part of a final topping formation and a long term right shoulder technical construction pattern. - The "Peek Inside" shows the detailed coverage available this month.
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Latest Public Research ARTICLES & AUDIO PRESENTATIONS
As of Friday, our estimates of prospective return/risk for the S&P 500 have dropped to the single lowest point we’ve observed in a century of data. There is no way to view this as something other than a warning, but it’s also a warning that I don’t want to overstate. This is an extreme data point, but there has been no abrupt change; no sudden event; no major catalyst. We are no more defensive today than we were a week ago, because conditions have been in the most negative 0.5% of the data for months. This is just the most negative return/risk estimate we've seen. It is what it is.
Hussman's general approach is to look at an "ensemble" of datapoints, and then compare them to previous market periods to see how stocks generally performed after this signals emerged.
He notes that "single lowest point" does not necessarily mean most overvalued (which was in 2000), but merely that the complete ensemble gave the most negative reading.
So what makes this moment so fraught with risk?
Hussman gives a taste of his secret recipe for measuring the market:
Despite the uniformity of negative signals we presently observe, I can’t say with certainty that this particular instance will produce negative market outcomes, or that we won’t find ourselves at odds with a speculative, richly valued, overbought, overbullish but still-advancing market. But even setting aside our particular methods, we have a very mature market advance, at a high Shiller P/E, atop nearly every upper Bollinger band (two standard deviations above the 20-period average at daily, weekly, and monthly resolutions), in an environment of lopsided bullishness. All of this should make bells go off for anyone familiar with market history. Of all the investment adages that are being embraced as reasons to accept market risk, somehow the phrase “buy low, sell high” is conspicuously absent. I expect that this will prove to be a crucial error for investors. In all of the present ebullience about quantitative easing with no ex-ante amount (which I’ll again point out is far different than “unlimited” QE), the market conditions we observe at present have been consistently associated with negative outcomes throughout history.
The chart below shows the S&P 500 since 1928, with blue bars identifying points where 1) the Shiller P/E exceeded 18; 2) the S&P 500 was above its upper Bollinger bands on daily, weekly and monthly resolutions; 3) the percentage of advisory bulls exceeded 45%, with bears less than 27% (sentiment data prior to 1960 is imputed based on the strong post-war relationship between sentiment and measures of price momentum), and; 4) the 10-year Treasury yield exceeded its average over the prior 6-month period. This set of criteria is one of many observationally equivalent ways to define an “overvalued, overbought, overbullish, rising-yields” environment.
It's worth noting that Hussman's fund, due to the fact that it's been so cautious and hedge, has had a very rough run, and is close to post-crisis lows.
That being said, Hussman's general predicament is not that different from many investors who can't abide by this huge rally, but don't want to get creamed by the bull run.
3 - Risk Reversal
VOLATILITY STAGE - The Bridge from RISK On to RISK Off.
Much has been written over the course of the last few days/weeks about what Bernanke could do, has done, and the efficacy of said actions. Inflation, unintended 'energy' consequences, debasement, financial repression, scarcity transmission mechanisms all come to mind but realistically they are all just symptoms of what is really going on. As the following chart from Barclays shows, the real effect of LSAPs is to suppress the signaling effect of macro data from the real economy. During periods of extreme monetary policy, the stock market's beta to macro-economic data surprises is dampened massively - and hence the forced mal-investment and mis-allocation of funds occurs. However, given the now open-ended nature of QE3, this may change with the 'good news/bad news' logic leading to a stronger market (higher beta) response (since all bad news is automatically attenuated by QEternity and thus all the good news is out there).
An important driver of this attenuated market response to economic news was the sense that important elements of the monetary policy framework were ‘in play’, and that policy was likely to respond if the economy weakened sufficiently, but not otherwise. In this context, bad economic news may not seem so horrible, if it is perceived to raise the probability of a market-friendly monetary policy response. In the run-up to June 2011, the question facing investors was whether the Fed would allow QE2 to end in June, in accord with the Fed’s stated intention. More recently, the question has been whether the Fed would put a more aggressive policy in place. But the ‘good news/bad news’ logic was much the same.
It seems to us that this logic will not, however, remain operative in the months to come, since the policy frameworks recently announced by both the Fed and the ECB have no stated end date on which markets can focus (as did QE2), and are not likely to be materially adjusted in response to economic data for some months to come. Economic news may have been a ‘good news/bad news’ story in the recent past. But now that the monetary policy responses to economic weakness are in place, markets have had the good news.
In the future, bad economic data will be, well, just bad, and good news will be unambiguously positive. This should lead to a stronger market response to economic data in the weeks and months to come.
Up until now, the LHD 7 Iwo Jima Big-Deck Amphibious Warfare ship was all alone in the Arabian Sea, patiently awaiting orders to liberate this or that middle east country of their oil reserves. This is no longer the case: launching today in general direction - Middle East - for a brand new 7 month engagement, is the LHA 1 Peleliu Amphibious Ready Group, consisting of the amphibious assault ship, the USS Peleliu which consists of 4000 marines. LHA 1 also comprises of the amphibious transport dock USS Green Bay and the dock landing ship USS Rushmore. Also deploying Monday is the Marine Corps' 15th Marine Expeditionary Unit and elements of Fleet Surgical Team 1, Helicopter Sea Combat Squadron 23, Assault Craft Units 1 and 5, and Beach Master Unit 1. And as we reported previously, the middle east veteran - the CVN 74 Stennis aircraft carrier - was providently already on its way. In other words, in about 2 weeks, the Middle east will be the focal point of 3 aircraft carriers, 2 amphibious assault forces, and who knows how many "developed" world armadas, all hell bent on securing that one extra bit of Middle East oil, under the guise of spreading democracy and liberating the local people who "hate America's for its freedom."
This is how US naval assets stand as of last week via Stratfor:
Also deploying Monday is the Marine Corps' 15th Marine Expeditionary Unit and elements of Fleet Surgical Team 1, Helicopter Sea Combat Squadron 23, Assault Craft Units 1 and 5, and Beach Master Unit 1.
Their departure comes against the background of ongoing tensions with Iran over its nuclear program and amid anti-American unrest throughout the Muslim world triggered by an anti-Muslim film trailer posted on the Internet.
U.S. Ambassador to Libya Chris Stevens and three other Americans working for the State Department -- including two local former Navy SEALS, Encinitas resident Glen Doherty and Tyrone Woods of Imperial Beach -- were killed by an armed force in the Libyan city of Benghazi on Sept. 11 amid demonstrations over the film.
The sailors and Marines in the Peleliu Ready Group recently completed nine months of training scheduled long before the current anti-American unrest flared. Rescue training is a common part of pre-deployment training for Marine expeditionary units.
The final pre-deployment training was on the evacuation of noncombatants from hot-spots, according to U.S military authorities. The exercise included role-players on San Nicholas Island and Victorville in San Bernardino County who were "rescued" by Marines and taken by helicopter to Camp Pendleton, the Los Angeles Times reported.
The 15th MEU was on a deployment similar to the one starting Monday when the Sept. 11 terrorist attacks occurred. Summoned back to their ships from a port-call in Australia, the Marines were among the first U.S. combat forces into Afghanistan just weeks later, The Times reported.
Bullish Brent calendar spreads may be cheap to quite cheap once all this firepower finally arrives at its soon to be liberated, pre-election destination.
Having trouble keeping track of how many countries have now officially rebelled against Pax Americana in the past week? Here is your handy one-stop resource to keep you abreast of all the latest in the embassy storming fad.
Click to Enlarge
Since the map above is as of September 13, don't forget to add Afghanistan and now Pakistan. And further details courtesy of AP:
Hundreds of protesters demonstrating against the film torched a press club and a government building in the northwestern town of Wari, setting of clashes with police that killed one demonstrator and wounded several others.
Hundreds also clashed with police for a second day in the southern city of Karachi as they tried to reach the U.S. Consulate there. Police lobbed tear gas and fired in the air to disperse the protesters who were from the student wing of the Jamaat-e-Islami party. Police arrested 40 students, but no injuries were reported.
Demonstrations turned violent outside a U.S. military base in Kabul, where about 800 protesters burned cars and threw rocks at Camp Phoenix. Many in the crowd shouted "Death to America!" and "Death to those people who have made a film and insulted our Prophet."
Police fired into the air to hold back about crowd and to prevent it from pushing toward government buildings downtown. More than 20 police officers were slightly injured, most of them hit by rocks. Protests also broke out along the main thoroughfare into Kabul, where demonstrators burned shipping containers and tires. The crowd torched at least one police vehicle before finally dispersing.
Hundreds clashed with police outside the U.S. Embassy in Jakarta, hurling rocks and firebombs and setting tires alight. It was the first violence seen in the world's most populous Muslim country since international outrage over the film exploded last week. Eleven policemen were rushed to the hospital after being pelted with rocks and attacked with bamboo sticks, while four protesters were arrested and one was hospitalized.
Demonstrators burned a picture of President Barack Obama and tried to ignite a fire truck parked outside the embassy after ripping a water hose off the vehicle and torching it, sending black smoke billowing into the sky. Police used water cannons and tear gas to try to disperse the crowd as the protesters shouted "Allahu Akbar," or God is great, and burned a U.S. flag. Demonstrations were also held in the cities of Medan and Bandung.
Iran's top leader urged the West to show it respects Muslims by blocking the film. Ayatollah Ali Khamenei said Western leaders must prove they are not "accomplices" in a "big crime." Khamenei was quoted on state TV as noting that some nations place restrictions on expression, such as banning Nazi-related sites.
An al-Qaida-linked Egyptian jihadist, Ahmed Ashoush, issued a religious edict, or fatwa, saying it is justified to kill anyone who took part in the making of the prophet film.
Ashoush, who was believed close to Osama bin Laden and al-Qaida's current No. 1, Ayman al-Zawahri, heads the relatively obscure "Jihad Group." His edict, posted on a militant website, says the blood of the participants in the movie "should be shed, including the producer, the director and the actors" and that "their killing is a duty of every capable Muslim."
Several hundred Palestinians held a peaceful protest in the city of Ramallah against the film. Men stood on one side, chanting, "We will sacrifice for you, oh Muhammad." Women wearing headscarves stood on the other side, holding up large posters in Arabic, including one that read: "The Prophet is more important than my family."
UNITED ARAB EMIRATES
The country's telecommunication regulator said it has blocked access to the video and urged users to report any existing links to the country's Internet providers. Internet users in the Emirates searching by name for the film on YouTube, for example, now get a standard page used for other censored sites in the country saying "this website is not accessible in the UAE." There are loopholes, though, since YouTube itself is not blocked and it is still possible to view the film by clicking recently posted links found within the site.
"when things are this senseless, a reversion to sensibility will occur again at some point."
His view is to be long vol and as the disconnect between the economic cycle and stocks continues to grow, we present three mind-numbing charts of the exuberant hopefulness that is now priced in (oh yeah, aside from AAPL actually selling some iPhones in pre-order). Whether it is earnings hockey-sticks, global growth ramps, or fiscal cliff resolutions, it seems the market can only see the silver-lining. We temper that extreme bullish view with the fact that all the monetary policy good news has to be out now - for Ben hath made it so with QEternity.
These three factors - weak economic growth, powerful monetary policy and elevated public policy uncertainty - remain the critical drivers of performance and with weakening data, the market is all the more dependent on central bank life support - and following the rally through the Fed signalling period to 1460, much of the monetary policy related rally seems to be priced in, with the market already discounting considerable data improvement. With already high oil, gasoline and food prices, the Fed’s balance sheet expansion risks driving down the dollar, boosting commodities and dampening consumption and thus growth.
As this chart comparing P/E multiples to the ISM New Orders index, we need to see some serious unicorn-conjuring for these valuations to be sustained...
One tool often utilized to assess the attractiveness of equities relative to other assets is the equity risk premium (ERP), also known as the Fed model or the difference between the forward earnings yield and the yield on the 10 year U.S. Treasury. We have argued, based in part on the prior period of extreme financial repression in the U.S. following WWII, that a sustained contraction in the ERP and expansion of the PE multiple was unlikely until the Fed began the policy normalization process. Integrating inflation and a ratio of stock to bond market volatility paints a far less compelling picture for equity market valuation. We are at least 3 years from any normalization of Fed policy (according to them) and thus...
the following chart (or real rates vs P/E multiples) suggests current valuations are unsustainable at best, or down-right crash-worthy as you simply can't fight the cash-flow forever...
The reach for yield and safety has led investors to push into mega caps - defensive ingredients including lower betas, lower earnings volatility, and lower P/E multiples as well as higher dividend yields. This has pushed the relative median P/E of the mega caps notably above smaller (and higher beta) stocks - as the somewhat odd beta-defying rally of the last few weeks took hold...
Our point here is that 1) the spread between LTM and NTM PE is gaping (something that we saw in the run-up to the peak in 2008), and 2) that the mega-caps which dominate the indices (which everyone watches including Ben) are 'over-valued' rightly or wrongly relative to less-defensive stocks... leaving plenty of room for rotational risk-off as well as reality disconnects
On balance, Barclays are less bullish than they were at this time in either of the last 2 years. Investors seem to mis-remember history; monetary policy was not the only driver of the rallies following QE2 and Operation Twist. In the signalling period prior to QE2’s launch, and in the immediate aftermath of its commencement, both the economic and public policy outlooks were improving.
[They] remain relatively cautious given a weaker economic outlook and no clear trend in the polls to provide confidence that the U.S. can avoid the potential massive tax hike scheduled for January 1, 2013
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Sept 16th- Sept. 22nd, 2012
The recent position of the Fed was spelled out and will be enacted. You may be happy, unhappy or camped in between but they will do exactly what they have said they are going to do. This is a Continent apart for the recent announcement of the ECB and should be noted. The European Central Bank waved the banner of “unlimited” and “without cap” subject to the CONDITION of the EU’s acceptance and audits and the approval of any nation applying for aid. It may not have dawned upon you or most of the world but the ECB may never do anything as a result of the yoke that it placed upon itself; nothing at all may ever happen. If the Austrians and the Dutch are to be taken at their word and no more of their money is going to be used to bailout other nations then all of the fluff raised upon giant banners may be no more than flags waving in the wind. The strategy has worked to date and driven down interest rates but when people figure out that the condition is actually an impediment; the winds may begin blowing in the other direction. If “A” depends on “B” and “B” is not forthcoming then “A” is a worthless proposition.
Tell no one that I told you though. It could cause indigestion in Brussels and their food is rich enough now and costly enough for the other nations in Europe. It is a funny thing you know; when a promise made is not a promise kept then Pandora jumps about with her little box of miseries.
“Let the key guns be mounted, make a brave show of waging war, and pry off the lid of Pandora's Box once more.”
Far more important to most Americans than the interest rate on their mortgages is how much they have to pay to fill up their cars. This is true, I think, for the group affected by both costs but the amount of people in the United States that have no mortgages and still have to pay for gas to go to work and the grocery store is a far larger amount of people than those that own houses. Further, the amount of time necessary to lower mortgage rates is a much longer proposition than the time it takes to raise prices at the gas stations. With oil hovering around $100.00 and likely to go higher as a consequence of the Fed’s recent actions; trouble may be brewing.
Even without Bernanke’s recent move the price of gas has escalated dramatically. Regular gas, since July 1, has risen 54 cents to $3.87 which is a 14% move up in just two and one-half months. It is now highly likely, in my view, that regular gas will reach $4.00/gallon and move higher from there. This will cause a hue and a cry from the streets and the Press will turn its attention to this and the Fed and Mr. Obama may well get blamed for this outcome and hence the “unintended consequence” swings fully into view.
22 - Oil Price Pressures
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
TECHNICALS & MARKET ANALYTICS
REAL VERSUS NOMINAL: Hyperinflationary Germany Tells the Story
A century apart and a continent apart. With Bernanke's fingers now glued on CTRL-C, perhaps the reality of these two charts suggests it's really not different this time at all...
Chart 1 - GERMAN REAL STOCK MARKET 1914-1927
Chart 1 is the real value of the German stock market from 1914 to 1927 (and the lower chart is the nominal price)
Chart 2 -The GERMAN Wealth Effect
Chart 2 is the real value of the Dow Jones Industrial Average from 1999 to Present (real = adjusted for the value of Gold)
Can you identify what is being charted in each of these images?
Doing so may help to lift the veil of Bernanke's (and Draghi's) Grand Plan.
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