Now, the rubber meets the road for Kuroda, the monetary policy dove selected by recently-elected Japanese Prime Minister Shinzo Abe to lead the charge from the BoJ, which has to do a lot of the heavy lifting.
An increase in the size of the Bank of Japan's quantitative easing program,
A directive to start buying longer-dated bonds as part of those asset purchases,
A cut in the interest rate the central bank pays on excess reserves, and
Stepped-up purchases of risk assets like ETFs.
Below is what BAML analysts Shogo Fujita, Masayuki Kichikawa and Shuichi Ohsaki predict for Kuroda's meeting.
Announcement of early introduction of an open-ended framework (FY13).
A suggestion of a forward-guidance framework. (such as “easing to continue until a 2% inflation target is feasibly attainable”)
Announcement of elimination of the banknote rule and unification of JGB purchases through the APP and rinban operations. (We expect the APP will be maintained for risk assets, integration will depend on the construction of procedural systems i.e. will not be immediate)
Extension of the central JGB purchasing zone to longer maturities (with the shift to full rinban this is fully expected, extension to 10 years, plus small rinban increases in the 10- to 30-year range expected, the BoJ may defer announcement of details/technicalities for a later date).
After unification of JGB purchasing operations, an increase in the current monthly purchase amount from slightly under ¥5tn to ¥10tn (possibly with a move to net purchase targets like the FRB, implementations and details may come at a later date).
Announce gradual elimination of fixed-term funding operations. (A shift to JGB purchases likely. This would make it unnecessary to lower the IOER. Implementations and details may come at a later date.)
Announcement of the BoJ’s intention to increase purchases of risk assets such as such as ETF, J-REIT, corporate bonds, and CP. (Details to be provided at a later date, but the BoJ’s capital will have to be reinforced or BoJ will have to receive a government guarantee against losses if it is to increase risk asset purchases. We believe the most credible option is for the APP to handle only risk assets and for the government to provide a first-loss guarantee scheme for the APP up to a certain amount
Deutsche Bank analyst Makoto Yamashita says the market will "hinge on the details" of the meeting.
"We expect BoJ Governor Haruhiko Kuroda to emphasize a regime shift at the Bank, which is likely to become a catalyst for yen depreciation and a rise in stocks," says Yamashita.
That would be welcome news for investors betting against the yen, which is expected to continue falling as a result of Abenomics policy initiatives, but has found a bit of support in recent weeks, effectively stalling one of the most popular currency trades in the world.
However, most agree that the market is already expecting so much of Kuroda and the BoJ that the outcome of this press conference has probably already been discounted.
"The market is already positioned for boldness, with the largest speculative short JPY position since the heyday of the yen-funded carry trade in mid-2007, according to CFTC data," says Société Générale analyst Alvin Tan. "We remain on the sidelines in JPY for the short-term."
Deutsche Bank strategist Taisuke Tanaka agrees.
"The markets have largely discounted these possibilities," Tanaka writes in a note to clients today. "Thus, we believe the new regime's decision will not spark a second 'Abe market' (i.e., a repeat of the market upsurge following the election victory of Prime Minister Shinzo Abe) and may disappoint markets."
Economic risk: SPX has lined up very well initial jobless claims for the past 5+ years but has recently overshot by quite a bit.
SPX versus INITIAL JOBS CLAIMS
"HIGH QUALITY" RISK
High quality risk: the BAML Global Financial Stress Index, which attempts to measure stress in areas such as solvency and liquidity, price momentum, and short term volatility. This is the first time it has broken significantly below equities in over two years.
SPX versus GLOBAL FINANCIAL STRESS INDEX
"LOW QUALITY" RISK
the Markit CDX North America High Yield Index tracks CDS for 100 non investment grade debt issuers. This has been an extremely tight relationship.
SPX versus Markit CDX North America High Yield Index
Today, lets look at another interesting data point from AAII: Cash allocations reached a 16-month high in March. Individual investors pulled money from both equities and bonds last month.
We have shown the flip side of this chart in the past — equity allocation — which is similarly moderate.
Equity allocations fell 3.0 percentage points to 59.5% in March. Surprisingly, the past 15 months have not seen much variation in equity allocations stuck in a range from 58.8% (June 2012) to 62.5% (February 2013). The historical average is 60%.
March AAII Asset Allocation Survey results:
• Stocks Total: 59.5%, down 3.0 percentage points
• Bonds Total: 17.7%, down 1.5 percentage points
• Cash: 22.8%, up 4.6 percentage points
Since 1966, inflation-adjusted annual income for the bottom 90% of Americans increased just $59, while the 1% increased income average by $625,000, and the 1% of the 1% increased average incomes by $18,700,000 per year.
Pulitzer Prize-winning tax journalist David Kay Johnston reports IRS tax data since Mr. Obama’s 2009 inauguration shows “change” for 90% of Americans: they lost income. The 1% increased income; taking 81% of gains (the top 1% of the 1% took 39% of this total).
This follows a pattern that between 1980 and 2005, the 1% also took over 80% of all income gains.
Since 1966, inflation-adjusted annual income for the bottom 90% of Americans increased just $59, while the 1% increased income average by $625,000, and the 1% of the 1% increased average incomes by $18,700,000 per year.
If you’re ready for solutions rather than death to millions, harm to billions, and looting of trillions: now’s the time to take all the lawful action previous generations have given you under the US Constitution.
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Mar. 31st - Apr 6th 2013
JAPAN - DEBT DEFLATION
EU BANKING CRISIS
EU - Policy Shift Threatens the View of Bank Deposits
In Luxembourg, leaders are warning that applying the Cypriot bailout model -- a levy on bank deposits -- to other crisis-plagued countries could lead to a flight of investors from Europe. But the EU is considering the option anyway.
The debate over this week's "bail in" of bank account holders in Cyprus as part of the country's debt crisis bailout is continuing to simmer in Europe. In Luxembourg, Finance Minister Luc Frieden has warned that the example set in Cyprus by taxing people holding €100,000 ($129,000) or more in their accounts could drive investors out of Europe.
"This will lead to a situation in which investors invest their money outside the euro zone," he told SPIEGEL. "In this difficult situation, we need to avoid anything that will lead to instability and destroy the trust of savers."
Earlier this week, Euro Group President Jeroen Dijsselbloem sparked an enormous controversy after stating that the solution found in Cyprus could be applied throughout the euro zone in the future.
The remark triggered immediate criticism from his predecessor as head of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker. "It disturbs me when the way in which they tried to resolve the Cyprus problem is held up as a blueprint for future rescue plans," Juncker told German public broadcaster ZDF earlier this week. "It's no blueprint. We should not give the impression that future savings deposits in Europe might not be secure. We should not give the impression that investors should not keep their money in Europe. This harms Europe's entire financial center."
But in the European Parliament, politicians are considering ways to make banks bear greater responsibility for their own financial problems. Lawmakers are considering the European Commission's proposed banking resolution legislation for faltering financial institutions. The discussion includes the possibility of future compulsory levies on major depositors, although it is more focused on placing greater responsibility for risks on other investors in banks.
"We want to clearly strengthen the position of deposit customers," said Swedish European Parliament member Gunnar Hökmark. Under the proposal, deposits of up to €100,000 would be excluded from any loss participation at a bank. Any deposits over that amount would only get hit if the losses couldn't be fully covered through a bank's shareholders and other creditors.
'Societal and Political Acceptance Is Ending'
The EU currently guarantees all deposits under €100,000, but this policy was called into question two weeks ago after the finance ministers of the euro zone decided to make small-scale savers contribute to the bailout of the Cypriot banking sector. Ultimately, Cyprus issued a one-time levy only against depositors with €100,000 or more in their accounts, the first time that personal bank accounts have been hit in Europe as part of a formal bailout package.
Under current EU policy, private creditors will not be required to cover banking imbalances until 2018. But in Germany, Andreas Dombret, a board member of the Bundesbank, the country's central bank, would like to implement the new rules much sooner, by 2015. And Carsten Schneider, the budget policy expert for the opposition center-left Social Democrats, says he believes the rules for winding down banks should be implemented as soon as 2014.
"Societal and political acceptance is ending for the model of bank rescues in which the state protects bond holders and major investors," said Schneider.
4- EU Banking Crisis
THE CYPRUS IMPACT - Crumbling EU Foundation Principles
The euro’s core founding principles, based on the Maastricht Treaty’s:
1- “irrevocable” fixing of currency rates, and of
2- the free movement of capital, have been violated.
According to Barclays: From a European perspective, the list of broken taboos and assumptions continues to grow. It includes:
1. EU sovereign debt cannot be restructured: broken by the Greek PSI.
2. Senior bank debt-holders cannot be bailed in: broken several times with respect to banks in Denmark, Ireland and now two Cypriot banks.
3. Depositors are sacrosanct: broken by Cyprus – deposits greater than the formal guarantee (EUR100k) in the two biggest banks, with EUR4.2bn of uninsured deposits in Laiki Bank set for a large haircut of unknown size, and Bank of Cyprus deposits set for a haircut of around 35% according to several news reports (eg, Economist, Reuters).
4. Depositors should not be punitively taxed: broken by the Cypriot government and implicitly endorsed by the EU, but vetoed by the Cypriot parliament.
5. If capital controls are applied in the euro area, it is ‘game over’: broken by Cyprus – banks were shut for nearly two weeks; draconian controls of uncertain duration have been imposed.
6. Discussion of a euro exit is ‘off limits’: already it is apparent that euro exit was discussed with respect to Greece during H1 12; this topic again re-emerged last weekend with respect to Cyprus.
7. The EU can rely on the IMF to be sympathetic in providing financing without haircuts, even for countries with high public debt: from the Greek and now the Cypriot experience, the Fund is evidently evaluating new programmes more critically, particularly when debt/GDP ratios rise above 100%.
The euro will never be the same again; its preservation now depends urgently upon economic recovery. Without the delivery of economic growth, unemployment will rise to yet higher post-war record levels, and the widespread and growing disillusionment felt by EU citizens towards their economic regime will threaten to spill over into more explicit questioning of the euro’s suitability.
It would appear that between the historical revisions of over-optimistic initial prints in macro data in the last few months and the reality of the weakness in Europe; the global economy is in Slowdown. Goldman's Swirlogram has now seen its Global Leading Indicator in the 'slowdown' phase for two months as momentum fades rapidly and seven of the ten major factors in the index declining with Global (Aggregate) PMI, and Global New Orders-less-Inventories worsening. Quite comically, the three factors providing some positivity are the Baltic Dry Index (which we are told is irrelevant when it drops), Japanese Inventory/Sales (which improved but remains at depression-era levels), and US initial jobless claims (which have become a farce statistically from what we can tell). Of course, none of this macro reality matters for now - until it does that is.
The red arrows show the relative size of adjustments from the initial estimates...
and the last 3 days have seen the biggest drop in US macro data in 9 months...
Long-term growth conditions in Spain, Italy and France are as weak as they have been (other than during wartime) in over a century. The chart below tells the story. As JPMorgan's Michael Cembalest notes, while European sovereign debt spreads have rallied across the board, European bank lending to households and businesses is still declining, and the cost of small business loans in Italy and Spain is higher than both real and nominal growth. With ECB policy now clearly useless given Europe's fragmentation, and with Germany's forward expectations rolling over, it is hard to see how, absent wholesale devaluation and/or inflation (or as Cembalest notes destruction & rebuilding), Europe will recover from this.
11 - Shrinking Revenue Growth Rate
SENTIMENT - Small Investors Edging Into Market Afraid to Miss Rally
The market's record-breaking spree has raised a new fear in many American households—dread that they are missing out on big gains.
When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling "sucker punched," she says, they swore off stocks and put their remaining money in a bank.
This week, as the Dow Jones Industrial Average and Standard & Poor's 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.
"What really tipped our hand was to see our cash not doing anything while the S&P was going up," says Ms. White, a 39-year-old dermatologist in Houston. "We just didn't want to be left on the sidelines."
So far this year, U.S. stock-focused mutual funds—the traditional domain of mom-and-pop investors—have taken in a net of $33.6 billion, according to Lipper.
That is a small reversal compared with the $445 billion that they pulled from domestic stock mutual funds from 2007 through the end of 2012.
Many on Wall Street think that trend will likely accelerate in coming months, particularly if the stock rally continues.
So far, most of the gains have been powered by big institutions and professional traders, whose buying helped push the blue-chip Dow to a gain of 11% in the first quarter of the year, which ended last Thursday.
That rally, which also pushed up the S&P 500 to a record last Thursday, is the best start for the Dow since 1998.
Providing some comfort to small investors are fading concerns about the health of the U.S. economy. While growth is far from vibrant, unemployment is falling. Crucially for individual investors, the values of homes—the biggest single investment for most Americans—have started to inch higher. Corporate profits are at record levels, and confidence is rising among consumers and businesses.
But there is nothing like bad returns to scare away investors, and good ones to bring them back.
After the long bull market of the 1980s and 1990s, the first 10 years of this century have become known on Wall Street as the "lost decade." The S&P 500 finished 2009 down 24% from where it was a decade earlier, thanks to a pair of vicious bear markets.
First came the collapse of the technology stock bubble starting in March 2000, which saw the S&P 500 tumble 49% to its nadir in October 2002. Then from its peak just before the financial crisis in October 2007, the S&P 500 slid 57% to its March 2009 low.
22 - Public Sentiment & Confidence
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
We noted last night the 'six charts' that represent the sum total of the hopefulness of these markets with relation to fundamental earnings but it is the ratio of negative to positive earnings guidance - which stands at a record high - that should worry investors the most (and doesn't). As the WSJ notes, in the last bull market, the negative corporate guidance ratio hit a peak of 2.38 in the third quarter of 2007 - just as that bull market was ending (and troughed at 0.97 right as the bottom was in in stocks in Q1 2009). The current 3.55 ratio is the highest on record. But what is more representative of the market's absolutely sanguine nature is that just 2 days after guiding earnings down, stock prices are down just 0.3% (and half the stocks actually rose). As the WSJ concludes, and we tend to agree, watch out. There may be a nasty drop on the other side of this wall.
As the first quarter drew to a close, 86 companies in the S&P 500 issued negative guidance for what they expect to report in earnings for that period. Just 24 issued positive guidance. At 3.58 negative updates for every positive one, that is by far the highest ratio since FactSet began tracking such data in 2006.
A look at consensus earnings-per-share expectations for the companies with the 10 highest weightings in the S&P 500—making up close to a fifth of the total—shows a similar pattern. Relative to where forecasts stood at the start of the year, they have fallen for seven and risen for three.
Ignore corporate worrywarts at your peril. In the last bull market, the negative corporate guidance ratio hit a peak of 2.38 in the third quarter of 2007—just as that bull market was ending. Meanwhile, one of the lowest ratios of negative guidance, 0.97, came during the second quarter of 2009, when many analysts and investors still were very pessimistic and stocks hit a 13-year low.
Investors' reaction to recent guidance shows they may be too sanguine. FactSet notes that the average stock-price change from two days before to two days after the announcement of negative guidance has been a drop of just 0.3% this quarter. About half of the stocks involved actually rose.
Conversely, companies issuing positive guidance had larger-than-typical gains on average, although this figure was pulled higher by Netflix, which rallied by two-thirds
A rather skewed distribution in asset returns Year to Date (through March 31), with the winners so far i) the Nikkei, in both JPY and USD terms, on endless jawboning out of the Japanese political apparatus that it may do virtually anything - although in a few hours we will see just what the BOJ actually will do, the S&P on the $85 billion in monthly liquidity injections, and finally the FTSE on expectations the arrival of yet another Goldman central planner will unleash yet another epic episode of monetization in July, just as the Japan effect is fading.
The losers: pretty much everyone else. (BitCoin was not included in the sample).
Miller Tabak Chief Technical Market Analyst Jonathan Krinsky says "the cracks in the market appear to be growing, with the small-caps and transports severely underperforming."
Doug Kass says the same thing today, pointing to "subsurface weakness" in the market.
Here are a few points Kass highlights in his note:
The Russell 2000 underperformed on Monday (-1.3%) and was down (-0.5%) on an up day on Tuesday.
The advance/decline line is eroding as the market's rise narrows.
Breadth disappointed – yesterday, NYSE decliners eclipsed advancing issues by over 200, excluding ETFs and fixed-income closed-end funds.
The number of new 52-week highs is narrowing.
The bank stocks/brokerages are lagging.
Transports trailed, down 1.5% and 1.2% on the first two days of the week, respectively -- check out the chart of FedEx (FDX).
Semis got schmeissed (-2.0% on Monday and -0.8% on Tuesday).
The cyclical index dropped by -0.7% on Tuesday, following a 1.2% decline on Monday -- check out the chart of Caterpillar (CAT).
The yield on the 10-year U.S. note remains low (1.86%) and is signaling slowing domestic economic growth -- speaking of the bond market, this week brought a continued disconnect between Treasury note and bond yields (lower by 3 to 4 basis points) compared to the market averages (slightly higher in price).
"It is an unusual market feature when defensive stocks are among the leading groups in a market moving to new highs," says Kass.
On the other hand, Phoenix Partners Group Chief Equities Strategist Michael Block doesn't think these signals are necessarily anything to worry about.
"As for the argument that defensives have led, my advice is to think about what quant factors might be leading those stocks higher here," says Block. "There are style, size, and fundamental factors there that are likely the cause... and it has nothing to do with them being hiding places."
Block points out that Russell 2000 outperformance is still trending up despite recent weakness, and that he considers these technical factors "an early warning sign and nothing to jump in against with both feet."
ANALYTICS - Weakness Below the Headline Numbers - 2
Small-cap stocks have been lagging the market recently.
Miller Tabak's Jonathan Krinsky brings this to clients' attention today, writing, "Generally, when the small-caps show relative weakness vs. the large caps, it is a sign that investors are moving out of the riskier/high-beta names and into the 'relative safety' of the large/mega-caps."
Perhaps the best way to see this rotation out of small-caps and into large-caps is by charting the ratio of the Russell 2000 (a small-cap index) to the Dow Jones Industrial Average (an index of large-caps).
When the ratio goes down, investors are moving into bigger, safer names. That's what is happening right now.
Krinsky points out that this ratio peaked in February 2012, before the S&P 500 ultimately peaked in early April, as shown by the arrows in the chart below.
The chart also shows that the Russell 2000/DJIA ratio has peaked again and appears to be headed lower.
"This is by no means a guarantee of a market top of course," says Krinsky. "We saw this ratio plunge from July to August 2012, even as the S&P grinded higher."
This time, it might be saying something prescient, though, given the fact that the market rally hasn't really faced a major test yet.
"When put in context, however, and combined with many of the other factors we have been highlighting, it should certainly be given some consideration," says Krinsky.
In a new note, Gluskin Sheff's David Rosenberg that it is "exciting" to see the S&P 500 hit an all-time high, but that "beneath the veneer, some signs of 'nonratification' or at least 'overbought' readings are starting to take hold." He offers 10 reasons:
Too much exuberance - Many are repeating the mistakes seen during the highs of 2001 and 2007 and believe things are good, because of the way the stock market is currently performing. "One must wonder if this is a classic case of performance chasing at the highs. Those jumping in now after a give year period in which the major averages have soared 135% and without the major components of the economy having fully recovered could end up being a classic case of bad timing."
Volume - The average daily volume for March is about 12 percent lower than year ago levels.
50-day moving averages - "There has been a deteriorating share of NYSE-traded stocks trading above their 50-day averages in recent weeks… in other words, leadership is narrowing."
Insider selling - Corporate insiders have been some of the biggest sellers in the past few weeks.
Defensive sector are seeing highs, not cyclical stocks - "It is very rare to achieve new highs with defensive sectors that shield investors from recessionary pressures dominating the leadership board, like Healthcare and Consumer Staples, while economic sensitivities like Tech and Materials rise the rear."
Bulls are investing cautiously - "Leadership has come from defensive sectors such as Consumer Staples and Healthcare, along with high dividend-paying stocks. If bulls are backing recovery, they are investing cautiously." In Q1, the Dow was up 11.3 percent, the S&P 500 was up 10 percent and the Nasdaq was up 8.2 percent.
Rising short positions - NYSE short positions went up 2.4 percent in the first half of March.
Historical trends - In each of the past three years, first quarter rallies are followed by "a stutter and sputter well into the summer months."
Buying power is nearly maxed out - "Portfolio managers only have an average of 3.7% of cash on hand relative to equity assets under management."
Dow Theory advocates are silent - At the start of the year, Dow Theorists were looking at transportation stocks and seeing 'buy' signals, but, these stocks have come off their highs. "I don't want to take this too far, but the weekend WSJ does quote the legend Richard Russell as saying that a move in the Down Transport index to 6,100 from the current 6,255 level would be a vivid signal that the overall market has topped out (so at least we have some time then in order to make a judgment call, at least based on this indicator).
The markets closed out the first quarter of 2013 with a big rally and the bulls seem to remain in charge. The Dow Jones Industrial Average (DJIA) is up more than 11% and the S&P 500 is up 10% so far in 2013, and they are both at all-time closing highs. We recently gave our synopsis showing the road map for the bull market to continue in April, but we also want to be open to the obvious and less obvious risks. Unfortunately for the market bulls, there are two sides to a coin.
24/7 Wall St. wants to cover the other side of the bull market coin. The saying goes, “Bull markets often crawl up a wall of worry.” Here are 10 serious considerations that those of us who remain bullish on stocks need to keep in the back of our minds. We have looked at the year-to-date changes for much of the analysis, and historical data or color has been added elsewhere.
1. The Ticker Tape and Market Internals: For starters, when markets hit all-time highs, the ticker tape and market internals come into focus. The S&P 500 took more than two weeks of challenging the all-time high before closing above it, even though the DJIA already had broken out. In fact, it looks like the S&P was within 10 points of the all-time closing high for almost three weeks before punching through. Some may question that the ticker tape is not as strong as you might expect. DJIA stocks are up year-to-date by a ratio of 14:1, but the S&P ratio is close to 7:1 year-to-date. Capital inflows into stocks have been monumental, but they seem to have slowed. Even with the normal bump at the end of a month and start of a month from 401K monies, what if that starts to peter out? It takes money to make money, and it actually does require inflows to keep driving up stock prices. What if the “sell in May and go away” theme comes early this year?
2. The European Follies: That darned European situation just refuses to go away. First it was all the woes of the PIIGS (Portugal, Italy, Ireland, Greece, Spain). But in 2013 suddenly Cyprus matters. This inconsequential island nation is just not very relative. Outside of being an offshore banking mecca and a tourist destination, and having a British naval base, this nation should have no importance at all. Unfortunately, that is now the world we live in. Imagine if Spain, Italy, Portugal or Greece were suddenly back in the soup. They at least matter compared to Cyprus. A Dow Jones headline caught our attention: Greek Retail Sales Plunge 15.7% as Country Enters Sixth Year of Recession. Any new spike higher in interest rates around the PIIGS, or any other unwelcome growing anti-austerity measures, could tip Europe again. If Europe unexpectedly gets far worse again all of a sudden, kiss our great U.S. bull market bye-bye.
3. Employment and Economic Reversals: What if the employment data really does get wrecked by the spending sequestration? This is a low probability because sequestration was really just cutting the growth of spending rather than cutting actual spending. But what if employment just reverses again? The validity of the 7.7% unemployment rate from February can be debated, but that was still the best reading in four years. What if companies just start laying workers off or have furloughs for, say, the entire slow summer period? It seems unlikely, but it is possible. The equity markets would not respond positively if the official unemployment rate gets back up around 8%.
4. QE-Exhaustion: Ben Bernanke and friends are printing up more money than you can fathom. The bond buying alone is $85 billion or so per month in the United States. Throw in whatever the Japanese are doing now to end their two-decade period of no inflation and no growth. What if the funny-money stimulus measures start to end or taper off? This is not expected, but you cannot imagine that the central bankers really will live up to their promise of signaling when the end or tapering will come about. Bernanke likely will not say, “Soon, soon, getting closer, getting much closer, almost there, really almost there, OK NOW!” The market has many theories about how global quantitative easing will end. No one really knows, but if not handled properly it could be shocking.
5. International Bad Boys: The United States and the developed world have two serious bona fide financial enemies. A nuclear Iran is something that no one wants. What happens when the world wakes up to the headline “Iran Successfully Tests First Nuclear Bomb” one day? Then there is North Korea. The new leader, Kim Jong Un, has just stepped up his saber-rattling with more nuclear threats. They cannot afford to give their citizens enough food, but they can still threaten to use their nukes. Iran and North Korea remain risks, and they are likely secular risks. And what about America’s other nemesis? Al Qaeda and other offshoot terrorist groups are still a threat. We will no given them any ideas to consider, but neither will we ever forget them as a risk.
6. Bank and Financial Regulation: Investors still want to talk up bank stocks. Meredith Whitney says Bank of America Corp. (NYSE: BAC) will hit $15 and Dick Bove says it will hit $30. But what about the Dodd-Frank implementation and the Volcker Rule? What if the banks really do have to stop trading in the financial markets? There are trillions upon trillions of dollars of over-the-counter derivatives still outstanding that would have to be unwound. Maybe the regulation is more ruse and threat than real, but this remains a risk. Congressman Peter Defazio is out with yet another trading tax as well. What if that socialist effort takes on more steam this time around because Defazio became less stupid by proposing a watered down tax effort this time? It seems unlikely, but that is another risk to the banks.
7. Earnings Season: What if earnings season starts out poorly? Alcoa Inc. (NYSE: AA) kicks off earnings season, and it may be very short of “with a bang” this April. Alcoa is down 1.5% so far in 2013, while the S&P 500 is up 10%. How great are its earnings expected to be? Many other companies may report what are very choppy earnings in the first quarter. All of those preparations for the fiscal cliff had some lingering effect in the business world, even if the stock market discounted it. Then there was sequestration of the federal budget, which may still have some impact even if it is the cutting of spending growth versus actual spending cuts. See below about the dollar, but currencies could alter guidance negatively as well. Many companies could have very choppy earnings. Oracle Corp. (NASDAQ: ORCL) was a disappointment that the market was not braced for. What if there are more of the major DJIA and S&P 500 stocks that have unexpected negative news lurking?
8. King Dollar: U.S. companies hate when the U.S. dollar strengthens too much. Japan decided that Johannes Gutenberg’s Bible-printing efforts could be applied to the yen. The demise of the yen has taken it from about 78 yen/dollar in October up to 96 before settling in at about 94 for the end of March. The Europeans just cannot keep things marching smoothly for more than a month or two at a time it seems. In January the euro rose to above $1.36, but now it is closer to $1.28, and the chart still points as though $1.25 or even $1.20 are possible. A strong dollar hurts American companies wanting to export goods and services because it makes our goods more expensive. That ties into earnings above, but watch for companies to start complaining about currency again.
9. Buzzkill of Apple and Facebook: Apple Inc. (NASDAQ: AAPL) has gone from the darling of Wall St. to the ugliest pig in a prom dress. After the monumental rise that led it to be the largest company by market cap, Apple is now down 37% from its peak and is about 16% lower year-to-date. The Facebook Inc. (NASDAQ: FB) IPO also was a total disaster, and the stock is down 45% from the peak of the IPO. After an initial trick into thinking that Facebook’s stock was back, its guile and charm quickly turned into deceit. Facebook shares are down more than 21% from the highs in January, and the stock’s recent weakness has it close to a 2013 low, and shares are now down almost 4% so far this year. Both of these investments could keep pushing the so-called millennials even further away from ever wanting to buy stocks. These may seem like outliers, but psychological damage can take many years to recover from.
10. The Wild Card(s): The last thing that can come up and wreck the great bull market is simply the unknown. We have argued for quite some time now that the markets have lost their ability to predict and price in events. So whatever the next trouble is, the market may not even know about it. Financier and billionaire George Soros once wrote, “Contrary to the tenets of market fundamentalism, financial markets do not tend towards equilibrium; they are crisis prone.”
OK, so now you have 10 real-life issues or risks that are threats to the bull market to consider. The charts are signaling that the bull market likely is not dead. The fundamentals look better than they did a quarter ago as well. But history has taught us over and over that the tide can change suddenly. There are probably 20 other serious risks that investors have to consider on top of this. We just wanted to offer some of our top concerns as you try to navigate the current bull market.
There are two sides to a coin, and we wouldn’t want you thinking we only have pom-poms for cheering those bulls three months before the festival in Pamplona begins.
Chances are you have seen a long-term chart of the Dow annotated as the chart below has been. The red hash marks designate secular bull and bear markets. But if you look closely, you may notice one significant difference from similar charts; the first secular market begins in 1921 and not in 1932 as is often shown.
Why the low in 1921? Why is the secondary low of March 2003 used and not the nominal low in October 2002? The dates shown on this chart are the lows of, what George Lindsay called, the Long Cycle and were found using very specific, rules-based methods devised by him. These rules are explained in the book An Aid to Timing. I recently took a moment to count the exact length of these long-cycles. Although Lindsay devised these methods using data he had collected back to 1798, he wrote the original An Aid to Timing in 1950 so he wasn't able to do perform this exercise for our "modern" market. Review the table below and notice how similar the four cycles are in duration.
Regardless of the time period chosen, the long cycle which began in 2003 is not expected to bottom until 2023. This should eliminate any question of whether the Dow began a new secular bull market at the low in March 2009.
For all those calling for multiple expansion to save us from dismal earnings - take a look at this...
GOLD-DOW RATIO - A Secular Trend
In the chart below, courtesy of Cambridge House, we ask readers: in which period was there a more stable relationship between tangible and intangible values, and a less exuberant irrationality vis-a-vis that which is purely based on confidence, if not so much reality.
A second logical follow up question is: where is this ratio of intangible to tangible value going next? The chart below attempts to provide some log-based perspective on precisely this.
FALLING BEHIND - Here is Why
US INDICATORS CATALYSTS
COMMODITY CORNER - HARD ASSETS
2013 - STATISM
INSIDEOUS INVOLVEMENT - Stealth Capture of Controlling Financial Repression Information
U.S. to let spy agencies scour Americans’ finances
The Obama administration is drawing up plans to give all U.S. spy agencies full access to a massive database that contains financial data on American citizens and others who bank in the country, according to a Treasury Department document seen by Reuters.
Financial institutions that operate in the United States are required by law to file reports of “suspicious customer activity,” such as large money transfers or unusually structured bank accounts, to Treasury’s Financial Crimes Enforcement Network (FinCEN).
The Federal Bureau of Investigation already has full access to the database. However, intelligence agencies, such as the Central Intelligence Agency and the National Security Agency, currently have to make case-by-case requests for information to FinCEN.
The Treasury plan would give spy agencies the ability to analyze more raw financial data than they have ever had before ….
The planning document, dated March 4, shows that the proposal is still in its early stages of development, and it is not known when implementation might begin.
The plan calls for the Office of the Director of National Intelligence – set up after 9/11 to foster greater collaboration among intelligence agencies – to work with Treasury. The Director of National Intelligence declined to comment.
It has been well and often said that only two types of “paper” money have ever existed in history - those that are already worthless and those that are going to be. Eventually, the physical pieces of paper or plastic which have been given a function as a medium of exchange by government order may remain - but their purchasing power on the market does not. The transition point always comes when the “promises to pay” on which the fiat money depends are exposed beyond the possibility of denial to be the LIES which they always were. History is replete with examples, yet very few ask the obvious question: “Pay? - WITH WHAT??” One of the great wonders of the twentieth century was the lengths to which the economics “profession” proved willing to go to avoid even facing that question let alone trying to answer it.
For hundreds if not thousands of years of human history, the vast majority were all too well aware that the government “lives” on the backs of the people. Today, that long-held knowledge has been astonishingly successfully reversed. Today, the perceived “wisdom” is that the people live on the back of the government. In the realm of the history of ideas, it took many centuries to bring forward the idea that a life might be lived without constant kowtowing to government. It has only taken one century - the time since WW I - to all but totally submerge that legacy in a new wave of government dependency.
The old and tired phrase - “I’m from the government and I’m here to help you” - is met by as much derision as it has ever been when people bemoan the impositions of their rulers. But those same people rely on the government to insulate them from the consequences of any action they may choose to undertake.
There are people who love government, people who hate it, and people who fear it. But when the chips are down, the majority of those same people profess to have “confidence” in the government’s power to protect their “welfare”. Governments count on that confidence” above all other things.
Short On Credit And Long On Faith
The ignorance over the mechanisms and procedures which power the modern global financial and monetary system is fiercely held. When it comes to the general public, we have seen demonstrations of that on numerous occasions over the past few years, the latest being in Cyprus. As was the case in all previous like instances in other nations in Europe and elsewhere, very few of those demonstrating in the street have ever thought about the TRUE nature of the banks, central banks and governments in which they place their “trust”. Many reports on the anger of the Cypriots have talked about the end of the “age of innocence”.
Unfortunately, the term innocence is not defined as the fierce refusal to see what is right in front of one’s face. At the end of his great work, Human Action, Ludwig von Mises dealt with the real problem like this:
“There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a selfappointed elite of supermen. In such vital matters blind reliance upon ‘experts’ and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people’s domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny are at stake.”
“Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.”
Human Action was published in 1949. The problems which von Mises so brilliantly dissected then are incomparably worse now. But the main failing remains the same. Those who refuse to gain the knowledge necessary to stand for something will fall for anything. The result in Cyprus is the latest in a long line of similar cases. To give one example, how many of the “Occupy Wall Street” crowd could give a cogent explanation of what they were protesting against? The specific instances may differ, but the reaction remains the same: “But ... BUT ... YOU TOLD US IT WAS ‘SAFE’!!”
What makes it worse is that most knew that it was NOT ‘safe’ - but they refused to admit it to themselves.
2012 - FINANCIAL REPRESSION
2011 - BEGGAR-THY-NEIGHBOR -- CURRENCY WARS
2010 - EXTEN D & PRETEND
CORPORATOCRACY - CRONY CAPITALSIM
GLOBAL FINANCIAL IMBALANCE
STANDARD OF LIVING
NATURE OF WORK
CATALYSTS - FEAR & GREED
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Tipping Points Life Cycle - Explained Click on image to enlarge
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