Laughing As You Sink

This video clip is from ABC News Australia, recorded in mid-May.

The Long and Winding Road... To "Oh Happy Day"

I've been reading Tim Wood's articles on Financial Sense for a few years. Without a doubt, he can be described as the most devoted Dow Theory technician I know of. Here is a link for more description of Dow Theory as a follow up to the earlier post on it, titled Dow Theory Basics. It is also his current opinion of the stock market trend using his version of Dow Theory analysis. He sometimes includes a bothersome list of financial events that he discovered in a book. This list is a sort of road to hell and it is his belief that we will visit every little point described by the book author. I have no such belief and I am only curious about Dow Theory, but I do want to keep the list in front of me, just because it challenges me to keep my mind open to ideas. It's a way for me to manage the influence of cognitive dissonance. There is some credibility to the idea of events happening in a sequence that can be predicted, but I don't think it can be predicted out further than a few years and have any probability of occurring as predicted. IMHO, the list in Tim Wood's article is going to need ten years to play out. (He mentions a K-wave winter which is described as a long period of global deflation.) I have added my POV in bold type for each point. Anybody else? Make a copy of the list and send me your thoughts in a comment or an eMail. Don't miss the big ending!

Bulls and Bears Need a Plan

If there is anything certain about what direction the market has moved since late April, it is that it is unpredictable and moving fast. In that environment, we need to be comfortable about our allocations measured against the market risk we are comfortable carrying. The quickness and degree of change we are seeing makes it clear that the time to move on strategic allocation decisions is whenever you can, on any positive bounce. John Hussman has a great way of describing his view of portfolio management that addresses the concept of risk management and evaluating your plan. His article is titled "Don't Mess With Aunt Minnie".

As you'll read, he is not making a bull or bear declaration. Instead, he is pointing out a big technical warning signal (see the graph below) to be aware of, and suggesting there is still elevated risk of fast downside moves from day to day for the unquantified near term. Here is a bit of his article...

BEA News: GDP and Corporate Profits, 1st Qtr 2010 (second estimate)

The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.0 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the "second" estimate released by the Bureau of Economic Analysis.
The full text of the release on BEA's Web site can be found at http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm. 

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U.S. Bureau of Economic Analysis · 1441 L Street NW · Washington DC 20230 · 202-606-9900

Dow Theory Basics

In the world of technical analysis, there is a method called Dow Theory that pops up frequently. I know nothing about it and do not have a desire to become educated in it. Today I found a little insight when I came across an article on MarketWatch, written by Mark Hulbert, that describes it from the perspective of three different practitioners. Here is what it says...

According to two of the three Dow Theorists I monitor, the system is still on a buy signal. If they're right, then the Dow Theory is among the very last of technical trading systems still in this market -- since, especially after Thursday's market action, most of the others are now in cash. ( Read commentary on Thursday's breaking of major support levels.)
You might wonder why there is any doubt as to whether a sell signal has been triggered. The reason is that the Dow Theory's creator -- William Peter Hamilton, who introduced the approach in numerous editorials over the first three decades of the last century in The Wall Street Journal -- never codified his thoughts in a set of complete and precise rules.

Market Correction or Bear Market Redux?

Volatile is the only way to describe all markets during the month of May. With the S&P currently hanging at 1060, up from the morning open where it gapped to down 1040, the obvious question is are we watching a good old fashioned market correction, with a kick, or the beginnings of a more sustained bear market leading to losses of more than twenty percent (S&P 973) from the recent high. The kick is that on any day, everything you observed in the stock markets gets a complete reversal during the final twenty minutes of trading!

Last night I was observing the trends of currencies illustrated along the left panel of this blog. The overnight activity was a departure from yesterday, showing the US dollar strengthening against everyone except the Yen. This is not good for stocks or commodities. It is a clear indication of risk avoidance. In the morning, I will observe the currency trends since the markets opened. If the dollar strengthening is continuing, then I need to decide if the other fundamental and technical signs show support or weakness. (See chart at the end of this post.) Whatever I find, I feel the dollar is the clearest indicator of market sentiment and gets double respect from me until further notice. The other signs need to convince me to ignore the currency exchange rate charts.

Market Data: Week Ending 5/21/2010

Market Index	2009 Close	5/21   Close	Week Change	YTD Change
Dow Industrials Avg	10428.05	10,193.39	-4.02%	-2.25%
S&P 500	1115.1	1,087.69	-4.23%	-2.52%
Fed Funds Rate	0.25%	0.25%	0%	0%
10 yr T-bond Yld	3.85%	3.24%	-0.21%	-0.61%
5 yr T-note Yld		2.02%	-0.14%
5 yr infl adj Note		0.42%	0.12%
Implied 5 yr Inflation %		1.60%	-0.26%
2 yr T-note Yld	1.14%	0.76%	-0.02%	-0.38%
2-10 Yr Slope	2.70%	2.48%	-0.19%	-0.22%
90 day T-bill Yld		0.15%	0.00%
Gold ($/oz)	$1,096.95	$1,176.10	-4.40%	7.22%
WTI Oil ($/brl)	$79.36	$71.68	0.10%	-9.68%
VIX "Worry Index"	21.68	40.1	50.30%	84.96%
Credit Spreads		5/21   Close	Week Change
Inv Grade Credit Idx		4.90%	0.05%
Low Grade Credit Idx		9.11%	0.49%
Markit CDX Inv Grd Idx		123	23.00%
Markit CDX Mid Grd Idx		173	15.33%

Timeframe for Bullish Outlook

The Boeckh Investment Letter (BIL) has described in a way not often seen, the development of the current financial crisis. They put it in the context of a long-term wave of private debt-fueled consumption, leading to asset inflation. The long wave was supported by the final elimination of the gold based US dollar, replaced with the fiat US dollar in 1971, under President Nixon. The title of the article published by the BIL is "The Great Reflation: The Mother of All Financial Experiments". Another feature of this article is the timeframe they place on the evolution of the economic events in front of us. It is recommended reading for inquiring minds. For a sense of the message, here is a clip...

Bullish Outlook

This week I am seeing steady declines in stock indices, Treasury bond yields are off and the dollar is strong. There are many possible explanations floating around (see the end of this post for a summary). For me the explanation not mentioned enough is that this pullback has been overdue. Until the beginning of May, the markets have been rising steadily one month after another since March 2009. There was always a question about when it would turn and rest. The problems in Europe are easy to write about as causes and the pissed off Greeks are easy to show in pictures. Headlines bringing up political problems from around the world are very easy to tie into the wall of worry in front of us. What is not so easy is to say that despite all the fires and uprisings around the world map, the businesses in the US still are healthy and growing revenues. Businesses in Europe have some steep challenges in front of them and they too will make hard choices and their businesses will be stronger (completely disregarding the pain that supports this result). Don't take your eyes off of China, although for the moment they are shadowed by the euro crisis. This is not the beginning of a return to the good old days.

One Eye on the Fed: April CPI

Year-on-year, overall CPI inflation eased to 2.2 percent (seasonally adjusted) from 2.4 percent in March. The core rate slipped in April to 1.0 percent from 1.2 percent the prior month.

At the core level, apparel prices fell 0.7 percent and the huge shelter component was unchanged. Providing some upward pressure were gains in recreation, airline fares, and medical care.

Consumer prices inflation remains extremely low-giving the Fed plenty of leeway in its timing of unwinding its balance sheet expansion. Bond traders should like today's news and equity markets should be happy that the Fed is not under pressure to tighten sooner rather than later.

Mutual Fund Flows for March 2010

Washington, DC, April 29, 2010 - The combined assets of the nation’s mutual funds increased by $237.1 billion, or 2.1 percent, to $11.209 trillion in March, according to the Investment Company Institute’s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.

Total Net Assets of Mutual Funds
Billions of dollars

	Mar 2010	Feb 2010	% chg	Dec 2009
Stock Funds	5,205.8	4,891.7R	6.4	4,957.6
Hybrid Funds	673.7	644.7R	4.5	640.7
Taxable Bond Funds	1,870.2	1,824.0R	2.5	1,749.1
Municipal Bond Funds	475.2	472.2R	0.6	457.1
Taxable Money Market Funds	2,618.9	2,761.9R	-0.5	2,918.8
Tax-Free Money Market Funds	365.0	377.2	-0.3	397.4
Total	11,208.7	10,971.6R	2.1	11,120.7

R=Revised data; Components may not add to the total because of rounding.

Market Data: Week Ending May 14, 2010

Market Index	2009 Close	5/14   Close	Week Change	YTD Change
Dow Industrials Avg	10428.05	10,620.16	2.31%	1.84%
S&P 500	1115.1	1,135.68	2.23%	1.81%
Fed Funds Rate	0.25%	0.25%	0%	0%
10 yr T-bond Yld	3.85%	3.45%	0.02%	-0.40%
5 yr T-note Yld		2.16%	0.00%
5 yr infl adj Note		0.30%	-0.08%
Implied 5 yr Inflation %		1.86%	0.08%
2 yr T-note Yld	1.14%	0.78%	-0.03%	-0.36%
2-10 Yr Slope	2.70%	2.67%	0.05%	-0.03%
90 day T-bill Yld		0.15%	0.03%
Gold ($/oz)	$1,096.95	$1,227.80	1.42%	11.93%
WTI Oil ($/brl)	$79.36	$71.61	-4.66%	-9.77%
VIX "Worry Index"	21.68	26.68	-18.66%	23.06%
Credit Spreads		5/14   Close	Week Change
Inv Grade Credit Idx		4.85%	-0.09%
Low Grade Credit Idx		8.62%	-0.24%
Markit CDX Inv Grd Idx		100	8.70%
Markit CDX Mid Grd Idx		150	4.90%

California Budget Crises, A Look into OUR Future?

The new fiscal (budget) year in California begins on July 1, 2010. Between now and when the Democratic controlled legislature agrees on a new plan, there is going to be a lot of public discussion about how the state government will close a deficit of $19.1 billion from a general fund budget of $83.4 billion. During the past year in the golden state we have already seen student protests over tuition increases with program cutbacks. To set the stage for understanding where they start from, the editorial board at the Seattle-Times summarized the California fiscal condition like this...

People With Jobs Are Losing Them at a Slower Rate

By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events. Obviously, there is no need for concern of wage inflation for years into the future. Wage deflation and unemployment, are the immediate concerns and so they are on the radar screen. Jobless claims illustrate wage deflation since unemployment benefits are not replacing 100% of employment income.

Weekly series fluctuate more dramatically than monthly series even when the series are adjusted for seasonal variation. The 4-week moving average gives a better perspective on the underlying trend

Data Source: Haver Analytics

Credit Default Swaps Are Unveiled

Since the waterfall effect created in the stock markets in October of 2008, I have remained wary of the lack of visibility of the credit default swap (CDS) market. This is another 800 pound gorilla in the room, and I am concerned that I cannot see any sign of it. These derivative securities were a major influence in how rapidly stock and bond prices shed value and I cannot forget that. Companies (primarily the foreign and domestic 'too big to fail' entities) that used them for protection suddenly found they were unprotected and suffered large, unexpected losses, repeatedly. Thanks to a swift accounting rule change and federal bailouts to cover realized losses and build up reserves for future losses, their losses were only temporary stock price declines that have almost completely recovered. This may have something to do with their complexity. But their complexity has not prevented Ron Hera from taking on the investigative task and having his article published on Financial Sense. Hera has written what I think is the best review of the CDS world I have found and I want to refer to it in the future. Here is the link to "OTC Derivatives: Failed Banks or Failed Nations?"

10 Yr Treasury Note is Still in Demand

Here is a summary from Bloomberg following today's ten year note auction. For some longer historical perspective, see an earlier post about the 10 yr Note. Briefly, yield has fallen from 3.90% in the April auction when the bid-to-cover ratio was a nine year record high 3.72. This month shows a ratio of 2.96 indicating less enthusiasm for the Note, but still historically strong.

Bidding was aggressive for the month's 10-year note auction, an oversize $24 billion offering where coverage came in at a solid 2.96. Dealers are definitely losing business as direct bidding was very aggressive at 25 percent. Indirect bidding was also firm, at 42 percent, making for a combined 67 percent non-dealer takedown and far above the 52 percent average.

High yield of 3.548 percent was right at the 1:00 bid. A look back at the high yield in last month's auction offers a key yardstick for the sovereign-risk effect. The April yield was more than 35 basis points higher than now, this during a time when U.S. economic data have strengthened! Tomorrow the Treasury auctions $16 billion of 30-year bonds.

Wholesale Inventory and Sales Summary

This from Bloomberg...

Wholesale inventories rose 0.4 percent in March but are far below the 2.4 percent rise in sales, a mismatch that pulled the inventory-to-sales ratio down 3 tenths to a record low of 1.13. This mismatch is not due to price swings but is fundamental and reflects company reluctance to build stocks as the durables ratio fell 2 tenths to 1.50 vs. a 3 tenth slide for non-durables to 0.83.

But the durables side does show solid evidence of accelerating build with inventories up 0.8 percent on top of a 0.6 percent rise in February. Inventories of metals, computers, electrical goods, lumber and autos all rose. Wholesale sales of durables show wide and more significant gains led by lumber, metals, furniture and machinery. The rise in lumber and furniture sales points to improvement in the housing sector while metals and machinery point to improvement in the industrial sector.

Lending and Bank Solvency

This wholesale trade summary posted earlier today tells me that there is weak momentum behind the growth we have in our US economy. Reliant on consumers for nearly 70% of US GDP, there is still too much potential for another housing price collapse due to the number of homeowners who are underwater, the number of homes repossessed and held back from the market in support of prices of houses already listed, and the Fed is no longer providing liquidity. I expect home loans will get more difficult to qualify for than they are now. That seems to be born out in the graph from the St Louis Fed below.

Market Data: Week Ending May 7, 2010

Market Index	2009 Close	5/07   Close	Week Change	YTD Change
Dow Industrials Avg	10428.05	10,380.43	-5.71%	-0.46%
S&P 500	1115.1	1,110.88	-6.39%	-0.38%
Fed Funds Rate	0.25%	0.25%	0%	0%
10 yr T-bond Yld	3.85%	3.43%	-0.22%	-0.42%
5 yr T-note Yld		2.16%	-0.26%
5 yr infl adj Note		0.38%	-0.01%
Implied 5 yr Inflation %		1.78%	-0.25%
2 yr T-note Yld	1.14%	0.81%	-0.15%	-0.33%
2-10 Yr Slope	2.70%	2.62%	-0.07%	-0.08%
90 day T-bill Yld		0.12%	-0.03%
Gold ($/oz)	$1,096.95	$1,210.40	2.45%	10.34%
WTI Oil ($/brl)	$79.36	$75.11	-11.50%	-5.36%
Credit Spread		5/07   Close	Week Change
Inv Grade Credit Idx		4.94%	0.19%
Low Grade Credit Idx		8.86%	0.64%
Markit CDX Inv Grd Idx		92	3.37%
Markit CDX Mid Grd Idx		143	1.42%

Stock Market or Market System?

Today we saw unprecedented volatility occurring within a few minutes. The explanations coming out of news services leave me unsatisfied that there is anyone taking time to think before they publish something. I suppose there will be time for that later. Now however, there are some observations being made that make me wonder. The financial crisis in Greece is the easiest and most obvious topic area for initial focus. But there has actually been some signs of responsibility from the government of Greece in that they passed an austerity plan yesterday to show good faith to the world, that they will begin to spend less beginning now. Greeks are rioting in the streets on that but they are not investors who can move the markets. Is this an example of "buy the rumor, sell the news"?

There have also been reports of errors being made on trading systems. This news is going to take awhile to get facts on. Here is the beginning of a report, based on rumors, from CNBC, always fair and factual... LOL, In one of the most dizzying half-hours in stock market history, the Dow plunged nearly 1,000 points before paring those losses—all apparently due to a trader error.

So far, here are pieces of today's news, all from Bloomberg, that covers the bulk of what might have influenced markets today.

Moody's, Fitch, S&P All Still Suspects

Bill Gross reminds me that the corruption within our revered rating agencies is still in need of respect. They are flying under the radar now while Congress and their cohorts, the financial press, drag Goldman through the meanderings of progress. Here is the essence of the brief message from Mr Gross this month in his Investment Outlook. BTW, I do not endorse his statement that describes his staff at PIMCO. I believe this is knowledge a good bond manager has known for several years, and it is not unique to large firms.

"Still, as future bond issuers belly up to the bar with their rating agency seals of approval, it is incumbent on the buying public to treat those IDs with a healthy skepticism. Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. 

BEA News: Personal Income and Outlays, March 2010

The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:  
Personal income increased $36.0 billion, or 0.3 percent, and disposable personal income (DPI) increased $32.3 billion, or 0.3 percent, in March, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $58.6 billion, or 0.6 percent.
The full text of the release on BEA's Web site can be found at http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm.

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U.S. Bureau of Economic Analysis · 1441 L Street NW · Washington DC 20230 · 202-606-9900

Market Data, Week Ending April 30, 2010

Market Index	2009 Close	4/30   Close	Week Change	YTD Change
Dow Industrials Avg	10428.05	11,008.61	-1.75%	5.57%
S&P 500	1115.1	1,186.69	-2.51%	6.03%
Fed Funds Rate	0.25%	0.25%	0%	0%
10 yr T-bond Yld	3.85%	3.65%	-0.16%	-0.20%
5 yr T-note Yld		2.42%	-0.17%
5 yr infl adj Note		0.39%	0.10%
Implied 5 yr Inflation %		2.03%	-0.27%
2 yr T-note Yld	1.14%	0.96%	-0.11%	-0.18%
2-10 Yr Slope	2.70%	2.69%	0.11%	-0.01%
90 day T-bill Yld		0.15%	0.00%
Gold ($/oz)	$1,096.95	$1,180.70	2.29%	7.63%
WTI Oil ($/brl)	$79.36	$86.15	1.51%	8.56%
Credit Spread		4/30   Close	Week Change
Inv Grade Credit Idx		4.75%	-0.10%
Low Grade Credit Idx		8.22%	-0.03%
Markit CDX Inv Grd Idx		89	0.00%
Markit CDX Mid Grd Idx		141	2.92%

Bull, Bear, Secular, Cyclical... Jibber Jabber

Technically speaking... Tim Wood is a market technician who focuses on identification of long-term trends, trying to identify when they will change direction. It seems like an art to me, but he approaches it using a science called Dow Theory. He writes about his observations of trends and does a good job of explaining how he comes to his conclusions. He continues to hold that the stock market began a long-term bear market after reaching the current market high water mark in October of 2007. More technicians say that the secular bear market began with the inflation-adjusted high water mark, reached in 2000. Tim Wood has a description of the length of time he would expect a secular bear market to last, following the peak reached in 2000. He concludes it was scheduled to reach it's low point in 2009, like we saw in March in 2009. That would end the secular bear market, unless you are Tim Wood. When the secular bear market trend begins is important as he explains.