Monthly Archives: March 2012

Saturday, March 31, 10:30 a.m.

Apple stock has risen to the point where it is now the largest capitalization stock in the world, even the severe 2007-2009 bear market not much more than a blip on the long-term chart.

It’s so profitable that if its earnings were left out, S&P 500 earnings for the 4th quarter would have been 3.0% instead of 6.1%. That would double the P/E ratio of the S&P 500, which is touted as still being undervalued, or perhaps it would be more revealing to say that theoretically the P/E ratio of the S&P 499 would be double that of the S&P 500.

Its estimated that the 21% earnings increase for the tech sector over the last 12 months was actually only 5% when Apple’s earnings are taken out. The difference is shown in this chart produced by Barclay’s Capital, the blue line being tech sector earnings without Apple.

Its estimated that S&P 500 earnings for the 1st quarter of this year will show no growth from the 4th quarter, but if not for Apple’s earnings would actually show a decline of 1.6% from the 4th quarter.

Yet investors are not just bidding up Apple but the entire market?

A few Interesting global charts.

I’m still fascinated by the divergences between the U.S. market and so many of the other major economies of the world.

The highly touted BRIC nations (Brazil, Russia, India, China). Down sharply in March while U.S. market experienced a strong month.

And other regions:

In fact, the world’s markets on average omitting the U.S.

And then there is the U.S.

It’s great for our 100% invested Seasonal Timing Strategy. And in our non-seasonal Market Timing Strategy we do not have a sell signal, but can the divergence continue?

Is Great U.S. Treasury Bond Bull Market Over?

We’ve been warning you for several months that bonds were at least vulnerable to a tradable correction.

The 20-year bond has lost 10% of its value since mid-December.

To read my weekend newspaper column ‘Don’t Shrug Off Similarities To Last Two Aprils!’ Click here.

Subscribers to Street Smart Report: In addition to the charts and updates in today’s premium content area of this blog, the new issue of the newsletter will be out on Wednesday in the subscribers’ area of the Street Smart Report website.

Yesterday in the U.S. Market.

A mixed day to end a positive week. The biggest winner by far was our holding in the inverse ETF against bonds, TBF, which closed up a big 1.7% on the plunge in bonds.

The Dow closed up 66 points, or 0.5%. The S&P 500 also closed up 0.4%. The NYSE Composite closed up 0.5%. The Nasdaq closed down 0.1%. The Nasdaq 100 closed down 0.3%. The Russell 2000 closed down 0.2%. The DJ Transportation Avg. closed down 0.1%. The DJ Utilities Avg closed up 0.6%.

Gold closed up $ 6 an ounce at $ 1,668.

Oil closed up $ .29 a barrel at $ 103.08 a barrel.

The U.S. dollar etf UUP closed down 0.1%.

The U.S. Treasury bond etf TLT plunged 1.7%.

Yesterday in European Markets.

European markets also closed up yesterday. The London FTSE closed up 0.5%. The German DAX closed up 1.0%. And France’s CAC closed up 1.3%.

Global markets for the week.

A positive week in U.S., but mostly negative globally.

Premium Content Area.

For Street Smart Report subscribers only, used to provide additional info to that provided in the newsletter, mid-week reports, and hotlines.

To obtain access please click on the ‘Subscribe’ link. It will take you to an information page on subscribing to Street Smart Report, a subscription to which includes access to the premium content area of this Street Smart Post blog.

In the Premium Content section this morning: U.S. stock market, short-term and intermediate-term. Gold. Bonds.

Next week’s Economic Reports:

Next week will be a very important week for potential market-moving economic reports, including the ISM Mfg Index, Factory Orders, the ADP Jobs Report for March, and on Friday when the U.S. Market will be closed for the Good Friday holiday, the Labor Department’s Employment Report for March. To see the full list click here, and look at the left side of the page it takes you to.

To read my weekend newspaper column ‘Don’t Shrug Off Similarities To Last Two Aprils!’ Click here.

Subscribers to Street Smart Report: In addition to the charts and updates in today’s premium content area of this blog, the new issue of the newsletter will be out on Wednesday in the subscribers’ area of the Street Smart Report website.

I’ll be back with the next regular blog post on Tuesday morning at 9:25 a.m.

Non-subscribers: We believe we can help you not only make more profits, but just as importantly avoid losses, and at very reasonable cost!

Our portfolios were up an average of 9.4% last year, our Seasonal Timing Strategy up 15.8%, in a flat year (S&P 500 unchanged for year) when many, if not most, managers and funds were down for the year. We were on Hulbert’s Ten Best Newsletters of the Year list for the 2nd time in 4 years, and #4 Long-Term Market-Timer in Timer Digest’s rankings. And we are off to a great start this year.

Market, sector, stock, gold, bond, and dollar buy and sell signals, short-sales, long-side and ‘inverse’ etf’s, mutual funds, two portfolios of recommended holdings (one modified buy and hold, and one market-timing). Street Smart Report Online provides an 8-page newsletter every 3 weeks, an in-depth 6 page interim update every Wednesday on our intermediate-term signals and recommended holdings, an in-depth 4-page ‘Gold, Bonds, Dollar’ update every 2 weeks, and special reports and hotline updates as needed. Highly regarded and in our 24th year. As a bonus for a one-year subscription you will also receive my latest book Beat the Market the Easy Way- Proven Seasonal Strategies That Double the Market’s Performance. Click here for subscription information.

This blog appears every Tuesday, Thursday, and Saturday morning!

**** End of Today’s post*****

Apple earnings

The Nasdaq has made a significant new high as it has erased all the losses from the 2007 financial crisis, but more importantly it erased what was labeled as a nice 5 wave impulsive decline.  This ws important for wavers to use in order to support the claim that a much larger downtrend was in place.  This is gone now.  And this is not good for the EWP community that was following Prechter’s count.  The Nasdaq’s new high may signal that it is leading the blue chip S&P and Dow higher.  Usually the higher risk stocks lead the overall market so I have to be prepared for this to be the case here.  The flipside here is that the Dow and S&P have not made new highs with the Nasdaq so there is a divergence in place.  If stocks turn down hard while this divergence is in place, then it’s very bearish for the overall market.  But this is less likely to occur.  I believe that it’s highly possible that the Nasdaq is simply leading the S&P and Dow higher, and they too will take back all their losses from the financial crisis and erase their 5 wave declines as well.

Remember, markets are all about probabilities.  The probabilities at this point favor the bullish side.  That doesn’t mean the bears are dead, it simply means that the odds favor the bulls.  I have no position in stocks right now.

Learn Elliott Wave Principle (EWP)

Focusing on the short term I see a possible head and shoulders top forming.  This means that the current rally is the right shoulder that should top around the 1414 area.  A move above the head at 1419 will negate this pattern and keep the rally well intact.  I am not shorting here though since trying to call a top has been foolish the past several weeks as many of you know.  I’ll wait for an opportunity to arise and announce it here.  Until then, I’m focusing more on currencies as I’ve found more success their recently.

The euro appears to be forming a head and shoulders top on the daily chart.  The pattern here is much more mature and suggests a decline is coming very soon, perhaps Sunday night or Monday.  I have a small short position in place but plan to add to it if there’s a strong impulsive shot lower.

What All Major Depressions Have in Common

Momentum for the euro rally on the intraday charts is not good for the bulls.  The RSI is lagging badly and has not confirmed the euro’s new prices highs in a long time.  This is not a good timing indicator so this doesn’t mean the euro will decline right now.  But with a head and shoulders formation in place on the daily chart, I’m shorting the first sign of weakness.  Euro bears be alert Sunday night and Monday for an opportunity.

PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

What is the broader Sector Rotation Model saying about the current rally and state of the market?

Good things actually.

Let’s take a moment to view the current Sector Rotation Performance from three perspectives, starting with Absolute Performance so far in 2012:

To recap, the Sector Rotation Model breaks down the broader market into nine sectors as represented above with the tradable AMEX Sector SPDRs (XLK for Technology for example).

These nine sectors are divided into two broad categories:

• Offensive/Aggressive Sectors (tend to outperform in a Bull/Rally mode)
• Defensive/Conservative Sectors (tend to outperform in a Bear/Decline mode)

By assessing which sectors are outperforming, a trader or investor can get a sense of the broader stock market and economy.

In addition, savvy traders can scan to locate the strongest relative stocks in the strongest relative sectors for short-term trading opportunities (go with the winners!).

Ok, so what is the Model saying?

This is the picture of Bullish Strength – mainly in terms of the strong outperformance (greatest percentage increase in 2012) coming from the aggressive/offensive sectors of Financials (XLF), Technology (XLK), and Consumer Discretionary/Retail (XLY).

By the same token, the weakest sector performance comes from the Defensive sectors of Consumer Staples (XLP), Health Care (XLP) and a slight negative return (down 2.3%) for Utilities (XLU).

Energy – despite the headlines – is also an underperformer at 5.7%.

The next chart shows the sector performance RELATIVE to the S&P 500 (which is up roughly 13%):

This is just another way to view the performance where we ‘flatline’ the S&P 500 and then view the over or under-performance (relative to the 13% mark).

This perspective gives a clearer perspective of where sector strength or weakness resides – which is clearly in the Defensive (and Energy) sectors.

This next chart is a more advanced “Line” perspective of sector performance so far in 2012:

This chart is helpful to assess the trends in price, rather than the frozen “snap-shot” in time that the other charts provide.

You can also use it to view sector “clusters,” which is where different sectors cluster or travel together.

Two examples would be the XLI and XLB cluster (with the S&P 500) near 13% and the XLP, XLE, and XLV (defensive) cluster near the 5% line.

Again, the weakest sector is – and has been – Utilities (XLU) through 2012.

We generally do best to trade WITH sector trends rather than against them – meaning it would have been far more profitable to trade long with financials so far than trying to call a top and play a reversal.

The same is true with Utilities which were weakest from the start… and continued to be weak into late March (present).

Again, to me, the surprise from teh charts above is the Energy (XLE) sector which is registering a plus 6% performance – with all the focus on oil prices, one would expect the XLE to be among the top performers.

Anyway, continue watching the current Sector Performance for…

• any signs of continuation (which suggests further bullish stock market activity into the future) or else
• a reversal/rotation away from these developments (meaning a sudden reversal towards the Defensive Sectors and away from the Offensive Sectors would argue the opposite).

Be sure to view additional articles on previous Sector Rotation updates for more information:

“Sector Rotation Lessons and Insights from 2011″ (important reference post)

“What the Sector Rotation Model is Saying in July 2011″ (Bearish… and correct)

“Clear Bearish Signals Developing from the Sector Rotation Model” (May 2011 – right at the Top)

“Sector Performance from August to February (2011)” (Bullish insights)

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

When most people think of hedges, they think in broad terms like hedging an entire long equity portfolio with SPX/SPY puts or VIX calls or some similar product. The thinking is typically that it is better to have broad-based protection against a bear move in stocks and/or a spike in volatility than to build only one castle wall facing the direction in which an enemy attack is expected. More often than not, it is the unexpected that wreaks havoc on a portfolio, not the white swan that slowly morphs into ivory, then light gray, then…

I might as well say this up front: I hate hedges. I love the idea of hedges, but when it comes time to pay for one, they invariably come across as more expensive than even a reasonably effective market timing strategy. Of course, there are all kinds of hedges, from those that are limited to a disaster protection insurance to those that are intended to counteract even the slightest nick to a portfolio. If I feel like I can get my hedges at a discount (Groupon, are you listening?) then I will gladly ante up and enjoy the safety net.

Now there are some out there who think that some of the risks to stocks, particularly domestic equities, are being exaggerated by most investors. Those who hold this opinion might be better served to avoid a broad-based hedge and think in terms of what I call a point hedge. Simply stated, a point hedge is a rifle approach to portfolio protection rather than a (full perimeter) castle wall approach.

Perhaps an example will help to illustrate the point hedge approach. Let’s assume that an investor thinks that the U.S. economy will do better than the doomsayers predict and even fulfill James Altucher’s prediction, which was far-fetched at the time, that the SPX will hit 1500 in relatively short order. If that’s the case, then should the rifle be aimed? Let’s further assume that bullish investors are primarily concerned about a worsening conflict between Iran and Israel, Spanish fiscal issues starting to resemble the Greek crisis, a possible hard landing in China and the rise of cyberwarfare.

Rather than construct a broad-based hedge, it is possible to create a more cost-effective portfolio hedge by aggregating point hedges across all four areas of concern. For Iran and Israel, something like a long position in Brent crude oil (BNO) might do the trick. As far as Spain is concerned, purchases of puts in the country ETF (EWP) would be appropriate, but a more liquid and perhaps more targeted approach might be long puts in Spain’s largest bank, Banco Santander (STD). There are many alternative approaches in China, but certainly a short position in FXI or some long puts in that ETF is one approach worth investigating. Last but not least, cyberwarfare presents a different set of problems, but some of the firms where call purchases might be hedges against a spike in cyberwarfare are SAI, CHKP, FIRE, FTNT and SYMC.

Of course this is just one of many potential list of threats to the stock market and possible point hedges that might be used to counteract them. Even if you prefer the blanket coverage of a broad-based hedge, it is usually worth the time and effort to draw up a list of potential threats and stocks/ETPs that might be employed to counteract those threats or perhaps even provide some speculative gains.

On a related note, I realize that I have only periodically been applying the “hedging” label to my posts, so I reviewed quite a few posts in the archives and have begun to retroactively apply that label to those posts (such as several in the list below) which might be of particular interest to financial archeologists.

Related posts:

• Dynamic VIX ETPs as Long-Term Hedges
• Comparing SPLV and VQT
• Three New Risk Control ETFs from Direxion
• The Case for VQT
• The Year in Safe Havens
• The VIX as a Hedging Tool
• Global Bank Stocks in a Post-Lehman World
• Reflections on Investing Ten Years Ago
• The Dangers of Anticipating a Market Reversal
• Availability Bias and Disaster Imprinting
• The Gap Between the VIX and Realized Volatility

[graphic: Scaliger Castle, Sirmione, Italy – Library of Congress]

Disclosure(s): long FIRE at time of writing

Commodity prices held up well earlier in the week but then weakened towards the end. Several factors, including the ease in economic data and talks of an imminent SPR release, and the tug of war between renewed sovereign debt crisis in the Eurozone and speculations of firewall expansion, were the main causes of the price actions. Over the past week, investors were disappointed by the slides in the preliminary PMIs in China and Europe, as well as some of the regional surveys in the US. Strength in oil prices over the past months was driven by worries over supply disruption as the US sanctions against Iran tightened. However, the concerns were readily eased after France indicated SPR release would come soon. In the Eurozone, concerns over the sovereign crisis in the Eurozone re-emerged as uncertainties were seen in Spain, Greece and Ireland. Yet, expectations that EU finance ministers would expand the firewall for future bailouts lifted sentiment somehow.

The front-month contract for WTI crude oil plunged -3.60% to 103.02 during the week while the equivalent Brent crude contract lost -1.80%. Yet both contract managed to record gains for a second consecutive quarter. Crude oil prices slumped sine the middle of the week as talks of SPR release intensified. French Prime Minister Francois Fillon stated that prospects are ‘good’ for a US-Europe agreement on a release from strategic reserves while the White House attempted to downplay the plan by stating only that the option ‘remains on the table’. Yet, as talks of a release have been intensified, it appeared that policymakers are pressured to do something regarding this. However, we doubt if oil prices would be further affected should policymakers announce a release as recent decline in prices has almost reflected the increase in oil supplies. We believe that unless there is a huge surprise the amount of quantity released, further sustainable lower oil prices would be difficult to achieve.

The DOE/EIA reported that gas inventory increased +57 bcf to 2 437 bcf in the week ended March 123. Stocks were +816 bcf above the same period last year and +900 bcf, or +58.6%, above the 5-year average of 1 537 bcf. Separately, Baker Hughes reported that the number of gas rigs added +6 units to 658 in the week ended March 29. Oil rigs rose +5 units to 1 318 and miscellaneous rigs stayed unchanged at 3 unitd, sending the total number of rigs to 1 979 units. Directionally oriented combined oil, gas, and miscellaneous rigs climbed +2 units to 233 while horizontal rigs increased -6 units to 1 180 and vertical rigs gained +3 units to 566 during the week.

The precious metal complex was pressured during the week. Although gold, silver the platinum recorded weekly gains, their outlooks are uncertain and downsides risks remained. Palladium has indeed plummeted to the lowest level since January. Concerns over demand, in particular a potential slowdown in China, were key factors affecting prices of silver and PGMs. Gold’s movement has been highly affected by expectations of QE3. It got dumped over the past weeks as hopes of QE3 dissipated. Yet, the situation appeared to have changed a bit towards the end of last week as the Fed chairman Bernanke signaled further easing is needed give further boost to the job market. His comments have driven some analysts to anticipate further accommodative measures to be announced in as soon as April.

Thursday, March 22, 9:25 a.m.

Now that the euro-zone debt crisis has been kicked down the road another year or so, analysts and markets have turned their attention back to normal concerns of economies and earnings.

Unfortunately they’re doing so just as the reports are becoming more worrisome in Asia and Europe, and less impressive in the U.S.

Earlier this week disappointing Chinese housing data, and a warning from giant mining company BHP Billiton raised concerns about the direction of the second largest economy in the world, where economic strength has been so important in supporting anemic global economic recoveries the last few years.

Those concerns were not helped by this morning’s report that the HSBC China PMI index fell more than expected in March, falling to 48.1 from 49.6 in February, and remaining beneath the level of 50 that separates expansion from contraction.

And in Europe it was that the 17-nation euro-zone PMI fell to a three-month low of 48.7 in March from 49.3 in February, worse than forecasts, adding to the concerns that Europe is already in another recession.

In the U.S. most reports, particularly on employment, remain positive. But potential cracks in the impressive U.S. recovery are also showing up.

Among them have been that Factory Orders fell 1.0% in January, Durable Goods Orders fell 4.0% in January after rising 3.2% in December, the ISM Mfg Index unexpectedly declined in February, to 52.4 from 54.1 in January, Construction Spending declined in January versus the consensus forecast for another increase, new housing starts unexpectedly fell 1.1% in February, and existing home sales fell 0.9%, while the inventory of unsold homes jumped 4.3%.

Keep in mind that at our buy signal in October, the reports were still mostly ugly, but a few rays of light were showing up. We potentially have the opposite situation shaping up now.

Is Goldman Sachs behind the curve again?

Goldman has been making headlines this week with some wildly bullish pronouncements.

Jim O’Neill, chairman of Goldman’s Asset Management Allocation, appeared on CNBC to say that stocks are at the beginning of a big upside turnaround.

An anchor on the show said, “That’s good news, Jim, but I wish you had told us that six months ago.” [the S&P 500 has already gained 29% since the October low].

O’Neill replied saying something like, “But I didn’t just turn bullish. I’ve been bullish since February.”

Asked “How do you square your bullishness with some Goldman analysts in other departments who were bullish in the fall and say the S&P is now overbought and vulnerable to a correction?”

The reply was something about there always being differing opinions.

The anchor then asked, “So why should we believe you over the analysts in other Goldman departments?”

“Because I am the chairman of my department and they used to work for me.”

Okay.

To read my weekend newspaper column ‘There is now a new type of ‘wall of worry!’ Click here.

Yesterday in the U.S. Market.

The Dow was down 58 points in the early going until about 11 a.m., followed by a rally into positive territory and then a collapse in the final 15 minutes to close it down 45 points, or 0.3%. All on low volume again with only 0.7 billion shares traded on the NYSE.

The Dow closed down 45 points, or 0.3%. The S&P 500 closed down 0.2%. The NYSE Composite closed down 0.3%. The Nasdaq closed up 0.1%. The Nasdaq 100 closed down 0.1%. The Russell 2000 closed up 0.1%. The DJ Transportation Avg. closed up 0.8%. The DJ Utilities Avg closed down 0.2%.

Gold closed up $ 2 an ounce at $ 1,649.

Oil closed up $ .83 a barrel at $ 106.90 a barrel.

The U.S. dollar etf UUP closed up 0.1%.

The U.S. Treasury bond etf TLT closed up 1.1%.

Subscribers to Street Smart Report: In addition to the information and charts in your premium content area of this morning’s blog, there is an in-depth ‘U.S. Market Signals and Recommendations’ report from late yesterday, ad a hotline from last evening, in the subscribers’ area of the Street Smart Report website.

Yesterday in European Markets.

European markets closed mixed and flat yesterday. The London FTSE closed unchanged. The German DAX closed up 0.2%. And France’s CAC closed down 0.1%.

Asian Markets Were Mixed Last Night.

The Asia Dow closed up 0.1%.

Among individual markets:

Australia closed up 0.4%. China closed down 0.1%. Hong Kong closed up 0.2%. India closed down 2.3%. Indonesia closed up 0.1%. Japan closed up 0.4%. Malaysia closed down 0.1%. New Zealand closed down 0.2%. South Korea closed down 0.1%. Singapore closed down 0.9%. Taiwan closed up 1.0%. Thailand closed down 1.4%.

Subscribers Premium Content Area.

For Street Smart Report subscribers only, used to provide additional info to that provided in the newsletter, mid-week reports, and hotlines.

To obtain access please click on the ‘Subscribe’ link. It will take you to an information page on subscribing to Street Smart Report, a subscription to which includes access to the premium content area of this Street Smart Post blog.

In the premium content area this morning: Our signals and outlook for the U.S. market, gold, and U.S. treasury bonds.

Markets This Morning:

European markets are down quite sharply this morning. The London FTSE is down 0.8%. Germany’s DAX is down 1.5%. France’s CAC is down 1.4%

Oil is down $ .96 a barrel at $ 105.92.

Gold is down $ 12 at $ 1,637 an ounce.

This Morning in the U.S. Market:

This week is an average week for potential market-moving economic reports that will include the first look at the housing sector in awhile, including New Housing Starts, Existing Home Sales, and New Home Sales, as well as the FHFA Home Price Index. To see the full list click here, and look at the left side of the page it takes you to.

Monday’s report was that the the NAHB Housing Market Index, which measures the confidence of home-builders, remained unchanged in March at 28. That is a 4-year peak, but that is very misleading, as it remains very low and bearish. The index is designed so readings above 50 indicate normal expectations from builders.

Tuesday’s report was that new Housing Starts declined 1.1% in February, but permits for future starts rose by 4.9%.

Yesterday’s report was that Existing Home Sales fell 0.9% in February and the inventory of unsold homes increased by 4.5%.

This morning’s report was that new weekly unemployment claims fell by 5,000 last week to 348,000, a new four-year low, and the lowest level since February, 2008. The more important 4-week m.a. also fell, by 1,250 to 355,000..

Still to come are the FHFA Home Prices report, and Leading Economic Indicators, which will be released at 10 p.m. Neither are usually market-movers unless there were to be a surprise decline in the LEI, quite unlikely.

The unemployment claims report hasn’t affected pre-open indicators in either direction. They have been somewhat negative and remain so.

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being down 40 points or so in the early going.

To read my weekend newspaper column ‘There is now a new type of ‘wall of worry!’ Click here.

Subscribers to Street Smart Report: In addition to the information and charts in your premium content area of this morning’s blog, there is an in-depth ‘U.S. Market Signals and Recommendations’ report from late yesterday and a hotline from last night in the subscribers’ area of the Street Smart Report website.

I’ll be back with the next regular blog post on Saturday morning, as usual later than the week-day posts, probably around 11:00 a.m.

Non-subscribers: We believe we can help you not only make more profits, but just as importantly avoid losses, and at very reasonable cost!

Our portfolios were up an average of 9.4% last year, our Seasonal Timing Strategy up 15.8%, in a flat year (S&P 500 unchanged for year) when many, if not most, managers and funds were down for the year. We were on Hulbert’s Ten Best Newsletters of the Year list for the 2nd time in 4 years, and #4 Long-Term Market-Timer in Timer Digest’s rankings. And we are off to a great start this year. And we’re up nicely so far this year.

Market, sector, stock, gold, bond, and dollar buy and sell signals, short-sales, long-side and ‘inverse’ etf’s, mutual funds, two portfolios of recommended holdings (one modified buy and hold, and one market-timing). Street Smart Report Online provides an 8-page newsletter every 3 weeks, an in-depth 6 page interim update every Wednesday on our intermediate-term signals and recommended holdings, an in-depth 4-page ‘Gold, Bonds, Dollar’ update every 2 weeks, and special reports and hotline updates as needed. Highly regarded and in our 24th year. As a bonus for a one-year subscription you will also receive my latest book Beat the Market the Easy Way- Proven Seasonal Strategies That Double the Market’s Performance. Click here for subscription information.

This blog appears every Tuesday, Thursday, and Saturday morning!

**** End of Today’s post*****

global economies slowing

Potential head and shoulders pattern in the works.

VIX daily.

Trendline for the Industrials.

“But that is not the question. Why are we here, that is the question. And we are blessed in this, that we happen to know the answer. Yes, in this immense confusion one thing alone is clear. We are waiting for Godot to come” - Samuel Beckett, Waiting for Godot

And so it goes, more questions than answers really. My confidence in market expectations continue to be bifurcated and sliced, like a cadaver – six months worked through by over ambitious first year med students eager to connect the dots. 

_____________________

Student: “Yes Professor, I can see the circulatory system. The heart, the vessels – the physiological framework.” 

Professor: “But how are things correlated to his death – what caused it?” 

_____________________

Perhaps our patient isn’t terminal after all. They are certainly pumping bolus infusions of liquidity into the global circulatory system, as evidenced in the once ailing equity patients now sprinting sub 5 minute mile’s with the reckless abandonment of the late, great Steve Prefontaine. So why is gold and silver, and the broader commodity complex in general – behaving so poorly in an environment inundated with easing(s) and the constant almost daily ruminations of QE(x)? It seems for many of the purchasers of these hard assets, that was the rationale and attraction to own them in the first place, no?   

Before I take a shot at this, I would be fooling myself without acknowledging that perhaps I am distilling a situation that is far more complicated than my thesis presents. Although I am constantly reminded that the purported experts on various mechanisms for asset movements – since these troubles (circa 1998) began, have often been wrong in both causation and timing. It’s wise to remember if you swim in these waters long enough, don’t forget to acknowledge lady luck as well. She’s sometimes your best friend and at other times a cruel mistress of misfortune. Of course you never really know by walking beside her – she smile’s just the same. 

So with that said, and considering the currency and commodity markets have for the most part acted within my understanding of their respective anatomies, I am waiting as a thesis is tested; of which, a critical part is being scrutinized as our domestic equity markets continue to outperform by a very wide margin, what was once the stalwart of the reflationary moves off both the 2002 and 2009 lows – the precious metals and commodity (CRB) markets. 

As mentioned before in my previous notes, I utilize ratio charts as another dimension in appraising where a market stands. For this particular thought I continue to lean heavily on the silver:gold and the CRB:SPX ratios. The basic premise being that the interventions by the Fed and Treasury – since 2002, put considerable pressures on an overvalued U.S. currency, which in turn contributed to the reflationary rebound in our equity markets and the reemergence of precious metals and commodities as a performing asset class.These ratios have also in the past provided guidance as to when risk ebbs and flows within the markets. Generally speaking since the bulls’ started snorting in 2002, when silver outperforms gold – risk is being taken on by traders in size. Certainly there is more motivational nuance to the story for both the equity and commodity markets – from historically low interest rates to the emergence of large developing economies such as the BRIC’s. Both of these reasons have been sited by the bulls as strong underpinnings of the cyclical bull markets in equities (2002-2007 & 2009-Today) and the secular bull market in precious metals and commodities (2002-2011?). 

So where am I going with this? 

As noted in the chart below, we are currently experiencing the inverse dynamic of the downturn that began at the end of 2007. At that time it was our own economic growth that began to turn down before the world economy caught fire. This time around, the world indices have been diverging from our own markets performance since last year.  

Considering growth has very much been tied to the commodity boom in the emerging economies of the BRIC’s – it is hard to see that well being replenished as the commodity index continues to slump. As noted last year in April - the CRB index appeared to be completing the final retracement rally of a very broad head and shoulders top. Since then, the MSWORLD index has also followed that same arc. 

This has also coincided with the downturn in the euro, the silver:gold ratio and the precious metals market in general. 

You could make the argument that our markets on a relative performance basis have just been playing catch up to the overshoot of the last crisis. 

So can the Bernanke Put avoid a similar fate of his predecessor’s psychological control over the markets? 

In this version – Godot actually shows up.

In the last 8 weeks, bond traders have seemingly been willing to “fight the Fed.” The 10-year yield has crept up 50 basis since the start of February to 2.27%. What’s more, you don’t have to look very far to find an analyst willing to declare an end to the love affair that investors have had with U.S. government bonds.

Perhaps ironically, the boldness of Wall Street bond traders may have been ignited by better-than-expected employment data. And, intuitively, one might think that an improving labor market would be good for the U.S. economy and for U.S. stocks.

So why would Fed Chairman Bernanke express doubt on the viability of a continuation in employment gains (3/26/2012)? And why would such negativity encourage the stock market to surge, striking multi-year highs?

Consider Bernanke’s speech to the National Association for Business Economics. He said, “While the labor market may lead to a self-sustaining recovery, we have not seen that in a persuasive way yet.” In essence, he wants to provide ongoing stimulation (e.g., ultra-accommodative rates, treasury bond purchasing with electronic money printing, etc.) because he believes it is the answer for helping an economy that is not capable of sustaining itself.

Naturally, if the head of the most powerful central bank in the world says that it will continue buying bonds with electronically created money that didn’t exist prior to quantitative easing, that fiat currency may not be worth as much as it was before. Not surprisingly, gold moved markedly higher. And most currencies that trade internationally strengthened against the greenback.

It’s important to note, Bernanke probably needed to reassert his intentions. If you look at the 1-month losses in treasuries and the the 1-month losses in foreign currencies, it was as if people were beginning to bank on a self-sustaining U.S. economy. At least for a day, though, Bernanke made sure that the U.S. dollar didn’t get ahead of himself.

Indeed, it may make sense to avoid investing in a manner inconsistent with the Federal Reserve’s goal. On the other hand, Europe’s economic contraction and ongoing austerity will make it hard for Currency ETFs to make appreciable progress against the U.S. dollar.

That said, if you believe that the Australian dollar can hold its ground over the course of 12 months, Currency Shares Australian Dollar (FXA) may reward you with a 3.5%-4.0% annualized payout. That’s still better than the U.S. 10-year treasury.

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When you listen to the arguments in favor of tying the nation’s monetary policy to gold, the associated claims for why this is reasonable are often presented as airtight. One example that I hear frequently is the claim that the gold standard’s application in U.S. history was virtually flawless in promoting economic growth. The implication: any one who questions a policy that genuflects to a certain shiny, malleable metal is either uninformed, inebriated, or part of some vast big-government monetary conspiracy.

The case for the gold standard is commonly presented as open and shut by its more ardent supporters, but the historical record is slightly more nuanced. At the very least, there are substantive questions that should—must—be addressed in any reasonable discussion about reviving a gold-based monetary system. But don’t hold your breath. Most gold bugs aren’t eager to embrace the awkward bits of history that cast aspersions on their metal’s monetary past.

A recent example that caught my eye is a Forbes column by Brian Domitrovic, a professor in the department of history at Sam Houston State University. The professor’s latest brief asserts that the metal’s influence over the U.S. economy, when the gold standard reigned supreme in the decades following the Civil War, was nothing less than spectacularly productive. Yes, he concedes, there were some minor problems, but these were mere trifles, barely worth mentioning. As Domitrovic explains:

Whatever criticism there is to be leveled at the gold standard during its halcyon days in the late 19th and early 20th centuries, we now know, it is small potatoes. However many panics and bank failures you can point to from 1870 to 1913, the underlying economic reality is that the period saw phenomenal growth year after year, far above the twentieth-century average, and in the context of price oscillations around par that have no like in their modesty in the subsequent century of history.

While we can all agree that economic growth was impressive during the roughly four decades until the creation of the Federal Reserve in 1913, it’s debatable how much of the growth is attributable to gold. The U.S. was an emerging market at the time and so it’s reasonable to ask if the country’s natural growth rate was higher compared with the relatively mature economy that currently prevails. But let’s accept Domitrovic’s premise at face value and give the gold standard the benefit of the doubt. What, then, are we to make of the nasty run of deep and relatively prolonged recessions that harassed this era on a routine basis? Small potatoes? Hardly.

According to NBER data, recessions a century ago were relatively frequent and lengthy by the current standards of the last several generations of macro history. During the 43-year span of 1870-1913, the U.S. endured 11 recessions. By contrast, there have been roughly half as many downturns—six, to be exact—in the 41 years since 1971, when the last vestiges of the gold standard were abandoned. Meantime, the recessions of 1870-1913 lasted longer, running for an average of nearly 24 months (peak to trough) vs. a comparatively short 12-month average from 1971 onward. Keep in mind, too, that the longest U.S. recession on record—a 65-month monster during 1873-1879—surfaced in the era that Domitrovic hails as gold-inspired macro nirvana.

You can, of course, argue that robust economic growth over the broad span of 1870-1913 is a reasonable tradeoff for any short term volatility. Then again, arguing for the wisdom of such a tradeoff may not be all that persuasive if you’re one of the victims of the era’s many downturns. The public may have been a stoic lot in the 19th and early 20th centuries during episodes of macro turmoil, but the tolerance for such events is virtually nil in the 21st century. Dealing with political sentiment in democratically elected governments may be inconvenient, but it’s reality.

Domitrovic also dismisses the various studies over the years that place some if not most of the blame for the Great Depression on the gold standard. For example, he advises that Barry Eichengreen’s book Golden Fetters from 1992 has been superseded by Richard Timberlake’s research. The argument here is that the gold standard really wasn’t operative in the 1930s. Maybe so, but it’s hard to overlook the fact that the economy grew strongly soon after Roosevelt removed the link between the dollar and gold in March 1933. Meanwhile, before we throw out Eichengreen’s research, consider too that he documents that the earlier a country left the gold standard in the 1930s, the sooner its economy began to heal from the deleveraging crisis:

Source: “The origins and nature of the Great Slump revisited,” Economic History Review, May 1992

Gold bugs would have us believe that a monetary system based on the metal relieves us of the burden of maintaining a central bank. But once again, history tells us different. During the The Panic of 1907, before there was a Federal Reserve, and at a time when the U.S. was on a version of the gold standard that professor Domitrovic recognizes as legitimate, a financial crisis forced the country to invent a central bank on the fly (under the leadership of J.P. Morgan) to inject some much-needed liquidity into the system and prevent a meltdown. In fact, similar events had been common in the previous decades. After the 1907 debacle, the country decided that it had had enough and established a formal central bank.

The point of all this is to remind us that the alleged open-and-shut case for returning to a gold standard has a few defects after all. There are tradeoffs in binding a nation’s money supply to gold. You can argue that the tradeoffs, when all is said and done, favor a gold standard. History, in my opinion, suggests otherwise, but, hey, it’s certainly legitimate to have this debate. But that’s the issue here: there are debatable aspects in this conversation. You wouldn’t know it from listening to some of the gold standard people, but history isn’t anywhere as compact and tidy as some claim.

I think the onus of proof should be on those who assert that central planning in money and banking is superior to a system that would emerge from voluntary contractual arrangements. Central planning doesn’t outperform in any other sector of economics.

I suggest reading Lawrence H. White’s works on banking, and consider a wider array of data and time periods.

As for gdp volatility vs growth, there is much to be said for having a financial system evolve as hardy weeds, rather than a bunch of greenhouse flowers protected by government (that occasionally itself crashes down, allowing all to die at once). Volatility breeds resiliance. However, some of US volatility could potentially be attributable to branch banking laws that prevented banks from diversifying exposures.