Personal Finance
»» Stocks rallied across regions late in the week after the ECB’s Mario Draghi committed to preserve the euro. Short covering fueled the move.
»» Given European policymakers’ spotty track record, we’re skeptical the ECB can change the region’s course on its own. Governments need to carry much of the load. (page 2)
»» Have households extinguished enough debt to start spending again? (page 3)
»» China’s interest-rate cut may be seen as reactive, rather than preemptive. (page 4 – Asia Pacific section)
»» Global Roundup: Updates from the U.S., Canada, Europe, and Asia. (pages 3-4)
Submitted by Victor Adair on July 30, 2012 – 7:41am
We’ve had a week of dramatic reversals across all markets.
Stocks: The DJI dropped nearly 500 points from the Friday July 20 highs to this past Tuesday’s lows…and then rallied back nearly 600 points to the Friday July 27 close.
Credit Markets: Early this week the yields on “safe haven” bonds fell sharply while the yields on Spanish bonds soared. This pattern reversed dramatically Wednesday through Friday.
Currency markets: Early this week the US Dollar Index surged to new 2 year highs…and then reversed sharply Wednesday through Friday.
We had Key Weekly Reversals higher in Euro, Swiss, CAD, AUD, DJI, S+P, TSE, Gold (in USD terms), US treasury yields from 2 through 30 year maturities, and a Key Weekly Reversal lower in the US Dollar Index.
From an emotional point of view the stock market had been flying high (relative to the credit markets) until it hit a stone wall Friday, July 20, as Spanish bond yields soared and the markets feared that the Euro debt crisis could swiftly spin out of control. The fear intensified Monday and Tuesday…investors scrambled for safety…the USD and the Yen soared, stocks tumbled, safe haven bonds rallied and liquidity drained out of the markets…and then…
Late Tuesday afternoon an article by Hilsenrath in the WSJ speculating about imminent Fed easing brought the DJI back from its lows to close slightly higher on the day. A comment the next day from ECB head Mario Draghi to the effect that the ECB would do “whatever it takes” to save the Euro seemed to light a fire under the markets and the weekly reversals were on with a vengeance. The market mood had become increasingly fearful Friday through early Tuesday and then suddenly changed to becoming increasingly hopeful Wednesday through Friday. To say that the market mood swings have been manic-depressive would be an understatement.
This week ahead there are scheduled central bank meetings of the BOE, the ECB and the Fed…as well as the US employment numbers Friday Aug 3…plenty of fuel for more manic price swings.
What is the market really doing? Despite the manic-depressive mood swings, despite the torrent of capital rushing into perceived safe haven bonds, despite the seemingly intractable European debt crisis, despite the sluggish US and global economy, despite the all time record high number of American citizens on food stamps and disability it seems that THE STOCK MARKET WANTS TO GO HIGHER…the DJI has rallied over 1000 points from the June 4 lows…over 2,700 points from the October 4 lows.
Why? It seems as though we are mainly trading off macro political or central bank inspired headlines…or rumors…its seems as though the markets expect central banks will take further reflationary action…will print more money…which will inspire risk on…and higher asset prices.
The technical view: Technicians make the point that you can never know all you need to know to make the best market decisions…but if you look at the market you can see what it’s doing…so free yourself of your opinions about what the market should be doing and look at what it is doing. When I look at the US stock market this week I see that it rallied right through this month’s previous highs and closed at its best levels in nearly three months. This market is a classic case of climbing a wall of worry.
There has been a huge amount of cash sitting on the sidelines for the past few years due to economic and political uncertainty and that money could come into this market…taking it much higher…yes, the economic and political uncertainty that has kept that cash on the sidelines still exists…yes, those problems may only be intensifying…and yes, it’s entirely possible that the stock market may reverse tomorrow and drop a few thousand points before Christmas…but…since March, 2009, the US stock market has been trending higher and, as skeptical as I am and as skeptical as I have been, I have to say it looks like this market wants to go higher.
With my own money I remain cautious in both my short term trading account and my long term savings accounts…I feel there is a high degree of risk in these markets…so I remain on the sidelines…but I don’t want to be short either!
Victor Adair
Senior Vice President and Derivatives Portfolio Manager
Contact Victor E-mail @ vadair@union-securities.com
Victor Adair is a Senior Vice President and Derivatives Portfolio Manager at Union Securities Ltd. Victor began trading financial markets over 40 years ago and has held a number of senior positions during his long career as a commodity and stockbroker. He provides daily market commentary on CKNW AM 980 radio Vancouver and is nationally syndicated on Mike Campbell’s weekly Moneytalks radio show.
Victor’s trading focus is primarily on the currency, precious metal, interest rate and stock index markets and his clients are high net worth individuals and corporations.
Three major events will dominate equity market trends this week:
- · The FOMC meeting announcement on Wednesday. Will the Fed hint or take action of QE III? Market action last Thursday and Friday suggests a high probability.
- · The European Central Bank announcement by Draghi on Thursday. Is Draghi serious or is he bluffing following his comments last week about saving the Euro? Market action late last week suggests that he is serious.
- · The July employment report on Friday. Consensus suggests a modest improvement. However, this report is infamous for its frequent adjustments that have little to do with real employment (birth/death adjustment, immigration adjustment, seasonal adjustments particularly related to the auto industry in July).
U.S. economic news released this week (other than the employment report) will be mixed at best. Most will confirm that real GDP growth in the third quarter is anemic at best. On Friday after the initial estimate of second quarter GDP was released at only a 1.5% annual rate, most economists lowered third quarter real GDP estimates. According to CNBC, average estimate based on a survey of well-known Wall Street economists was a decline of 0.1%.
The VIX Index rose 0.43 (2.64%) last week, but was heading lower on Thursday and Friday following spikes to higher levels earlier in the week.
Other macro events to watch this week include Eurozone Consumer Confidence to released today, Canada’s May GDP on Tuesday, Eurozone PMI on Wednesday, China’s PMI on Wednesday and Eurozone interest rates on Thursday.
Earning reports will remain a focus. Reports released last week generally showed lower revenues and earnings than the second quarter last year, but earnings that exceed consensus. Unless, reports were significantly lower than consensus, stock prices advanced. Look for more of the same this week. Frequency of Canadian reports will increase significantly this week.
Seasonal influences on equity markets in August turn negative. According to Thackray’s 2012 Investor’s Guide, “The month of August has been the fourth worst month from 1950 to 2010” for U.S. equity markets. In addition, U.S. equity index losses during the past 10 periods were significantly higher than the previous five decades. More information will appear in tomorrow’s Tech Talk. Weakness in August is greater in the first half of August than in the second half. August frequently is the time when analysts re-evaluate their estimates following release of second quarter results. Analysts have a habit of over-estimating annual results in the first half and adjusting estimates lower after second quarter results become available. Currently analysts are estimating a 13% increase in fourth quarter earnings on a year-over-year basis. These estimates clearly are too high. Downward adjustments this year will be higher than usual.
Short and intermediate technical indicators for most equity markets and sectors are overbought, but have yet to show signs of peaking.
North American equity markets have a history of moving higher from June to December during Presidential Election years. However, at least one correction during that period also is normal.
Cash on the sidelines remains substantial and growing. However, political uncertainties (including the Fiscal Cliff) preclude major commitments by investors and corporations.
The Bottom Line
Equity markets on both sides of the border have had a good ride since their lows set on June 4th. The Dow Jones Industrial Average is up 8.6%, the S&P 500 Index has gained 9.4% and even the TSX Composite Index has improved 5.0%. Investing in equity markets has become less attractive. Accumulation of seasonal trades on weakness continues to make sense as long as the seasonal trades are outperforming the market. Sectors in this category include agriculture, energy, leisure & entertainment, software and gold. Equity markets will move higher if good news from three major events this week is released. However, upside potential relative to downside risk is significantly less now than early June. A cautious bullish stance appears appropriate.
Equity Trends
The S&P 500 Index gained 23.31 points (1.71%) last week. Intermediate trend is down. The Index broke above short term resistance at 1380.39 on Friday to reach a 12 week high. Support is at 1,266.74. The Index returned to above its 20 day moving average on Thursday and remained above its 50 and 200 day moving averages. Short term momentum indicators are trending higher.
Percent of S&P 500 stocks trading above their 50 day moving average increased last week to 75.00% from 64.60% last week. Percent is intermediate overbought, but continue to trend higher.
Percent of S&P 500 stocks trading above their 200 day moving average increased last week to 65.40% from 59.40%. Percent remains intermediate overbought.
The ratio of S&P 500 stocks in an uptrend to a downtrend (i.e. the Up/Down ratio) increased last week from 0.95 to (230/198=) 1.16. Sixty S&P 500 stocks broke resistance (mainly on Thursday and Friday) and 43 stocks broke support).
Bullish Percent Index for S&P 500 stocks increased last week to 61.60% from 61.20% and remained above its 15 day moving average. The Index remains intermediate overbought and trending higher.
The Up/Down ratio by TSX Composite stocks improved from 0.82 to (111/110=) 1.01. Twenty seven TSX stocks broke resistance and 20 stocks broke support.
Bullish Percent Index for TSX Composite stocks increased last week to 50.00% from 48.37% and remained above its 15 day moving average. The Index continues to trend higher.
The TSX Composite Index gained 143.45 points (1.23%) last week. Intermediate trend is down. Support is at 11,209.55 and resistance is at 11,936.16. The Index remains above its 20 and 50 day moving averages and below its 200 day moving average. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index remains negative.
Percent of TSX stocks trading above their 50 day moving average increased last week to 58.94% from 53.66%. Percent is intermediate overbought, but continues to trend higher.
Percent of TSX stocks trading above their 200 day moving average increased last week to 39.43% from 38.62%. Percent is trending higher.
The Dow Jones Industrial Average added 253.09 points (1.97%) last week. Intermediate trend changed from down to up on Friday when the Average broke above resistance at 12,077.57 on Friday. The Average remains above its 20, 50 and 200 day moving averages. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index is negative, but showing early signs of change.
Special Free Services available through www.equityclock.com
Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.
To login, simply go to http://www.equityclock.com/charts/
Following is an example:
AMEX GOLD BUGS INDEX ($HUI) Seasonal Chart
Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc
For investors, this summer has been a doozy so far. It’s been full of uncertainty. What will happen to Europe? Will taxes go up here in the United States? Who will be the next president?
The concerns, however, don’t end there.
Is the economy OK, or is it starting to tank again? What will the investment environment look like four months from now … six months from now … next year?
And for traders, things haven’t been much better.
The above uncertainty and more has led to nothing but wildly swinging trading ranges in most markets. One day, gold looks like it’s tanking. The next, it’s soaring.
One day, the Dow Industrials are collapsing. The next, the Dow is exploding higher.
All of this has made for some very volatile markets for the summer, chopping up even the best investors and traders.
Given Europe, the fiscal cliff facing the United States at the end of the year, and the upcoming presidential elections leading up to it — the uncertainty is definitely understandable. The choppy trading markets are, too.
But all of this begs several questions …
When will the uncertainty subside? When will the choppy markets give way to trending moves? How best can an investor get positioned now? How best can a short-term trader get ready to make some decent, trending profits?
In this column, I’ll answer all the above based on what my cyclical and technical models are telling me.
And in my opinion, it’s all good news.
FIRST, and perhaps foremost: I don’t think we will have to wait much longer to see a resolution of the current choppy and uncertain markets.
Based on everything I am studying, virtually all markets are on the cusp of important moves. Moves that will clarify a lot of the uncertainty out there, and lead to solid, trending moves in many markets.Moves with very high profit potential.
That’s what my cycle work is telling me. Virtually all of it — short- and intermediate-term models — point to the first two weeks of August as major turning points for the markets.
A time period where we will see the wildly swinging moves in the Dow Industrials give way to a consistent trend. Where the extreme volatility in gold, silver and other commodities also gives way to trending markets.
And where we will also probably see the beginning of the end for the euro and the European Union.
Let me explain …
SECOND, dis-inflation still has the upper hand. Fundamentally speaking, there’s simply too much debt in the world for the central banks to corral right now.
And they know it. That’s why you’ve seen the Federal Reserve and the European Central Bank largely sit on the sidelines, refusing to take any big steps.
It’s why Moody’s has downgraded Germany. It’s why Greece will soon have no choice but to pull out of the euro. It’s why Spain is now on the verge of not another bailout for its banks ― but instead a full-blown sovereign bailout. And it’s why Italy is also starting to go over the cliff.
None of that will change until the world’s major central banks come out swinging. And they won’t come out swinging until the masses want them to — when systemically important financial institutions are about to go under, like they were in the midst of the real estate crisis here in 2008 and 2009.
In the meantime, dis-inflation continues to keep its upper hand. Despite the recent (and very weak) rallies in many markets, you can take your cues from U.S. Treasury rates.
They are at RECORD lows, which means the majority of capital in the world is still scared stiff and flocking to cash. That’s not inflationary. That’s dis-inflationary.
And my models are clear: It’s going to continue in August, and probably well into autumn ― as investors largely withdraw from the markets.
Moreover …
THIRD, all of my technical models are resolutely short- and intermediate-term bearish for almost all asset classes (except the U.S. dollar and bonds).
For instance …
Gold would have to close above $1,727.70 to turn the short- and intermediate-term trends back to bullish. And my models say that’s not in the cards yet.
Silver would now have to close above $30.71 to reverse the immediate bias to the downside. Again, my models say that’s not likely.
Oil would have to close above $98.48. Given the recent increase in the supply picture and falling demand around the globe, that’s not likely to happen either.
The Dow Industrials would now have to close above 13,995.30 on a weekly basis. That’s not going to happen in my opinion. Quite the contrary, I think we will soon find the Dow turning back to the downside and in an ugly way.
I repeat what I’ve said many times before: Ultimately, all of this will flip and nearly all markets will re-establish their bull markets. The only exceptions at that time will be the U.S. dollar and U.S. Treasury markets, which will turn back into bear markets.
But for now, the short-term dis-inflationary trends I’ve been warning you about are still intact, and about to accelerate to the downside, in the first two weeks of August.
Conclusions:
If you’re an investor with an eye to the long term, you should continue to preserve your ammo and hedge positions you can’t get out of, for whatever reason. The time will come to add to your long positions — but it’s not here yet.
If you’re a short-term trader, don’t be frustrated by the recent choppy markets, or any short-term losses you may have experienced.
And don’t let all the background noise in the markets, of which there is plenty, distract you. Instead, keep your eye on the true underlying short-term trends … and stay disciplined with your money management.
That’s because you’re about to see some terrific trending moves unfold, with awesome profit potential. So, keep your eyes open and stay tuned!
Best wishes,
Larry
We’re in the midst of a major global restructuring that has been happening for the last decade. (For the full interactive edition, please CLICK HERE)
Technology is replacing the traditional methods of manpower – much like that of the auto industry where machines have taken over the assembly and production of automobiles.
Last week the U.S. Postal Service announced that it would be unable to meet billions of dollars in payments that are coming due in August and September for future retiree health benefits. Post offices all over the US are being cut back as digital communications have taken over.
Newspapers and magazines around the world are struggling as people move away from print to online media. Publishers everywhere are feeling the heat as new and less wasteful forms of books are published in digital format.
The days of walking to your neighbourhood video rental store are gone. The once famous Blockbuster stores and Canada’s own Rogers Video stores are all but obsolete. I still remember grabbing the free popcorn and browsing the aisles of the Jumbo Video stores – but that is a distant memory never to be relived again.
Innovation is human evolution. Yet as we advance in technology, more jobs will be destroyed and replaced by more efficient robotics and digital technology. Movies where humans lose their jobs to robots and technology are no longer fiction – its reality.
Manufacturing has long moved to emerging markets where costs of production are far below anything in N. America. That means the technology created here are sent overseas to be mass produced.
The Big Problem
Economies grow through mass consumption. The more we consume, the bigger the economy. That is why the US is the number one economy in the world; it is the ultimate consumer.
To fuel that consumption, an economy must be able to sustain itself through the production of goods and services. It must be able to create wealth through job creation. But the problem is there is no job creation.
Unemployment rate has been stuck above 8 percent for more than three years in a row (real unemployment rate is easily double that number) with little signs of hope. Confidence among U.S. consumers dropped in July to the lowest level this year.
Revised GDP numbers are now showing a 2.5 percent growth in the 12 months after the contraction ended in June 2009, compared with the 3.3 percent gain previously reported. The government also revised down corporate profits and personal income for each of the past three years.
The US knows it needs to create more jobs to fuel consumption – to increase GDP. But where will the new jobs come from?
The Truth About the Bubble
A couple of years ago in the letter, “The Truth About the Bubble” I wrote:
Over the past few decades, we have witnessed two very significant bubbles: the dot-com bust and the recent housing/commodities bubble.
During the rally of the dot-com days, everyone got excited about the Internet boom. The NASDAQ 100 doubled in less than a year and kids from their basements were becoming multi-millionaires.
In 1996 Alan Greenspan warned that the U.S. economy was suffering from “irrational exuberance” as the stock market, led by the high-tech and Internet sectors, boomed. Yet he and the Fed took no action, and added billions of dollars into the economy. Greenspan knew he should have put a hamper on the stock market craze with rate hikes, but he didn’t – until it was too late.
The dot-com crash wiped out $5 trillion in market value of technology companies in two years.
A few years after the dot-com boom, recovery was slow and tedious. This put pressure on the fed to once again cut the Fed Funds rate dramatically over the next few years from a high of 6.25% in 2001 down as low as 1.5% in 2004. This, of course, created yet another bubble.
The Housing and Commodities Bubble
Because of the low rate, housing prices were climbing and many of the homes increased by as much as 200% in less than a few years.
First time home buyers were eagerly racing to snag up homes with low interest rate mortgages. They took on half million dollar mortgages on houses that were worth less than 200k just years ago.
Combine that with offers from mortgage companies that were far too good to be true, it led to the subprime mortgage crash, and thus 2008 unfolded.
A Credit Bubble
Where I am I going with this?
For the last decade, most American consumption came as a result of low borrowing costs. This led to the major bubble in 2008. Yet here we are again and the only choice politicians have is to give away free money to avoid the same disaster caused by giving away free money.
In Q2 America added $2.33 in debt for every $1 in GDP; the US added $274.3 billion in debt while adding $117.6 billion in GDP. Never have I studied a scenario like this that hasn’t ended in disaster.
There is no way to avoid the collapse of a credit boom. There are only two simplified choices:
- Let the world’s financial system collapse
- Print more money/expand credit, destroy currency
Most people believe that printing more money causes inflation. But what they don’t realise is that it doesn’t always happen right away. Too much austerity can, and will, lead to a deflationary spiral – especially when combined with a world economy that is in surplus. Years of deflation will occur, followed by a fast and major rise in inflation as the economy recovers and grows.
The world is producing far more than it can consume as a result of a mentality that the only way out of this credit bubble is to increase spending. But when the spending comes from debt, it only creates a larger bubble. What would happen if the US couldn’t print more money? What would happen if the dollar was no longer the world’s reserve currency?
Still Number One…But for How Long?
The only reason America has not already collapsed under the weight of its massive debt is because of its status as the world’s reserve currency. That status means it can print massive amounts of dollars and people will still buy them. But surely this won’t last.
I have mentioned before in my letter, “The Biggest Buyer of Garbage” that China is secretly and cautiously introducing its currency to the world by untangling itself from its substantial reserves of US dollar. I also talked about how China and Russia have already abandoned the dollar in bilateral trade dealings, resolving to use their own currencies instead (see It’s Already Here).
Many major banks, including British banking giant HSBC, have already openly said the Renminbi could soon become another world reserve currency. These banks are already setting up in preperation for this occurence by allowing major transactions to be done in the Renminbi. HSBC has just recently created the first Renminbi bond issue outside of China and Hong Kong, a move toward the internationalisation of the renminbi, and in the UK’s efforts to expand its financial links with the world’s largest emerging market.
If it were freely convertible today, the Renminbi will be the second-largest currency in the world.
What Happens if China Sells Out?
China is the largest holder of US bonds. If China were to sell its $1 trillion plus of US bond holdings, the prices of US bonds would drop and interest rates would rise (yield moves opposite to price in bond markets. The rate of interest from a bond does not change, so the price of that bond fluctuates to adjust to current yields. The bigger the yield, the bigger the risk associated with the issuing country.)
Higher interest rates would obviously be bad for business. As the world’s largest manufacturer, China cannot afford bad business. As a result, China would not be looking to unleash all of their US bonds. Rather they would slowly diversify their holdings for gold and other commodities.
It’s not a coincidence that the US is both the largest holder of gold bullion and the world’s reserve currency; it has more than 76% of its foreign holdings in gold. China, on the other hand, owns less than 2% of its foreign holdings in gold. Furthermore, the US has nearly 8 times more gold than China.
China will be increasing its gold reserves.
I mentioned a few weeks back that banks in Europe will soon have to recapitalise their tier 1 assets in gold bullion. What many are unaware of as well is that the recent proposal from the Germans on the European redemption facility requires that gold be posted as collateral by those who participate.
That’s a clear sign that countries and central banks trust gold over any other currencies.
Gold to Breakout?
From a technical standpoint, gold is looking to rebound with some serious momentum. If gold were to break through $1640 and stay above this level, we should see a renewed rise in gold.
Gold mining shares are looking strong – finally.
Despite the drought, the GDX’s MACD has finally turned up towards a buy signal and RSI is also positive. Bellwether Agnico Eagle’s price action is looking much stronger – especially considering the beating it took after its $2-billion write-down earlier this year at its shuttered Goldex mine.
By September, Hong Kong will have completed construction and opening the doors to its largest gold vault. It will hold nearly 22% of the gold that Fort Knox has.
China, currently the world’s second largest consumer of gold, is clearly making a statement that it wants to expand its holdings of physical gold bullion.
You don’t build a vault that big just for show.
Until next week,
Ivan Lo
(For the full interactive edition, please CLICK HERE)
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