Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. This
is an article that expresses our personal opinions about comments made
on Television and in Print. It is NOT intended to provide any investment
advice of any type whatsoever. No one should base any investing
decisions or conclusions based on anything written in or inferred from
this article. Investing is a serious matter and all investment decisions
should only be taken after a detailed discussion with your investment
advisor and should be subject to your objectives, suitability
requirements and risk tolerances.
1. The U.S. Stock Market
This week, our summary will be rather short. Frankly, the only reason for this summary is to provide an update about the Santa Claus rally. The Dow, S&P, NDX all rallied by 3.6% this week. The S&P also closed above its 200-day moving average in the final spurt on Friday.
The outlier was BKX, the Bank index, that rallied by 6%. That must mean Europe was benign this week. For once, Europe surprised on the upside with the first LTRO. The other surprise on the upside was the vacation of Angela Merkel.
A week ago, we wondered:
- This week, our featured clips are all mega bearish. Will this prove to be
another contrary signal for the stock market next week?
And so it was.
2. Technician Calls on the S&P 500
This week, Tom DeMark appeared on Bloomberg TV (see clip 1 below) to defend his forecast of December 5 about a rally to 1313-1340 in 8 trading days (See clip 4 of our Videoclips of December 5-December 9, 2011). This is noteworthy in itself. Rarely does a pandit come on air to discuss his forecast when it is not working. It is also rare for a FinTV Anchor to keep updating the predictions of the pandit on Tweeter and then invite the pandit on his show to challenge him. Kudos to both Tom DeMark and Adam Johnson of Bloomberg TV. Following the interview, Adam Johnson tweeted the summary:
- Tom DeMark: $SPX will likely trade thru 10/27 high of 1284 next 7-8 days and then top out 1313-1340. Caveat: if no 1284 by 12/31 problem.
Mr. DeMark also made the following comment that suggests caution ahead (see clip1 below):
is what we really concentrate upon, it is getting very close to a
bottom..two more lower closes in that volatility index, could identify a
bottom and typically anywhere from 2-7 days later, the markets top
Mr. DeMark made this comment at around 3:20 pm on Thursday. The VXO closed down on both Thursday and Friday. So the requirement of “two more lower closes” in VXO has been met, we think. If the stock markets tops out in 2-7 more days, then Mr. DeMark and his host Adam Johnson will have rendered valuable service to Bloomberg TV’s viewers.
Mr. DeMark was more humble and circumspect on this Thursday unlike in his appearance on December 5. Is humility a better prognosticator of reliability? We shall find out together.
Mr. DeMark’s suggestion of a potential market top was somewhat shared by @ElliottForecast, which tweeted the following on Friday morning at around 10:40 am:
- we see a market possible tending a Trap
As Lawrence McMillan forecast last week, the oversold condition ended up producing a short term rally. he warned on Wednesday that Tuesday’s rally had converted the oversold condition into an overbought condition. What does he say about next week?
- The $SPX chart is confined by two trend lines. A breakout through either trend line should propel a sizable move in the same direction. Currently, the breadth indicators are on buy signals. $VIX has been divergently bullish for some time now. … In summary, the test of resistance is taking place now. We should know fairly soon whether or not it is successful. If so, bullish positions can be taken.
His charts can be viewed at Option Strategist.
Note however, Mr. McMillan’s 2012 Market Forecast is very different and strongly worded:
- …We still expect a bear market to unfold – one that will be far more severe than what we’ve seen in the last few months (although perhaps not so volatile). It is likely that the next bear market will take out the 2009 lows, thereby souring an entire generation (or two) on stock ownership for much of their lives – as it happened with investors in the 1930’s.
Like some other technicians, Mr. McMillan is looking at comparisons between the current market and the 1937-1942 market.
We must hasten to add that the vast majority of “expert guests” on FinTV this week spoke glowingly of a big rally next week. They also predicted that stocks are the best place to be and Treasuries need to be sold or shorted. In other words, the same forecasts that pervaded FinTV in December 2010 and December 2009. They also suggested concentrating on high dividend paying stocks. Only a couple of brave contrarians like Steve Cortzez of CNBC Fast Money advised viewers to get out of high dividend paying stocks because it had become an extremely crowded trade.
3. Emerging Markets
A week ago, Michael Hartnett of BAC-Merrill Lynch wrote:
- Meanwhile, global long-only equity redemptions of $23bn in past 5 weeks means we move very close to a “buy” signal for equities.
This week, he announced “Buy-signal triggered”:
- Our trading rule us flashing a tactical “buy” signal….Our backtesting shows that MSCI ACWI, on average, rallies 6% in the subsequent 3-4 weeks…..The rule last gave a “buy” signal on Aug 9, 2011, coinciding with the first trough in global equities after big 16% sell-off in Jul-Aug. ACWI rallied 4% in the subsequent 3 weeks before taking another leg down to the Oct 4 trough.
But, strangely, his EM trading rule is not a Buy.
- EM saw big $4.3bn outflows (6 straight weeks of outflows and strongest since Aug’11); alas our EM trading rule remains in neutral territory
4. Interest Rates
Just as stocks rallied by 3.5%, TLT, the Treasury ETF, fell by 3.5% this week. The yields on the 30-year and the 10-year rose by 20bps and 17bps resp. to close at 3.06% and 2.02%.
We urge readers to read the article The ugly side of ultra-cheap money by Bill Gross in the financial times on December 21. This article begins with:
- Ultra low, zero-bounded central bank policy rates might in fact de-lever
instead of relever the financial system, creating contraction instead
of expansion in the real economy. Just as Newtonian physics breaks down
and Einsteinian concepts prevail at the speed of light, so too might
easy money policies fail to stimulate at the zero bound.
The article ends with:
- Fed chairman Ben Bernanke blames policy rate increases in the midst of
the 1930s for an economic relapse, and a lack of credit expansion for
Japan’s lost decades 60 years later. But all central banks should
commonsensically question whether ultra-cheap money continually creates
expansions as opposed to destroying liquidity, delevering and
obstructing recovery. Gresham as opposed to Keynes may become the
applicable economist of this new day.
The next day, the Financial Times published the views of Jeffrey Gundlach in the article titled US bond manager fears debt ‘crescendo’. The article describes his concept of Twin Towers of Risk that he articulated in his CNBC interview on October 13 (see clip 2 of our article Videoclips of October 10 – October 14, 2011). He answers the bond bears who expect inflation and much higher yields:
- People who are looking for an explosion in bond yields on a better
economy are thinking that somehow the world is still in 1995, where we
have moderate economic growth, low inflation, stable tax policy and
people getting along.
For once, Europe gave us a break. That in itself might explain the rally in US financials this week. Next week may not be so news-light with European auctions. Then Angela Merkel returns the following week.
Both Bill Gross and Jeff Gundlach agree that the European accord was hardly worth the paper on which it was written. Bill Gross tweeted his disgust, while Jeff Gundlach told the Financial Times how he felt:
- It [the Euro] was the most heroic example of co-operation but the co-operation was
on paper and it was lip service, because the countries started to
violate the requirements – the fiscal requirements – of their own treaty
He expects the European sovereign debt crisis to reach a “crescendo” next year. In the FT article, Jeff Gundlach invokes the favorite dictum of Kyle Bass of Hayman Capital.
In contrast, Jim Rickards wondererd if Kyle Bass had lost his reading glasses. Mr. Rickards, author of the national best seller Currency Wars, appeared on Bloomberg’s Money Moves on Thursday. He had tweeted earlier that the recent European agreement was far more than what the US Congress had dared to contemplate. Below is the summary of his opinions:
- He thinks the next currency crisis will hit the British Pound due to massive money printing by Britain. Britain is isolated and has no gold.
- He is positive on the Euro and on Gold. He thinks by the end of the first quarter of 2012, Deflation will be a reality in Europe. This will move the ECB to print money because deflation violates its mandate of price stability. But Europe has 10,000 tons of gold and so the Euro would be fine. Gold will of course be the big beneficiary.
- He thinks China is in trouble and would set the peg at a lower level to the dollar. This, he thinks, will be the trigger for the US Fed to launch QE3.
- He thinks the US is in a depression which began in 2007 and will last until 2014. But the US is the Saudi Arabia of Gold and so the US $ will be OK.
For a completely different analysis, see clip 2 below.
- Tom DeMark on Bloomberg TV’s Street Smart on Thursday, December 22
- Megan Greene on CMC Markets on Monday, December 19
- Robert Shiller on The Motley Fool on Friday, December 23
1. Better Rally by 12/31 or else – Tom DeMark with Bloomberg’s Adam Johnson – Thursday, December 22
Kudos again to both Tom DeMark and Bloomberg TV’s Adam Johnson for this follow up segment, the 3rd in the past few weeks. A summary of this entire interview was provided by Adam Johnson in his tweet on Friday afternoon:
DeMark – $SPX will likely trade through 10/27 high of 1284 next 7-8
days and then top out 1313-1340. Caveat : if no 1284 by 12/31 problem
Adam Johnson opened the segment with a direct question:
- Johnson – Two weeks ago, you came on on air and said you need to buy S&P 500. It is going higher – 1313-1340. You also thought it was going to happen by 12/21, yesterday. Didn’t happen. What do you think about the S&P right now?
- DeMark – Its difficult..it is difficult to define when a particular top or bottom is going to occur unless you use a model and the model we use has not spoken unfortunately. It is still directing us to the upside. We are currently at the same price level we were on the December 5th day and the market still looks like it could go higher…If someone were perfect, then obviously the business would be no fun.
- Johnson – As I recall, you were trying to extrapolate – you had said the previous 3 upwards moves in the S&P were 17-21 days and based upon your model, you thought that December 21st would be the peak. You were extrapolating, is that right?
- DeMark – that’s right. Just for simplicity’s sake, the rally of the August 9th low was 16 trading days, the rally off the October low was 17 trading days, so just for simplicity’s sake, I said this one would probably be 17 days = December 21. Actually, you got the seasonal pull through the first week in January..you got a lot of other factors that hinted the market should go higher and it has. Usually when a market makes a top as it did back in first week in December, it does correct less than 5.56%, and rallies again. Typically, that peak is taken out and our models are still telling us the upside the direction to follow the market.
- Johnson – you have also made the comment to me that we have to get through the high from October 27th, I believe it was 1284, and then you believe you are looking for 4-5 successively higher closes – that is still part of your thinking?
- DeMark – Still active – what I am looking for – there is some confusion from prior two times I was on the air – the October 27th high close is very critical, once we exceed that..if we do that October 27th..close, we must record 3 successively higher closes and that will fulfill the requirements of our model to identify the market top – it is the same model we used for the August 9th low and the October 4th low, it might possibly be 4 closes but we are running against the beat the clock right now..I think we got may be 8 more days, the VXO is what we really concentrate upon, it is getting very close to a bottom..two more lower closes in that volatility index, could identify a bottom and typically anywhere from 2-7 days later, the markets top…so by the end of the first week of January, we should have accomplished what I am looking for..which is 3 successively higher closes over that October 27th close ..
What happens if the market does NOT go higher than the October 27th close by the first week of January? Bloomberg provided an update on Friday afternoon:
- The latest forecast will expire by the end of the
first week of January if it doesn’t come true, Market Studies’s
Roderick E. Bentley said in an e-mail.
At this point, Adam Johnson changed the topic and began discussing the applicability of the DeMark model to Jobless Claims:
- DeMark – I tell you, it doesn’t look good. We have applied our model which are called Sequential and Combo, for primarily the markets, but also for have applications for economic indicators as well as politics..If you apply our model to the jobless indicator, you can see in 2006 it was a low bid and subsequently the jobless claims went up.. it peaked in 2009 and the market bottomed…currently we are at a low again, that doesn’t bode well for the market….
At this point Adam Johnson gives Tom DeMark credit for predicting the Gingrich-Romney tussle using Intrade charts. Mr. DeMark said:
- We called the Gingrich top and we called the Romney bottom…it was the right to the day when the thirteens (model rank) appeared…we are as surprised as most people are; the indicators do have some validation when they are applied to trends such as the popularity of a public politician…
2. Full Fiscal Union or Breakup of the Euro – Megan Greene of RGE with Michael Hewson of CMC Markets (21:20 minute clip) – Monday, December 19
We were alerted to this video by a tweet from Doug Kass in which he gave a shoutout to Zero Hedge for posting it. We thank both Zero Hedge and Doug Kass. This 21 minute clip is what Michael Hewson of CMC Markets calls his “brief chat” with Megan Greene of Roubini Global Economics.
Find some time during this holiday season and watch this clip in its entirety. Mimicking the “brief chat” understatement of Mr. Hewson, we include a “few” excerpts below:
- It’s not at all a debt crisis any more, it started off as a public debt crisis in Greece and a private debt crisis in Spain & Ireland, a bit of both in Portugal. But it has moved way beyond that by now. It is not just a debt crisis, it is a financial crisis, a political crisis. You have a banking crisis with the Sovereigns having to prop up all the banks. So there is a sovereign-banking negative feedback loop we see. It is impossible to break that unless you address both sides and you cannot do that unless you have political unity. But of course, you have a political crisis as well. It is very difficult to draw a line under this Eurozone crisis.
- The announcements they made at the Euro summit in theory kinda address the short, medium and long term nature of the crisis.
- So in the short term, they announced IMF funding from the national central banks that can be used for a big bailout of Italy and Spain.
- In the medium term they announced they would accelerate the ESM next year from 2013 and
- in the long term they talk about some treaty changes. But fundamentally, none of these measures actually draws a line under the crisis.
- For the IMF bazooka for Italy and Spain, we could cobble together about 600-700 billion euros and that’s enough to take Italy and Spain out of the markets for about a year and quarter, may be year and half….Some of it will come from the IMF possibly from national central banks lending to the IMF, some of it will come from the EFSF, there is 250 billion left over that has not been earmarked, and some of it will probably come from the ECB in terms of its continuing securities market purchase program. So using these different sources, you could cobble together around 600-700 billion euros.
- It would be stretching it but it wouldn’t actually really help. It would kinda delay the inevitable. So Spain and Italy both have new governments and immediately they have to implement austerity measures. And they also have to implement structural reforms.
- And in the short term, the austerity measures would just undermine growth.
- In the medium to long term, the structural reforms would help. But it would take a number of years for them to start supporting growth. So by mid 2013 at the latest, when Spain and Italy have to return to the markets, their debt dynamics are going to look even worse because their GDP would have fallen by then. So when they have to return to the markets, I don’t think investors will be anymore willing to hold their debt than they are now.
- So a debt restructuring is probably inevitable for both countries. But they have managed to do what they do best which is to kick the can a bit further down the road.
- Greece – The tipping point is either the Troika says you have missed the targets so many times, we are not willing to lend more money to Greece or whether it is the Greece government or the Greek people say we can’t do this anymore. I think ultimately EU leaders have said that Greece is a special case, it is really going to be a model of how we deal with weaker countries in the Eurozone, and ultimately Greek government will face a choice in terms of its growth strategy –
- it can either continue down this road of austerity and recession/depression to regain competitiveness which will take about a decade for Gree
ce probably and finally return to growth or
- it should leave the Eurozone, reissue the drachma, see a depreciation massively, regain competitiveness and return to growth –
- Argentina Parallel – that’s not say that leaving the Eurozone is an easy choice, it will be messy and painful, but if you look at kinda the nuclear case of Argentina, the worst case scenario, Argentina defaulted and gave up the dollar peg, it returned to growth within months. It is a much faster route to growth and given that choice most weaker Eurozone governments will probably choose to leave the Eurozone.
- EU Fiscal Compact – The idea of the fiscal compact is that it is meant to be the first step towards eventual fiscal union and I think the fiscal union and Eurobonds are potentially the only game changers left in this crisis. And these are supposed to be the first steps but they are not actually fiscal union. All the fiscal compact really does is institutionalize the asymmetric adjustment going on in the Eurozone whereby it is the peripheral countries that are having to make all of the adjustments with retrenchments while the core countries don’t make any adjustments at all. Gemany has been really insistent that fiscal union happen a certain way, that there is political union first and pooling of assets and finally pooling of liabilities, with Eurobonds and I think this is the right way to go about it but they needed to have started that process about years ago and now we are in middle of a crisis and they need to do things differently.
- LTRO – It doesn’t deal with the problem at all. In fact, it exacerbates it, a terrifying prospect in my view. Because then you are just strengthening this banking-sovereign debt feedback loop – banks borrowing at the ECB to buy more sovereign debt- that just makes it worse. At the end of the day, if you see cascading defaults, it will be that much messier. I am not convinced the banks will actually do that. I have spoken to a lot of banks and it seems that actually they are not interested in same sort of carry trade that they previously carried out using cheap ECB financing of sovereign debt.
- Germany – yeah, we will continue to lurch from mini-crisis to mini-crisis in this greater crisis. Unfortunately, fiscal union as I said is the only game changer and I don’t think there is the political will to achieve that. I mean for there to be true fiscal union, Germany would have unlimited fiscal transfers to the weaker countries for ever. and I don’t think the German government or the German people will ever be willing to accept that. I think fundamentally it will come down to the question of growth and growth is the one thing that no one has done anything to deal with.
- ECB – For the ECB to do the “right thing“, they would have to step in with unlimited, unsterilized fashion for ever. If it did anything short of that, if it did in a limited way, it would basically create the equivalent of a bank run in the bond market. All of a sudden, these investors who have been trying to get rid of this debt will see there is finally a big buyer and will line up to dump what they are holding. I think the ECB could actually exacerbate things if it stepped in a limited way. And I don’t think there is any chance that the ECB will step in an unlimited way.
- Binary Solution – Full Fiscal Union or Break up of the Euro –
- the first country that will leave the Eurozone will be Greece, possibly as early as end of next year, they will still be running a primary deficit, I think, basically it will be like a divorce. The Troika and Greece will admit this wasn’t really meant to be and I think because Greece is running a primary deficit, Greece will be frozen out of the markets if it leaves the Eurozone. The Troika will provide some kind of bridge financing to facilitate Greece’s exit from the Eurozone. So, I think there is a chance it could be done in a negotiated orderly way – like a Marshall plan for Greece – there are a lot of triggers that could switch it from orderly to disorderly – certainly events could supercede best intentions, it is possible… but I think it is in everybody’s best interests to have a default and exit be as orderly as possible. So I think they will probably deal with it that way..
- Greece will become kind of a model for weaker countries. So I think Portugal won’t be too far behind, and probably Ireland will end up going down the same route even thought it doesn’t have to but it might choose to if no one is making their creditors whole then why would Ireland?
- And I think Italy and Spain are the really the big question. Ultimately, it is the same decision and it will be much more difficult to make the exit of Italy and Spain more orderly but they will definitely try. Once you have Italy and Spain leaving the euro, there is essentially no Eurozone left. and at the end of the day, monetary union is really a political choice and so if you have that many countries dropping out there will be the political will to keep this euro project running any longer.
- Growth in Europe – there is a laundry list of things that need to happen for this recession to bottom out next year and growth to return..
- the ECB needs to cut rates really aggressively close to zero,
- it needs to provide quantitative easing and credit easing, it needs to talk down the euro massively, that it depreciates to parity with the dollar, and
- the core countries need to provide fiscal stimulus for the peripheral countries.. the probability of each one of these things happening is pretty low and I will give you two main examples…
- Euro Depreciation – in terms of the Euro depreciating massively, I don’t think either the US or China would allow that actually – every b
ody now is trying to weaken their currency and so I don’t think it is possible for that to happen and also you look at as things get better in the euro zone, then the Euro appreciates ..it depreciates as things get bad, it is impossible to engineer it so that things are getting better as the euro depreciates,
- Fiscal Stimulus from the Core – I recently attended a conference with a bunch of German CDU MPs and they had an entire panel session on austerity and Germany and I finally asked why are we talking about austerity why aren’t we talking about stimulus package and they looked at me as if I had 20 heads, – absolutely not on the table whatsoever…
- German Bundesbank – if you walk into the Bundesbank, there is a trillion reichsmark note that is framed in the lobby – its a social memory at this point – but I think it is a very powerful one… but also there is a question of wage growth in Germany which if you look at the past decade, real wages really haven’t risen in Germany – it has been really flat – whereas they have risen quite significantly in the rest of the Eurozone country – so if Germany were to all of a sudden be in favor of the ECB stepping in as a lender of last resort the Government would have to admit to its population – look you went through flat real wages for a decade which was really all for nothing…
This is probably the most detailed and understated discussion of the European mess we have heard.
3. House Prices may Decline for 30 years in Real Terms – Robert Shiller on Motley Fool – Friday, December 23
Robert Shiller is probably the best student and scholar of the American Housing market. Every time we listen to him, we learn something new, something important.
In this gem of an interview, Professor Shiller puts forth a view that would have gotten him burnt at the stake for sheer blasphemy a couple of hundred years ago. We speak of course about the prevailing American religion for the past 50 years or so – the deep and abiding faith that housing is a good long term investment.
Read what America’s foremost expert on housing told Morgan House of The Motley Fool.
- Robert Shiller – The housing boom in the early 2000s was driven by a sense that housing is a wonderful investment. And it was not informed by good history. If you look at the history of the housing market and I have taken it back to 1890, it hasn’t been a good provider of capital gains – it is a provider of housing services, that’s not exactly like a dividend,…. and so whether that is good or not depends on what you want – but capital gains is more of an investment aspect of housing and capital gains have not even been positive. From 1890 to 1990, real inflation directed home prices were virtually unchanged.
- Morgan House – So is that what they [homeowners] should expect going forward that their house will be giving them a place to live, it will keep up with inflation and nothing else? Is that the basic model that homeowners should think about?
- Robert Shiller – I think it is a reasonable first approximation to assume that home prices will just keep up with inflation. There is concerns that they will do something different and people are very focused on the possibility that there will be another boom which is possible. Over the ten years of one’s ownership of a home, it is very hard to say what they will do. But I think we should also consider the possibility that home prices will decline in real terms over the next few decades. Why is that? well, you have to reflect on the fact that it has done it before. Home prices declined for the first half of the 20th century in real terms.
- Robert Shiller – Economists discussed that back then – Why are they going down? The conclusion, if there was any consensus in say 1950, was, as I interpret what have read, of course home prices go down, there are technical progress, they are a manufactured goods, back in 1900, homes were hand made, you know, craftsman, now in 1950, we have all kinds of power tools and prefab and they are just better in 1950 than they were in 1900 and so of course home prices go down…and from that frame of reference, that is exactly what we should expect too. It is just a manufactured good and progress is always happening. On top of that progress, there is the outmoding, the out of style factor.
- Robert Shiller – So what kinds of houses would they be building in 20 years? They may have lots of new amenities, computerized something, in some way that we can’t anticipate now. People won’t want these old homes. So the idea that buying a home is such a great idea is just wrong. They may very well decline in the next 30 years in real terms.
The house, our home as just a manufactured good! – Think about it.
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