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Technically the financials have been weak since mid July. they now appear poised to move through support.
http://stockcharts.com/def/servlet/SC.web?c=$BKX,uu[h,a]daolyyay[pb50!d20,2][vc60][iUb14!La12,26,9]&...
I think Nick pointed this out years ago, the economy and the market don't necessarily rise at the same time. There is at least, no direct corrolation between a growing economy and a rising market. But a rising economy and market will require a stable bond market. I don't see how this will be possible over the next few years.
I'm not surprised by this. Here's a snippet from the Daily Reckoning, "American households now borrow 11 cents of every
dollar they spend". I don't know where they've gotten this number or how it's calculated, but I'll find out more about this as it's an impossible ratio to maintain.
If you remember that gold primarily acts as just another currency, you can get the big picture. This is one of the reasons I'm not so excited about this run-up. The US$ has not been weak.
Here's a bit longer reply to Mike's comments on the XAU. I've mentioned the HUI before, affectionately known as the "gold bugs index". As you can see, it is still relentlessly moving up. The XAU is over-weighted with a few large companies that are unwinding their hedge books. It makes it a much less useful index to track when trying to understand the interim top of the gold market. The reason this is true is that a rising gold price does not necessarily translate to more value for some of these companies.
Attached is a chart I've posted before. As you can see the relative value of the component stocks in the HUI are now 4 times higher than they were when the bull market began. This is of course related to investor expectations but those expectations are wildly enthusiastic at this point. I was a bit too cryptic this morning, the "not yet" is really about the metals market, I've no idea if the XAU is topping as I don't find it useful to track.
http://stockcharts.com/def/servlet/SC.web?c=$HUI:$GOLD,uu[h,a]daclyyay[df][pd20,2!b50][vc60][iUb14!L...
IMO, not yet.
As noted a week or so ago, metals are breaking out. If gold moves through 390, it will move up quickly.
That's quite good Lance! We achieve that speed with regularity here, but of course we're decending from 10,000 ft. to 7,000...:). I've seen Florida, you have to actually train to achieve those speeds.
Nick, I think that like the government, companies have, over the last 50+ years, been willing to over promise and over commit their current accounts to support past efforts. The shadow of Franklin Roosevelt is cast much more wide today than most realize.
This announcement of cutbacks in promised benefits, is just the very first crack in the infrastructure of promise. Most people see the promise as a contract, a guarantee. I think they shall find out it was more wish and hope.
As the proverb says, "The road to hell is paved with good intentions".
As they say, we should be careful what we wish for. I smell a witch hunt - or at least a grab for money. In my estimation, there are several people now proposing an investigation that should be investigated themselves.
It's interesting that you mention the French in this context as they famously tossed out everyone and everything in their little revolution 200+ years ago. By the time they were done breaking every institution and beheading anyone remotely in charge, they'd created such a vacuum of leadership that the mob finally turned on the leaders and most of them were quickly dispatched.
A reading of the Salem witch trials will lead one to the same conclusion. When there is a frenzy of retribution, the end game is likely the persecution of the leaders as the mob realizes both sides were in on the game and their loyalty to the accusers was ill advised.
Ditto, Joe McCarthy.
We've not had a good witch hunt in this country for 50 years, the mob, I mean the people, just might be ready for a blood letting.
That was a nice rant...:). He's right of course, it's very difficult to get the currently subsidized businesses to allow any new players in the game. Especially if they want to start a new game.
Thanks Gus. In days past, when I had some time for this, I'd have been tracking the squeeze daily. As I review the S&P and the VIX I see a comparison with March 2002. But closer review of the S&P in 3/02 reveals a double top with a VIX / BB contraction. Today, we have a new market high with this VIX / BB contraction so my view is that we'll see a 5-10% sell-off and then a climb to a new high or double top before year end.
We could also see the market continue to climb through September and we'll likely have an October sell-off for the record books. In any event, this is a good market to short.
And on another note - when will the crowd finally revolt? That should signal the bottom. When Abby Cohen is a feature in People magazine or America's Most Wanted? Marie Antoinette Cohen. Only time will tell.
Lucent cuts benefits to retired managers....this will be the next wave of cost savings. A little here a little there and the next thing you know, you're profitable. Who needs growth?!
Lucent to change retiree health benefits, save $75 mln (LU) by Carolyn Pritchard
SAN FRANCISCO (CBS.MW) -- Lucent Technologies (LU) will make changes to its management retiree healthcare subsidies that will yield the telecom equipment company about $75 million in annual savings, according to a document filed Monday with the Securities and Exchange Commission. Lucent said that as of 2004, it will no longer pay for dental coverage for its management retirees and their dependents and will not reimburse them for the cost of Medicare Part B premiums. The firm will no longer provide subsidies for dependents of management retirees who retired on or after March 1, 1990, and whose base salary at retirement was $87,000 or more. Lucent shares ended Monday up 15 cents at $2.37.
Assembler on the 64...now I'm laughing. I don't think anyone has written in assember in 15 years. Too many good high level languages....but of course those are for wimps...:).
2nd that Mike, but I'd disagree regarding the power. The power was to release imagination to do things no one thought possible. I don't see that in personal computing systems today. It's all canned and end user oriented.
I realize what you meant, I'd just like to see a cell phone delivered as an open system. But, we'll just keep getting canned PDA / cell phones until someone gets close and we'll be stuck with it for life...ala Windows 95.
Nick, this appears to be an excellent time for traders to take profits on IP as it's broken through a long term down trend and broken out to the upside. It should get good support if it retreats to the 36-37 range. I will be a buyer for the long term in that range. But still not a lot as I think there will be unpleasent surprises over the next 6-9 months which should present great opportunities.
As Court says, paper, paper everywhere...and a lot of it will be coming from IP.
I'm afraid none of us really understand it. To understand it would mean to predict the outcome with some accuracy and I'm not prepared to even hazard a guess. Maybe the saving habits of the 'great generation' will ameliorate the problem for another 20 years as it's passed to the 'me' generation.
In 1980 the DOW and an ounce of gold were roughly equivalent in price. Both were about 800 with gold peaking and the market bottoming. In 2000, after 20 years that relationship had reached another extreme of about 40:1, caused by a collapse in the value of gold and the great bull market of the last generation. Today that relationship stands at about 25:1. At a minimum, I expect this will move to 5:1 before the trend again reverses.
This is not an argument for buying gold stocks as they are currently as overpriced as the rest of the market. But it is a worthwhile to be aware of the current trend.
Thanks. Like turning a battleship, the economy is slowly moving from assets to commodities. As it does, most equities will not fare well. Continued loose money will further weaken the US$ and continue current inflationary trends. Inflation will have a negative impact on the bond market and that will impact earnings. I don't see an argument for currently taking a long term investing position in most US equities.
Then again, next year is an election year...:).
The best take-away from this and excellent party conversation is that there never was a surplus if you count the 'borrowing'. There aren't 2% of adults in the US that realize the extent of the lies.
This is a very likely scenario.
ECRI's FIG is one of my core monitoring tools.
Baby needs a new pair of shoes...I guess the VIX is mainsteam now.
I've not been harmed by BEARX during the market rise as it leverages metals as well.
You make a good point Gus, our hats should be off to Nick and also to Mike who've done a good job of reading the market trend. Those of us in the bear camp have been rewarded by the falling dollar and rising metals but the reward has been mitigated by the rising market. I expect we'll get a bone thrown to us soon but it may be very short lived as this will prove to be an up year. I had doubts last week but the new highs show real strength. My long term view has not changed however. The dollar, bonds and the market will move sharply lower.
And I was thinking about this post tonight and it all ties back to US bond rates. We're in a little rebound period now but there's a new trend - up. And, up in bond rates means down in, well, everything.
Bond rates moving up are so bad that almost nothing can prosper. Even metals will flounder while they adjust to shorter yield spreads, (short term rates moving up rapidly).
I am encouraged by the current administration. As they spend more and more, I spend less and less. I think it's time to be a Japanese consumer and save like tomorrow will be very, very cheap, (but maybe in some other currency).
Nice analysis Mike. Now in my bearish crystal ball I see a possible extension of the current bull market IF there is a better pullback than the one we've had. Maybe a 5% slip off the cliff that takes the VIX up 8-10 points. That would sustain us for another month or two of upside, maybe even though the end of the year. Without this, I think we're just testing the top and are headed down.
I still think lows will be below last October when they do commence.
The attached link is a speech from Greenspan last Friday. John Mauldin did some analysis of this speech, (you'll need to get his newsletter). I find the speech interesting as it re-confirms the Fed's fear of deflation. This fear should ensure continued inflation of things that are not the US$.
http://www.federalreserve.gov/boarddocs/speeches/2003/20030829/default.htm
In a previous life, I owned a consulting firm in LA. In 1995 we had 16 employees and the total cost was $72,000 a year. Those were the good old days...:). Certainly not a scientific comparison but that's close to 150% in 8 years.
Remember: If you don't measure it, it can't inflate.
I've no idea what portion of health insurance costs go to feed overhead, use-abuse and fraud but I'm afraid it's quite large.
Wait until we have nationalized health care...probably not more than 8-10 years away and could be closer if a certain New York Senator smells any more weakness in the field of Dems or in the economic landscape.
I was talking with someone in HR the other day and they said the total cost for benefits for a family of 4 is over $1000.00 a month.
Mike, metals appear to be confirming an up move. Too bad, I'd like to have been able to take some trading positions.
Thanks Court, this is a great article...
YOY housing went up 12% and the amount of mortgage debt also went up 12%. Too bad the writer didn't make the connection.
Nationally, housing has never gone down YOY in the 28 years it's been measured. It will, if not 2004, then 2005.
Home prices are not part of the CPI. I can't even comment.
And my favorite part: "Asset price inflation is a symptom of overly expansive monetary policy. Money is the fuel. Sometimes it chases goods and services. Other times it chases assets."
I think I've only written that here a couple of dozen times, but the writer fails to point out that asset inflation is most often called profit. Money is indeed fuel. Match, please.
And the price of oil has been moving up while the US$ has moved down...the net is about 38%. The OIX and gold both say the move is over.
And another sign that there's no inflation - college tuition is up over 10% this year...
Yes...and he's also going to have a balanced budget...:).
Mike, this is a market juncture that no doubt will prove one of us correct in the next month or so. I mentioned in the earlier note that the S&P would reach resistance with a 7% drop but the NASDAQ has been the real driver during this move and it appears to have peaked on Friday after dropping through support in July and confirming in August. I expect a test of that ceiling is possible but nothing more. We've already seen a double top on the NASDAQ. Let's review after October...:).
That's a good observation and one that I should have pointed out. The VIX/BB will begin the squeeze in a week or two but that squeeze could, and likely will, go on for several, to many, weeks - even if there is an external triggering event. The only thing the BB is predicting is future volatility that is greater than we see today. The timing and direction of that volatility will require analysis of external events and other technical indicators.
It's important to remember that one of the great powers of the BB squeeze is that the set-up is predictive of near term volatility. By the time the squeeze is ending great amounts of volatility will have already been reflected in market prices.
A good example of a squeeze which resembles the one we're looking at today is early 2002.
At this point, I'm inclined to see a small correction in the 5-10% area. After that correction I'll be very interested in where the VIX stands. If it's close to 30 we'll likely move up further through the spring of next year. The now famous S&P 500 head and shoulders pattern has been breached to the upside and should provide good technical support around this point.
Also, there may be some short term indicators of volatility through the first part of September has traders protect themselves from possible 9/11 style events.
Nice analysis of the VIX Gus. Sorry if Mike has already pointed this out but there is a massive squeeze underway in the weekly view of the VIX/BB. Bands up and down are contracting like a freight train. This will not last long. The last measurable week of volatility will be removed from VIX measurement next week and the lines will flatten over the next 2-3 weeks. As this happens the classic BB squeeze is set-up and we can expect a more volatile market. Since we're up, it will likely be caused by a downward movement.
Hi Court. Yes, inflation is a mirror of currency deflation. It's stuff reflecting the overvaluation of official currency. Even stocks might not be completely awful, (I doubt this scenario), as they are valued in the US$ which could prove to be yet more awful than average stock valuation. The market may go 5-10% higher, but it will also go much lower at some point next year than it is today.
Inflation is everywhere, housing, gasoline, healthcare, etc. Currency inflation has been, and will be, one of the twin 500 lb. gorillas of investment issues. The other of course is debt.