AI
Thursday, October 23, 2003 10:54:52 AM
Here's 21st Century Alert's morning briefing. $36,000 a year for a weekly newsletter? Even the big boys don't believe the Feds statistics.
THURSDAY a.m.
October 23, 2003
Handing Off the Microphone...
by David Nichols
I came across a great piece that's making the rounds right now among institutional investors, written by Michael Belkin, a top independent institutional analyst who writes a $36,000 per year weekly report. His latest report talks about how this certainly has been a great bear market rally (which he called, by the way); but now that everybody is on-board, the downside is ready to return with a vengeance.
Usually I don't quote extensively, but his piece is so good I couldn't find a good spot to break it up. Then again, maybe I like it so much because I've brought up many of these same points recently, and I couldn't agree more with his arguments and conclusions. I especially like his little rant about Labor Department statistics, as this is a major peeve of mine too.
So I'm going to turn over the Morning Briefing for a few minutes to Michael Belkin, and join up again with you on the other side. This excerpt comes from the October 19th Belkin Report
Deleveraging the System
"The Federal Reserve deliberately leverages the system -- every cycle seems to get more brazen and dangerous. Fed pump-and-dump operations resemble those of a boiler room penny stock operation -- cram a bunch of leverage (excess credit in the Fed's case) into financial markets, entice investors into excessive long positions in the targeted market (penny stocks for boiler rooms, bonds and equities for those who follow the Fed), push the bubble as far as it can go -- then watch from a distance (and deny responsibility) when it all goes up in smoke.
The Fed seems to do one of these pump-and-dump operations about every four years. The last was the 1999 Y2K credit expansion, which inflated the early 2000 Nasdaq bubble and led to the subsequent crash. The major one before that was the 1992-93 credit expansion, which culminated in the 1994 global bond market crash. The process of leveraging up the system sends out a signal -- go forth and speculate. Buy stocks, bonds and houses, build buildings, leverage up your holdings. Take no thought for tomorrow. Swing for the fences. At some point, the leveraged Ponzi scheme collapses -- either as a result of a Fed tightening -- or it simply topples from its own dead weight.
Markets and the economy are approaching that point. Since Fed honchos are promising never to raise interest rates again -- it probably won't be a Fed tightening that upsets the apple cart this time. But there is increasing evidence of an involuntary deleveraging.
1) Money supply growth has plummeted from 14% to just 1% since July (3 month annualized growth rate of M2).
2) Banks are liquidating Treasuries. Treasury holdings at commercial banks have dropped $100 billion since July. The Fed has pumped banks full of Treasuries with its low interest rate policy -- and now it is dump time. The model forecast sees an ongoing liquidation of Treasuries by banks.
3) Commercial lending has gone nowhere since July. The model sees no recovery in bank commercial lending.
4) A slowdown in real estate lending. So far it is just a slowdown in the growth rate, but the model sees a bigger real estate lending slowdown ahead.
This involuntary deleveraging process should feed through into weaker corporate results and economic statistics. This is a seasonally weak period for unemployment. The average increase in Initial Unemployment Claims (IUCs) not seasonally adjusted over the past four years was 421,000 from late September to early January. The Labor Department tries to disguise this with seasonal adjustments. Just be aware that every commentator babbling on about stronger job statistics is ignorant of the most obvious seasonal trend in existence. They are not talking about real-world unemployment claims -- they are blabbering about how fudged Labor Department numbers differ from other Labor Department fudged numbers. Why financial markets take any notice of this nonsense is beyond us. In any event, many more people will be losing jobs over the next three months in the real world -- no matter what Labor Department or CNBC morons say.
So the process of leveraging up the system has run its course and an involuntary deleveraging is underway. Deleveragings are not low-volatility events -- a financial market dislocation in the fourth quarter is likely. Earnings reporting season is keeping a bid under stocks for now, but the news should be mostly downhill from here. S&P500 earnings growth is at a 50 year high -- the profit cycle is probably topping. Overvaluation is still a huge issue -- the S&P500 P/E ratio is still 1.2 standard deviations above its long term average. That may seem cheap (down from 4 standard deviations), but the bubble era warped the concept of value. Templeton says to buy at a point of maximum pessimism and sell at a point of maximum optimism. For the current cycle -- this is a case of the latter."
That's certainly a lot to stew over. But the big point that is that the monetary system itself is now contracting liquidity -- right at the point when the majority feels the liquidity bubble can go on indefinitely. This is how a liquidity bubble collapses under its own weight. He also foresees a "market dislocation" in the fourth quarter, which goes along with some of the things I've been writing about lately. When majority opinion is so well-entrenched, there is not room for everybody to exit gracefully.
Yesterday may have been a watershed day along these lines, although that will only really be apparent in retrospect. However, this is what potentially big sell-offs look and feel like right at the beginning.
We finally got the start of the downtrend I've been looking and waiting for. Here's how it looked yesterday on my 150 minute SPX chart:
The VIX and VXO also cycled into a strong short-term decline phase.
The SPX ought to now be good for a quick trip down towards 1015 or so as a first landing spot. We piled in on some OEX put options in our speculative options service, looking for the 150 chart to do its usual thing and move its fractal dimension down towards the 30 range, as the market fully releases this burst of chaotic energy.
If the market just tumbles through 1015, and then 1000, then we'll know that there is more energy being released than just this 150 minute downtrend, and this could be the start of a much bigger and scarier decline than any we've seen in nearly a year.
THURSDAY a.m.
October 23, 2003
Handing Off the Microphone...
by David Nichols
I came across a great piece that's making the rounds right now among institutional investors, written by Michael Belkin, a top independent institutional analyst who writes a $36,000 per year weekly report. His latest report talks about how this certainly has been a great bear market rally (which he called, by the way); but now that everybody is on-board, the downside is ready to return with a vengeance.
Usually I don't quote extensively, but his piece is so good I couldn't find a good spot to break it up. Then again, maybe I like it so much because I've brought up many of these same points recently, and I couldn't agree more with his arguments and conclusions. I especially like his little rant about Labor Department statistics, as this is a major peeve of mine too.
So I'm going to turn over the Morning Briefing for a few minutes to Michael Belkin, and join up again with you on the other side. This excerpt comes from the October 19th Belkin Report
Deleveraging the System
"The Federal Reserve deliberately leverages the system -- every cycle seems to get more brazen and dangerous. Fed pump-and-dump operations resemble those of a boiler room penny stock operation -- cram a bunch of leverage (excess credit in the Fed's case) into financial markets, entice investors into excessive long positions in the targeted market (penny stocks for boiler rooms, bonds and equities for those who follow the Fed), push the bubble as far as it can go -- then watch from a distance (and deny responsibility) when it all goes up in smoke.
The Fed seems to do one of these pump-and-dump operations about every four years. The last was the 1999 Y2K credit expansion, which inflated the early 2000 Nasdaq bubble and led to the subsequent crash. The major one before that was the 1992-93 credit expansion, which culminated in the 1994 global bond market crash. The process of leveraging up the system sends out a signal -- go forth and speculate. Buy stocks, bonds and houses, build buildings, leverage up your holdings. Take no thought for tomorrow. Swing for the fences. At some point, the leveraged Ponzi scheme collapses -- either as a result of a Fed tightening -- or it simply topples from its own dead weight.
Markets and the economy are approaching that point. Since Fed honchos are promising never to raise interest rates again -- it probably won't be a Fed tightening that upsets the apple cart this time. But there is increasing evidence of an involuntary deleveraging.
1) Money supply growth has plummeted from 14% to just 1% since July (3 month annualized growth rate of M2).
2) Banks are liquidating Treasuries. Treasury holdings at commercial banks have dropped $100 billion since July. The Fed has pumped banks full of Treasuries with its low interest rate policy -- and now it is dump time. The model forecast sees an ongoing liquidation of Treasuries by banks.
3) Commercial lending has gone nowhere since July. The model sees no recovery in bank commercial lending.
4) A slowdown in real estate lending. So far it is just a slowdown in the growth rate, but the model sees a bigger real estate lending slowdown ahead.
This involuntary deleveraging process should feed through into weaker corporate results and economic statistics. This is a seasonally weak period for unemployment. The average increase in Initial Unemployment Claims (IUCs) not seasonally adjusted over the past four years was 421,000 from late September to early January. The Labor Department tries to disguise this with seasonal adjustments. Just be aware that every commentator babbling on about stronger job statistics is ignorant of the most obvious seasonal trend in existence. They are not talking about real-world unemployment claims -- they are blabbering about how fudged Labor Department numbers differ from other Labor Department fudged numbers. Why financial markets take any notice of this nonsense is beyond us. In any event, many more people will be losing jobs over the next three months in the real world -- no matter what Labor Department or CNBC morons say.
So the process of leveraging up the system has run its course and an involuntary deleveraging is underway. Deleveragings are not low-volatility events -- a financial market dislocation in the fourth quarter is likely. Earnings reporting season is keeping a bid under stocks for now, but the news should be mostly downhill from here. S&P500 earnings growth is at a 50 year high -- the profit cycle is probably topping. Overvaluation is still a huge issue -- the S&P500 P/E ratio is still 1.2 standard deviations above its long term average. That may seem cheap (down from 4 standard deviations), but the bubble era warped the concept of value. Templeton says to buy at a point of maximum pessimism and sell at a point of maximum optimism. For the current cycle -- this is a case of the latter."
That's certainly a lot to stew over. But the big point that is that the monetary system itself is now contracting liquidity -- right at the point when the majority feels the liquidity bubble can go on indefinitely. This is how a liquidity bubble collapses under its own weight. He also foresees a "market dislocation" in the fourth quarter, which goes along with some of the things I've been writing about lately. When majority opinion is so well-entrenched, there is not room for everybody to exit gracefully.
Yesterday may have been a watershed day along these lines, although that will only really be apparent in retrospect. However, this is what potentially big sell-offs look and feel like right at the beginning.
We finally got the start of the downtrend I've been looking and waiting for. Here's how it looked yesterday on my 150 minute SPX chart:
The VIX and VXO also cycled into a strong short-term decline phase.
The SPX ought to now be good for a quick trip down towards 1015 or so as a first landing spot. We piled in on some OEX put options in our speculative options service, looking for the 150 chart to do its usual thing and move its fractal dimension down towards the 30 range, as the market fully releases this burst of chaotic energy.
If the market just tumbles through 1015, and then 1000, then we'll know that there is more energy being released than just this 150 minute downtrend, and this could be the start of a much bigger and scarier decline than any we've seen in nearly a year.
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