SANTA RALLY SENDS MARKET UP 800 POINTS IN 3 DAYS

‘Tis the season’ for a year end rally. A time for good cheer and merriment!   Watch out, the Egg-nog can make you delusional. I suggest you stay sober, so you won’t have a hangover after the traditional Santa Clause rally is over. In the last three days stocks shot up 800 POINTS on news from the Fed that they would be ‘patient’ in raising interest rates. Analysts  took this to mean, that rates would not go up for a ‘considerable time’, some say 6 months or more. This eased investor anxieties that the Fed would raise rates in January( for the first time since the 2008 financial crisis). The Fed is committed to an inflationary stimulation policy, which is crucially tied to not allowing a deflationary scenario to gain momentum, as they have no way to offset a deflationary effect on the economy. As we pointed out in our page above ‘SURPRISE! DEFLATION’. THEY APPEAR TO BE FIGHTING A LOOSING BATTLE. Oil was down again today! However, there are other things besides deflation, that investors should be concerned about.

THE  BOND AND CURRENCY CRISIS

Washington and the Fed have tried to strengthen the financial and banking system ever since it almost broke down five years ago. With the current turmoil in the emerging nations bonds and currency markets, the vulnerability of these efforts are currently being tested. With oil prices declining and with oil priced in dollars, there is a full-blown currency crisis in such countries as Russia, Brazil, Mexico and Venezuela.1) Will big banks be sturdy enough to bear the shocks? and 2) How dangerous are derivatives that banks now hold in record levels? If the stock markets worldwide starts to decline and short-term money suddenly dries up, there could be unforeseen difficulties dealing with a bond/currency crisis that has the potential to cause panic selling.

With lower oil prices, a disruption in oil producing countries economies could cause global instability and undermine the efforts of Europe and Japan to stimulate their economies. Petrobras in Brazil, Pemex in Mexico and Gazptom in Russia, sold billions of dollars of bonds to investors looking to receive high interest rates. Trouble with these State run companies, could cause worldwide investment growth to slow, leading to other corporate bond defaults. The bonds of non oil producing countries like Turkey, India and South Africa, have already suffered, as anxieties have caused selling in other emerging markets.
The problem is further multiplied by the holding of emerging market mutual bond funds and exchange traded funds, that cannot liquefy their bond portfolios as quickly as the shareholders can sell. The investors who hold these high-yielding funds have immediate liquidity. However, the managers that hold these funds in high-yielding bonds, have far less liquidity. PIMCO owns close to 50% of many foreign bonds and controls over 40% of the debt issued by the bank of China, 40% of the state bank of India and close to 30% of some Spanish banks. In some exchange traded funds like widely held BlackRock, they have 9% of its funds in government owned oil companies. These bonds cannot be sold quickly. Already this month Petrobras, 10 year bond has gone from 6% to 8% and Pemex bonds  have gone from 3.8% to 4.8%. The sell off in these bonds could quickly turn into a panic and a domino effect could occur, as managers sell more liquid bonds to meet redemption demands. This could spread to other markets including the stock market or visa versa..Anxieties are rising as Jefferies Company has reported a 73% decline in fourth-quarter revenue from its bond trading unit.

BlackRock, PIMCO and Franklin Temelton funds, among others, hold large amounts of high-yielding bonds. Since 2009, $1.7 trillion of emerging market bonds have been sold. Petrobras has $170 billion in debt, making it the most indebted company in the world. Russian companies sold some $244 billion of bonds since 2009. PIMCO’s Emerging Market Corporate Bond Fund assets soared to $1.5 billion in 2013, but now reportedly stands at only $496 million. The Russian stock market is down 50% this year and the rubble has crumbled. To some extent the panic has already started. However, its international economic implications have yet to be recognized. ‘Junk Bonds’ can very quickly become the new name for for these high-yielding bonds. Remember, markets hate the lack of liquidity!

Source: Barrons Magazine and The New York Times

Carl M. Birkelbach 12 /19/14

THE FED BUYS A 700 POINT RALLY

In the last two days stocks shot up 700 POINTS on news from the Fed that they would be ‘patient’ in raising interest rates. Analysts  took this to mean, that rates would not go up for a ‘considerable time’, some say 6 months or more. This eased investor anxieties that the Fed would raise rates in January( for the first time since the 2008 financial crisis). The Fed is committed to an inflationary stimulation policy, which is crucially tied to not allowing a deflationary scenario to gain momentum, as they have no way to offset a deflationary effect on the economy. As we pointed out in our page above ‘SURPRISE! DEFLATION’. THEY APPEAR TO BE FIGHTING A LOOSING BATTLE. Oil was down again today! However, there are other things besides deflation, that investors should be concerned about.

THE  BOND AND CURRENCY CRISIS

Washington and the Fed have tried to strengthen the financial and banking system ever since it almost broke down five years ago. With the current turmoil in the emerging nations bonds and currency markets, the vulnerability of these efforts are currently being tested. With oil prices declining and with oil priced in dollars, there is a full-blown currency crisis in such countries as Russia, Brazil, Mexico and Venezuela.1) Will big banks be sturdy enough to bear the shocks? and 2) How dangerous are derivatives that banks now hold in record levels? If the stock markets worldwide starts to decline and short-term money suddenly dries up, there could be unforeseen difficulties dealing with a bond/currency crisis that has the potential to cause panic selling.

With lower oil prices, a disruption in oil producing countries economies could cause global instability and undermine the efforts of Europe and Japan to stimulate their economies. Petrobras in Brazil, Pemex in Mexico and Gazptom in Russia, sold billions of dollars of bonds to investors looking to receive high interest rates. Trouble with these State run companies, could cause worldwide investment growth to slow, leading to other corporate bond defaults. The bonds of non oil producing countries like Turkey, India and South Africa, have already suffered, as anxieties have caused selling in other emerging markets.
The problem is further multiplied by the holding of emerging market mutual bond funds and exchange traded funds, that cannot liquefy their bond portfolios as quickly as the shareholders can sell. The investors who hold these high-yielding funds have immediate liquidity. However, the managers that hold these funds in high-yielding bonds, have far less liquidity. PIMCO owns close to 50% of many foreign bonds and controls over 40% of the debt issued by the bank of China, 40% of the state bank of India and close to 30% of some Spanish banks. In some exchange traded funds like widely held BlackRock, they have 9% of its funds in government owned oil companies. These bonds cannot be sold quickly. Already this month Petrobras, 10 year bond has gone from 6% to 8% and Pemex bonds  have gone from 3.8% to 4.8%. The sell off in these bonds could quickly turn into a panic and a domino effect could occur, as managers sell more liquid bonds to meet redemption demands. This could spread to other markets including the stock market or visa versa..Anxieties are rising as Jefferies Company has reported a 73% decline in fourth-quarter revenue from its bond trading unit.

BlackRock, PIMCO and Franklin Temelton funds, among others, hold large amounts of high-yielding bonds. Since 2009, $1.7 trillion of emerging market bonds have been sold. Petrobras has $170 billion in debt, making it the most indebted company in the world. Russian companies sold some $244 billion of bonds since 2009. PIMCO’s Emerging Market Corporate Bond Fund assets soared to $1.5 billion in 2013, but now reportedly stands at only $496 million. The Russian stock market is down 50% this year and the rubble has crumbled. To some extent the panic has already started. However, its international economic implications have yet to be recognized. ‘Junk Bonds’ can very quickly become the new name for for these high-yielding bonds. Remember, markets hate the lack of liquidity!

Source: Barrons Magazine and The New York Times

Carl M. Birkelbach 12 /18/14

MARKETS RALLEY ON FED REPORTING “PATIENT” ABOUT RAISING RATES

Stocks shot up (+281) on news from the Fed that they would be ‘patient’ in raising interest rates. Analysts  took this to mean, that rates would not go up for a ‘considerable time’, some say 6 months or more. This eased investor anxieties that the Fed would raise rates in January( for the first time since the 2008 financial crisis). The Fed is committed to an inflationary stimulation policy, which is crucially tied to not allowing a deflationary scenario to gain momentum, as they have no way to offset a deflationary effect on the economy. As we pointed out in our page above ‘SURPRISE! DEFLATION’. THEY APPEAR TO BE FIGHTING A LOOSING BATTLE. However there are other things besides deflation, that investors should be concerned about.

THE  BOND AND CURRENCY CRISIS

Washington and the Fed have tried to strengthen the financial and banking system ever since it almost broke down five years ago. With the current turmoil in the emerging nations bonds and currency markets, the vulnerability of these efforts are currently being tested. With oil prices declining and with oil priced in dollars, there is a full-blown currency crisis in such countries as Russia, Brazil, Mexico and Venezuela.1) Will big banks be sturdy enough to bear the shocks? and 2) How dangerous are derivatives that banks now hold in record levels? If the stock markets worldwide starts to decline and short-term money suddenly dries up, there could be unforeseen difficulties dealing with a bond/currency crisis that has the potential to cause panic selling.

With lower oil prices, a disruption in oil producing countries economies could cause global instability and undermine the efforts of Europe and Japan to stimulate their economies. Petrobras in Brazil, Pemex in Mexico and Gazptom in Russia, sold billions of dollars of bonds to investors looking to receive high interest rates. Trouble with these State run companies, could cause worldwide investment growth to slow, leading to other corporate bond defaults. The bonds of non oil producing countries like Turkey, India and South Africa, have already suffered, as anxieties have caused selling in other emerging markets.
The problem is further multiplied by the holding of emerging market mutual bond funds and exchange traded funds, that cannot liquefy their bond portfolios as quickly as the shareholders can sell. The investors who hold these high-yielding funds have immediate liquidity. However, the managers that hold these funds in high-yielding bonds, have far less liquidity. PIMCO owns close to 50% of many foreign bonds and controls over 40% of the debt issued by the bank of China, 40% of the state bank of India and close to 30% of some Spanish banks. In some exchange traded funds like widely held BlackRock, they have 9% of its funds in government owned oil companies. These bonds cannot be sold quickly. Already this month Petrobras, 10 year bond has gone from 6% to 8% and Pemex bonds  have gone from 3.8% to 4.8%. The sell off in these bonds could quickly turn into a panic and a domino effect could occur, as managers sell more liquid bonds to meet redemption demands. This could spread to other markets including the stock market or visa versa..Anxieties are rising as Jefferies Company has reported a 73% decline in fourth-quarter revenue from its bond trading unit.

BlackRock, PIMCO and Franklin Temelton funds, among others, hold large amounts of high-yielding bonds. Since 2009, $1.7 trillion of emerging market bonds have been sold. Petrobras has $170 billion in debt, making it the most indebted company in the world. Russian companies sold some $244 billion of bonds since 2009. PIMCO’s Emerging Market Corporate Bond Fund assets soared to $1.5 billion in 2013, but now reportedly stands at only $496 million. The Russian stock market is down 50% this year and the rubble has crumbled. To some extent the panic has already started. However, its international economic implications have yet to be recognized. ‘Junk Bonds’ can very quickly become the new name for for these high-yielding bonds. Remember, markets hate the lack of liquidity!

Source: Barrons Magazine and The New York Times

Carl M. Birkelbach 12 /17/14

DOW OPENS DOWN 100, THEN UP 250 AND CLOSES DOWN 112!!!

It was a volatile day in the stock market today. In the morning the Dow was down 100, by noon the Dow was up 250 in reaction to the Fed’s continuous low interest rate policy (they are desperately fighting deflation), but by the close, the market was back down 112 points. The NASDAQ was weak, down 1.24%. This kind of activity is reminiscent of a topping process. Last Wednesday, the market was down some 200 points, with the recovery on Thursday and then a disastrous Friday (worried about the weekend). On Monday the market rallied, but could not hold a rally as it was today. Once again, this kind of volatility is reminiscent of a topping process. International markets were mixed with Europe  up 2.5%, London up 2.4% China was down 1.5% the Nikkei was down 2%. Russian stocks rallied some 3% today, but one must remember that the Russian market is down over 50% for the year. Oil continued below $60 a barrel and there were forecasts to see oil below $40 a barrel in January.
So far, earnings forecast for 2015 have remained strong. S&P earnings are foretasted to grow from $117 for 2014, to $127 for 2015. The one cautious note I might add is that the P/E ratio is getting close to 17 times earnings, which was the high reached in 2008 (before the market dropped 50%). Dow Industrial earnings are expected to come in at 15 times earnings for 2015. IBM has the lowest P/E ratio at 9.6 times earnings, with Nike showing the highest P/E ratio at 25 times earnings, with Visa close behind at 24 times earnings. I think that these earnings estimates will be revised downward and are too optimistic, particularly when one considers the effect of earnings on energy companies and the slowing of business in Europe, Japan , China and Russia. In my estimation the US companies will have a tough time fighting a slowing world economy.

All stock market upward cycles end with a surprise. In 2000 it was the dot com bust, in 2008 it was the housing bubble and the market fell 50%. This time it could be deflation, as the surprise. The recent budget compromise allows more risky derivative buying by the banks and larger contributions by the financial industry which will make matters worse. . As interest rates are to rise next year, these derivatives could start another banking crisis with the taxpayers in no position for a bailout this time. All boats will sink. On the one hand consumers are reaping benefits from cheaper prices paid at the pump, but on the other hand, investors are weighing whether falling oil prices are symptomatic of deflation in a lagging global economy. Crude oil fell below $60 a barrel for the  first time in five years. This is normally the time of year when money managers are doing window dressing, as portfolios can meet benchmarks. Window dressing refers to the practice of selling poorly performing stocks in favor of high performing stocks.  For window dressing. the market should be rallying, but it is not.  The Intermediate Trend of the market is questionable and should reveal itself soon and reveal the direction of the Long Term Trend. SEE SUPPORT LEVELS BELOW

Carl M. Birkelbach 12/16/14

SURPRISE DEFLATION!  DOW DOWN 300!

All stock market upward cycles end with a surprise. In 2000 it was the dot com bust, in 2008 it was the housing bubble and the market fell 50%. This time it could be deflation, as the surprise. The recent budget compromise allows more risky derivative buying by the banks and larger contributions by the financial industry which will make matters worse. . As interest rates are to rise next year, these derivatives could start another banking crisis with the taxpayers in no position for a bailout this time. All boats will sink. On the one hand consumers are reaping benefits from cheaper prices paid at the pump, but on the other hand, investors are weighing whether falling oil prices are symptomatic of deflation in a lagging global economy. Crude oil fell below $60 a barrel for the  first time in five years. This is normally the time of year when money managers are doing window dressing, as portfolios can meet benchmarks. Window dressing refers to the practice of selling poorly performing stocks in favor of high performing stocks.  For window dressing. the market should be rallying, but it is not. SEE SUPPORT LEVELS BELOW

There is a fear that lower oil prices is an indication that world economies are starting to fail and world economies may be headed into a deflationary spiral. The Fed has done everything it can to cause inflation: (near zero interest rates, QE trillion dollar bond buying and economic stimulation).  With all this, the inflation rate is only 1.2%. The Fed can handle inflation, because it means they can pay off debt in the future with inflated currency. That’s what happened after World War II. However, deflation is another matter. With interest rates close to zero and as the Fed has already purchased several trillion dollars worth of bonds (QE), there appears little likelihood that they are in a position to stimulate the economy if deflation raises it ugly head. Also under deflation tax revenues drop and defects get larger and harder to pay off with deflated dollars. SEE BELOW I continue to believe industrial nations are going to have a problem with economic growth, as all the income growth is being sucked up by the top 1%. The working poor earning minimum wages, cannot support a consumer economy in the US and growth in Japan and Europe have stopped. China is slowing.

It is interesting to note that the price of gold is getting some notice, 43 years after Pres. Nixon scraped the gold standard. Gold appears to be reemerging as the centerpiece of a handful of initiatives in Europe, Asia and the Middle East. Voters in Switzerland considered and eventually rejected a populist plan to force its central banks to buy gold to stabilize its currency. Russia and China have both made the headlines by snapping up enormous stores of gold. In France, politicians are calling for the government to start amassing gold and the Netherlands followed suit by asking for its $5 billion of gold in the vaults of New York to be delivered to them. Even the Islamist state is declaring they wanted to avoid the ‘tyrannical financial system’ of the West by buying gold. What’s going on here? Holding gold for people and government reflects our anxieties about the future. Even though it might seem somewhat retrograde to many investors, having it on hand makes people feel safe

.
I have been reading a recent book called The Death of Money and the Coming Financial Collapse of the International Monetary System by James G Richards Mr. Richards asserts that he expects the economy to be in a economic bubble. He believes that the old normal is gone, but the new normal has not yet arrived and that the economy is in a phase of transition from one state to another. He believes that a new international monetary system will rise from the ashes of our present dollar based system, just as the British Commonwealth pound system ended at Brenton Woods in 1944. He believes the mortgage problem in 2008 was manageable. However, unmanageable were the trillions of dollars still in derivatives created from underlying mortgages and trillions more and of repurchase agreements. Congress just approved more risk of derivatives by the banks. From 2009 two 2012 the U.S. Treasury increased a $15 trillion cumulative debit and the Federal Reserve printed $3 trillion in new money. The bankers jobs and bonuses were preserved but nothing was achieved for the average citizen. The Fed sees inflation as a way to dilute the real value of US debt and avoid the specter of deflation. He expects deflation or skyrocketing gold prices and the crashing dollar to be two sides of the same coin and that will occur quickly. Deflation is the Federal Reserve’s worst nightmare for many reasons as real gains from deflation cannot be easily taxed. Deflation would increase the real value of government debt making it harder to repay. If deflation is not reversed there will be an outright default on the national depth rather than the less dramatic outcome of default by inflation. He suggests the breaking up of the banks that would eliminate the problem of too big to fail. He believes where larger financing is required small the banks can acquire a syndicate. He believes that if large banks continue to dominate the financial situation, and that financial failure on a global basis will follow and that the task every qualifying the finances of the world will fall to the IMF, because the IMF will have the only clean balance sheet left among institutions. He believes the IMF will then rise to the occasion with a towering issuance of SDR’s, and this monetary operation will effectively end the dollar’s role as a leading reserve currency. If this does occur United States be allowed to print money. So in these uncertain times, gold should be looked at as an alternative investment. Gold holds its purchasing value in deflation and deflation.

Carl M. Birkelbach 12/12/14

The market fell big time today, as oil prices fell to $61 a barrel and deflation worries abound 

There is a fear that lower oil prices is an indication that world economies are starting to fail and world economies may be headed into a deflationary spiral. The Fed can handle inflation, because it means they can pay off debt in the future with inflated currency. That’s what happened after World War II. However, deflation is another matter. With interest rates close to zero and as the Fed has already purchased several trillion dollars worth of bonds (QE), there appears little likelihood that they are in a position to stimulate the economy if deflation raises it ugly head. SEE BELOW I continue to believe industrial nations are going to have a problem with economic growth, as all the income growth is being sucked up by the top 1%. The working poor earning minimum wages, cannot support a consumer economy.

It is interesting to note that the price of gold is getting some notice, 43 years after Pres. Nixon scrap the gold standard. Gold appears to be reemerging as the centerpiece of a handful of initiatives in Europe, Asia and the Middle East. Voters in Switzerland considered and eventually rejected a populist plan to force its central banks to buy gold to stabilize its currency. Russia and China have both made the headlines by snapping up enormous stores of gold. In France, politicians are calling for the government to start amassing gold and the Netherlands followed suit by asking for its $5 billion of gold in the vaults of New York to be delivered to them. Even the Islamist state is declaring they wanted to avoid the ‘tyrannical financial system’ of the West by buying gold. What’s going on here? Holding gold for people and government reflects our anxieties about the future. Even though it might seem somewhat retrograde to many investors, having it on hand makes people feel safe

.
I have been reading a recent book called The Death of Money and the Coming Finincial Collapse of the International Monetary System by James G Richards Mr. Richards asserts that he expects the economy to be in a economic bubble. He believes that the old normal is gone, but the new normal has not yet arrived and that the economy is in a phase of transition from one state to another. He believes that a new international monetary system will rise from the ashes of our present system based on the dollar, just as the British Commonwealth at Bretton Woods in 1944 happened. He believes the mortgage problem in 2008 was manageable however unmanageable were the trillions of dollars still in derivatives created from underlying mortgages and trillions more and of repurchase agreements. From 2009 two 2012 the U.S. Treasury increased a $15 trillion cumulative debit and the Federal Reserve printed $3 trillion in new money. The bankers jobs and bonuses were preserved but nothing was achieved for the average citizen. The Fed sees inflation as a way to dilute the real value of US debt and avoid the specter of deflation. He expects deflation or skyrocketing gold prices and the crashing dollar to be two sides of the same coin and that will occur quickly. Deflation is the Federal Reserve’s worst nightmare for many reasons as real gains from deflation cannot be easily taxed. Deflation would increase the real value of government debt making it harder to repay. If deflation is not reversed there will be an outright default on the national depth rather than the less dramatic outcome of default by inflation. He suggests the breaking up of the banks that would eliminate the problem of too big to fail. He believes where larger financing is required small the banks can acquire a syndicate. He believes that if large banks continue to dominate the financial situation, and that financial failure on a global basis will follow and that the task every qualifying the finances of the world will fall to the IMF, because the IMF will have the only clean balance sheet left among institutions. He believes the IMF will then rise to the occasion with a towering issuance of SDR’s, and this monetary operation will effectively end the dollar’s role as a leading reserve currency. If this does occur United States be allowed to print money. So in these uncertain times, gold should be looked at as an alternative investment. Gold holds its purchasing value in deflation and deflation.

Carl M. Birkelbach 12/11/14