MARKETS SHOWING UNEXPECTED STRENGTH
The stock markets in the US are showing some unexpected strength. After meeting our intermediate down side goal for the Dow Industrial’s and 15,331 in August, the markets have since been moving sideways. If the Dow breaks above 16 933, the S&P 500 above 2020, and the NASDAQ composite above 4960, our Bear Market scenario may be delayed and the markets may make some new highs. I believe the new highs, if they do occur, will be temporary and will indicate an Elliott Wave a Un- Orthodox top, which is what occurred in 1929., This I believe will be a “false rally”. Do not join the crowd! The hubris is all hype at this level. The stage is set for not just a severe decline, but an economic scenario that will be very dangerous for everyone.
In today’s Wall Street Journal Marty Fridson, chief investment officer for Lehman, Livian Advisors says, “Unsecured bonds feel the pain first, then it moves to loans.” The subtitle of the article was ‘Goldman, J.P. Morgan, run up against weary investors in an attempt to shed leveraged loans.’
Why a stock market rally? As I said once before ‘It’s three men in a tub, rub a dub dub, nobody wants to pull the plug.There is talk, the Fed wants to delay increasing interest rates because of an unsure economy. Monetary policy, in my opinion, seems useless. The only thing, I believe can save this economic bear market scenario, is a progressive fiscal policy. This under current conditions, will be impossible to execute.
I continue to see corporate earnings as weak, the bond market as dangerous, banks as a house of cards, and international emerging market growth as negative and my Bear Market deflation scenario as on track.
- 9/30/15 Today, markets were up in the US, Europe and Asia. However, US stocks had its worst quarter in four years. The decline in September have all the major averages in the US, Europe and Asia in a severe downtrend and the Russell 2000 is below its August low, along with the DAX, the HIS and Nikkei indexes.
- The Chicago business barometer was issued today and came out at 48.7, the lowest level since July 2009. Although manufacturing only accounts for 12% of GDP, a strong dollar, slowing emerging market economies and lower commodity prices indicate there is economic trouble ahead
- Carl Icahn issued a statement today in the Wall Street Journal about his 15 minute Danger Ahead video. Wall Street Journal said, “Mister Icahan warned that the US is headed towards another financial collapse.”
- The Wall Street Journal also indicated that once the Federal Reserve begins to raise interest rates,” the odds of one or more banks stumbling over new ground are high.”
- Glencore stock has fallen some 75% this year. The Wall Street Journal indicates, “concerns that the $18 billion in short-term loans is riskier than the companies says.” Commodity price declines are devastating the Corporation and government debt that depends high commodity prices.
9/28/15 Look at the new warning signals
1) Deutsche Bank, today is at 26.53, is down 3.2% and has broken below its support at 27.34. To me, this indicates that there will be a larger fallout from the Volkswagen car emission test cheating. Today the DAX index Is at 9492 down 2% and very close to breaking into new low ground at 9426.
2) Today’s headline in the Wall Street Journal is “US bonds flash a warning signal! “With a sub title of “corporate debt yield spreads have climbed, which could signal economic trouble.” The spread between investment grade corporate bonds/ over treasuries is 1.6%. In the past this kind of spread foreshadowed economic problems. Watch where the money goes, not the HYPE you hear from analysts.
3) Brazil national bonds and their corporate bonds are in trouble. Brazil’s economy depends very heavily on oil prices, which are down severely. Also, a new problem is Brazil’s sugarcane price which is at an eight year low. A Brazilian sugarcane company has missed a bond payment for February and has not been able to renegotiate the terms of its debt. A Fitch analyst has said “the company is likely to seek bankruptcy protection.” This is just the beginning and the tip of the iceberg of problems with high-yield debt that are attached to commodity prices.
4) John Bonners resignation as speaker of the house will make matters worse in the House of Representatives, as radical right wing Republicans and no government advocates, continue to be an obstructionist Congress. The tail is trying to wag the dog. As quoted from Paul Krugman in today’s New York Times, he said, “Mister Bonner is quitting because he found himself caught between the limits of the politically possible and a base that lives in its own reality… Cry for America, which must find a way to live with the GOP gone mad.” They would rather shut down the government, than govern.
5) Baghdad, Iran and Syria have agreed to work with Russia in combating Islamic state extremists. These countries border Russia and they are trying to regain their influence in the area. The deal is another challenge to US influence in the area. This is a major shift in geopolitical power, that has negative implications to the United States.
9/24/15 The DAX Index has broken below its Aug 2015 low!
The DAX Index has fallen below its August low of 9,648 and is now 9,427. At 27.34 Deutsche Bank has broken into hew low ground. The Japanese Nikkei August low is only 180 points away from making a new low. The FTSE is only 70 points from breaking into low ground. What this means is, the markets worldwide are becoming more vulnerable. Any further drop in any of these indexes and could probably lead the world markets lower.
Trouble with illiquid bonds
The Wall Street Journal has been issuing reports on the bond market. One of the things that they point out, is that US mutual bond funds have invested over 15% or more of their money in rarely traded securities. This practice runs counter to long held SEC guidelines. By the Journal’s count, 10 of the 18 largest bond mutual funds have invested meaningfully in corporate debt that have significant holdings in bonds that are seldom traded. Bond buyers are concerned that the funds could cause market turmoil, if they tried to sell these ill liquid investments to meet redemption requirements. The crux of the problem is that mutual funds own more bonds that seldom trade than ever before, but they still promise to pay out investors within 7 days of redemption of the shares. John Ramsey, acting director of the SEC’s trading in markets division from 2012 to 2014 has said “in some sense, we have a crisis waiting!” If liquidation in bond funds begins to increase beyond a certain limit, fund managers will have to sell their more highly liquid grade A bonds in order to meet liquidation requirements. The Walls St., Journal mentions several bond funds and the percentage of bonds the fund would have trouble selling in 7 days as follows: Vanguard high quality corporate bond fund 40%, American funds American high income trust 39%, Vanguard long-term investment grade 39%, Dodge and Company income 31% and Lord Abbott short duration income 29%. According to the Wall Street Journal these bond funds hold approximately $132 billion of illiquid securities. Ponds connected to the price of oil trouble already, particularly Brazil.I wonder how many trillion dollars worth of illiquid securities the Fed owns?
9/18/2015 THE FED IF FRIGHTENED! – THEY CAN’T EASE AND THEY CAN’T TAPER!
The Federal Reserve decided to hold to their zero interest rate policy. They are concerned that if they raise rates, the economic crisis in the world will go mainstream. There only tool is to use monetary policy, as there is no fiscal policy collaboration with the do-nothing Congress.The primary driver of our present financial bubble in the United States has been the Federal Reserve. Through quantitative easing and zero interest rates, they have tried to encourage inflation, which has remained close to zero. They mention in this report that international considerations have influenced their decision, which for the first time is not unanimous. China is definitely part of a bigger problem. In today’s Wall Street Journal James Chanos said “As long as China adds credit faster than its growth, the real story is months and years ahead.” The Fed has done everything it can to bolster inflation. However, nothing yet has worked. The Fed says that it will delay any interest rate rise until December or 2016. This may give the stock market one more short-term boost. This will only delay the inevitable. Zero interest rates and overnight lending has directly created debt bubbles in numerous areas. The Fed QE1,2,3,bought $4 trillion worth of bonds and flooded the economy with dollars and still, they couldn’t stir up inflation. CPI in August was down -0.1% and is only up 0,2%in the last year. They are out of bullets to help the economy. All they can do is delay or slow reverse tapering. If oil goes down anywhere close to the $20 a barrel, as forecast by Goldman Sachs, it will have the same effect as the mortgage debacle, when mortgage bonds defaulted causing another financial crisis. Oil-producing nations have bonds that will be in trouble. Jim Flores the vice chairman of Free Port McMoran said “Whe’re all going to get wet. A few people are going to drown” Oil-producing companies have bonds that will be in trouble. The banks hold more derivatives on these trouble securities than they did of mortgage bonds in 2008. Once again, the banks are a house of cards. If the economy is doing so well, why is the capacity utilization rate at 77%? Before the recession it was at 80% and during the 1990s averaged 82%? S & P 500 earnings for the 3rd quarter are down -4.4% and more worrisome, revenue is down -2.9%. What is the real unemployment rate of those who have stopped seeking employment or have settled for poverty wages? the economy is in trouble and without fical policy changes from the do-nothing Congress, the Fed is at the opposite end of the Fed funds spectrum to help. Another quantitative easing will just make the end game worse, as the Fed already owns $4 trillion worth of questionable securities. They can’t ease and they can’t taper . We are ……!
|Foretasted Trend||DJIA||NASDAQ||S&P 500|
|Long Term||Bear Market?||Bear Market?||Bear Market?|
|Breakout Points||DJIA||NASDAQ||S&P 500|
|Short Term Up (Resistance)||16,933||4,960||2,021|
|Short Term Down (Support)||15,881/15,651||4487//4506||1879/1867|
|Int. Term Up (Resistance)||18,352||5,231||2,134|
|Int. Term Down (Support)||15,651//15,370 /14,688/ 13,377||4,506//4,116/ 3,986/3294||1,867/ /1,560|
|Long Term Up (Resistance)||18,352||5,231||2,134|
|Long Term Down Fibonacci Support||50%12,000 62% 10,750||50%2,958 62% 2,555||50%1,390 62% 1,177|
|10Treasury 2.06%||Gold 1,145||Oil 48.60|