Saturday, April 30, 2016

Apple and Tech and the Market, Oh My

(Note: I initially published this article a week ago, before Apple's report.  Since then, their results moved the stock strongly along the bear leadership path I outlined - from $105 to $92)


This Tuesday evening, what is arguably the biggest, most successful, most loved, and most widely held company on earth gives us its quarterly report.  I speak of Apple and, while I don't own it or even pay much attention to quarterly reports in general, I will be watching this one.  I am mostly a technical analyst, and AAPL is at an interesting place right now.

I don't pay much attention to quarterly eps for several good reasons.  Most all of the "financial engineering" and creative bookkeeping that goes on is focused on quarterly eps numbers, because that's what most people care about.  But that also makes them the least telling about how the company is really doing, in my view.  I look at multi year patterns in cash flow, EBITDA, revenue, and the market's technical opinion on a stock.

As for the direction of the broad market, I look at technicals, of course, but I also look at leader groups, because they are a very trustworthy tell. Like clockwork, certain leaders turn ahead of the broad market.  For the last couple years, as I have shown in previous articles, key leader groups have been doing a pronounced bearish turn - the financials (European banks in particular), the Russell 2000 small caps, high yield debt, etc.  These groups all confirm what things like aggregate corporate revenue and successful forward looking summations like the ECRI lead indicators all show.  All this reliable data is carefully avoided by the hard working men and women at the Fed:

Getting back to Apple, they could be considered a "lead group" just by the shear reach of their products.  Although I am not a stockholder, I plan on my next computer being an Apple.


This company has not just made the best communication devices in the world, but they have been a very well run business for 20 years now.  If you look at how the stock behaved during the last bear market, you see a remarkable leadership to the upside:

The 140/200 day ema is a good divider of bull and bear markets, and when they cross, we should pay attention.  Apple didn't do the bear cross until October, 2008 and sprang back to a bull market way ahead of the broad market, hitting new highs before 2009 was done with.

So what's up with this leadership now?  Well - not so much:

Charging into October, 2014, the broad market was hit hard, but it barely phased AAPL.  But then a subtle change began taking shape.  When the SPX formed a roll-over top in mid 2015, AAPL went meekly along for the ride.  It snapped back from the August panic better than the market, but since then, it has, for the first time in over a decade, begun to be a drag on the SPX.  It did not go anywhere near a new high in the November rally nor in the current rally.

Does this technical take have any roots in Apple's fundamentals?  I refer you to an overview at TalkMarkets where this change in leadership is presented in eps numbers:


The article, saying in its title that Apple is to be the "biggest drag" on SPX tech,  shows a phase change from Apple (blue bars) pulling up the tech average (green bars) to Apple pulling down the tech average.  The current blue bar is estimate.

As for top line, if the anticipated revenue (anticipated by Apple) of around $52 billion materializes, it would be the first quarterly sales decline in 13 years.  Think of how crude our phones were in 2002. 13 years is essentially the modern era of Apple.  If that quarterly rate of sales were to persist for the next three quarters, it would be a drop of nearly 12% from the last full fiscal year.  For a company that has more than doubled its sales over the last four years, that would be a bitter pill for investors to swallow.  Unless the global economy picks up quickly, it's hard to imagine a snappy return to big sales growth.

Having said all that bad stuff, the stock is not an overpriced balloon in search of a pin, like so many these days.  For the aforementioned revenue growth of the last four years, you are paying a price-to-sales multiple of just 2.6 - very cheap compared to the industry average (as defined by Morningstar) of 2.0, and the PE is just 11 for the disappointing earnings.  Even if you believe we are heading into a bear market for awhile, you could put this on your short list of longs to hold while waiting for better conditions if you don't care to try to time the possible bear.  This is especially true since Apple installed a dividend of around 2% - quite competitive in our new NIRP world.  Apple will live to fight another day.

I, for one, am going to be interested in the behavior of AAPL this week.  The stock has already clearly broken down out of the current rally.  If the quarter doesn't propel the stock back up through $115, its bear leader status won't change.  It really will be in limbo if it doesn't go through $130 and retake the baton of leadership.  And even if it were to do that, it would be one leader group saying "bull" while all the others continue to say "bear".  But maybe Apple will be the first to change its tune.

Thursday, April 7, 2016

Are We At A Fear Fatique Juncture In The VIX ?

We've all heard a steady drumbeat of negative developments about oil, bad debt, sluggish economies, blah, blah for well over a year now.  And we've seen some unsettling rallies in the VIX associated with all this, but now the AAII Sentiment Survey has just a 24% bearish reading.  The mean is about 30% with one standard deviation from the mean being 21%.  So we are nearing this extreme level of lack of fear in the stock markets right now.  The last time it was one standard deviation or more too low was back in November - when we should have been very afraid.

Have all these problems that have gradually edged the average value of the VIX up for many months now, magically gone away?  No, if you bother to check, they are actually getting worse, as I
have discussed in some of my recent articles.  Are we in denial? Are we inebriated?  Just what is our mental state? (click on images to enlarge)


As for substance and keen analytical insight, we tend to think of the fear index like we think of a manic-depressive teenager in love.  But can the behavior of the VIX really signal anything about the forthcoming behavior of the market?  Looking at a VIX vs SPX chart such as the one below from The Palantir Blog, one could surmise just that by simply paying attention to the slope of the VIX:

Here we see that the VIX will change to an up-slope in its base or support values between spikes as we approach important market tops.  And what's really bizarre is that the VIX collapses out of that up-slope just before the really bad market thrashings begin.  More on that later.

Even better than the stock market at foretelling recessions is the ECRI  (Economic Cycles Research Institute)  Weekly Lead Index, which looks at the economic cycle components that turn before the rest.  This index has a remarkable record if you just look at the trends it makes:


The trend breaks come months before the stock market turns and the recessions.  How do these trend changes compare with the above VIX trend changes?  Since the VIX wasn't invented until 1993, we will just look at the last two great bear turns - 2000 and 2007:


The VIX changes in trend preempt even the ECRI changes in trend, suggesting an even better economic information discounting ability than one of the most respected economic predictors around.

Why do we typically see a collapse of the VIX below its long, slow uptrend just in front of the main collapse in a bear stock market as mentioned above?  The only thing I can figure is a kind of fear fatigue where investors know there are serious problems developing for the market, but they are just tired of hearing about them.  They maybe just start viewing it all as the wall of worry that seems to permeate markets most of the time.  That justifies investing in bull markets, which climb the proverbial wall of worry, but it also seems to be a repeating pattern in approaching bear markets.  We are seeing a repeat of the VIX reaction to the approach of the 2002 market collapse and the 2008 episode:



The upward sloping support line shows a gradually increasing unease with investors over a period of many months, then a massive VIX spike into the classic pennant formation.  Then there follows a break of the pennant back down to the more gradual encroachment of fear.  Here the market becomes tranquil, sentiment is rosy, and investors are tired of hearing "wolf".  This Sounds a lot like the present.

But this appears to be the danger point when a turn back up in fear begins.  In 2002 and 2008, there is one more fade of the VIX back to the support trend before the major stock collapse begins.  We are at the first touch of the trend line now in the 2016 version of this pattern.  There is certainly no guarantee of a repeat of the past, but markets do tend to move in repeating patterns controlled by human psychology.  And the fear index is certainly one of the most psychological of them all.

James Picerno just published an article "US Financial System Risk Eases After Reaching a 4-Year High" summing up the current "stress test" the Fed regional banks publish.  I want to focus on the one done at Cleveland:


He shows some of the other banks' indices in this article, which do not show as dire a run-up currently as this one.  But if you examine those other graphs, you see that nearly all of the severe run-up they did in the last recession was well after the start of the recession, providing essentially no early warning. The Cleveland tabulation seems to be a little more excitable and ahead of the curve, even if it did give a false signal in 2011.


Picerno also recently posted "Macro-Markets Risk Index Signals New US Recession" where this markets based economic lead indicator shows its first recession signal since 2007:


Note this is also a lead indicator, shooting up over the 50% tipping point before the start of a recession.  It gave a false signal in 1997, signaling only the stock crash, but no recession. However, it was not faked out in the 2011 troubles, not even going anywhere near the 10% mark.

And if you like trouble indexes that weren't faked out in 2011, consider another fear index besides the VIX.  Credit Suisse has what they call the Credit Suisse Fear Barometer:


Despite all the PIIGS stress on the global financial system, this fear index remained unperturbed and, in fact, went down during this time.  But as we go into 2016, this index has gone the opposite direction of the VIX.  Note that, since mid 2014, this also seems to lead the VIX in fear spikes as in the October, 2014 market sell-off and the August, 2015 sell-off.  Could it be front running the next sell-off ?

It is worth noting that the Fear Barometer is a much braver fear index than the VIX, having thumbed its nose at all the 2011 dangers and remaining more unruffled in the sell-off of last August.  In fact, if you take a longer view of this index versus the VIX and compare for bravery, as in this piece from Phil'sStockWorld, you see this:


Not even the horrors of 2008 could run this fear index up.  But now, it's more afraid than ever before.  The above article, by Tyler Durden "Goldman Questions Rally, Fears Looming Event Risk Amid Record VIX Longs" explains two differences between the VIX and the CS index.  The Fear Barometer measures the relative put/call volume whereas the VIX just measures total volume.  And the Fear Barometer is geared to a 3 month outlook whereas the VIX is pummeled by every wind of rumor every minute.

Whether you go by the brave Fear Barometer or the slopes of the jumpy VIX, the market's fear gauges are registering danger in concert with the best economic cycling tools available (this does not include Fed Speak).  Adjusting appropriate hedging screws in portfolios would be wise.

Wednesday, March 30, 2016

The State Of The Rally

The 13% rally of the SPX and Dow from the "Dimon bottom" of February 11 has been most impressive and has converted a lot of bears into at least neutrality.  This week's NAII Sentiment Survey: 34% bullish, 42% neutral, 24% bearish.  Of such are tops made.  But the market is chugging along with the rally still intact, isn't it?

Well, if you believe, as I do, that our markets are being led by the big banks and their derivative troubles, especially in Europe, you better take a look at the following.  Things are going from bad to worse with the banks.  NIRP is crippling a beast already wounded by the quantum leap lower in commodity prices.  An article at Seeking Alpha states "NIRP Is Absolutely Crushing Big Parts Of The Finance World".

Negative interest rates are the antidote to a normal, healthy free enterprise system.  Banks are forced away from giving savers a return and making their money loaning to economic activity with a normal yield curve.  What are they forced toward?  They now have to devote their full attention to what Glass-Steagall bared them from doing after the banking fiasco of the 1930s, "investment banking", playing with commodity and all manner of toxic derivatives, which is what got us into this very mess to begin with! Yes, that's just what we need.

As I pointed out before back in October, the key outfit to watch for clues as to what might happen next is Deutsche Bank, the lead bank of Germany, the lead economy in all of Europe, the leader as we go into a socialist style banking takeover of our global economy.  They have replaced the Swastika with the Derivative Pricing Model.  Our entire free capitalist world is held captive to how these models play out, and, in particular, how they control our currencies.

My fellow militant Austrian economist, Jeffrey Snider, just wrote an article at SA called "Credit Suisse And Deutsche Bank Still At The Forefront (Just Where They Don't Want To Be)".   Here he quotes a mea culpa from Credit Suisse on their sipping of the Bernanke Kool-Aid with heavy bets on returning to normal economic growth in the Emerging Markets after the 2008 crisis. Tiajane Thiam, CEO of Credit Suisse, is giving a euphemistic review of Q4 that is paraphrased by Snider thusly:
In other words, the bank is admitting that it messed up in chasing high yield and EM credit and all the activities that surround them, vowing now to leave those areas as quickly as practical.  It isn't so easy, though, as Thain's most recent ante in more lost investment banking jobs suggests.

Credit Suisse is also joined in that regard by the others that followed this policy success vision.  Deutsche Bank, for example, was just put on negative ratings watch by Moody's. The ratings agency sees the same as Credit Suisse - that the strategy once followed and having been done leaves only further pain to undo it.
 "At the forefront" as Snider says, is indeed where DB is leading us ever onward: (click on images to enlarge)

The state of the rally with our leader is not good.  The rally off the Dimon banking bottom of February 11 did not go anywhere near a new high as has the Dow, and didn't even make it to the top of the bear megaphone progression, and now it is clearly breaking the rally to the downside.  As with the Dow, this rally has no buy volume with sell volume dominating.  I did a study on this bear megaphone progression pattern, which most of the big banks are now following. It has been the defining feature of every major US bear market since 1850.  If we follow DB's lead in this rally, it will soon roll over into a major new down leg.  As for Credit Suisse, our co-leader, it is even worse:

It is worth noting that nearly all these major banks peaked way before all other major averages.  And they actually look more like the CRB commodities index than anything else.  In any rally in this day and age, you want to see strong leadership from the financials.  If you check the other banks, you don't see a much brighter picture of where we're headed.

Make no mistake, we are getting into a market situation where the money flows of the big banks are taking over from GDP numbers, earnings, employment reports and the things that are supposed to operate markets.  Many would argue that the aforementioned numbers have already been removed from the real economy anyway. But the derivative kingdom has staged a coup and is now calling the shots in the stock market, superseding economic numbers, real or fraudulent.  This is a point Jeffrey Snider is making pretty clear in tracking the dollar shortage mess now getting to very dangerous levels. I wrote an article on this and its relation to gold and showed this amazing correlation Snider points out between the goings on at the big banks and our recent market selloffs:


The repo chart Snider shows has the dollar shortage recently doing a moon shot to the highest level since Lehman, 2008.  The sloshing around of currencies at the big banks seems to be controlling the value of your favorite stock more than the employment report or about anything else these days.  The out-of-control complexity of our credit based currencies and derivative linkages is what mostly matters anymore.  The dollar shortage is beginning to seriously disrupt business in many countries, mainly the heavy commodity exporters, as this CNBC piece details.  The list of such dollar shortage crises is growing.

The causes for this mushrooming menace in the currency markets are many, complex, convoluted, not understood well or reported by many.  And I certainly don't understand all the mechanisms involved.  But allow me, as someone who is viewing the forest, not the trees, to make an observation.

Our "money" over the last few decades has become purely a complicated series of credit transactions among banks, not based nowadays on much else besides creditworthiness.  As JP Morgan is famous for saying, back in the sensible days of sound currency, "Gold is money.  Everything else is credit".  Thus the Moody's talk of downgrades for Deutsche Bank and the like is naturally having a jarring effect in the credit-crazed currency markets.  The $700 trillion derivatives "bomb" that was partially detonated in 2008 may see more fireworks in this latest counterparty risk obsession in currencies.
Deutsche Bank, our fearless leader in the technical condition of the stock market, is also the world leader in derivatives.

Nearly a hundred years ago, after many years of looking the other way with the creeping policy of appeasement, it took a horrendous world war to stamp out the socialist rats enslaving the German people.  Now, a computer algorithm version is taking over our growing taxes, the bills in our wallet, and our right to a growing economy.  As I showed in Gold And Derivatives these Gestapo goons are even in the process of laying claim to your bank account to pay for their derivative indiscretions in the future.

In 1943, the Nazis were winning the war.  After Pearl Harbor, Japan ruled the Pacific and we were bracing for an invasion at California.  Hitler had drawn up the recently discovered construction plans for death camp locations in a divided America, the west half governed by Japan and the east half, with all the Jews, governed by Hitler.  IBM was developing the first computer that would be used by the Navy to calculate its gunnery.  Without the undivided focus and outrage of the world in the war effort, with every company making war parts and nearly every mom helping while her man was away fighting, the tide may not have been turned in 1943.  Now, our global socialists with reckless derivatives as their main weapon are looking to enslave, not just the German people, but anyone who must pay taxes and has a bank account connected to a computer.  They are farther ahead than the Nazis were in 1943, only with the world fast asleep.  What's it going to take this time to stamp out these cyber socialists?



Let's all hope the all-knowing, super-hero Derivative Pricing Model continues to solve all our problems for us.  It has gotten us this far.

Saturday, March 26, 2016

A Technical Note

The rally from February 11, the "Dimon bottom" where JP Morgan Chase chief Jamie Dimon made a large insider purchase of his bank's shares, is looking good to a lot of investors. The latest AAII Sentiment Survey shows only 24% bearish thinking right now. Count me part of the 24%. (click on images to enlarge):


Here we have a look at by far the most bullish of all the major markets around the world, the Dow 30, and even it looks like crap. This is not what you want to see at the start of a major new leg up. The buy volume is sadly absent. A new top appears to be forming short of a new high. And the rally looks like a carbon copy of the previous one in November that devolved into the January collapse.

On a positive note, we are well above the 200 day moving average, while the 50 day appears to be perplexed by all this, first doing a positive "golden cross" in mid December, then immediately doing the "death cross" in January and now sloped back to positive. Well, I ignore the 50/200 simple moving average thing as meaningless noise and look primarily at formations and the 140/200 day ema. There we see the following:

The 140/200 ema did a negative cross clear back in mid September and has remained in a negative crossover. We appear to be bound by a downsloping resistance trend. The volume since the September cross has been overwhelmingly dominated by selling.

Having said all this, I suspect the Dow 30 will briefly surge to a new all time high amid much bullish fanfare while all the little followed broader averages, the Russell 2000 in particular, creep up to much lower resistance levels before turning lower. This narrowing breadth of the good behavior down to just the 30 stocks of the Dow is very typical of the last stages of a multi-year advance. But now even the action of these last 30 in the bunker is looking weak.

Thursday, March 24, 2016

What the Approaching Dollar Liquidity Crunch Implies About Gold

Jeffrey Snider of Alhambra Investment Partners just published a piece at Talk Markets and at Seeking Alpha, "Huge Repo Warning", wherein he alerts us to a sudden and severe US dollar shortage, the likes of which we haven't seen since 2008. He monitors the Repo fail rate, which tracks failure to deliver on contracts for people buying the dollar: (click on images to enlarge)


This measure of dollar shortage has just now leaped past the September, 2011 spike to the 2008 crisis level. This reflects problems in the US. But it may not all be fears over the US.

This January 12 article from the Wall Street Journal may go a long way toward explaining the disruptive dollar shortage - it is titled "Chinese Consumers Race To Buy Dollars As Yuan Slides".
During the weekend, ICBC received an urgent notification from China’s central bank warning of a dollar shortage, he said. The tight supply means ICBC customers applying to change yuan for dollars on Tuesday have to wait four days to complete the transaction, rather than the normal one day, he said. Another person who works in retail banking at a leading Hong Kong bank in Shanghai said she estimates the amount of U.S. dollars bought by Chinese residents in December is roughly double what it was in June, the last peak.
These jams come and go, but Snider, who has been watching this dollar thing like a hawk for awhile, seems to think the magnitude of this latest liquidity crunch is an urgent warning for stocks. His conclusion:
It is difficult to accept this level of fails as anything else other than a liquidity warning as all the prior versions had been ...  And it’s not like repo is the only indication of a desperate financial shortage.

In fact, that is the growing consensus among the deeper, internal eurodollar indications. From swap spreads to cross currency basis swaps to countries literally begging for dollars, they all point to the same imbalance – a dollar shortage.

It seems yet another warning that the financial world is “on the clock”... With a countdown already in place from whatever the PBOC had been doing in January (and this very well could be related to that), it would be truly a bad sign if those clocks synchronized especially heading into the final two weeks of a quarter and the typical window dressing illiquidity space. I would not be surprised at all if this surge in repo fails was the starter pistol firing to sound the beginning of dollar run #3
To illustrate what he means by "dollar run #3" I drew a comparison between some previous episodes of dollar shortages he graphs in his article and the related actions in the stock market. I use the NYSE composite as a broader average and a lead group, as it peaked early in the present decline.



Dollar hoarding looks to be a growing problem and very tightly correlated to the timing of severe stock market sell-offs. Bouts of dollar hoarding have precisely accompanied each of the two global stock sell-offs of our current downturn, not to mention the possible foreshock to the bear turn back in October, 2014. Snider sees the late 2014 event as just that, a foreshock. He notes the rising dollar back then along with the top in a lot of markets - think CRB dropping off a 3 year plateau, European banks, the US transports. He pegged the October dollar hoarding run as "a clear warning sign".

There seems to be a growing propensity for safe haven scrambles developing.  And the
rocketing repo fails shown above strongly suggest the aforementioned run #3 will be underway in the downward megaphone progression pictured above.

This megaphone progression has been the defining characteristic of every major US bear market  since 1850. You can look at all seven of these cases in an article at my web site. I gave it an alarmist title similar to Snider's "Huge Repo Warning" - "An Important Market Message Is Now Blaring". Both our alarms sync together very well. We are approaching the upper reaches of the megaphone in what is probably a bear market rally, just as the most severe dollar crunch since 2008 arrives.

This all has a huge bearing on gold in that, in any flight to safety, massive amounts of money get divided between many things, but the USD and gold are the two main players. So it behooves us to consider the relative size of these two markets:


The size of the investable gold market including miners is about $2.6 trillion. The vast majority of forex trading, about 85%, trades the USD. This pictograph clearly shows that, when there is a traffic jam in the dollar, it is a big traffic jam. If we were to picture the $700 trillion derivatives market in the above graph, there would not be room on the page to show it. The trading turnover in the dollar is around 6.5%, for gold it's about 2.7%. If you do the math, that's roughly 4 times the supply/demand tightness factor for money wanting into gold, everything else being equal.

When things are not normal, as in the current, dangerous dollar shortage, it could divert much more flight-to-safety inflows into gold's already much tighter market for new money. The popularity of the dollar as a safe haven the last couple years is greatly helped by the simple fact that it has been in a rip roaring climb, and gold - not so much. But the dollar climb is seriously weakening, especially since the whole Fed rate normalization scheme of the last couple years is now being called out on the carpet. The Fed is viewed more and more as being caught in the same boat as the rest of the central banks. And the dollar may become more and more viewed as just another currency and not so much a safe haven.

This all may go a long way toward explaining the sudden rejuvenation of the gold markets since January. The dollar transaction fail amount shown above is $883 billion - that's 18% of the whole forex market and about 3 days worth of trading. This current illiquidity could result in major moves in gold if we embark soon on the next leg down in a bear stock market, as this massive dollar trade tries to squeeze into the much smaller gold markets.

What's even more compelling in relative market size in this diverter valve movement is a look at the gold miners. The $2.6 trillion "investable gold market" includes the miners, but that is a miniscule $200 billion. The higher quality miners are viewed as a superior way to invest in gold as they provide good leverage to the gold price in their operating results. The miners also provide some insurance against any possible government interventions into gold ownership and pricing in an economic crisis, as happened in 1933, when FDR confiscated all US personal gold at $21.67/oz and then declared it worth $35/oz. The owners of the miners didn't care:

So the gold industry rightly sees more than its fair share of safe haven inflows if there is any USD/gold change. Considering the dollar/gold miner market size ratio is about 22, we could say that good things can come in small packages:



Add to this the extreme low we are at in this age for investor exposure to gold in this time of building currency disarray, and you have a formula for a possible dollar/gold tsunami:



The major currencies of today will go by the wayside before our unsustainable debt situation is cleared up, as all preceding currencies have done - except for gold:


The massive and pressing dollar shortage problem could soon be a gold shortage problem. The sharp jumps in the gold miners we are seeing could have a lot of follow through.


Monday, March 14, 2016

An Important Market Message Is Now Blaring

I've outlined some very dependable markers of bear turns now developing in our stock market in some recent articles.  I don't like being a such sour puss as I mainly like analyzing individual stocks and seeing them climb. All I ask of the market is to leave my individual stocks alone. A flat, boring market is my favorite. But sometimes there is such a concentration of downside risk, you have to take measures against a market intrusion.

A bear attack is looking likely. One of the many signs is the megaphone. And I don't mean the device the Fed is holding up to its chin to say "everything is fine" to all the investing world.


The message from the central banks is confusing at best. With the US Fed insinuating four rate hikes this year while the rest of the world is scrambling into absurd negative rate territory, one has to wonder just how isolated the US can really be when 60% of the revenue in our major indexes is coming from outside the US.

The megaphone I am referring to is a technical formation. Like all good chart formations, they collect and digest information better than the Fed or anyone, and reflect the historically constant human psychology involved in buying and selling. I listen closely to these messages.

If you look over all the really bad bear markets since 1850, defined as those where the loss was 50% or greater, you have seven of them. Let's start with an early US bad bear, the 1852-1857 sell down. This one doesn't readily pop to mind when "really bad bears" are discussed. But a Wall Street Journal piece written March 6, 2009, three days before the bottom, discussing how '08 stacks up in history, features it prominently. It pointed out that we had to fall way more in 2009 to catch up with the #1 fall in history, 1929-1932 (-83%) and the #2 fall, 1852-1857 (-66%) inflation adjusted. Of course, we didn't do that in March of 2009, so the 1852 bear kept its # 2 all time ranking. So what did this bad one look like? (click on images to enlarge)

That's right - it looked like a megaphone. This technical formation is one that I look for in stocks, because they usually break violently to the upside, when the slope of the megaphone is down and there are positive technical indicators at the low end of the formation. But this is usually after a severe thrashing to the downside.

So #2 was a megaphone, what about #1? Well, sort of. The Crash of 1929 was just that - a crash. A bear market, which transpires over years, is not a crash. Thus the crash of 1987 was not a bear, and the crash in 1929 was not a bear. As I discussed in "A Study In Crashology" 1929 was just a big correction to an over bought condition (like 1987) but the fallout from this in the banking world caused the severe economic downturn, which was a bona fide bear. This was an exception to the rule that bull markets end with a whimper, not a bang. Bulls typically do a gentle roll over into a bear. So, how did all this look?

We see that, after the atypical bang at the end of the 1920s bull market, we had a big, near 50% recovery, and many felt the economy was back on track. Then the market did indeed settle into a megaphone as the banking problems took over heading into the massive bank failures of 1933-34. This diagram shows how the market gyrations get bigger as the megaphone progresses. Each bear market rally was progressively bigger percent wise, like an amplifying sound wave. Technical analysis is all about the message of the market. With these mega-bears, the message seems to get blared louder than normal.

There have been five other lesser bear markets, but of major magnitude, being of a 50% or more decline, since 1850. The next one was The Panic of 1907:


This was a two stage megaphone bear with the years prior to the actual panic included in an overall bear decline. Notice that the market announced the panic well in advance with a megaphone. Then there was the 1937-38 bear, which came after a five year bull in the Depression:


This was another two stage megaphone bear before the final low was put in. If you would have examined a chart in late September, 1937, a clear megaphone was clearly saying, "much more trouble ahead". Probably the next bad bear we think of is 1973-74. The decline was as bad as 2007-08 and the recession was one the worst ever. The recovery was weak and led to "the misery index" being a big election campaign item in the 1980 elections. How did this market look?


This one was not as sharply defined, but the overall pattern was there. What about the bear markets of our time we all know and hate - 2000 and 2007? As I've shown before, they were both of the typical, gentle roll over type. Let's look at 2000:


It was a very sharply defined megaphone with the brutal 2002 meltdown being the last trip down. And 2007?

This was a higher beta megaphone than its predecessors. I would like to point out that the moving average pair I'm showing above is the 140 ema and 200 ema (exponential moving average) which is the best divider I have found between a bull and a bear market. When it consistently acts as support, it's a bull. When it consistently acts as resistance, it's a bear. And it usually resides in the vicinity of the upper reaches of these major megaphones.

That's seven out of seven of the mega-bears in US history that have had this megaphone market message seemingly announcing their arrival. To look at where our current market may be headed, I want to look at probably the best leader index, the small caps of the Russell 2000. This index has been telegraphing the Dow very well lately, and here is how it looks now:


The leading transports (TRANQ) are also showing a nascent megaphone.




I say nascent, because the Dow is just a few percentage points off its high and has a long way down to go if this is indeed a major bear market beginning. The present rally looks like it should run some more to test and retest the moving average pair and the top of the megaphone, maybe to 1140 on the Russell, around 2040 on the SPX. But this may be a good area to lighten long positions that you don't want in a bear market. Don't be like the three monkeys above, be a little worried, take precautions - but be happy.

Friday, March 4, 2016

Gold and Derivatives

The "financial weapons of mass destruction " as Warren Buffett has been calling derivatives since 2002, are harmless and mostly beneficial most of the time - like bacteria. But when something upsets the natural, stable balance they thrive in, we can all get very, very sick. If you have ever bought a simple call option, you have dabbled in derivatives. Sometimes, these things work out and deliver an exciting homerun, but 80% or more of these contracts, which have deadlines, expire worthless. So "fun but dangerous" is the name of the game.

Having said that, derivatives have always been used like insurance policies with periodic premiums (worthless expirations) happily being paid by producers of all manner of crops and mined goods that have surprise price fluctuations. They purchase this insurance to hedge any unexpected price movement whilst they are busy getting their goods sold. So why does a smart guy like Buffett call them weapons of mass destruction?

I think a comment on an article  from ABC "$710 Trillion: That's A Lot Of Exposure To Derivatives" explains the problem well:
...the problem is that too many people can take out derivatives beyond the real needs of the market. For example, imagine I can insure my $100,000 house against fire by paying a fee of $500. Imagine also that 199 other people take out the same fire insurance on MY property, perhaps even using borrowed money to do so. This is the current state of much derivatives activity. If the house burns down the insurance company is up for $20 million. They might well go broke since it is the same to them as having to pay out on 200 property fires. If they did go broke I might not even get my claim paid, yet the other claimants have no underlying real interest in the property or the fire. They have simply made a $500 bet with a $100,000 possible outcome and have done so on borrowed money. The liability should lie with me and my insurance company. So why should the government agree to bail out the 199?
It is simply way too many people playing with derivatives, not as sensible insurance, but for a fast buck. They are not producers. They are not owners. They are just players. I won't go into the massive scale of the problem, that is beyond the scope of this article. But if you are not aware, you should read up on this, in case you don't have enough things to worry about.

What I want to focus on here is banks. That is because the 4 or 5 mega US banks are exposed to about 90 - 95% of the total derivatives for the whole country. And this is typical globally. It is not mainly farmers hedging their crops or producers of anything buying insurance. It is financiers playing with OPM (Other Peoples' Money) in out-of-control complication, not protecting crops or insuring anything except their own investments. Thus a staggering 80% of all derivatives are gambles on interest rates. When you have the Fed announcing four rate increases this year, the rest of the world charging into negative rate territory, and the US economy in a manufacturing recession, it is a little worrisome that our banks are riverboat gambling over the next twitch in interest rates.

More than oil, China, recession, Greece, or any one thing, banking derivative abuse could be our number one problem. It is the one thing that ties all the other problems together and gives them an amplification device. And I would like to show how it may be what's driving gold right now.

The conventional wisdom for explaining what gold is doing is to look at what it's supposed to be dependent on. You know - it has to be doing the opposite of the USD, or be doing whatever commodities are doing, or opposite the broad stock market. Well, don't look now but it's not doing any of those things very well recently! Let's not try too hard to figure out what gold should be doing and just look at the market's message on what gold is doing.

Gold is breaking its historical correlation with the commodity complex. If you look at the CRB/gold pair, you see that in 2016, gold is sharply breaking away from commodities, and actually began doing this clear back in late 2014. Oil and gold are moving sharply in opposite directions. The gold miners, whose biggest cost is energy, may soon have a field day. (click on images to enlarge)


Gold began latching itself to something else in late 2014. Note the sharp, opposite move by gold up as the stunning drop in commodities got a little crazy. Gold then resisted rejoining the CRB, building even more divergence until late 2015, where it is again bolting sharply in the opposite direction.  Gold is not just another commodity anymore. So is gold just doing the opposite of the dollar now?


This is not a very good correlation either. Note that in the sharp, late 2014 commodities swoon, the dollar followed commodities, but gold clearly started to follow something else. Then gold and the USD started to dance together for awhile, as is their custom - until late 2015. Here gold is bolting away from both commodities and the inverse dollar.

So is gold just being inverse to the broad stock market?  Let's take a good measure of that with the 2000 stocks of the Russell:


Here we have a little better correlation, especially in the last two months. So gold seems to be responding to something that's now vexing the stock market in general. Let's see if we can narrow that down to something more specific:


In horseshoes, we call this a "leaner", the next best thing to a dead ringer. Here we see that gold has been strongly correlating to the inverse of the financials. It's the banks that gold seems to be mainly concerned with, not the usual stuff. If you look over the charts of the biggest banks of Europe, you may be shocked to find that they nearly all went into a very bad technical breakdown starting clear back in early/mid 2014 as commodities were swooning and their debt and derivative books were taking a beating. By late 2014, gold may have taken note, because it was then where gold sharply broke away from the commodity complex as shown in our first chart above. Now we are seeing the bank stocks being decimated and gold responding in kind. By virtue of commodities being the flavor of the era in the malinvestment cycle, gold has ironically become the anti-commodity.

This gold/bank correlation seems stronger with the US banks (chart above) than with the uglier European bank charts. This suggests that gold is more concerned with spill-over from the European borders, which do not stop the flow of digital information on the derivatives superhighway into every other big financial in the world. We keep hearing that all the markets are being controlled by oil. But, if you look at gold/oil you don't see the gold/bank correlation at all. It's as if gold isn't focused on oil, or any one problem or bank, but on the connection webs involved - that is to say derivatives.

But what about the great inflation/deflation debate with gold? Isn't that supposed to control what gold does? Well, nowadays it's pure moronic nonsense. It really misses the point. All of the out-of-control debauched currency is in one of two locations. It is either residing in financial institutions or out on the street chasing goods and services. Right now, with the lowest money velocity since the Depression, most of it is sitting in financial institutions, which are all tied together via exposure to commodity operations and related over cooked derivatives. Many are going under and writing off debt. If it weren't for Faber's "Zero Hour" phenomena where we have reached the point of zero economic return for each new Fed dollar of debt, the market would say "no worries".  But we have reached that point. That's deflation, fixable only by frantically throwing more printed money at a failing process and failing banks, which is bullish for gold, which is now fixated on this very problem.

If all the debauched currency is not in the troubled financials causing deflation, it is out on the street in the form of money velocity, causing inflation. Both tend to be bullish for gold now. So why debate inflation/deflation on gold? They are two sides of the same gold eagle. The point is currencies are imploding, and gold is the only alternative currency to this implosion.

How troubled are the financials anyway? We recently heard a lot about Jamie Dimon doing a massive insider buy of JPMorgan stock. Since then, the Dow has rallied and his buy has been called the "Dimon bottom". On the 2/24 Fast Money on CNBC, bank health was the debate as they discussed the report out by RBC Capital by Gerard Cassidy on the exposure of all the major American banks to the oil industry. His take was that it is a containable problem, and that opinion was echoed by the Fast crew with Dimon groupie Karen Finerman saying that all of JPM's oil exposure amounts to just $0.30 a share.

I am a big fan of insider buying, but this buy will not induce me to buy any JPM. While Dimon expressed much confidence in his bank, his CEO of investment banking just released a somewhat shocking article titled "It Is Worse Than Anyone Thought On Wall Street"! Daniel Pinto, CEO of JPMorgan's corporate investment bank stated that the bank's investment banking revenues are forecast to be down 25% in Q1 and went on to detail the deterioration in banking. It notes that JPM's performance is better than the rest of the banks (they have, in fact, been the hero of the banks) and the rough Q1 was going to be industry wide. While JPM's oil exposure has a face value of just $0.30 a share, you must consider that JPM has $1.5 trillion in assets and around $70 trillion in derivatives exposure. That's a very dangerous multiplier of 47 on not just oil but everything else they are playing with under duress.  I find it interesting to read what they blame for the bad Q1. It's not the price of oil. It is:
...the Swiss National Bank decided to unpeg the franc...higher market volatility, wider credit spreads, lower equity valuations, slowing issuance, a tough comparison period, and uncertainty around the trajectory of economic growth across the globe.
To me, this sounds less like "it's the price of oil" and more like "our derivative book has suffered a great beating".  I think the gold market would agree. 

This irresponsibility with derivatives thing is, of course, nothing new under the sun. And it tends to run in cycles throughout history. You probably have heard of the 75 year cycle in the economy where the banking depressions tend to occur every 75 years, plus or minus 10 or so. This started right out of the gate for America with the Panic of 1796 which sounds a lot like the invention of the Fed and derivatives when you read the Wikipedia account:

Frequent instability characterized the United States economy during the 1780s and 1790s. Rampant inflation of Continental Currency during the Revolutionary War gave rise to the phrase “not worth a Continental.” Lacking a stable currency, banks issued their own notes, and calls for stronger public credit led to the establishment under the Articles of Confederation of the Bank of North America in 1781. After the adoption of the Constitution, the First Bank of the United States succeeded it as a de facto central bank... 
During this time, speculation was the investment of choice, leading to the Panic of 1792. Former Continental Congressman William Duer raised large sums of money to invest in bank stock and government securities, novel and financially sophisticated assets whose risks many contemporaries failed to understand. Duer soon defaulted on his debts, destroying the savings of many middle- and working-class people

Duer and his small group of prehistoric one percenters then sought to fix things "by applying unprecedented scale to an old concept: land speculation. This set the stage for the bubble that burst in 1797". Was it this group that Ben Bernanke studied and took as heros?

The cycle, which I think is mainly based on one human generation life span's typical 75 year length dividing the young and stupid from the old and wise, was repeated with the pivotal Panic of 1873, 76 years later. Then, we had the massive banking collapse of the mid 1930s dragging clear to 1944, 71 years later. If you take the depths of this banking catastrophe, which was 1934 and add 75 years, we arrive at 2009, where the Fed/banking/derivative problem appears to be dragging on to our day.

The old, wise men who enacted Glass-Steagall in 1933 were supplanted by the young and stupid 69 years later, with the 1999 repeal of this protective legislation that had given us decades of banking peace.

There also appears to be a half cycle to this generational thing. It makes sense to take half the average of these life spans, say 72 years, half of which is 36, and expect that the transformation form stupid to wise happens typically between ages 36 and 72.

David Nichols wrote an article published at Kitco May 7, 2013 "The Monetary Cycle And Gold" where he notes this 36 year cycle in currency and banking. If you wanted to assign a starting point to this 36 year thing, the Panic of 1873 would be a good choice according to the teachinghistory.org writeup:
The Panic of 1873 stands as the first global depression brought about by industrial capitalism. It began a regular pattern of boom and bust cycles that distinguish our current economic system and which continue to this day
They go on to say that this was really the beginning of the money supply capitalism we know of today:
Unlike earlier mercantile capitalism, which is dependent on local markets and periodic shortages of labor or materials, industrial capitalism is controlled by access to venture capital and the productivity of capital investments in stocks
Here began the rule that "money supply acts like oxygen" to quote the Teaching History writeup. The downturn was especially severe with bank failures triggering soon after October of 1873 and lasting until 1879.

The next 36 year cycle arrives at 1909 and the momentous aftermath of The Great Banking Panic of 1907. This was so bad that JP Morgan, along with other prominent bankers, stepped in with their personal wealth to stop a total freeze up. This led to the creation of the Fed 6 years later in 1913.  In 1908, Nelson Aldrich, father-in-law of John D. Rockefeller, convened the conference that investigated the causes of the panic, and the Fed was the replacement for the personal money of Morgan and friends. After 1908, we saw a 36 year period of financial chaos exacerbated by the two wars with Germany and associated bank collapses.

The next swing thing that happens in the banking world was exactly 36 years later in 1944. Here we had another monumental conference called Bretton Woods. From The Economist article "What Was Decided At The Bretton Woods Conference":
The Bretton Woods system that emerged from the conference saw the creation of two global institutions that still play important roles today, the International Monetary Fund (IMF) and the World Bank. It also instituted a fixed exchange-rate system that lasted until the early 1970s. A key motivation for participants at the conference was a sense that the inter-war financial system had been chaotic, seeing the collapse of the gold standard,
 John Maynard Keynes was at this conference arguing with Harry White, Roosevelt's rep, attempting even back then to destroy America's currency:
But while White, as the representative of a creditor nation (and one with a trade surplus), wanted all the burden of adjustment to fall on the debtors, Keynes wanted constraints on the creditors as well. He wanted an international balance-of-payments clearing mechanism based, not on the dollar, but a new currency called bancor. White worried that America would end up being paid for its exports in “funny money”; Keynes lost the argument
No Keynesian funny money, and what happened?
The Bretton Woods exchange-rate system saw all currencies linked to the dollar, and the dollar linked to gold. To prevent speculation against currency pegs, capital flows were severely restricted. This system was accompanied by more than two decades of rapid economic growth, and a relative paucity of financial crises
Then our brilliant President Nixon destroyed Bretton Woods in 1971 and we have had one severe economic collapse after another ever since, beginning with the recession of 1973, where the stock market lost 50%, about the same as the 2008 crash. We tend to think of the 1980s as good, but in the banking world it was one of the worst decades ever. Something came along in 1980 called the Savings and Loan Crisis. If you were to lay all these banking swing events out on a timeline comparing it with bank failures, it would look like this:

The first thing that stands out is that these 36 year periods are characterized either by a great ramp up in banking problems or, as in the period right after Bretton Woods, a near complete absence of banking problems.

Maybe the second thing that stands out is that these past banking episodes dwarf the 2008 Financial Crisis in terms of bank failures, thanks to the invention of the FDIC in 1933 and the bail-out age that started in the 1980s and has now gone parabolic with central bank central planning. But as bank failures have come down, currency soundness and derivative instability have gone out of control.

If you back up 36 years from the Panic of 1873, you arrive at the Panic of 1837, not shown on the graph above, but it was also a banking nightmare causing a depression. While this one isn't as well known as the 1930s, it was as horrible and lasted until 1844. Out of the 850 banks in the nation back then, 343 failed permanently and another 62 failed partially. That was about half the banks in the nation. It was another malinvestment cycle with cotton being the plaything.

David Nichols, who first brought my attention to the 36 year banking cycle, is a fractal analyst, but he does not claim this to be a fractal item of any kind. Nichols said in his article that 2016 will be a top for gold because of the 36 year cycle, looking back 36 years to 1980, the top for gold back then. But the 36 year cycle is all about banking, not the price of gold. If the cycle repeats in 2016, it will mean some kind of major turn point in banking. So it coincides with the fractal point that gold is at in 2016 (the start of a large climb, see my article on that) but doesn't necessarily mean the top of that climb.

My article pointed out the fractal significance of gold's 4 year cycling with our present gold market looking like a 2X fractal scaleup of the 8 year '70s fractal and 2 year down portion ('75/'76). The Swiss bank USB just published a USB Technical Research note January 6 pointing out the same thing with both the 4 and 8 year cycling.
A potential bottom in 2016 could be a rather powerful bottom, since together with a four-year cycle low we have also an eight-year cycle low projection for this year. In this context we expect a potential 2016 low in gold to be the basis of a new multi-year bull market.
UBS doesn't say fractals is their reason, but they see the same similarity between the '70s gold bull and our present gold market that I showed graphically in my fractal article:
Pattern wise we continue to see the 2011/2016 cyclical bear market in the same context as the 1975/1976 bear cycle in gold. Keep in mind, in the mid-70s gold lost 43% of its value from its January 1975 top before another gold bull market started into the January 1980 bubble peak. It is amazing to see that with a loss of 45% from its August 2011 top into the early December 2015 low, the decline in gold has more or less exactly the same proportion as in the mid-70s.
The 36 year banking cycle seems to lend itself to being broken up into 6 periods of 6 years each with significant banking happenings occurring in a 6 year cycle.


In any given year, there are several banking problems somewhere in the world, but there seems to be a tendency for the more significant ones to run in 6 year cycles. The latest iteration in 2010 with Greece may be especially foreboding as it could lead to a precedent for a banking contagion as a comment from the ABC article mentioned above explains:
In Cyprus when their banks failed people's savings were confiscated and they were given bank shares as a substitute, nominally at the same value but in fact worth much less. There were restrictions on cash withdrawals. This is the global solution for a major derivatives crisis put forward by the Bank of International Settlements (BIS). It's called a bank 'bail-in'. When the derivatives markets fail and banks go under, derivatives transactions take precedence over all other bank claimants ... Ordinary bank cash depositors go the way of Cyprus overnight. Effectively bank cash deposits are confiscated to pay out derivatives trades.
Since this "game changer" banking swing point, several articles have appeared outlining the dire danger these crazed idiots pose to the rest of us that are not going crazy with derivatives. Ravaging FDIC insured amounts results in government, taxpayer bail-out of the FDIC, so the wealthy accounts over the FDIC limit are becoming fair game for bail-in of any derivatives bust. The new "template" now being legislated - steal from the rich to finance derivative fun of the idle filthy rich. They seem to have a seared conscience about stealing from our bank accounts. Didn't the feds shoot Bonnie and Clyde and their stolen car full of holes for this?


This is what we used to do to bank robbers. Now they are Vice President In Charge of New Templates at Big Bank International. As a Huffington Post  piece phrased it "Bail-Out Is Out, Bail-In Is In". No wonder gold appears to be responding to all this. Criminal lunatics are taking over our banks, and the definition of money is changing.  How far we've come in one generation since 1934, when Clyde Barrow was shot for stealing from banks, and they enacted Glass-Steagall to erect a wall between our deposit banking and the young and stupid.

Now it's OK to steal from those awful rich, meaning anyone who is capable of creating good jobs in a free enterprise economy. They apparently are there just to provide funds for derivative shenanigans - funding free economic collapses and advancing socialism. And we wonder what's wrong with the economy.

Putting one's money in a bank has always been an investment contract. When you sign to create an account, you are legally making the bank owner of the funds to do with as they see fit. Your deposit immediately gets lost in a maze of loans amongst many banks. Of course, banks have typically been about the business of investing your money in the interest world to give both you and them a little profit, and they give all your money back whenever you say. That's changing.

With the new templates, depositing with banks is becoming more like investing in the derivatives world. Only you don't get any gain at all, just guaranteed loss in our new world of zero or negative rates. Either you get a little loss with the rates, or a big loss with a blowup in derivatives. This is not a good deal except for those playing with derivatives. What Bonnie, Clyde, and John Dillinger did was illegal. What Joe Derivatives Junkie is doing is perfectly legal. The definition of money is changing, and gold may be picking up on that.

As for the six year or 36 year cycles, I really don't think this is a fractal thing, and I am puzzled as to why this would happen. I can only equate it to the 7 year debt cycle that I showed in my article "A Study In Crashology" that I wrote back in October. The UBS Technical Research note also shows this 7 year cycle. In fact the title of their piece is "The 7 Year Cycle In Equities Is Rolling Over - Buy Gold". The 7 year cycle that I discussed was only concerned with the debt world, but there is, of course, a very strong correlation with equities. In my article "When The Canaries Die, Get Out Of The Mine" I go over the 7 year Shemitah cycles and the 7 periods of 7 years each that make up the 49 years between the Biblical Jubilee years of debt release.

As I showed in the article, big things tend to happen with debt and Israel in the Shemitah and Jubilee years. And it is very similar to the 36 year banking thing. Hmmm - banking and debt. They could be related. Both numbers, 6 and 7, are very significant Biblical numbers. This year, 2016 is both a 49 year Jubilee year and a 36 year banking cycle year, which is a very rare coincidence. Even if you were totally oblivious to all our boiling derivatives problems, banking troubles, and ugly market signals, you would have to be a little concerned about this cycling phenomena, no matter what you think may be causing it.