The Almost Daily 2¢ - Twin Peaks!

Subtitle: Let the Losers Lose!

Hmm… this run has some legs.

Could I be wrong about a retest of the March lows? Sure… Should I be wrong? No.

Cheats, frauds and the unwitting should never succeed. I would prefer that all losers lose.

Our system, in principle, is simple ... if you make a serious financial mistake … a homeowner that buys too much house, a stock speculator that gets comfortable with perpetually increasing stock prices, a firm that over-debts itself and fluffs up its income, a bank or broker dealer that makes junk loans without due diligence, a government that creates programs that can never be properly funded or that create longstanding distortions... you lose.

It’s that simple.

That's the invisible hand at work… eventually all mistakes are corrected and not without pain... that’s what (… theoretically of course) makes our system so good... losers are obvious and their experience serves both as a form of creative destruction creating new opportunities for those that are more capable and also as an important lesson to those that are equally incapable.

If you believe that the system of bailouts and government meddling is OK... if you are now relieved and believe that the worst is over and anyone who suggests otherwise is just a perma-bear looking for trouble, you are likely simply benefiting (…or believe that you are benefiting) from all the bailouts and fraudulent dealings.

If the stock bounce has brought you a measure of confidence and worked to allay your fears of the future, you are taking too short a view of things… you should be far more fearful of strong central planners (… the Federal Government and the Federal Reserve) thoroughly manipulating your economic system from stocks to housing to banking and finance and beyond.

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As regular readers know, I have been following along the stock market decline for well over a year now with this recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.

Be sure to study the charts well as they present several different ways of capturing market volatility and together compare past market performance to what we are seeing today.

I will continue to post the comparison to the “dot-com” era bear market for posterity but now that we have broken well through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras have now become one.

The “Percentage Up-Down” chart clearly shows that we have just entered a period of REAL volatility BUT also leads one to believe that we may have a long way to go in this market shakeout.

The “Up-Down Daily Closings” chart seems to indicate that although we have seen increased volatility and significant declines, we have yet to match the distribution of daily up closings and down closings (inverted red line).

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.



What follows below is now just maintained for old times’ sake… the second peak was obviously real and this series of posts identified it roughly a year ahead of time.

Now that we have entered effectively into uncharted territory, we are at a loss for historical comparison.

THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)
• H. Down Down we GO! (Uncharted Death)
• I. Bh Bye! (Fodder for the Sucker-Grinder)
• J. S&P 500 Blasts through the 50 and 200 day SMAs (The Cross of Life?)

Bull Trip!: GDP Report Q1 2009 (Final)

Today, the Bureau of Economic Analysis (BEA) released their third and final installment of the Q1 2009 GDP report showing a (revised) significant contraction with GDP declining at an annual rate of -5.5%.

Easily the most notable features of today’s report are the stunning declines to residential and non-residential as well as exports of both goods and services.

Fixed investment provided significant drags on growth with non-residential investment declining a whopping -37.3% and residential investment plunging -38.8% while exports of goods and services declined -30.6%.

Making a positive contribution to GDP were equally stunning declines to imports of goods and services slumping -36.4% (with and over 40% decline to the import of goods) as well as positive personal consumption expenditures increasing 1.4%.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

The Almost Daily 2¢ - The Fed and It's Mortgage Junkies!

Wall Street has weighed in on the future of the U.S. economy and the consensus is a resounding “All Clear!”

Yes, those who couldn’t perceive trouble brewing in the first place… even as late as the fall of 2007 … are giving the high sign … it’s over.. the decline is over.

Ten, fifteen or thirty years in the making (depending on your point of view) and the massive credit-housing-consumption bubble unwind is over in the span of just six to seventeen short months (depending on how you gauge it).

Just a bit of panic… a short and sort of typical decline in stocks… a recession and we’re good.

Sorry folks… we’ve got much more trouble up ahead but for now let’s take look at probably the most crucial trend the government is currently trying to control… and maybe get a sense of how their efforts are both myopic and will likely only result in more trouble.

Let’s remember that it took Fed Chairman Ben Bernanke quite some time to recognize that the housing market decline would have such a major effect on the overall economy.

As late as August 2007 Bernanke was calling the national housing decline “contained”.

But as a preeminent scholar of the “Great Depression” and a protégé of Alan Greenspan … once he recognized the seriousness of the situation he snapped into action slashing rates and cranking up the printing presses.

Specifically the Feds efforts at “quantitative easing” have focused on bringing down conventional mortgage rates… the thinking obviously being that if the housing market heals or at least stops bleeding so too will the overall economy.

A sensible conclusion I suppose yet… rates were already very low.

Our housing markets are in a sense “painted into a corner” or “out on a limb” so to speak… after years of declining interest rates and increasing credit enthusiasm and, of course, dramatically inflated home prices (way too many dollars chasing one asset class) the markets are stuck.

They are like a junky… They NEED low rates or else… a serious case of withdrawal.

They are so fragile and so seriously susceptible to interest rates that even a traditionally low rate of 6% would send them down for the count.

So the Fed is working overtime to give them their fix… bringing rates down and keeping them down until… presumably… they are healthy again?!?!?

To get a sense of the unusual position we have found ourselves in take a look at the following chart (click for dynamic interactive version).

Notice that mortgage rates have been declining for some time AND they are currently about as low as they can possibly go.

Also note that after a massive run up starting in the early 90s, non-revolving consumer debt had been in a declining trend from early 2006 until recently… Is the Fed winning the war?

Is it a war worth fighting? Are they missing the point?

The Almost Daily 2¢ - Five “Real” Bad Bears

Obviously this is a knock-off on the excellent charts posted at dshort.com but with the slight twist of adjusting for inflation (CPI for all except the Nikkie for which I used Japans general inflation index).

So the Great Depression era bear market took 360 months (30 years) to resolve while the early 70s bear took less than half that time at a mere 176 months (14.6 years).

Notice also that even 232 months (19.3 years) into the decline and the NIKKIE is still making new lows.

As for our current U.S. bears, they look grim but still young and spry… full of life… probably getting ahead of themselves as they wish that some day they too will grow down to be seriously big bears!

Commercial Cataclysm?: Moody’s/REAL Commercial Property Price Index October 2008

The Moody’s/REAL CPPI data series is produced by the MIT/CRE but is noted to be “complimentary” to their alternative transaction based index (TBI) as it is published monthly and is formulated from a completely different dataset supplied by Real Capital Analytics, Inc.

The latest results reflecting national data for all property types settled through October strongly suggest that prices for commercial real estate have eroded significantly.

Taken together, the MIT/CRE Commercial Property Index, S&P/GRA Commercial Real Estate Index and the Moody’s/REAL CPPI all appear to be firmly indicating that the nation’s commercial real estate markets are experiencing a significant decline.