(Courtesy excerpt of Gene’s www.ingerletter.com weekend analysis. Forward outlook provided via Flash video charts outline technical prospects for the new trading week.)
Gene Inger's Daily Briefing . . . for Monday October 26, 2009:
Good evening;
Desperate ‘life preserving’ . . . methods were applied in the final minutes Friday to try to prevent the breach of the daily moving average; and buy time for some sort of ‘holding action’ to be attempted in the new week. Where I see this leading you likely know; at the same time as we nailed Friday via a solid short-sale as housing number reports brief thrust higher. Remember what we said about our forecast turn last Tues. and Wednesday’s desperate ‘save’ (also an opportunity to short a spike up nicely on that day), as well as Thursday’s rebound into ‘technical congestion’; nothing more.
And that regardless of how they handled Friday (we allowed they might try to hold it, and they did; but it was clear to us from the get-go that it wouldn’t work; so we sold it as noted). Either way there are challenges ahead. There was more today; which is a reason I mentioned (as many ask) a bit about the fallacy of Keynesian economics as interpreted (he’s still dead, so can’t correct the inept assumptions about stimulus as intended to be used by a creditor, not debtor, nation), in the first of two videos. And in the second video (as noted for ingerletter.com members). The point is to address in the videos our thinking as to the meaning of the anticipated patterns of the past few sessions; having unfolding much as anticipated, and what that means going forward.
I also attempted to address the Calpers issue suspecting that traders are just starting to figure-out (or consider) something I’ve noted before; the deteriorating relationships between some state pensions or ‘others’, as well as actuarial impossibilities from our perspective of conservative returns sufficient to address pension requirements; no matter what policies any Administration embraces. There is lots of skirting around the edges on reforms; I don’t think it’s actually really been tackled yet. They (and there is a collective ‘they’) I think are likely afraid to confront what they’re really dealing with.
One example; I was very disappointment with Chairman Bernanke’s Friday speech at the same time you know my basic admiration and respect (mutually exclusive) for the man, as contrasted to his predecessor. The Fed Chairman talked about adjustments, and monitoring, plus allowing debt to be converted to equities to meet ‘net capital’ at higher levels in ‘times of stress’, and those single agencies; rather than re-imposition of Glass Steagall, which really is the solution (President Clinton signed-off on doing that in; and of course the media has failed to allow hardly any pre-Bush blame to go over on that side of the ledger, where it belongs). Are people totally naïve about (as outlined to members). Then you had lack of oversight through Administrations while LTCM (many remember our warning way back then) was pieced together, and it was a derivatives mess (shot across the bow which Greenspan assured Congress had no significance, as it was just a stupid mistake, not a structural issue, which of course it sure was at the time; contrary to what then-Chairman Greenspan told Congress).
My point is that it isn’t about more net capital and how you convert it; it’s about simply not allowing comingling of funds between banking and brokerage sides; and distinctly separating the deposits of working Americans from potential perils (as discussed). So that takes us to the ‘waivers’ we exposed (‘smoking guns’ if you will) in May of 2007, which to this day are not really permitted to be discussed anywhere, as to how the Fed allowed net capital as was already compromised at the most major banks and brokerages, to be shuffled in a way to conceal that they failed (due to securitized toxic holdings they still hold most of by the way) to maintain appropriate quality levels of assets. The waiver essentially abrogated the intent in the post-Glass Steagall era of not comingling such funds. The myriad of media discussions have never brought it down to this basic crucial point. In this regard I was disappointed the Chairman today danced around this, without himself calling for reinstatement of such ‘walls’. Further, when the Fed claims they didn’t know; of course they did (when we reported it the first ‘waivers’ already at the time were ‘officially filed’ in the Federal Register).
Now, we are NOT on an anti-Fed crusade; we are pro-the-American people and the stability of our banking system; that’s been at risk on more than one occasion (this forecast crisis from 2007 as ongoing regardless of any expected intervening equity rebounds; to focus only on that is oversimplification of what we’re dealing with as a Nation), starting with LTCM, which incidentally we caught both down and then up. It is important (also rarely heard in the press) to remember that the primary constituent of the Federal Reserve is the banks, and only indirectly the American taxpayer. As it has been ‘implied’ that their expanded (by proxy) role is to protect we the people; the failure to acknowledge that the mild-mannered suggestions for reform seem to imply a favoritism to the banks, struck me as a bit disingenuous. That’s why I’m saying that I was disappointed, as I would like to see more of the frequent Bernanke ‘candor’. Of course I realize they rarely (Geithner alluded to it once at a Senate Hearing) admit they knew there was a problem before firms failed; but they could look forward now.
In next week’s remarks (probably Tuesday) I will share what comparable period in all American history this really may be that we’re in; and it’s none you’re head anywhere; except the one reference I made to it back in 2007 when calling for an ‘epic debacle’.
Daily action . . . anticipates what we outlined last night and in the videos next week. I will highlight a few of this week’s earlier points, and then we’ll go to those videos now.
Besides critical financial issues and regulatory hurtles; next week will see the largest Treasury Auction yet, and that in-itself can have indirect challenges to other markets. There are global challenges, including certain bank (as noted). Quantitative easing might indeed get reversed ‘when’ (redacted) the economy recovers. Since the market has discounted that; there is a case to be made that scenario could actually knock-off stocks. However, let’s not get ahead of ourselves. (Balance reserved for members.)
Warning 8 days ago . . . that many factors were potentially going to collide in about 5-7 sessions (including Oil going over 80 while the Dollar fell a bit more, while certain historical comparisons had some minor relevance), we suggested an ‘ideal’ topping it seemed might be by 10:30 a.m. on Tuesday (October 20); though it didn’t have to be.
Less we be too negative; here’s some good news from Wall Street:
“The improvement in sentiment in Wall Street may be traced almost directly to the encouraging reports which the financial community is receiving from the leading industries of the country, according to investment trust executives. They say that the current rise in security prices is firmly grounded on the improvement in business conditions that began in December.”
New York Times
February 14, 1930
Two months later the Dow hit a level it would not see again for about 25 years.
In the Crash of 1929, the Dow lost 48% of its value. Six months later it rallied back 48% (because this was from a starting point half as high, this meant it got back 52% of the loss from the Crash).
In 2007–2009, the Dow lost 54% of its value. Roughly going into Tuesday October 20, 2009, the post- ‘crash of 2007-‘08’ in the ‘epic debacle’ we forecast in the Winter-Spring of 2007, it has now rallied back roughly 54%, or in other words, it has regained 45% of this loss in value. This isn’t exact science, but has a little to do with why we got to our ‘equidistant’ measures and other colliding considerations in a suggestion that we had 5-7 sessions to work-through, 8 sessions ago, to complete overall patterns.
Back to the future..
We still hear the naïve arguments for distressed property to increase in value during this environment; that is either ignorance or wishful thinking. On a residential basis, next year is the year in which most states and counties will radically curtail services and slice budgets (worse than what you’ve had so far in terms of property-tax based revenue reliance); with accompanying potential for (factors as and as will be noted).
Exogenous risk is not off the table. Reports we’ve heard of are disconcerting for any number of reasons. First there was the one suggesting barbarians planning attacks in Germany; then we heard (yesterday) of a planned attack against an oil refinery that is protected by, and important to, U.S. troops in Kuwait. And now I hear of an arrest in France that is particularly troubling since police plus the Central Directorate of Interior Intelligence police arrested French particle physicist Adlene Hicheur, and his brother, Halim, who has a Ph.D. in physiology and biomechanics. (Balance redacted here.)
Most significantly; an Oil push such as we have forecast and others are recognizing after-the-fact (we have said this since it was in the high 30’s and they were calling for 20; and just yesterday some were calling for a break to 60; and I keep saying no; look for it to go to 80-85; and expect eventual behavior to be other than seen heretofore).
Macro action . . suspected the repeated comebacks will fail not only because ‘good news’ earnings are being sold into (quite obvious as suspected); but that there now is another issue: fraud in stimulus (what a shock). Reuters is reporting (though it may or may not have been covered by financial media; haven’t had time to monitor at all this afternoon) that the internal watchdog of the IRS will warn the Agency -for now the fourth time- about fraud in the multibillion dollar homebuyer tax credit program.
What this means going forward is a reduced propensity to create another of these so-called ‘popular’ programs with lawmakers; besides the incredible expense essentially of subsidizing the buying of non-productive potentially-depreciating assets by citizens (and then arbitrarily limiting who can participate; unless they misrepresented the facts such as possibly alleged in the 107,000 civil cases). Like I said; stop monstrous and unfair albatrosses; and put money in the hands of the people via the tax code (even a simple Payroll Tax cut would help equally, without requiring upfront borrowing costs).
This stealing of growth from the future and hamstringing our kids and grandkids for at least a few generations, is the kind of insanity that brings down empires. We’re not of course an empire; but much as was the case for Great Britain; there is renewed talk it seems of pulling back troops, and disengaging in so much of the world. That triggers a corrosive worldview and propagates talk that the Dollar is essentially doomed; with which we do not concur (or at least say that, with some smarts, it need not transpire).
At the same time, there are forks in the road; and government’s role so far is taking it in more than a left-of-center direction, which may overcompensate for what preceded it. At the risk of too many comparisons with Great Britain or more recently Japan, we do have to realize that expensive wars, and moronic trade policies, even when saved from the risks of colonial expansionism and ensuing contraction, nevertheless sap at least a good part of a country’s economic prowess. Myopic politicians and citizens do nothing but stare at this recklessness, or ignore the large portion who ‘get it’, and are trying to not be ignored by the biased media (such as failed to truthfully report larger attendance at the Washington gathering recently); and then they wonder why ‘their’ entitlements are at risk. Well, because everything is predicated on levels of income and growth. That is what essentially deteriorated; and that is part of a ‘new normal’.
The U.S. economy continues struggling . . . while the pundits cheer tech results as Apple reports (no surprise). Few talk seriously about Fannie Mae and Freddie Mac or other challenges; which continue to escalate irrespective of the media ignoring them.
Chief among problems remains credit market weakness and sales growth stagnancy. Recent surveys of small business show optimism only gaining the most minor levels. I guess the good news is sentiment didn’t tank, but to support valuations or notions of broad recovery on the back of ‘not much’ improvement is stretching credulity it seems to us. Then there is the overseas situation besides geopolitics where (reserved note).
Now, certainly, we may be in the early stages of the credit cycle’s ‘second half’. That I suspect could see 1-1.5 trillion of credit card lines still to be removed within a year or so. Yes, as I have said for ages; the panic ‘shock & awe’ of deleveraging is behind; at the risk of folks believing just because they’ve adjusted to the so-called ‘new normal’, it means we are growing like beanstalks. The reality is we developed heavy structural problems we warned of forthcoming for years, which means (forecasts as described).
Conclusion: stabilization efforts notwithstanding; overall recession and deleveraging conditions will prevail (not may prevail) through this year, and probably (as we noted).
MarketCast (intraday analysis & embedded Daily Briefing audio-video – Reserved for Subscribers only)). . . remarks forecast substantive failures by banks or other areas; following breakdown action, as we've outlined. Remember; back in early 2007 we denied the 'liquidity' momentum as a canard; believing housing only the first of the asset bubbles to deflate. We outlined structured investment vehicle failures; banking issues, confluence of asset deflations, and more; continuing with interruptions per projecting long ago: 'a perfect storm'.
As the debt bubbles continue to deflate, alternating tradable moves continue from a trading perspective. Against that backdrop retaining a macro (adjusted) Sept. S&P 1600 +/- short irrespective of interim oscillations.
Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers an assortment of technology issues (needed for assessment of general factors in tech overall, or as compelling developments call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks might merit further reflection. (Individual stock comments generally are provided in the video overviews only; once in awhile I'll have some thoughts here, where something's particularly emphasized or of technical nature necessitating some discussion. Increasingly most all is via video.)
Thirty-one months ago I commenced projecting an 'accident waiting to happen'; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now a market struggles with periodic rebounds as this economy tries to restructure.
Though enormous efforts have avoided systemic disaster on the banking front; there is no equivalent rescue of the overall economy besides perception; nor restoration of engines for sustainable growth. People are adjusting to lower expectations; which will never be a favored approach to American life. Actually we don’t see it as permanently alternating the future; but we still have major adjustments to work-through. That’s the reason we warn about chasing rallies; not to mention major ‘commercial’ adjustments as are ongoing. And as I’ve said; there are fairly visible new storm clouds gathering.
Enjoy the evening;
Gene
Gene Inger,
Publisher
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~Gene Inger’s MarketCast™ (Intraday audio updates emphasizing S&P futures and market action)
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