(Courtesy excerpts of the current Daily Briefing, published nightly at ingerletter.com; all primary forward technical analysis projections are provided by embedded videos.)
Gene Inger's Daily Briefing . . . for Monday January 25, 2010:
Good weekend!
Simply put . . . our projection for the market (though it fought back) to run into fairly solid resistance early in January; and then decline in the second half, with the next stage as outlined in the weekend videos, continues according to the general outline.
As last week began we not only suggested professional traders would shift quickly to selling the rallies rather than buying the dips; and that the S&P and Dow Jones would finish the week with a close below the 50-day Moving Average (to say the least at this point). Actually the weekly moving average is now being challenged, and it will break soon in our humble view; with some nominal efforts to revive strength clearly falling on deaf ears. Most important; while the President did NOT kill a bull market as some of the frenetic pundit shills for the bulls might suggest; he also neglected addressing many of the core factors that caused the problem, which go way beyond NY bankers. We also again highlighted these both in the week’s earlier text and in multiple videos.
Why is that a factor here? Because this week’s so-called ‘Volcker Rule’, as much as we applaud it, may be insufficient to do a darn thing with respect to real causal areas of the ‘epic debacle’ we rightly forecast back in May of 2007, or for the still-unwound securitized derivative fiasco. In addition the speech avoided denoting the Fed’s error (hint: ‘waivers’ in 2007), as well as necessary growth engine generation and of awful joblessness, which have only been addressed in superficial terms. Thus the speech in fact has only lukewarm meaning for the equity markets or the American economy so far. And although the market was declining and set to break earlier; it didn’t help.
That means we do not have a solid solution that has anything to do with growing this Nation soon; and that’s what we’ve long argued as what’s wrong with responding to populist politics solely, only in a generalized way avoiding a multifaceted attack on all the real causal factors and meaningful solutions. Also, if anything, the U.S. saying to ALL internet companies operating in China that they must in every case prioritize the openness of the internet and security when operating abroad, is in a sense a more significant (and totally overlooked) occurrence on Friday. China will of course accuse us of interfering in their domestic internet; omitting the little detail that’s our internet all others are availing themselves of (yes, the internet wouldn’t exist if not for US military development, not Al Gore, and definitely nothing China came up with). There’s a time to be meek (the U.S. unfortunately did so for a generation in trade) and a time for a toughening up. If this is a belated toughening, then it’s the first indication we’ve seen. Will the United States finally stand-up to exploitation of an uneven playing field?
Daily action . . . will have no further remarks about the market or the week’s myriad of projected developments (including a bulletin to MarketCast members before the President addressed us) suggesting that Paul Volcker’s fingerprints were all over it. I will discuss some of this and where we see the market going next in the two videos.
By the way; after the close on this Friday; we hear that Google’s two co-founders are selling 5 million shares each. So much for our argument that only fools would suggest buying it at 650, as some were suggesting with a 750 goal. Said that was insane risk. While not suggesting anyone was trying to create demand, so they could sell shares into strength; ideas of buying Google well into the 600s was just nuts; as contended.
Now a summary of some of this week’s earlier points:
Bloody murder . . . may be screamed by some financial institutions (mostly in the so-called ‘too big to fail’ crowd) in the wake of already-brewing moves against quick resumptions of their old tactics, in trading but while withholding lending, that have an increasingly suspicious gander (appropriately) by the majority of Americans, and that concern and irritation crosses party lines. So much so that the President again just in last night’s ABC interview, conceded as much; suggesting ‘he knew’ people would be ticked-off, but that ‘they’ had to save the banks. Sure; we argued they would embrace that approach all the way back in 2007, before the panic, but as crisis was brewing.
It’s notable that ‘saving the banks’ needn’t have meant funding their profligate trading with taxpayer (or foreign borrowed) funds. Where does this take us from here? That is something you know already; and the shills on TV saying the President ‘broke’ the bull market are nonsensical. It’s been under distribution for some time; and as I said the other day; professional traders were already starting to short rallies not buy dips.
Well, listening to Barney Frank suggesting it will take 3-5 years to engage separation or reform; that would give time for lobbyists to water-down the inhibiting of what for a period of years we’ve considered extracurricular activities by the banks. Recent new members may not realize that the importance of our emphasizing the Fed ‘waivers’ to the banks in 2007 (triggering our ‘epic debacle’ coming call) comes down to allowing the banks comingling of funds between banking and brokerage operations (because the securitized derivates and CMO’s were not investment grade and thus qualification as ‘net capital’ for the brokerages was nullified). That was taking down a firewall just I thought as the fire was starting. A firewall has no purpose if deactivated in presence of a fire. We suspected that would eventually occur all the way since Glass-Steagall was repealed; something we slightly cynically thought would come back to bite later.
Not only did it bite; but now the ‘fire sale’ pitch is being given for why they won’t be in a reform mode very quickly. Could that be to talk about it all the way through election time, and thus hold the jobs for Congressmen until later, and then water things down a bit? Perhaps; but we’ll hold off on some of the politics, as now it becomes clearer of course that to keep their jobs, politicians had better support the centrist politics we’ve embraced, but so many have eschewed in favor of unsustainable political extremes of the left or the right. As the Obama Administration departed from early campaign or other promises, and it became clearer that the ‘Chicago sausage’ style would prevail in shoved-through politics for awhile, we actually suggested repeatedly that over time a movement back to the center would develop, because most Americans really want a fair and balanced Government; not one that advocates on behalf of either extreme.
As I mentioned yesterday and before (and today after hearing the President’s speech this morning), I think eventually this restraint will be as good for the Nation long-term, as the lack of restraint in spending and financial combinations has been short-sighted and bad in the intermediate term. It’s taken a generation (through both parties errors) to get to where we are, and it may take the better part of a generation to emerge from it in good shape; but one has to start, and the kickoff at least officially may be today. I hesitate to think that if Scott Brown had not won the Massachusetts Senate seat we’d be looking at more of the same from the Congress and the White House; but suspect the handwriting’s been on the wall for some time with respect to popular frustration. If so this is what we like to see: ‘regression to the mean’ not only in stocks, but in life as well; given a predilection to view extremes as unsustainable temporary anomalies. At the same time (and we’re glad it’s not completely squashed by media) our initial take on the Chinese espionage and targeting of U.S. companies through Google is terribly sobering about the risks of becoming too dependent on trade with a particular entity. Not to even mention the prospect of a broad disengagement with that regime; which it strikes me might engender some (whether heard or not) internet upheaval in China; who also knows how important (and symbolic elsewhere) their relationship with the U.S. is from a broader context. Plus we owe them too much money for them to try to fiddle with us beyond a point. Remember my saying; if you owe your banker let’s say a hundred thousand dollars, you have a problem. If you owe your banker let’s say a million bucks, he has a problem.
Finally, there is the argument that the President’s outline hit all the wrong triggers in today’s statement. Actually I think that’s off-base. He didn’t hit enough of the triggers might be more accurate. While ‘private equity’ did not have much to do with the panic or what led to it, ‘hedge funds’ were involved, whether directly or indirectly with banks in some cases. Many hedgers saw this coming after our projections of 2007 (typically in 2008 and at the start of 2009) and either limited their business or simply exited it. It is also the case that those who stuck around actually did well especially in leveraging financials in the past 8 months or so; until the distribution began actually in late Fall in that category. However my point here is that profligate lending and political pressures to facilitate that lending, were at the root cause of the problem; and the derivatives as such became an effort to offload risk to other unsuspecting parties. The banks were unable to accomplish that task once everyone wised-up, and got stuck with worthless (or nearly so) inventory; and it was downgraded so not able to be investment grade in an important way for those to whom qualification as ‘net capital reserves’ mattered. In this area I’m simply saying that those suggesting the President is off-base are wrong; but that there were more bases to cover, would be a reasonable way to approach it.
I fear that you’re not going to create reforms that’s truly tailored-for-the-situation, until or unless they acknowledge the myriad aspects of contributing factors to the fiasco. If they do, then it’s like an air tragedy investigation which hasn’t truly yet-occurred; find all the dots to connect which allowed this to occur. We projected that back in 2007 to greater accuracy than even we suspected; and since then hindsight books affirmed a majority of what was then for us a forecast. However nobody talks specifically about the waivers, with only hints of Fed knowledge (from a Geithner tidbit at a Hearing that he may not have meant to acknowledge) in advance of the panic (typically they deny it; but the waivers of course proved that they were embroiled right in the midst of it).
As to the upcoming vote on Bernanke; this market is heading lower, perhaps just as I outlined; and we believe that will occur when the vote on the Fed Chair is up or down. Those that contend either the President’s Volcker-rule speech, or the Bernanke vote, is what determines forward action, are generally using it to excuse their miss of a top.
Macro action . . . wraps this up by saying while the market (especially financials) are of course reacting negatively; the knee-jerk reaction simply reflects the tide’s shifting in a way that the American people (and thus the remaining politicians) must embrace. The size and scope of all of this (and the President’s statement) was not shall we say ‘Goldman Sachs appropriate’; but rather had the fingerprints of Paul Volcker all over the proposal. Geithner was nowhere to be seen; but Larry Summers was in the back, and Paul Volcker (as we suspected in a comment before the speech) was right there; jovial and backslapping with the President. They are right, if tardy; and don’t forget it was Paul Volcker who described Alan Greenspan as the best ‘clerk’ he ever had.
I will have two videos tonight; the second a pre-close references the repeated issue of how low we might go; which we’ve already discussed more than once and varies of course with how events play-out. I have said for some time that risk will be greater once this is let-go than they typically project for a ‘correction’. And frankly it may be (to be determined, but suspected) the beginning of a new leg-down in the bear trend overall, rather than a ‘mere’ correction. But remember; what I have in mind overall.
Fiscal sanity is not the prerogative of one Party or another; or at least shouldn’t be. It is evident that people misconstrue the malfeasance of the prior Administration as reflective of normal conservative fiscal philosophies; Ayn Rand not withstanding. It is also fair to say that Congressmen of both parties scrambled for too long for funding from donors whose interests are not necessarily aligned with fiscal responsibility and the protection of conventional depositors in their banking operations. There’s an old term of bankers: ‘know your customer’. Well citizens now believe: ‘know your banker’.
A cap on the size of financial institutions; a ban or limit on risky investments in things like hedge funds and private equity, must be constrained. A wall between commercial banking (as relates to protecting conventional deposits and operations without tricky guidelines) and speculative trading was intended, but taken down. Restoration and a simple preventative of comingling of funds between the sectors will help immensely. I think that as ironic as the market’s decline might seem to make what I say next; it is a tenet that I believe: while there we will market decline or lots of angst from all parties in the nearer term, in the longer-term this is bullish for the United States of America. I think we go back to our roots to stop squandering the wealth built post-World War II.
Spooked by a number of issues . . . the suspicion that (Tuesday) was a bit of an upside capitulation took hold on Wednesday; and the market barely held together from taking out the ‘daily moving average’. Efforts to bring it back were anticipated, which is why we ‘allowed’ the guideline to take us briefly long in that final hour. This by no means suggests any change in where we suspect this market is still heading.
This was a day to sell the emerging markets after China moved to slow growth (sad that the United States depends on Chinese growth to fuel hope here; but that reality pathetic or not, is having an impact on markets); and the Bank of America extolled a bit of analysis similar to our own view; that if this is recovery, it’s not normal at all. In that regard the charts I showed last night about joblessness amplify the abnormality.
As for China; late today reporting an over 10% year-over year GDP gain; it’s going to help the Asian markets tonight and perhaps New York in the morning; temporarily I’ll suspect. This may actually become a good excuse for a snapback before lower yet.
The Massachusetts upset was not surprising; and affirms what I suspect (and noted in an earlier comment) is what might as well be called the ‘Tea PARTY’ rather than a ‘tea party’. Boston is not unknown for having political weight that travels widely; so it is of particular interest that though many of us have championed fiscal sobriety (for us predating the near mob of people doing so now even across party lines, since the Democrats generally are fearful of needing a new job if they don’t get their senses in general lineup with those of the majority of the American people), it just has a bit of greater meaning because it involved one of the longest-held Democratic seats.
Also, I don’t believe this reflects a ‘bolting’ from the Democratic Party, as much as a broad or general cross-section of Americans from any party, believing Government overstepped their bounds and (as we have long contended) went beyond systemic stabilization to a pattern of stoking the financial traders and prioritizing depreciating asset classes in a way that some have described as the ‘Chicago sausage’ style of appropriations. It is something many members of both parties sense abandoning, as their careers will depend on it.
This doesn’t mean we endorse what the prior Administration did either; it is a sense almost that the Executive Branch lost touch as did Congress, with what the American people want, and need; and the realization of this as a centrist Nation. Perhaps in the long run this will actually be fiscally good for the Nation; but it was a needless delay.
Macro action . . firmly believed that moving average is coming out as I’ll explore in a video. (This has now occurred as we forewarned they would not ‘hold the line’ as so).
Once we close below the moving average (and we will), then prospect of a downside acceleration becomes more visible. In that regard there is no change in my overall view of distribution preceding a 2nd half January decline, with prospects (as outlined for many days with respect to late January and early February action). They don’t want to give-up on the upside easily; but when the pros shift to doing what we’ve been doing mostly for some time (shorting rallies more than buying dips), there possibly will be very little support underpinning this market and that’s the point where risk may increase a considerable bit more than is generally suspected.
Actually I’d not be surprised if professional traders have their fingers crossed for such a political outcome (Brown’s victory), which would help put the finishing touch on an upside extension I thought feasible at the beginning of this abbreviated trading week anyway. However suspect those traders are looking for a rally to sell-on, not in order to elicit an approach to buying strength. Who outside of some pundits would suggest chasing it? (Our thoughts about shills and pundits hyping old uptrends is well known.)
As to earnings, they may please or bomb here and there; doesn’t matter; good is the anticipation (including ours); thus it’s already in the market; nothing to play-for either. As with Intel, I think IBM amplifies that concept: buy the rumor, fade the actual news. Note that in aftermarket trading on Tuesday, IBM was trading a bit lower. No surprise. Google? Gee, some were pushing it at 650 for 750; instead it’s 100 lower as warned.
(Last) night, I included a couple charts that depict the jobless situation, which as you all know is worse than anything since WW II. The importance is that alone debunks such comparisons as suggest how this winds-down, as analysts try to compare it to all the previous recessions in our lifetimes. That leaves us with the 1930’s (or worse; aside a coordinated effort to save the banks), and a recovery that may be more prolonged as a direct result of the misdirection of funds beyond simply ‘systemic stabilization’. (New members or those who missed it, may peruse the archives for it.)
I have called this a controlled Depression since forecasting well over two years ago that the Fed and Treasury would facilitate systemic stabilization, but not much more. I regret to inform you that we were and continue correct. It dovetails in that businesses and even municipalities (we know of two) who concurred with our specific expectation back then, circled their wagons, harbored their cash, and properly rode-out the storm.
Conclusion: stabilization efforts notwithstanding; overall recession and deleveraging conditions will prevail (not may prevail) through this year, and probably into next year as well. Intervening rallies in markets will occur (some fairly wild), of limited duration. In event other developments unfold that could truly change prospects; we’ll evaluate.
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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.)
In summary . . events continue reminding us of risks Allied fighting forces face, given continued attacks on free peoples, by elements including organized terrorist forces in various countries. A world addressing terror threats continues, as domestic issues absorb us more while as we must focus on Middle East and World War III avoidance.
McClellan Oscillator finds NYSE 'Mac' extended, with intervening bull-bear shuffles; overall bias transitioning from ‘crash’ mode to something else, as noted. Reflex rallies allow 'risk off-loading' tactics into strength now. Still too much comparison with last 20 years; slower growth prospects post-bailouts makes it realistic that price multiples associated with earlier market eras predominate; not higher ranges many anticipate.
Thirty-four 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 extended 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 weekend!
<h2 style="">Gene</h2>
Gene Inger,
Publisher
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