Gene Inger's Daily Briefing . . . for Monday March 7, 2011:
Good evening;
The ‘Ultimate Unwind’ . . . as we shall call it, is what is at stake in the near future. It is a risk that typically is limited to speculation about Oil prices, but as I’ve outlined via the videos, and in the texts this past week, there is much more ‘at-play’ than Oil; not to lessen it’s critical influence in the ‘mix’, as I often believed the case for many years.
After the serious fall, those who encouraged buying at or near the highs (especially in absurdly overpriced big-cap stocks given the slowing global growth, and the fallacy of sticking with never-valid estimates for the S&P earnings this year) will be appreciated for getting their clients into securities simply because bonds weren’t attractive, and as (we have often seen historically) money always sloshes around looking for a home. It doesn’t always find all homes to be ‘sweet homes’. I suspect this to be such a time.
Conventional wisdom will say the decline, whether epic or not as will be seen over an outlined timeframe that has not yet deviated from what we had in mind all this year so far, wouldn’t have occurred if it were not for the collapse of Middle East stability and a resulting explosion of Oil prices. First of all the market distribution preceded the event cascade overseas; and secondly Oil prices were already advancing anyway. In fact it was Oil stock strength that masked a January-early February distribution we outlined, as so many stock were going down (we gave big-cap examples of Cisco, Wal-Mart, Hewlett Packard, and Amazon; all just as examples). In-effect masking distribution at the same time many analysts didn’t spot that; naively calling it a ‘perfect world, where no pullbacks could possibly endure, given continuation of Quantitative Easing’ (more on this subject and Quantitative Easing reserved for ingerletter.com members only).
As members know; it was not a ‘perfect world’, but as we warned of gathering clouds, it was shaping-up to be the ‘perfect storm’. Stocks were priced for perfection, and the storm (incidentally) hasn’t really hit yet. A series of light volume rebounds, alternating with declines, was and is fair warning of (reference to our ongoing pattern evolution).
Combine this instability (we discuss in one of the videos the insidious meddling that Iran already is doing in both Bahrain and even in Saudi Arabia itself), with a previous warning about the Fed Balance Sheet shenanigans, and the budget collisions that for sure remain on the table on a fairly wide state and local basis, and (as we outine).
As this change (related to the evolution of the ‘chaotic instability’ forecast) occurs, we might as well have a majority of people (Islamist types never will, because they have a global agenda that has nothing to do with sincere accommodation with the Western world, and the sooner leaders grasp that, the better we all will be) who appreciate the indirect or direct support of the United States and a few leading European countries, as that will help when the ‘harmony’ following victory turns into political infighting, and we’ll need a large majority in-line with civilized ideas. (We already see the splintering political effects in Tunisia, Egypt and particularly in Libya, at the same time fighting still rages. So presume in the several countries which never had any real democratic or parliamentary system, it will be even worse. (More on this topic & impact follows.)
‘For whom the bell tolls’ . . . is an ongoing debate throughout not only North Africa, and the Middle East, but perhaps some other areas of the world. This is not about the ‘reform’ or revolutionary movements; but increasingly an effort by Iran to incite and to intimidate both Shiite and Sunni regimes, in order to create insanity and great chaos. There is a direct financial connection, and it goes beyond simply the volatility in Oil. (I explain our perspective on this, including the China linkage; and more, to members.)
In recent days a Pentagon report was released publically as we noted, and others did comment on a day or two later. Of note, that report was written in 2009; so why did it take two years for it to be released? Perhaps the Pentagon is now warning that there is new(er) evidence suggesting the financial aspects of cyber-warfare or other attacks on the Western world. This is a complex issue (portion redacted). However, long-time members will recall that after the 2011 attack I’d noted stories of certain London firms traders who shorted the S&P and went long Oil in advance (by a day or two and ‘in-size’) of the 9/11 attack. So either al Qaeda itself for sure it seems, tried to profit from their own forthcoming attack; or other parties (Saudi’s? . . as most attackers and the family of bin Laden, all who proclaim him an outcast) were privy to the coming attack.
Only now do we hear inferences that short-selling or other tactics (including rumors) likely played a fact in breaking certain financial firms on Wall Street. Not to say they were not up to their ears in fiduciary violations and insane risk in leveraged derivative plays (they were); but that well-timed actions by such enemies was more than merely coincident, but in-part causal. The current involvement (forward risk perspectives).
And that will be something to watch closely in about ten days; for impact (if any) on a volatile Oil market, and indirectly the stock markets. Certainly anything (as outlined).
Bottom line: despite new fields off Brazil and so on; given a continued failure here in the U.S. to open up known fields believed holding huge reserves; we have a damage to global growth, and ‘stagflation’ concerns, because for most people energy’s direct or indirect prices have great significance. Essentially you have oil industry reluctance to engage in new exploration in many prolific areas, because of geopolitical risks we noted, or frankly political risks here at home, where you do not have steady oil policy. (Opening strategic reserves are a short-term irrelevant factor, barring actual hot war.)
Basically you’ve had an anti-energy / anti-affordable necessities policy in the U.S.A.; colliding with general threats to, if not disintegration of, stable (if not free) regimes in a slew of countries already or potentially. It means, regardless of country outcomes on a one-by-one basis, that the bulk of planned projects are extremely unlikely to be proceeding in a timely fashion, if at all (with the sole exception of the Gulf of Mexico, given the Federal Court Order to the Administration to rule on drilling apps forthwith).
As to the Middle East, Libya, though not that big a producer itself, brought forward an awakening to the oil crunch that would have happened in time anyway, or intensified the reluctance to invest in replacement production; which means (for members only).
Bottom line: investment in fresh Oil fields across Arabia, the Persian Gulf and North Africa, as well as any African heavily-Moslem country, or South American nation that is stuck with a banana republic regime (Venezuela is the best example; no wonder of course that they want to mediate a ‘peace’ that would benefit tyrannical state control; as otherwise their own longevity might come to be questioned), are unlikely to occur, or at least become ‘guarded’ versus before; after stability precedes a tip-toe return.
Absent new investment in oil (or a big policy change here); the age of cheap oil is an historical memory. Nevertheless the swings are wild, within an overall upward trend. It is not impossible that the Islamists this Justice Dept. doesn’t even want to label as what they are, actually are delighted that Washington tries to deflect new drilling here that might deflect their strategy. What is that strategy now? To have Oil go so high as to derail any semblance of economic recovery, which they hoped to throttle more with the 9/11 attacks on our financial and military centers. There is a linkage to all of this; so there’s limits to how high Oil can go without serious deleterious economic impact.
(And just like to so-called ‘individual’ extremists acts Government declines to call for sure as they are..terrorism..they need to understand how it all ties together. Even as al Qaeda may be repudiated by the majority in the Middle East uprisings; Islamism in all forms in an enemy to Western Civilization; with sedition and seemingly random or individual attacks, all part of their overall effort to destabilize civilization. This actually can be reversed particularly ‘if’ the Middle East and most notably Iran, shift course to democratic free-market republic or checks-and-balances systems; but it’s a big ‘if’.)
To wit: we’ve agreed for a long time that there is ‘recovery’ but that it is insufficient for a real comeback, and could have been better-helped by a refocused bailout from the get-go. Presume Oil prices (forward looking technical pattern calls just for members).
Overall my points remain the same; this is a year of ‘instability and chaos’ on top of a major problem of debt, which remains unresolved. Stocks were (many still almost are amazingly) priced for a perfect world, which this certainly is not. I am enthused about buying stocks; but (reserved projection range) below levels of the recent highs. It will surely be below (particularly level); although happenings in the ‘politically tumultuous battle zones’ will influence timing of course. Don’t forget even such leading (some believe) indexes like DJ Transports are a bit intriguing as (redacted portion). What I try to do is look at facts; then the technicals and deduce probabilities. What I do not try to do is approach markets ‘as if’ there’s a preconceived bullish/bearish notion. In other words, sure we can be wrong or premature on anything, but perspectives are an effort to look at a broad mix of market influences, beyond simply charting, or also beyond ‘assuming’ markets must perpetually advance due to an underlying ‘Fed bid’.
Speaking of orderly, there is always a ‘crash’ risk involved (large portion reserved for members); thus nimble defensiveness seems to be the continued favored approach, against a dangerous backdrop that also by the way includes something very simple for big companies: margin compression risk.
Disequilibrium . . . is not the condition conducive to higher equity prices. While most technicians simply look at the fact we’re not very overbought on a monthly basis; they fail to realize that besides the daily pattern being (almost exactly) as we outlined over the past weeks, you have underlying fundamentals which refute bullish arguments.
Debt monetization, Oil issues, and inflation . . . are all tied-together these days. It is reason enough to be concerned about the low relevance of superficial debates of supply vs inventory, or even trade policy at the moment (as we’ll not recover much of it), just as Intel’s Paul Ottelini indicated (Mon.), amplifying points we’ve mostly made.
Why it takes the CEO of Intel, or the stinging rebuke of Washington strategies on the monetary front by the Chairman of MMM, to get anyone’s attention, I don’t know. As these were the two most realistic observations provided on Monday, it’s no surprise they got such little press exposure. These guys, as I, want the Nation to thrive, not to just survive. I think we’re all (in our own ways) trying to convey that things were as we all know poorly handled (we said they would be in advance with Keynesian era policy initiatives that simply could not work; or if they did would create a heavy price later on like past money-printing exercises to cure debt with more debt). We just want leaders to understand that ‘better late than never’ they better sober up and reform all this fast.
Again all this is within context of the wider global scenario, which seems to unfold in stages (thank goodness not really all at once, or Foggy Bottom would be real foggy). And thank goodness the credit ‘image’ of the United States through tarnished, isn’t at the point of Greece or Ireland’s yet, or we’d be in a much bigger pickle already. So I’ll add: if US debt is downgraded (might of course not be), and short rates start ramping up too suddenly, the implications are more (conditions that would become dominant).
Bottom-line: the nexus for ‘societal discontent’ is something we’d warned of from the May of 2007 ‘epic debacle’ call. Why then and not 20 years ago? Because creation of paper wealth, and perceived asset equity growth (like real estate) gave an illusion to the mass of the population to keep them content, and complacent about politics while the industrial base of the Nation was being persistently and perceptibly dismantled. It was partially accidental and unintentional; though there were obvious policy lapses; as well as many other aspects, ranging from taxes, to outrageous pension structures.
Conclusion: stabilization efforts notwithstanding; overall recovery and deleveraging conditions will prevail (not may prevail) through this year, and definitely into next year as well. Intervening market rallies do occur (some fairly wild), but are dangerously at extended levels. If other developments unfold changing the prospects; we’ll evaluate.
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks forecast increased risk given the unanimity of optimism absurdly prevailing after what had been a remarkable upside run. Remember back in early 2007 I denied 'liquidity' momentum as a canard; believing housing only the first asset bubble to deflate. We then outlined structured investment vehicle failures; banking issues, the confluence of asset deflations, and more; continuing with interruptions, per projecting long ago: 'a perfect storm'. New storm clouds clearly gathered; the latest rebound’s very high risk.
Daily Briefing Technical-Corner MarketCast Videos
Exactly 4 years ago I commenced projecting an 'accident waiting to happen'; as we affirmed historically after long-duration periods of free money (Gilded Age mentality). Now extended markets struggle with rebound ‘distributions’, in a U.S. restructuring.
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 I warned about chasing rallies; not to mention major ‘commercial’ adjustments as are ongoing. Yes, there is ‘some’ recovery. But no it isn’t sustainable as of yet; not to mention Oil’s influence. So as said; visible new storm clouds were again clustering.
Enjoy the evening;
Gene
Gene Inger,
Publisher
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