(This weekend’s ingerletter.com Daily Briefing addresses continuing critical volatility; this time in the zone around the so-called triple bottom that has prevailed this Fall.)
Gene Inger's Daily Briefing . . . for Monday November 17, 2008:
Good evening;
Warning about 'boomerang' patterns . . . having risk of coming back to hit you, we were a good bit reserved as far as endorsing Thursday's dramatic turnaround, even it should be noted, as we had called for a washout, and done a bit of nibbling near the (Thursday) lows (for a trade). Irrespective of obvious (too-well-advertised I noted) 'W' bottom formation. I minimized the suspected rebound scramble’s significance, given what we've said for most of the last 2 years; this is an 'epic' not just normal correction or even Bear Market activity; thus so-called rules exist to be broken. So that's why we thought they might take it below the previous old low, run-in the shorts, then it seemly reasonable, take it down yet again. The markets cheer (this Friday evening) when it is reported that another 20 banks will get 'capital injections'. Do investors think that's really a sign of strength? Is that why the recipients reject distribution transparency? Is the behavior of Citigroup, and more layoffs pending there, also not terribly relevant to not only the financial community, but collateral damage to New York City or more? Is a postulated merger with American Express worthy; or more deleterious to Amex?
As this traumatic drama continued on Friday, I actually suggested that the afternoon's action would likely be as wild as making a high above the morning and Thursday's so as to tempt some about 'confirmation', and then rollover with a late pre-weekend fade thereafter. Well, that's just what we got late in the session; ahead of new volatility and possibly related to 'leaks' of panic concerns emanating from the G20 meeting today.
This is a convulsive disorder in markets; traumatic as excess liquidity wrings out, in a deleveraging 'process' that has further to go as ingerletter.com persistently outlined.
Daily action . . . anticipates continued dramatic volatility; as there is no organized big money effort to come into this market; and that would only change temporarily, if (lets reserve this for members). Probably the unspoken seismic shift (of many we forecast) will be realization that bailout of motors or not, there must be a gradual rebuilding of U.S. manufacturing, and distribution capabilities, and that's fairly well recognized. But the part that barely is discussed, is whether that dries-up the buying of Treasuries by China, who is now in the midst of their own massive infrastructure growth planning. It is notable, that with their trade definitely going to be slower (even though they are a creditor nation as we once were and we've bemoaned that for years); they may need those foreign reserves at home. Guess how that dovetails-in with ‘parity’ trade shifts.
With rates of return low here; and money so far invested in U.S. firms providing poor results, that mitigates enthusiasm for more absorption of U.S. debt; so that's where it dawns (though hopefully won't actually happen) on the thought of downgrading U.S. Treasuries themselves. (Or maybe that's just tossed out there to repel Congressional actions against the rating agencies, quite clearly in the heart of the SIV distribution.) (Just as a footnote; imagine what happens if a major bank underwritten by Gov'mint, and heavily invested-in by foreigners, including major sheiks of Arabi, still essentially implodes, or is compelled into yet-another shotgun marriage ahead. Is that a plus? If you think we're talking of [reserved for members], if they're considering marrying one. Or maybe that is covering their tails, sort of as a banknuptual agreement, if you will.)
At the same time, the falling Libor and TED spread, may be hinting of some favorable developments, and that's fine. This is not an argument for credit not to restart; we are primarily just observing whether the odds favor that being concident with a major low, or not. Of course we're going to 'eventually' get through this, but at what cost, and at what implications for our society and incentivized entrepreneurial system; and when. I often share my thoughts about all these issues with our ingerletter.com members. I’d also remarked about the wisdom of being involved with the IMF or BIS; not that they are bereft of intelligence; but it's closer to those Austrian economists than preferred.
But let's not get ahead of ourselves; and give this market a chance to sort out (likely pattern action in the new week discussed; though much will depend on hour-to-hour events..none of which resolves ongoing macro issues; but could impact daily action).
The main point is that capital creation abilities are very limited here. There are certain areas people aren't even focused on; like the pensions; like venture funds and capital being not only dumped in some cases, but almost impossible to raise in this climate. I think that, besides Government involvement where we don't historically want it in with a desire 'not' to become another 'universal banking' European-style state; there is still little understanding that this shuts down money for start-up's; keeps the IPO market a bit (reserved for members), so that with fewer M&A players (not just the guys, but the firms), there's hardly viability to venture capital now (unless of course you're opening-up a bank); and unless you are in a business (such as autos, electronics, laundry, or car-wash, that easily qualifies to be chartered as a 'bank'). Appreciate slight cynicism.
For many months I've expected variations of a series of crises to envelop pensions, municipal and state budget messes, and even university endowments. What all that's doing is creating a surplus of positions for sale, as dwarfs the basic hedge fund story that everyone 'thinks' ended today (why it didn't is discussed for our members only). I need not remind ingerletter.com readers that any consumers who fail to sense this as a crisis, won't feel that way when they see what 2009 has in store in their world. I’ve described 2007 as the distribution and initial panic; 2008 as this crash (the big one was in 2000 for tech particularly); and 2009 as the heaviest consumer pressure. The G20 release calls for 'resisting protectionism' and won't be finalized until March; so that might not sit well for those who believe we're in an emergency situation now.
Next week I may explore some other detriments (and opportunities). One of course relates to tech, that we warned for many months wasn't protected; just as Asia and Europe weren't going to decouple from the U.S. Others agree now; after the fact; hardly anyone agreed when we took these stances well over a year ago. As to real estate; some think the issue is nearly over. I wish it was too; however, with the flood of 'additional' foreclosed homes we've already indicated would hit the market in part due to sluggish speeds by which lenders and Gov'mint-assisted inaction progressed, we think it gets worse. Because all those parties failed to listen (that was our original warning back in 2006-early 2007, after I gave stocks an extra year past the forecast housing bubble burst before they’d turned south in a string of disasters as would vary depending how quickly appropriate policies were enacted; as weren't), it has become increasingly likely that despite some revised loans or forbearance, there will now be an entire segment of society newly underwater, because (as outlined to members). Remember our forecast for an 'overshoot' of the bubble's base? Well this is part of that; you may be looking at another 20-30% decline in real estate; promulgated by economic hits as well as new foreclosures in the Alt-A and Option ARMS categories already outlined. It strikes me as reasonable to suspect such occurrence (as noted).
So, besides focusing on 1990's house prices again (or older condo's 1980's prices, in selected demographic markets I hasten to add); I see this contributing to the malaise in the economy; and the lower multiples and S&P earnings as we have long forecast. It strikes me that many had trouble getting their arms around the concept of roughly (the ratios and levels we’ve projected are known to members; but reserved just here). Of late some others have been emulating our suspicions on earnings levels, which is fine, as it's normal for a 'continuation' pattern in a bear market to have the pundits or run-of-the-mine analysts becoming sober about prospects ‘well-into’ the bear market.
Now; the trick will be not to overstay (more reserved). This week was an example of 'don't judge a book by its cover' as far as traditional technical expectations, and even though we've been generally right throughout, that's not an assurance, plus even on the right side (being bearish) isn’t stress-free given the volatility. The calming factor is that having been vastly in cash (or often short the rallies since the S&P 1600 highs), it's more pleasing dealing with a little stress but no financial losses, and even gains.
So we empathize with those who wouldn't listen to anything but 'stocks always go up' nonsense; because they were either naïve or hoodwinked by modern portfolio theory marketers. We know of members who got it right; agreed with us; but clients wouldn't listen, because they had been brainwashed by the seditious Goldilocks or momentum crowds that (we often wondered) seemed to back every marketing strategy the Street ever came up with; until that kind of 'story telling' was no longer viable; after the crash (oh yes; and you know ingerletter.com believes the 'actual' tech crash was in 2000; a 'reflation' cyclical bull took place from 2002 into 2007 as outlined and projected too; a subsequent forecast credit crunch and liquidity as well as 'solvency' crisis followed; to leave us now in a scenario where the same crowds that misguided investors over the top..failing to recognize fairly classic distribution patterns too.. keep gunning for lows).
Eventually they'll see a low of course. But getting there can be odious. For individuals and companies or for Government itself. We demanded lower multiple (as remarked). In the weekend videos I'll once again emphasize where I suspect this goes aside the shuffling on a daily basis, and seasonal factors, which are being overemphasized as this 'great unwind' progresses. Remember: I called this from February 2007 forward, as a projected 'epic' debacle. By definition there is nothing 'typical' about an 'epic'. I will highlight some of the key points of the past week, and then we'll do the videos.
Highlights from the week just past:
Boomerang patterns . . . are inherently dangerous; as while a key reversal surely is welcomed by investors yearning for relief lasting more than a couple of hours; there’s nothing inherent in such reversals that necessarily implies a change in the underlying concerns. Or is there? While I’ll reserve tonight’s discussions to the twin videos, after some light buying during the preceding washout (whether a trade or not is pending at this point, but held overnight in any event); there was one factor that caught attention beyond the Treasury Secretary, or the usual financial information. (From Thursday.)
The 'Jonestown Massacre' . . . saw lots of folks who drank their leader's 'kool-aid' of course brought down; as the toxic brew poisoned not only their systems, but removed their very basis of making a 'choice' about what they wanted to do with their lives. So it is with the investment arena; aside those of us who made the decision not to travel in the company of Goldilocks whackos, on their way to their purported promised land.
Now we have leaders, this time often with Harvard or Yale degrees, leading America down another primrose path; towards an unknown destination, while being promised it's salvation for the 'system', if not economic utopia. The outgoing crowd campaigned as 'social conservatives', but depart as 'conservative socialists'. An incoming clique is seemingly well-intentioned, but has garnered a messianic adherence that anticipates more than can reasonably be done expeditiously, as the primary damage has itself at this point become an 'engine' of deleveraging, with a certain momentum of its own.
Market TKO
This is not the first time we've talked about a 'technical knockout' for the stock market this Fall. However, it is in the wake of denoting the 'box' of rangebound activity for the past several weeks, that many thought (we persistently felt mistakenly) as some sort of bottoming pattern. Rather we saw it as a double bottom; ascending triangle; falters at the first rebound high or just shy; drop from a little ledge to the inflection point just the other day, then accelerate to the downside. All of this did occur as we anticipated. Sharp rallies (especially after breaking prior lows); are characteristic of such markets.
We already noted and it shouldn't surprise anyone (who would think otherwise really) but this market is so focused on holding lows and viewing things as 'glass half full'; it may be reasonable to say this becomes a 'one-two-punch', or TKO for the market for now. No reasonable person would respond by only figuring things out now of course; but reason has not prevailed; just as many expected the Gov'mint to be really helpful. (So, does ingerletter.com believe a second break of the October lows accelerates?)
It may be that there is no way to stem this tsunami without a natural capitulation. We viewed what occurred a month ago as 'a' capitulation, not 'the' capitulation. Case was rested, even though some members got restive about missing some sort of bottom (I think at this point, that point has been vindicated; no significant low was at hand). For now the point may be that as that is 'proven' by going to new lows; our expectation of it all as a consolidation within a continuation pattern (pause before downtrend simply resumes) is not only validated; but there is growing risk that not only leaders 'freak'. It may be all this drives-home what we've said: (further summarized to our members.)
No Tea Party
Over the course of the nearly two years of warnings here though (where I took pride in the early days of our 'alert' as a sort of financial Paul Revere riding through NYC to proclaim 'the bears are coming; the bears are coming'), it has been tough to fight this sometimes fatiguing battle. During this period even I am amazed how poor leadership could mess up. They mostly did with the sole exception of deflecting banks crumbling with real panic runs. (However even there what they did was to channel control to a universal banking style, as outlined, which has its own limitations, as further outlined.)
Because we suspected these toxic interventions to prolong the overall toxicity; we've had a simple term to describe how markets would unwind: 'Chinese Water Torture'. I was trying to convey a couple things: 1) that the big secular top and crash was 2000, not 2007 (which was our forecast cyclical rebound top); 2) that the interventions just provided periodic temporary 'dike-leak' fixes, rather than permanent repairs (reforms); and 3) that this approach would prolong the agony and deepen the price adjustment.
Suffice to say: 'intellectual buffoonery' is at the top of its game trying to resurrect our economy. You can't redress the wound by a slow removal of the bandages versus an occasional quick 'yank' of the band-aid, even if the short-term bleed is a little messy. I realize Government is saying they're in-charge; but that means we have little ability to climb-out with any aggressiveness; just as was Japan in the last generation; or earlier the United States in the 1930's. As I wrote in 2007; that's what history will say of this. It will be known (we wrote in advance) as the 'panic of 2007', the 'crash of 2008', and risks becoming a 1st Depression of the 21st Century (already said it is in some areas).
This Nation is 'not' set-up for massive unemployment and broad-based subsidization. It was to some extent in the 1930's (cobbled together); but again, that's not so now; it is a reason we remain concerned about 'how' this is going to be handled; as already expressed with my concerns about Obama viewing this as 'failed State Syndrome'. It is at such times that Government sort of takes-over and they don't release for years; even when times are gradually better. That's the future risk for long-term speculation. It's also the risk where they try to underpin legacy industries at the expense of newer; rather than (which would be a compromise) channel the old into forced restructuring.
With a Nation geared to spending, and not manufacturing and 'real' productivity; we have a long road ahead to 'restructure', not simply bailout, old and mostly improperly positioned key industries. The approach of 'good money against bad' is bandaging a wound, rather than first killing the infection, or excising the cancer. (More followed.)
Overall . . . need only look at the volatility that exceeds 1987 and 1929 for clues too; if one wants to mitigate everything we've argued for these couple years. (Reserved.) Humans tend to view relativity with respect to their recent experiences, rather than the historical perspective. Happened in 1929; after 1987; and after 2002's low too by the way. And let's not forget that the 'big rally' from this crash, was from 2002-2007, I increasingly have believed, rather than after the break in 2007; from a cyclical top. (A new member may wonder about this; 2000 was we think the secular top; and thus in our view the forecast 2002-'07 'reflation' was a gigantic 'Hail Mary' reprieve effort; just a cyclical bullish rebound; and not a bull market in-and-of itself. A unique perspective, that others are just recently starting to come around too if they even consider it at all. This is one key point our excerpts have withheld in recent months for members only.)
Summary: historic combined illiquidity was so gargantuan in the business world; and insolvency for much of the banking / institutional worlds; that for it not to triumph was delusional. Lest anyone misunderstand; we need solid 'velocity' of money to become energized more (since toxic housing debt is a microcosm of the overall debt picture) and we need to create 'velocity' in ways that 'empower substantive American revival'.
Bottom line: macro signs as interpreted; including (updated recently) the following bullet points:
· Economic disequilibrium continues; especially for nations with fixed pegs; the crisis moves;
· It's alive; it's dynamic; and there are various derivatives fiascoes likely to yet-hit headlines;
· Eighteen month macro key forecast was correct: not short and shallow; but long and deep;
· (Another dozen points reserved for ingerletter.com members only; we welcome your joining).
Further points: nearer-term issues to contend with beyond above; some with macro aspects:
· Comprehension of 'why' we suggest a lower multiple on lower S&P earnings will be grasped;
· Forget absurd optimistic EPS estimates for the S&P; projected 'multiple compression' rules;
· Our year-long warning about Goldilocks globalism as extremist, has been robustly vindicated;
· (We welcome your joining ingerletter.com for our daily analysis and technical charting videos).
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . 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 what we projected long ago: 'a perfect storm'.
Cumulative S&P short and long guideline gains today; details via videos
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 also focus on Middle East and World War III avoidance.
There are increasing rumors of al Qaeda attacks attempted on the U.S. Little noticed after the Election was a barbarian statement which encouraged doing horrific harm. It should also be noted that Pakistan is finally cooperating better with U.S. Army efforts.
Our 2007 view: we were heading into a recession or potentially worse. Preventing it descending into something akin to post-railroad debacles way back in the 1880's; is precisely what the Feds combat here in 2008. Actions affirm they remain desperately engaged to stabilize fluidity of functionality; as we've argued for months; and has now gone into 'overdrive' so to speak (refer to prior comments for expanded discussions).
Twenty-one months ago I commenced projecting an 'accident waiting to happen' as affirmed historically after long-duration periods of free money (Gilded Age mentality). Such doesn't create enduring liquidity; just gives that interim illusion; we postulated back in 2007. Do not presume particular price levels associated with key Index lows.
(Part of the ‘art’ of market analysis is to know when fundamentals overwhelm a basic technical analysis ‘science’; though all action is viewed within a charting context too.)
Since early 2007 we noted economic conditions more similar to post the Gilded Age ending in 1929, the panic of 1907 (hence our call for the start to be the 'panic of 2007' last year at the end of that Gilded Age, and it's NOT coming back anytime soon). It is not a structure entirely resolved by rate cuts, stimulus, 'miracles', or political actions.
Enjoy the weekend!
Gene
Gene Inger,
Publisher
~Gene Inger’s Daily Briefing™ (The Inger Letter daily analysis on www.ingerletter.com)
~Gene Inger’s MarketCast™ (Intraday audio updates emphasizing S&P futures and market action)
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