WSW – Sunday, 7 August 2011

General Comment

I’d been planning to add a ‘Mo Mo! Momentum section, but as all the momentum right now is ‘down’, I think I’ll wait just a bit…

The biggest news is just that Congress, both the Dimocratic part and the Republicants too, managed to sign up for a bigger credit card on the mantra that the debts must be paid and somehow having a larger credit limit means the bills have been paid? “No, Timmy, just because the credit card still has room on it, that does not mean the bills have been paid…” (Little Timmy G. our Treasury Lap Dog in Charge of Money Printing)

OK, so the Dems used the threat of a ‘downgrade if we do not DO something’ to do very much the wrong thing, then got a downgrade anyway. They, of course, are livid as they were sure they could spend any amount they wanted as long as the new credit card could make the minimum payments on the old credit cards… not realizing that in The Real World financial folks (and we are ALL financial folks at some time or other) expect you to have enough income to pay your bills, not just float more.

At any rate, the markets tanked (more) after a long slow drip of dropping on the Dysfunctional Congressional Circus… So S&P held off to the end to announce the Coup De Gras and we’re faced with a “Sloppy Open” on Monday Morning in the USA…

Already Asia has opened (and I’ll need to be in bed before the European open, but it ought to follow suit) down and sloppy. Got that… The implication is that the USA ought to do the same.

I would expect (were I willing to “expect at” the markets) a down open of several hundred points, then a partial recovery toward the last half of the session. THEN we will find out what the Real Direction will be….

Margin Calls are made late in the afternoon. (About 1pm+ IIRC) and if you have a leveraged portfolio with too much margin (borrowed) the Margin Desk starts selling stuff to get the account back in balance. THEY get to choose what to sell, and if something is “sloppy down” they tend to sell what still has stable value in it (to avoid clients screaming about selling them out into a bottom / buy moment…) and right now that’s gold. So don’t be surprised if gold opens UP for a bit, then drops on margin selling.

Sometimes, but the time Asia and Europe have had a whack at it, the major traders and institutional players have already done most of the hedging / dumping they wanted and the USA can open down, then rally to the close. I’d not expect that today ( were I willing to “expect at” the markets…) but it could happen. We’ll have to look at the charts to see what’s more likely…

On CNBC on Thursday (the ‘down several hundred points’ day last week) a rather bright and articulate presenter gave a delightful summary of WHY treasuries were up on the news that the USA was going to be selling $2T+ more of them and buggering the dollar more: “On days like this, all correlations go to one… except treasuries.” Michelle Caruso-Cabrera. Her wiki says:

Life and career

Ms. Caruso-Cabrera graduated from Wellesley College in 1991 with a degree in economics. Prior to joining CNBC in 1998, she worked as a reporter for WTSP-TV in St. Petersburg, Florida, and prior to that, as a reporter and later as a special projects producer for Univision where she won an Emmy Award for a five-part series on children with AIDS. She also received a Broadcaster of the Year (2004) award from the National Association of Hispanic Journalists.
On October 1, 2008, Caruso-Cabrera stated she leaned “very far to the right” on The Rachel Maddow Show on MSNBC.
In 2010, she wrote a book titled You Know I’m Right: More Prosperity, Less Government.

What she was talking about was something usually called “Beta”. The tendency for a stock to have a correlation with the market averages. What she was saying is that in a strongly ‘risk off’ market, everything tanks together, except US Bonds.

The wiki on Beta is not too bad:

In finance, the Beta (β) of a stock or portfolio is a number describing the relation of its returns with those of the financial market as a whole.
An asset has a Beta of zero if its returns change independently of changes in the market’s returns. A positive beta means that the asset’s returns generally follow the market’s returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset’s returns generally move opposite the market’s returns: one will tend to be above its average when the other is below its average.
The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset’s statistical variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index.

Michelle is, IMHO, something of a “sleeper”. It’s easy to think she is on the set as “eye candy” and just to look nice. That she has a very pleasant personality and easy going social style tends to further lull folks into thinking she’s there to ‘report and look good’. Thinking that is a serious mistake. This is one very sharp cookie…

So what caused me to have a “contemplation moment” (and those are rare on most financial shows where it’s more about ‘juice’ and ‘action’ than “I need to think about that”) was that she clearly was just tossing out this line as a “minor comment” on the state of the market, yet…

First off, it requires that you have clue what Beta is and why it matters.
Second, you have to know to map ‘correlation’ to Beta.
And finally, it has a particularly interesting bit of wisdom in it…

Most all discussion of Beta treats it as a nearly fixed quantity. You see things like “Utilities have a 0.5 Beta vs the broad market” or “Brazil EWZ has a 1.5 Beta so moves more” or even “Bonds have a -0.5 Beta vs… so are a good way to balance your portfolio”.

Michelle has a very significant insight hidden in this small ‘throw away’ line:

Beta is a VARIABLE quantity, proportional to PANIC, and as panic approaches one, so does Beta for all assets other than U.S. Treasury Bonds.

THAT, folks, is worth a ponder.

I’d observed the effect, but never put it in such succinct form. I’ve made postings about how markets strongly correlate, about how treasuries are negatively correlated (even put up charts showing it) and had commented on gold and margin calls in earlier postings. But, in comparison, my comments were dilute and scattered. She ‘nailed it’ cleanly and compactly. Bravo!

So why are USTreasuries special?

Well, lets say you are a portfolio manager and things have just gone dodgy. Two effects kick in. First off, there are all those margin calls. Second, as our market tanks, folks in other markets start to be worried and sell too. So selling spreads into foreign markets (Israel had THEIR stock market sell off on the USA debt downgrade… Go Figure…) as folks sell what has value in it and / or sells what they fear (fear is it’s own contagion), they increase their CASH holdings. One Small Problem: Banks to NOT insure an infinite level of cash… So if you want that cash to be ‘safe’ from a bank failure, you need to put it into an instrument that IS backed by a government… Now is the point where that $14 T (soon to be $16 T headed for $20+T) of US Treasuries has a “quantity has a quality all it’s own” moment: If you try to buy, oh, 5 Tons of Gold (as Russia just did) the price spikes up. If you try to buy $100 B of Norwegian Bonds, well, you will have a hard time ‘getting the trade off’.

No, the ONLY thing that is available in the depth and liquidity needed are US Treasuries. So they are an easy, quick, and (relatively) safe “parking spot” for all that cash being generated from the asset sales. This, of course, attracts more folks to them and helps to form a self fulfilling prophecy… As the ‘crash’ deepens, more selling causes more selling in global stocks and more buying causes more buying in US Treasuries.

Eventually that process reaches a necessary end. At that point, shorting Treasuries starts to have “charm” and it’s time to go ‘bottom fishing’ for all the goodies that were dumped that didn’t deserve it and are just Floundering about… ;-)

We saw some of that on Friday as buyers tried to ‘catch a falling knife’. I’d not “go there” as it’s best to wait for the actual turn upward before deciding ‘now is time’. Others like to ‘scale in’ with a series of buys over several days or weeks. That, too, can work. (Though it’s easy to start the ‘scale’ too early and get burned…)

OK, so what about this coming week?

It will have a sloppy open. It will likely have a decent rally off that opening dive. Then we get the answer toward the close. (Wait until AFTER margin calls go out to make a decision…)

Treasuries ought to continue to rise for about 3 days (as ‘settlement’ happens and more money gets dumped into them), then watch for a ‘failure to advance’ on a 10 day Hr chart for traders wanting to trade TBT (or hedge a long bonds position…)

The US Dollar ought to rise (as all the sympathetic sales of stocks in foreign countries get turned into USD and sent off to treasury land.) and gold will be a nice “margin canary” as it will say (via forced sells) where the balance lies… If it slides on through without a hiccup, you have low margin selling of gold (and likely NOT panic levels of margin calls) and you have the likely result of yet more gold buying as a ‘safe haven’ (which gold very much IS NOT… it is a highly volatile commodity subject to bubble and bust and with Central Bank pot stirring… though with Korea, Russia, and a couple of others buying gold by the ton it is likely ‘risky to the upside’ … until they stop, then it plunges. And no, Central Banks do not buy gold forever…)

Commodities in general will sell off on the notion of a ‘double dip’ recession meaning low manufacturing demand. We say oil dip below $90/bbl (even in the cheap Obama Dollars) for just that reason and Natural Gas is back below $4. Even platinum sold off a chunk. So watch out for commodities as they, too, have “correlation go to one”…

(Yes, the notion of Beta as a dynamic function will become a cornerstone idea for me; it is a great foundation on which to build new understandings… That’s WHY it was such a big deal from such a small comment…)

In general, I’m going to continue in the “US Dollars and a few core holdings” that I’ve been in for a while now. I could have made a bundle by owning “shorts” against the market, but I’m just not emotionally engaged enough with short selling to do much of it. Yes, I need to ‘get over it’ and do more; but while I can pretty well ‘call the ball’ on when to do it, something about it is still not “in my nature”… But at this point it’s likely a poor entry point for aggressive shorting. That time is when volatility is low (so options are cheap and short funds that use them are selling cheap too) and near a quite market top; not in ‘mid panic’ and certainly not after two weeks of steady dropping… While it’s a much harder trade, technically, to pull off; I usually do the “counter trend rally” trade instead. ( I ought to do BOTH, with CTRally on the down spike and Shorts at the start of the roll down… but “A man has got to know his limitations”… and right now one of mine is ‘no day trading’ as I’ve got a ‘day job’. So expect more ‘swing trades’ and ‘trend trade’ comments.

With all that said, it’s time to head to the charts, but we will get there via a few stops at prior commentary from the 16 July WSW posting, about 3 weeks back. Then I said:

It would be great to hunker down in cash, were it not for the fact that the value of our currency is exactly what is “in play”. It would be great to be in non-$US cash, were it not for the fact that the exchange rate is in play. Basically, it’s going to be a volatile mess. Best idea I’ve got on it is to be diversified and hedged to remove the risks. Some gold, some other metals, some Swiss Francs, some Yen, some $US Dollars, some WIP and TIP bonds, some stocks, etc.

Well, I got the “volatile mess” part right, and the diversification was not a bad idea either. The gold and bonds were good, as were Swiss Francs. Yen had a dip down on Bank Of Japan intervention (that is most likely just a ‘buy entry’ point…) but the “some stocks” was a dismal idea. It violated one of my core rules: Do not fight the trend. And the stock charts then showed a trend of rolling over into decline. All I can say in my defense is that the earnings reports were coming in spectacularly and argued for SOME stocks… I then went on to say:

Yet I doubt I’ll do it as the work is just more than I care to do at the moment. Perhaps better to just “seek Alpha” and find things rising fast enough on growth that the rest of it just washes out of the equation…

At any rate, 2 or 3 weeks from now, we have our SHTF moment. I suggest practicing “duck and cover” along with “decontamination drills”.

So that was a bit of a ‘saving face’ moment. It’s been 3 weeks and the 1000 point drop to date and a USTreasuries downgrade is certainly a Stuff Hits The Fan moment… while “duck and cover” was certainly the best possible thing to do.

At any rate, I’m now looking for more “buy a counter trend trade for a couple of days” and then a “go short at the SMA Stack” result. We’ll see if the market gives us that opportunity.

I’d also said:

The Euro Zone continues to lurch toward implosion. Germany will eventually discover that the “other people’s money to spend” is theirs, and it’s being spent as rapidly as it is handed over to the PIIGS. Greece is saying “Send More Money”. If the northern states do not, then Greece defaults and implodes, leaves the Euro, and the Euro Zone starts to unravel. (As Portugal, Italy, etc. follow suit). If money IS sent to Greece, then the others line up for THEIR share of the largess. Repeat until Germany is bled dry; then the Euro Zone collapses.

We saw exactly that playing out. A “great deal” was announced where MORE money was sent to the consumers side, but with the notion of ‘strings attached’ for more austerity and even a balanced budget requirement.

The only way out of THAT dilemma is for the PIIGS to cut back on spending and entitlements. Like that is going to happen…

So now we’re in “Act Three”: Where the PIIGS promise to be better this time and certainly they will go on a diet… right AFTER this one last big meal… So here is where we learn just how gullible IS Germany?

There are already calls to hide this fact by even MORE indirection with “European Union” bonds being floated as an idea. The whole of the EU to back them. That still leaves it as German money and PIIGS debt, but with a nice political indirection rug over the lie-ing over the facts.

As last time:

No, the political will for it just does not exist. Inflating away the obligations is the only way to sweep the lie under the rug. Then it is the fault of “inflation” and not the politicians. They pay the full pension amount, it just buys a lot less. Same effect as cutting the entitlements, but less blame.

IMHO, this drama will run a couple of more years as things get increasingly unstable. Then the Euro Zone starts to unravel, or Germany accepts an inflating currency. One wonders at this point how many current German voters really have a cultural memory of the hyperinflation anymore…

That simple fact will stay. The USA is well on it’s way to a ‘wild inflation’ like that one used by Johnson to hide the Vietnam War costs. The Euro Zone is joining us in a wild ‘race to the bottom’ in currencies. Only recession is keeping commodity prices down as the whole systems slowly grinds to a halt. The Progressive / Socialists will have only the answers of more “fully money” and more “planning” and “social programs”. It is doomed to fail. The only question is how spectacularly (and maybe ‘how soon’).

It’s time to “fish or cut bait” and the Progressive Mindset will simply NOT be able to accept that they were wrong. That they are causal. That spending (or promising to spend) $Trillions that you do not have (and can not make if you suck the prosperity engine dry of fuel) is what causes them to fail. Even though it always has, and always will. No, they will continue to believe that someone else is to blame (thus part of the reason for the constant scapegoating) and that If Only THEY had more power, they could make it all better. Watch out for growing Power Lust and increased Centralization Of Authority as the wheels come off the bus…

And don’t EVER expect a Socialist or Progressive to cut bait. They would rather fish with an empty hook…

Summary Points

Well, there are times I’d rather not be quite so right…

Watch the US Congress. (At least the show will be fun to watch, even if the ticket price is beyond astounding.)

“Beyond astounding” was just about right. Couple of $Trillion in new debt, For Now; AAA lost and downgrade to raise all refunding costs; liberty in the crosshairs; poverty spreading as unemployment heads higher; “Double Dip” looming and spreading globally as ‘hunker down’ continues.

Also heard on CNBC that in the next 10 years something like 60% of US Debt comes due. $8.4 Trillion. Somehow I think it’s going to be getting even harder to find folks to take that debt at lower ratings without a bump in interest charges… At present rates, we’re talking about roughly $2 T of combined refinance and new deficit PER YEAR. Unless the central banks suck that up, it’s going to be very hard to do. (And increasingly central banks are looking for non-dollar ‘reserves’…)

But the new summary is just this:

Watch the markets spasm, then bet in the direction of the resolution. Stay hunkered down if unsure. Don’t make any long term bets.

Oh, and watch out as a Very Cranky Congress and Grumpy Administration seek revenge and / or throw rocks at folks as retribution for the downgrade. I’d not be surprised at all to see the ratings agency heads pulled in front of some Barney Franks committee for a spanking. (Barney seems to enjoy spankings…)

Lastly, keep an eye on the non-Euro non-USA part of the world. Russia and China in particular are likely to get tired of this nonsense. Both have shown concern already. Toss in some Arab $Trillionaire Sovereigns and who knows what will happen.

It’s going to be an interesting week.

Conclusions and Likely Actions

What I said last time still holds:

On the sidelines and looking for “duck and cover” or selected protective positions.

At this point I’d add: Thinking of a ‘counter trend rally swing trade, but mostly planning an ‘entry’ to short positions on a return to the SMA stack from below. And maybe picking up some nice commodity or REIT properties on a ‘failure to advance’ to the downside. “Real inherent worth” ought to be the guideline for a while.

Pointer To Other Topics

Some general comments on how long term investing differs from trading and my thoughts on things to do for the long term investor, start with this page:

http://chiefio.wordpress.com/2011/06/12/lti-long-term-investing/

If you are expecting global warming stuff, it’s under the “AGW” categories in the right hand margin. Things specific to the NCDC data and GIStemp are under categories with those in their names.

This posting is about the other thing I do, looking at investment markets. Prior postings in this series are available here: http://chiefio.wordpress.com/category/wall-street-week/

Posts with some relevance to trades, but not in the format of a full WSW analysis, are available under this category:
http://chiefio.wordpress.com/category/economics-trading-and-money/

The Nature of the Charts Here

The charts in this posting are usually live charts, so my comments will describe how it is now, but in a week it will be showing new data and a new week. If I capture a “static image” I usually label it as such. You can tell by looking at the date bars on the bottom of a graph. I typically use the live charts since I think it is more important to be in touch with what the market is doing NOW than to preserve the historical chart, this is, IMHO, a reasonable choice. Just don’t be surprised if the chart I describe is not the one you see a few weeks from now! If you would like to see the historical chart, you may enter custom date ranges on the charting tool at www.bigcharts.com

Wall Street Week – Sunday, 7 August, 2011

Long Term Context

I’m promoting this chart to the top for a while, as it is now in control. Look closely at what it’s saying.

This is a very long duration chart (5 years) of NYSE. It will not change much from week to week (just one tick mark) so guides longer term attitude.

5 Years, NYSE

5 years, NYSE

Last time I’d said:

So this is a ‘hard spot’… not a clear trend. Possibility of a ‘buy the dip’ moment only partly done; but with a ‘head and shoulders’ being printed (but also not done). I’ve managed risk by stepping out; but if it heads up, that confirms to get back in. Frankly, I suspect folks are sitting tight waiting for either the Euro Zone or the USA to stop having Sovereign Risk Issues…

You will likely need to click on the chart to expand it to see the size of that final tick mark down. It’s just a gut wrenching spike down through the lowest SMA line. RSI is ‘stair steps down’ from a ‘near 80′. The ‘bull run’ is over for a while. MACD had a ‘crossover downside’ a while ago. But the more interesting one is DMI / ADX at the bottom. The rid line has had a major breakout upside. We’re in a raging bull phase for now.

Back at the price ticks, we not only have “failure to advance” but the latest ‘hump’ is about as high as the one on the other side of the peak. A classical, if shallow, ‘head and shoulders’ (with the middle peak being the ‘head’). Bonds have also done a spike up. Bonds up, stocks down. Now look back about Jan of 2009 (just after the ’08’ on the bottom legend). Notice anything similar? Long red down spikes on prices. Head and shoulders. MACD headed down. Nice large spike up in the red DMI- line. Bonds having run up for a month or two and with a nice recent ‘spike’ of similar (if slightly smaller) size?

We don’t yet have the blue SMA line crossing over to the downside, but just give it a bit of time… What we are waiting for is simple. Does the chart resolve to look like March of ’09 with an SMA stack rollover and with prices below? Or does it resolve to look like August of 2010 with a price pull back above the stack and the blue SMA line recovering? Does MACD have a crossover ‘upside’ while staying above zero like in October of 2010, or a punch below the zero line and a ‘failed crossover’ as it can’t stay above zero and a ‘counter trend rally’ back to the Simple Moving Average stack fails (as in June / July of 2009) with the SMA stack clearly inverted (with 20 period on the bottom and 60 period on top)?

We are at a ‘decision point’ on this very long duration chart. For the next few months you can ‘trade fast charts’ for day trades or swing trades, but can not ‘marry’ a long term position until it resolves. Then you will know if it is ‘buy the dip’ or ‘sell the counter trend rally. (for now, you can look at ‘fast charts’ to avoid missing the dip, OR staying in any rise after it gets back to the SMA stack and falters…) All I can add is that the RSI was a ‘drop to 50′ in the last ‘dip’, but is now ‘stair steps down’ like it was in the summer of 2008…

IFF you ‘trade to the long side’, remember that this chart is saying you are fighting the indicators… At a minimum, hedge any trades with a mix of bond positions so that you get the average of the two lines on this chart. Plot a line 1/2 way between those two lines and it’s “not bad”…

For now, we are still ‘officially’ in a bull market (SMA stack is 20 over 40 over 60) per my rules; but also in an official ‘correction’ (off 10% from the recent high) and prices have violated the 40 week, or 200 day moving average line making it a ‘bear market’ by standard trader rules. At any rate, until MACD is ‘blue on top’ and prices are rising again, you can’t go long as an investor. Trading on faster charts, or sit in cash and hedged positions. With Slow Stochastic pointed down, even faster trades to the long side have to wait until it is bottomed and pointing back up…

The Dollar Lately

Time to measure our Rubber Ruler.

One Year Daily of UUP Dollar UP, with TBT and selected currencies

One Year Daily of UUP Dollar UP, with TBT and selected currencies

Here’s the same chart with the main ticker being “UDN” the “Dollar Down” ticker and TLT instead of TBT. Note also that the XAU ‘gold and silver stock index’ is swapped for GLD gold metal.

6 Month Currencies and TLT the US Treasury "20 Year Bond " fund

6 Month Currencies and TLT the US Treasury "20 year Bond" fund

Swiss Franks are way up. I have to wonder, though, at that ‘flat part’ the last few days. There is talk of Central Bank intervention… it’s also “way high” and in something looking a bit like a parabolic rise away from the trend. Probably not a good day to be buying a new position. I’d wait a couple of days… TBT looks like the spike down might be over. We also have a disconnect between gold metal and gold miners. A bit of a worry for gold, or a buy opportunity for miners. Clearly the ‘big win’ of the last couple of weeks was TLT, long duration US Treasuries. I’d expect that “spike” to erode over the next few weeks, so a ‘reversion to the trend’ trade could be done, IMHO. The only question is when does the flood of ‘buy’ orders end. Watch Monday closely for guidance.

And here is the 10 day Euro chart, with BZF the Brazilian Real added. Also notice that the British Pound is showing a bit of life. Up 1% or so

The clear winner was Swiss Francs. Up about 5% in 10 days. That will eventually ’cause issues’ for the Swiss Economy, so their central bank will want to intervene. The question is: Can they get the help of the US and Euro Central banks and the BOJ? As the BOJ is busy trying to sell Yen, it will likely not by selling Francs, and both the USA and Euro are trying to print and spend to stimulate, so will be unlikely to ‘buy dollars and sell Francs’ or ‘buy euro and sell Francs’. I doubt that the Swiss Central Bank can pull it off on their own. So watch for ‘daily dips’ as they try, and then buy them… but if the ‘news flow’ turns to ‘concerted central bank efforts’, then bail out of the Franc.

You can also see how the ‘resource currencies’ got hit, with everything from the Brazilian Real to the Mexican Peso (and with the Aussie and Looney too) down about 3%. “As correlation moves to one”…

Currencies - 10 Day Hourly Interval chart vs US Dollar

Currencies - 10 Day Hourly Interval chart vs US Dollar

Base Metals

So last time I decided I was too tepid about a ‘maybe a bit in base metals’ and so gave a ‘hop in’ just in time for a crunch. My apologies about that. I was “expecting at the markets” and expected that the good earnings reports would indicate more economic growth (what ought to have happened) and not weighting heavily enough the potential for a Sovereign Risk induced quashing.

That was too tepid. I’d not realized the impact Bernanke would have. We’ve got JJP showing a good rise ( a ‘precious metals’ basket) along with JJT Tin, JJN Nickel and even JJC Copper. OK: Metals 1, currency 0. Got it…

Now look at that chart. Yes, we had a nice rise in silver and JJP from the time of the last posting, but the other metals rolled down and then the last 10 days got whacked.

Metals 6 month chart

Metals 6 month chart

DBB  - Base Metals ETF
GLD  - Gold (physical metal) ETF
JJU  - Aluminum ETN
JJN  - Nickel ETN
JJC  - Copper ETN
JJP  - Precious Metals ETN
ld   - Lead ETN
JJT  - Tin ETN
SLV  - Silver (physical metal) ETF
PALL - Palladium (physical metal) ETF

It’s a ‘risk off’ world right now and a ‘double dip’ for desert… at least in the traders mindset that drives the markets. You can see MACD call the ‘exit’ about August 1 on the crossover to the downside. A very good example of a ‘right idea’ that gets run over by news and I did not post a followup. You simply MUST watch the charts for that kind of stuff if you do enter a trade. The “story” is fine, but it’s the charts that tell you when to change direction.

Gold vs Gold Miners vs "Gold and Sliver Index"

Gold vs Gold Miners vs "Gold and Sliver Index"

Last time I’d said:

Gold has started a new run higher, with ADX rising toward 20 or so. MACD above zero and ‘blue on top’. We had a spike up in the miners on The Bernank speech. Last time I’d said:

and the high real gold price will give them great earnings reports. At this point I’d be in the miners rather than the metal itself.

If only I’d taken my own advice, but I was traveling, so not trading. GDX, the miners, just rocketed up.

And now we see them just rocketing down… Gold has continued the rise, though. I do think it’s ‘due’ for a correction (things can not hold parabolic rises away from the SMA stack forever, but the central banks buying by the ton makes it sporadically irrational and for unknown durations). At this point, I’d not be in either. Miners are going to move with the stock market for a while, and that’s going to be a very rocky ride. To the extent margin calls start hitting GLD and similar ETFs, gold sales can suddenly increase. Too much risk for me.

Ag Commodities

All the commodities have turned down. Even sugar. Good news for consumers. Bad news in that it indicates expectations of economic downturn.

Ag Commodities 6 month chart

Ag Commodities 6 month chart

The close up view of sugar and Brazil shows a lot of news driven effects. It’s hard to see, but the Real has had a bit of drop the last few days. The “melt up” is ended. Sugar just fell off a cliff in the prior chart, here you can see how that impacted the major sugar grower.

You can also see how when the USA catches cold, Brazil gets pneumonia… Quite a plunge.

CZZ Cosan - Brazilian Sugar vs BZF Real,  EWZ Brazil and SPY S&P 500,

CZZ Cosan - Brazilian Sugar vs BZF Real, EWZ Brazil and SPY S&P 500,

When things are looking bad for the USA, stay completely out of Emerging Markets…

Monthly Running Stock Sectors

So what “won” and “lost” over the last month? (though remember, they may not be the winners next month… it’s just to provide ‘context’).

One Month

10 Best Performing Industries
Industry Name	Percent Change (over time selected)
Dow Jones U.S. Internet Index	1.34%
Dow Jones U.S. Gold Mining Index	-0.12%
Dow Jones U.S. Tobacco Index	-0.93%
Dow Jones U.S. Computer Hardware Index	-2.04%
Dow Jones U.S. Food Products Index	-4.77%
Dow Jones U.S. Computer Services Index	-4.87%
Dow Jones U.S. Broadline Retailers Index	-5.26%
Dow Jones U.S. Soft Drinks Index	-5.40%
Dow Jones U.S. Restaurants & Bars Index	-5.48%
Dow Jones U.S. Brewers Index	-5.49%

Well, your first clue is that only ONE sector had gain, and that’s only a 1.3% gain. Looks like that “sit out” and “duck and cover” was not a bad strategy…

How about the losers?

10 Worst Performing Industries
Industry Name	Percent Change (over time selected)
Dow Jones U.S. Real Estate Services Index	-28.38%
Dow Jones U.S. Tires Index	-27.75%
Dow Jones U.S. Consumer Electronics Index	-25.98%
Dow Jones U.S. Airlines Index	-25.30%
Dow Jones U.S. Coal Index	-24.32%
Dow Jones U.S. Industrial Machinery Index	-22.76%
Dow Jones U.S. Real Estate Holding & Development	-22.42%
Dow Jones U.S. Electrical Components & Equipment Index	-21.53%
Dow Jones U.S. Hotel & Lodging REIT Index	-21.42%
Dow Jones U.S. Electronic & Electrical Equipment Index	-20.82%

Can you say “Brutal”? I knew you could…

So if you ‘guessed wrong’ and were in, say, Airline Stocks or Tires, you were whacked by 25% to 27%. Mostly real estate services, equipment, and consumer related. Guess those unemployment and retail sales numbers were not so good… while the ‘least down’ in the ‘ups’ were mostly things we just keep on buying, like tobacco and food.

OK, if you like bottom fishing you can watch some of those ‘very whacked’ sectors. Me? I’m not bottom fishing just yet…

Any change vs. “lately”?

Weekly Running Stock Sectors

The best and worst of the week? Do they tell a different story on the short term trade? What moved up the most in this recent rally, and what was left behind?

0 Best Performing Industries
Industry Name	Percent Change (over time selected)
Dow Jones U.S. Mortgage REIT Index	0.85%
Dow Jones U.S. Soft Drinks Index	-0.89%
Dow Jones U.S. Beverages Index	-1.32%
Dow Jones U.S. Water Index	-1.58%
Dow Jones U.S. Nondurable Household Products Index	-1.93%
Dow Jones U.S. Tobacco Index	-2.17%
Dow Jones U.S. Fixed Line Telecommunications Index	-2.48%
Dow Jones U.S. Gold Mining Index	-2.56%
Dow Jones U.S. Food & Beverage Index	-2.60%
Dow Jones U.S. Food Products Index	-3.11%

Well, that’s pretty dismal. Even beverages and tobaccos losing. Mortgage Reits only gain a tiny, and likely due to the high dividends. Having a 3% loser in you ‘best’ bucket is NOT a time to be owning stocks… IMHO.

10 Worst Performing Industries
Industry Name	Percent Change (over time selected)
Dow Jones U.S. Coal Index	-23.81%
Dow Jones U.S. Tires Index	-18.90%
Dow Jones U.S. Real Estate Services Index	-16.89%
Dow Jones U.S. Consumer Electronics Index	-15.93%
Dow Jones U.S. Hotel & Lodging REIT Index	-15.47%
Dow Jones U.S. Mining Index	-14.79%
Dow Jones U.S. Real Estate Holding & Development	-14.34%
Dow Jones U.S. Steel Index	-14.04%
Dow Jones U.S. Basic Resources Index	-14.01%
Dow Jones U.S. Industrial & Office REIT Index	-13.99%

One week, dump 23% in coal stocks and 14% in a bunch of industrials. Someone is betting that the consumer is NOT going to book a lot of hotels this summer nor will industrial production do well. (Given the lousy industrial numbers reported, not exactly a leap…)

Shorting The Broad Market

TWM Ultrashort Russel vs RUT Russel 2000 and S&P 500

TWM Ultrashort Russel vs RUT Russel 2000 and S&P 500

Last time I’d said:

Not seeing a reason to short, but as ‘tactical protection’ of long positions it has it’s uses. If that MACD crosses above zero and / or gets a strong ‘blue on top’ a short term tactical short could be useful. For now, I’m more inclined toward “long side” swing trades than “short side”.

Decent advice. Not great, but decent. That giant spike in TWM is partly from option volatility raising option prices, so I’d sell out of it at this point (mid morning tomorrow on a down dip if we get one). That “if that MACD crosses above zero and /or gets a strong ‘blue on top'” would have put you in for a nice 20% gain. Having 1/3 of your portfolio in a mix of this and bonds would have protected about a 2/3 mixed stock portfolio. That’s how to use ‘protective hedges’…

For now, I’d ‘cover the shorts’ and then wait to put them back on during a low volatility time (when the price bars are short, like in the last weeks of July…) and at the same time sell any ‘accidentally held’ long positions at a return to the SMA stack…

10 Day Hourly Fast Trader Chart

Shorts winning, by a lot. Things are so ‘out of whack’ I’d expect Monday to be down / mixed, then a ‘return to the trend’ over following days. News flow likely to drive it, though. For now the fast trader chart indicators are still calling for ‘more down’. But watch for a turn with MACD going above zero and DMI getting “blue on top” as a ‘counter trend rally’.

Trader Chart - Longs and Shorts of Index Funds  10 day hourly interval

Trader Chart - Longs and Shorts of Index Funds 10 day hourly interval

What about Brazil? Also India and China.

A ‘data artifact’ has one price quote distorting the chart. Almost certainly a bit of bad data. At any rate, reading around it…

Brazil the EWZ ETF vs the BZF currency ETF

Brazil ETF vs Currency Race

EWZ  - Brazil
GLD  - Gold fund
BZF  - Brazilian Real currency
FXA  - Australian currency
FXI  - China
EWA  - Australia
EPI  - India - WIsdom Tree fund
EWC  - Canada
EWW  - Mexico
GUR  - Middle East Fund

As you can see, Emerging Markets sell off when the USA sells off.

Closeup on Gold

Gold 1 year daily chart

Gold 1 year daily chart

As I said last time:

Continued on it’s run from lower left to upper right.

BUT with some margin call sales causing that ‘red tick mark’ last week. Given how far it is from the SMA stack, it’s time to edge out. RSI ‘near 80′ and DMI+ (the blue line) about to cross over ADX (the black line). It’s just looking a whole lot like last April / May. Better to buy when it is AT the SMA stack, not pulled away from it…

VIX the Volatility Index

Volatility Index and Related

Volatility Index and Related

VIX  - Volatility Index (not a ticker, you can't trade it)
VXX  - Short term VIX futures ETN (a ticker you can trade)
VXZ  - Medium term VIX futures ETN (a ticker you can trade)
FXY  - Japanese Yen
SH   - "Short" sell of SPY
SPY  - S&P 500 benchmark
IYT  - Transports, a leading sector
XHB  - Homebuilders, a leading sector and "canary" 
XRT  - Retail

On spikes like that, we usually are near a bottom. Expect a ‘bounce’ later in the week. Maybe as soon as Tuesday / Wednesday.

Volatility Index and Related

Volatility Index and Related

Ideas of the Week

Preserve assets in cash and hedged positions. Wait for the Dancing Elephants and Donkeys in DC to finally get done breaking things… Maybe buy some oil if we get ‘stair steps up’ on the RSI, and have a MACD go ‘blue on top’.

Oil And Fuels?

All getting crushed in the dismal news. With RSI ‘near 20′ we ought to have a ‘buy soon’. For now, though, it’s a ‘bear market’ in oil.

USO Oil, KOL coal, UNG Nat Gas, UGA Gasoline with a Golden ruler

USO Oil, KOL coal, UNG Nat Gas, UGA Gasoline with a Golden ruler

The 10 day chart is looking like a short term ‘oversold’… maybe a nice day trade bounce.

USO Oil vs KOL Coal, UNG Natural Gas, and UGA Gasoline

USO Oil vs KOL Coal, UNG Natural Gas, and UGA Gasoline

So what happened in the Tech Market relative to world markets?

Tech vs Other Markets

Tech vs Other Markets

QQQQ  Nasdaq 100 mostly Tech companies
DIA  Dow Jones 30 Industrials
SPY  S & P 500 largest companies in the U.S.A.
MDY  Midcap  (Middle sized in terms of market capitalization)
RUT  Russel 2000 - a collection of 2000 companies from small to large.
EWZ  Brazil fund
EWA  Australia fund
EWO  Austria fund
EWW  Mexico fund

So whacked too, but a little bit less so… Not enough to matter.

Last time I’d said:

To me, it all just looks like the slop and jump you get in a topping market. MACD is above zero and headed sideways. Slow Stochastic is setting up for a ‘buy in’ crossover. DMI is muddled with ADX at a low 21 or so (so Slow Stochastic and faster trades are in order) and with the red and blue DMI lines nearly equal and low.

Sideways roller swing trades, not investments, is what that says. None of the other markets particularly stands out either.

That first sentence was worth far more than all the others combined.

Were Bonds a good idea?

OK, lets take a peak at the Bonds Race but with TBT (the “long term bonds” short sell ETN – that is, the thing that “shorts bonds”) as the main ticker symbol:

Bonds - TBT to Short Them

Bonds - TBT to Short Them

Bonds were the place to be, and longer term more than shorter. That TBT chart took quite a plunge, but with RSI ‘near 20′, we just need ‘stair steps up’ to have a TBT counter trend trade to the long side. DMI- (red) has inflected down; a crossover of the black line would be good to have too, but mostly we need MACD above zero and blue on top. For now, it just not looking attractive enough. It’s mostly saying bonds will drop some in the next few days, but maybe not enough to be worth shorting, and not for very long.

What About Oils?

Some Selected Global Oils:

The Oil Majors Race

The Oil Majors Race

XOM  Exxon Mobil - Largest, U.S. / Global
COP  Conoco Philips - U.S.  with Russian exposure
CVX  Chevron Texaco - U.S.
PBR  Petrobras - Brazil
PCZ  Petro Canada HAS NOW MERGED WITH SU SUNCOR
BP   British Petroleum
STO  Norway
E    Eni Italy
TOT  Total - France
RDSA Royal Dutch Shell
IMO  Imperial Oil - Canada Oil and Oil Sands
SU   Suncor - Canadian Oil Sands
SSL  Sasol - South African Synthetic Oil Company

Tanking with everything else and with the oil price.

Some Near Oil and Oil Related Comparisions

What about oil service companies? Or that Sugar and CZZ?

Oil Services and Oil Related

Oil Services and Oil Related

All dismal.

SGG Sugar vs EWZ Brazilian stock market, SPY and BZF the Real currency

SGG Sugar vs EWZ Brazilian stock market, SPY and BZF the Real currency

Ag and Ag support / Input companies

Ag Trade 6 Month Daily Interval Mixed Players

Ag Trade 6 Month Daily Interval Mixed Players

TNH took a dip, but not much, and is holding up. Everything else is dropping.

TNH - Terra Nitrogen

TNH - Terra Nitrogen

Look at the range of that daily price bar, though! Gigantic. With RSI ‘near 80′ and in the context of a falling general market, I’d likely edge out of this position (or, more likely, hedge it with a bit of TWM while still collecting the dividends…)

SEE the SEA!

Shipping Comparison

Shipping Comparison

And as you can see, just like a ‘rising tide lifts all boats’ and falling side sinks them all…

Royal Caribbean Cruise Lines, Carnival C.L., and SPY S&P 500

Royal Caribbean Cruise Lines, Carnival C.L., and SPY S&P 500

Last time I’d said:

If MACD goes to “blue on top” and “over zero” after a failure to advance to the downside, we’ve got a good ride ahead for a few months at least. It will likely take until mid August to fully form the bottom.

At this point, we’re likely talking October… That’s the problem with bottom fishing… you have to wait so long for things to prove they are not going to fall further… with lots of ‘false starts’…

The REITS race – Real Estate Investment Trusts

Here we again see that they all fall together when they fall. So, on a return to the SMA stack from below, sell out or hedge with a bit of a short ticker like TWM if you want to keep collecting the dividends. With MACD “red on top” and “below zero” and DMI “red on top” it’s an official ‘be out’ indication, though…

REITS Race

REITS Race

PEI  Pennsylvania Real Estate - Mall REIT (REMOVED to make better graph)
VTR  Ventas - sr. care, nursing homes, hospitals
PSA  Public Storage - junk storage units
BXP  Boston Properties - office REIT on BosWash corridor  
HCN  Health Care REIT -  extended care, senior care, medical offices
HCP  Health Care Properties - ex. care, senior living, Dr. offices
PCL  Plum Creek Timber - lumber and trees REIT
SPY  S & P 500 broad stock market benchmark
RPT  Ramco Mall REIT
PLD  Prologis - logistics 

The Long Term Context

SPY isn’t much better. W%R saying “be in”. RSI saying “just had a ‘buy the dip’ moment”. Rate Of Change saying “gone flat”… RSI also saying “lower highs – be afraid…)

SPY 5 year weekly tick, RSI, Williams %R, ROC

SPY 5 year weekly tick, RSI, Williams %R, ROC

I’m adding another chart of SPY, as the S&P 500 is the basic investment vehicle for most folks (unless you really want to pick sectors or individual stocks, you ought to start with a “SPY / Bond” oscillator on this long term chart.

SPY vs TLT (20 year Treasury Bonds) with RSI, MACD and DMI

SPY vs TLT (20 year Treasury Bonds) with RSI, MACD and DMI

Here is another interesting chart where you can see how volatility spikes at market bottoms and drops lower during times of topping actions. It also as “momentum” no it which can act as a reminder of how much force a trend has, and which way. Slow Stochastic is better for a faster trade behaviour when ADX (of the DMI / ADX indicator above) is below 20 or so.

If this all looks like “too much”, just remember that you don’t need to look at more than the one basic chart. The rest of these indicators give more depth of insight into “why”, but not better answers as to when to be in stocks vs bonds.

SPY vs TLT with Slow Stochastic, Volatility (fast) and Momentum

SPY vs TLT with Slow Stochastic, Volatility (fast) and Momentum

Stock Indicators – what and how


So when the long duration charts say "maybe making a top, but perhaps a 'buy the dip' moment", I look at the faster charts and faster indicators and move to a faster time scale with faster trades.  But I'm a trader.  For long term investors, you just ride the ride until the chart says "top is definitely in" and "buy the dip" until proven otherwise by a confirmed roll over (price below SMA stack).  In general, I'd put very long term bias as "be in".  Trend is up, dip happened.  Be in.  But you just can't ignore that the price plot looks very "rolled flat" at least... and we're all waiting for DC and Germany to "make their moves"... So you must WATCH the chart each week, even if not acting to be out of the market yet.

I've been 'stepped out' for some vacation time.  Now I'm 'reengaging'.  Probably start with short swing trades and work into longer positions.

If all this talk of indicators is leaving you wondering what the heck I’m talking about, hit the link in the heading of this paragraph and there is a bit of an explanation.

Click for Disclaimers, Disclosures, and Where To Get Charts

Remember that on any stock or ticker I say I’m looking at, you don’t just go buy it. You wait for a stock entry indication to get the best possible entry into the position.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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27 Responses to WSW – Sunday, 7 August 2011

  1. Pascvaks says:

    “And in good Eagle Scout fashion, I have an interest in preparedness, but it’s a minor sidebar.”(EM Smith in ‘About’)

    “Economic and Political” Prognostication can get mighty iffy, I know, but if you have a moment or two in the next couple weeks and would like to share some thoughts on the way this can of worms world of ours is coming apart around us, the next 18 months seems to be rather significant –Macro vice Micro, though micro is the road to macro. I have a feeling the cumulative result would we “interesting” for all of us.

  2. R. de Haan says:

    Spengler has a fairly optimistic view:

    Please read: The end of the road for Hedge Funds
    http://www.atimes.com/atimes/Global_Economy/MH09Dj02.html

  3. Pascvaks says:

    @R. de Haan
    Well I’ll admit Spengler has his butt closer to the boiler room than I do, but I think his “it’s all hot air and water vapor” assessment is a bit too optimistic too. I’m buying EM’s “watchful waiting, things are pretty flakey, steam might well be smoke” assessment.

  4. Larry Geiger says:

    Here’s the answer:

    White House adviser blames tea party for downgrade
    AP Associated Press

    WASHINGTON (AP) — A top White House adviser is blaming the downgrade of the U.S. credit rating on tea party Republicans, whom he says were unwilling to compromise on how to reduce the federal debt.

    The adviser to President Barack Obama, David Axelrod, tells CBS’ “Face the Nation” on Sunday that the decision by the Standard & Poor’s credit agency to downgrade the U.S. from AAA to AA+ for the first time was strongly influenced by weeks of standoff between Democrats and Republicans over the debt.

    Axelrod calls the action, in his words, “a tea party downgrade” and says it’s clearly on the backs of lawmakers who were willing to see the country default to get their way.

    Axelrod also criticized GOP presidential candidates for not speaking up in favor of compromise.

  5. H.R. says:

    @Larry Geiger
    Here’s the answer:

    White House adviser blames tea party for downgrade

    ============================================

    Hahahahahahahaha…..!!!!

    The Tea Partiers got nothing! Any thinking 3-year-old could see past that one, but we’re talking the American public here. “If you tell the Big Lie often enough, etc.” We’ll see if alternate media can counter that porkie.

  6. Richard Ilfeld says:

    Time to wind the watch (geez, getting old even ruins decent stories).

    Youn ang old pilot in an airliner. Turbulence, plane starts bucking, dial go mad, toung pilot goes nuts. Old pilot starts to wind his watch. Young pilot stares in amazement.
    “are we on fire?” “No”
    “are we in a stall?” “No”
    “So I wind my watch to force my self to count to ten and think”
    “Anything I do in panic will make things worse!

  7. Richard Ilfeld says:

    About the charts_

    Gold: HA HA HA HA HA HA
    Panic money now, bust when things calm down.

    The REIT drop — buying opportunity! This is the kind of investment that annutiy providers have. The ones that don’t carry much debt will pay their coupon –
    even in a depression with deflation they will pay something, and the assets can grow and compensate for the inevitable inflation. Some grow more ways that one, I’m a fan of Plum Creek.

    Oil – it can drop too? Who knew. But less energy use will mean serious slowdown if these guys are right. Unfortunately, this may also remove pressure from the enviro-statists who will use a price lull to further constrict the industry helping more to choke off recovery.

    Verizon — On strike? In Long Lines. This is a macabre dance of the dinasours that may further cement in the public mind that Labor Unions are dangerous and dysfuntional players- wages and benefits these guys have will make public support of them as “middle class workers” hard (disclaimer – I once spent two years as a member of this union – no choice in the job I had).

    Using charts for stocks vs bonds? Hey, either way you lose. Unless I am really really bonkers on the true rate of inflation (food mostly) average bond returns are negative – you are paying to park money.

    That pool sure looks better and better – with a good book and beverage, and the TV off for a couple of days. After all, we ALL KNOW EXACTLY what all the “experts” are gonna say, and the politicians, and I expect the net wisdom of the next few days to be 0.

    Prices are the primary coveyance of information in a free market, lets see where they end up after folks who should be in the market in the first place finish their foolishness. (and the pros make out like bandits).

  8. Pascvaks says:

    I knew a GOPer who drank tea once. I don’t think he’s a GOPer anymore. I also knew a few Dem’s who drank real tea too; same thing happened to them. It’s really quite a coincidence how few GOPers and Dems there are anymore, seems everyone’s just a boiling hot, irate American taxpayer whose fed up with Democrats AND Republicans and the worthless dollars in their pocket. It’s a real pandemic.

  9. pyromancer76 says:

    Thanks, E.M. for taking the time with your schedule. Yes, wait and see seems like our “doom”. At the same time, I am working on TeaParty matters — no taxation (or spending my taxes) without representation. Government “remains” a minor economic player — no more than historical 18% of GDP. Maybe I will go up a percent, but within this we have to thrash it out as to what is best for government to do. Also, everyone works hard and pays (some) taxes. I used to think that this was the basic argument between Repubs and Dems. “All of a sudden” we have switched to “marxism-fascism-statism”.

    I will keep my faith that Americans — including most immigrants who have come to this country for “something different” — will recover their “paranoid” style in politics. Never trust the government is an American truth from the beginning.

    I followed Ron de Haan’s and Pacvasks comments and looked at Spengler. He said that the corporations were highly profitable. Not so much the “middle class”. “Apart from real estate, the next-largest component of middle class wealth was in the form of equity in small businesses. Small business has had no share in the recovery.”

    I would like to know how much of corporate profits have been made from “crony capitalism”; I believe far too much and that this area is going to be the area of one huge battle in 2012, mostly within the “Republican” Party, the only repository of free market ideals today. The Progressives of the late 19th and early 20th C had a large component of “main street”, business owners and citizens who wanted a return to “equality of opportunity”. When TR split the Republicans, the reformers went into the dustbin of history. Now they are back, I hope with a vengeance, in the TeaParty. Two dangers: the Rove-Romney crony capitalists and the social-authoritarian “conservatives”.

  10. boballab says:

    EM:

    You know what is funny is watching the same taking heads that before Aug 2 were peddling the “We will DEFAULT if we don’t raise the ceiling meme”, now hop on the “We knew it was a DOWNGRADE we had to worry about all along”.

    Especially after Greenspan stated the fricking obvious about having a fiat currency: You can’t DEFAULT, You just print more money.

    “This is not an issue of credit rating. The United States can pay any debt it has because we can always print money to do that. There is zero probability of default,” Greenspan said

    http://www.google.com/hostednews/afp/article/ALeqM5id6TmxqWKM5-cu6cpSC2Mvp4nCdw?docId=CNG.5d6f173a61bdfeb80b6b1c2c77b88e64.61

    The only way there would have been a default is if Obama deliberately didn’t pay out like Greenspan said.

    And that was Obama’s Bluff

    Which the GOP did not call, they caved. They negotiated from a false assumption and when you do that you will always get a bad deal.

    As to the markets I was watching the cross feed from Fox Business last night to FNC and Gold futures were up over $40 while Oil was going down. When the Asian markets opened they dropped initially by about 1.5% then went flat. Didn’t stay up to watch the European markets open. Have notice that as of about 12:30 pm EST that the Dow is down over 300. Looking at the ticker looks like it dropped quickly by 350 until around 10:30am EST, rallied a bit until 11am EST then has started a long slow drop.

    Word is that President Downgrade is going to “address the nation” while the markets are still open. Oh boy, expect them to crater after that from either: falling asleep as he drones on thus letting the computers crash the market or they stay awake and realized once again he still has no plan.

  11. boballab says:

    In case some don’t understand why the ability to print your own money is such a big deal think on Greece and The US.

    Prior to joining the EU, Greece had it’s own currency the Drachma. Also prior joining the EU it practiced the same budget policy as the US: Borrow and Spend.

    http://en.wikipedia.org/wiki/File:Greece_public_debt_1999-2010.svg

    That type of borrowing is nothing new as shown here:

    The evolution of the Greek economy during the 19th century (a period that transformed a large part of the world due to the Industrial revolution) has been little researched. Recent research[18] examines the gradual development of industry and further development of shipping in a predominantly agricultural economy, calculating an average rate of per capita GDP growth between 1833 and 1911 that was only slightly lower than that of the other Western European nations. Nonetheless, Greece faced economic hardships and defaulted on its loans in 1826, 1843, 1860 and 1893.[19]

    http://en.wikipedia.org/wiki/Economy_of_Greece

    So Greece ambled along over the years and when things got bad they could always print more Drachma’s to get out of the fix:

    Second modern drachma

    In November 1944, after Greece was liberated from Germany, old drachmae were exchanged for new ones at the rate of 50,000,000,000 to 1. Only paper money was issued. The government issued notes of 1, 5, 10 and 20 drachmae, with the Bank of Greece issuing 50-, 100-, 500-, 1000-, 5000-, and 10,000-drachma notes. This drachma also suffered from high inflation. The government later issued 100-, 500-, and 1000-drachma notes, and the Bank of Greece issued 20,000-and 50,000-drachma notes.
    [edit]Third modern drachma

    In 1953, in an effort to halt inflation, Greece joined the Bretton Woods system. In 1954, the drachma was revalued at a rate of 1000 to 1. The new currency was pegged at 30 drachmae = 1 United States dollar. In 1973, the Bretton Woods System was abolished; over the next 25 years the official exchange rate gradually declined, reaching 400 drachmae to 1 U. S. dollar. On January 1, 2002, the Greek drachma was officially replaced as the circulating currency by the euro, and it has not been legal tender since March 1, 2002.

    http://en.wikipedia.org/wiki/Greek_drachma

    Now what was causing that inflation? Borrow and Spend which is how they paid for their high standard of living:

    Greece is a developed country, with a high standard of living and “very high” Human Development Index, ranking 22nd in the world in 2010,[26] and 22nd on The Economist’s 2005 worldwide quality-of-life index.[17] According to Eurostat data, GDP per inhabitant in purchasing power standards (PPS) stood at 95 per cent of the EU average in 2008.[27]

    The per capita income (in purchasing power terms) of Greece was 65% that of France in 1850, 56% in 1890, 62% in 1938,[20][21] 75% in 1980, 90% in 2007, 96.4% in 2008, 97.9% in 2009 and larger than countries such as South Korea, Italy, and Israel.[22][23] The country’s post-World War II development has largely been connected with the so-called Greek economic miracle.

    http://en.wikipedia.org/wiki/Economy_of_Greece

    What was that “Greek Miracle”? mentioned:

    The rapid recovery of the Greek economy was facilitated from a number of measures, including (in addition to the stimulation, as in other European countries, connected with the Marshall Plan) a drastic devaluation of the Greek drachma, attraction of foreign investments, significant development of the Chemical industry, development of tourism and the services sector in general and, last but not least, a massive construction activity connected with huge infrastructure projects and rebuilding in the Greek cities. The latter is connected with the dramatic effect this economic growth had on Greek society and the development of its cities.

    Notice the bolded part, they were able to fiddle with their currency to facilitate economic growth. This is important because in 1974 the Greek economy took a hit bigger than the one they took in 2010 but there wasn’t all the problems that we see today:

    A major setback came with the collapse of the military junta in 1974 when the country recorded its worst annual contraction in GDP (about 5%) in its post-war history.[2] Marginal GDP contractions were also recorded in the 1980s. In total, the Greek GDP grew for 54 out of the 60 years following WWII and the Greek civil war.[3]

    http://en.wikipedia.org/wiki/Greek_economic_miracle

    In 2010 they had an annual contraction of 4% of GDP. So why is this time different? One Reason: The Euro.

    Look at the graph in that first link, they pulled an Obama and tried to massively Borrow and Spend their way out something that had always worked in the past because they were always able to print more drachmas to pay for it. However in 2000 they went and joined the EU and gave monetary control to someone else. They can no longer say: “Hey print up some more, the bill is due”. Germany is sure as hell not going to go along with that, because besides being the one that holds most of that debt, it’s their currency too.

    That is the big difference between the US and Greece, we still control our own monetary policy and our own printing press and by fiat make more money and say it has worth.

    Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning “let it be done”, as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.

    http://en.wikipedia.org/wiki/Fiat_money

    This is also why if you want to see what is going to happen in California, watch Greece. They are both in the same position, for the same reasons. The only difference is that Greece stil has the option of dropping out of the EU and going back to the drachma.

    Now as to why the US debt is a worldwide problem look up the Bretton Woods system and the term Nixon Shock.

  12. boballab says:

    Well lets see how the markets react to President Downgrade. The Dow was down 404 when he started speaking .

  13. boballab says:

    Ok the market is now down 428 when he stopped speaking. What is funny is that as he was droning on everytime it seemed like he was starting to wrap up the market ticked up. Of course when he continued to drone on the market went back down. Matter of fact it got as far down as 455. It was right after that point he stated that he had one final point and got off the economy and jobs and the market ticked back up.

  14. boballab says:

    As of 2:22 pm EST the Dow is down 542.

    Time for a WAG: Dow ends the day down 675.

  15. Richard Ilfeld says:

    In each transaction – there is a buyer.
    Who is buying. This is more interesting than who is selling.

  16. boballab says:

    Right after I made that WAG the Dow jumped up from being down 542 to only 460.

  17. boballab says:

    @ Richard Ilfeld

    Usually in cases like this the companies that the stock belongs to will try and by back. Of course that is predicated that they have the liquidity to do it. Why they would do it is two fold:

    1. It cushions how much they lose that day.
    2. Strengthens their own hand for down the road.

    An example of this, right before the debt deal got down it was in the news about how Apple had something like $79 Bn in liquidity on hand. Well right now Apple stock is down about 17.25. That means Apple can snap up their own stock as the price drops and when it rebounds resell it at a profit.

  18. boballab says:

    As an aside as I stated back at 2:22 pm EST the Dow was down 542, now it has been hovering between 450 and 480 for the last half hour. I also heard on Fox that the Dow did hit -600 at one point. That probably triggered an automatic buy back on those companies and what caused the bounce back. Matter of fact the Dow is back up to only being down 410.

  19. boballab says:

    Time to see how well the WAG was:

    The Dow closed down 634.76. I Wagged a 675 and that might have been low if there hadn’t been that mini rally between 3 and 3:30 pm Est

  20. George says:

    Well, one thing is certain; you can’t believe a word that is said on the major broadcast networks. Check this out:

    http://newsbusters.org/blogs/mark-finkelstein/2011/08/07/abc-financial-expert-slapping-sp-suspect-undisclosed-obama-fundrai

    Good Morning America had on Mellody Hobson, a regular ABC “financial contributor” and former host of her own ABC financial-advice show. Hobson hit S&P hard, expressing the view that “everything that they do is suspect.”

    There’s just one little factoid ABC didn’t share with viewers. While presented as a presumably objective financial expert, Chicagoan Hobson in fact is an Obama partisan. Hobson served as a big-time fundraiser during Obama’s 2008 presidential campaign and is involved with his 2012 campaign.

  21. boballab says:

    @George

    Here is a better one:

    Obama attacks S&P using Warren Buffets comments. Two problems:

    1. Buffet’s Berkshire Hathaway just took a hit from S&P by having their outlook downgraded to negative.

    and

    2. Buffet is a major shareholder in S&P competitor Moody’s

    Berkshire, which make big chunks of money from its insurance and reinsurance businesses, is spared the loss of its AA+ rating for now. But S&P marked Berkshire’s outlook down to “negative” from stable.” UPDATE: Buffett told Fox Business Network he isn’t surprised about S&P’s move. S&P had telegraphed plans to knock down insurers if the U.S. were downgraded.

    For what it’s worth, Buffett hasn’t been saying very nice things about Standard & Poor’s in the past 24 hours. The Oracle of Omaha, a big shareholder in credit firm Moody’s, said S&P’s downgrade of the U.S. “doesn’t make sense.”

    http://blogs.wsj.com/deals/2011/08/08/berkshire-other-insurers-get-negative-tag-from-sp/

  22. George says:

    Buffet’s tune changed just as soon as Obama started talking about taxing private jets. Buffet owns NetJet.

  23. E.M.Smith says:

    @Pascvaks:

    I’ve been calling it the “Demographic Bomb” and it is unstoppable. “Demographics is destiny”… We’ve promised 4 “Full time equivalents” of “goodies” and we have about 2 “full time equivalents” of productivity to use for it. No way out either.

    Folks were seduced by the promises of The Socialism Shiny Thing into thinking they could have no kids and society at large would provide everything needed in their old age. Yet that requires kids to do the providing. And there are not enough of them.

    It really is that simple. Everything else is just indirection, obfuscation, and greed.

    So in the “end game” the “kids” have to decide to NOT die trying to let someone else’s “Granny and Gramps” live the high life. How they do it will be of interest to observe… My bet is on inflation as the most polite of the available lies…

    I’ll ponder if I can make that less Zen and more explanatory…

    @Larry Geiger:

    De Nile is not just a river in Egypt… I suggest we rename the Potomac…

    We’re 3 years into his watch. He owns this tar baby…

    Attempt to deny it will just result in rising resentment. Attempts to paint the Tea Party as villains do not pass the “Giggle Test”,and that’s a brutal test to the folks who get giggled at…

    @Pyromancer76:

    There is so much to say from what you have said. Yes, much truth there.

    Folks forget that Fascism AND other “Market Socialisms” work well for the corporations who are feeding at the Socialist Central Planning Trough… right up until the system collapses…

    There is only “so much stuff” to share, and when the exploited are getting too little a share, things collapse. The nature of the collapse varies (wars, depressions, revolutions, etc.) but collapse it does. As soon as the “Average Joe and Jane” decide they are better off without the leaches. When you have nothing left to lose, you are free to do what you wish to the Gamesters and Gangsters running the table.

    So Big Business can have profits go up for a quarter or two, but then they need to hire some more folks (as the existing work force gets worn out and tired of the exploration of unpaid overtime); and they can rake in some “looks good” year over year numbers (until analysts start requiring Real Inflation Adjustments). In the end, it’s a shadow game good for only a couple of rounds.

    That does not make the system more stable, it makes it less stable. But stability may not be the goal…

    Centralized Power wants control, not liberty and prosperity. It is quite willing to do “stupid things” as long as they lead to more authority.

    So I, too, trust the average American to want the right thing. I also trust the average well connected politician and “business leaders” to want graft, corruption, self dealing, self aggrandizement, and power mongering. It is the collision of those two that’s the exciting bit. And that collision is coming. It will happen in the inevitable conflict of those promised $211 Trillion of “Benefits” vs the “20 somethings and 30 somethings” who don’t have it to pay. They will want families of their own… and supporting 4 to 6 “grandparents” (and a few odd hangers on) per couple while trying to build a future and raise a couple of kids will simply NOT happen. There’s about $1,000,000 of promised “Goodies” per person in the USA. Now not only do the elderly not have it, and the children, but those folks entering their earnings years will not have their share AND the other two ends shares. (About $3,000,000 per worker, conservatively). We’re all flat broke, as is the government, on a collective basis. Most of the population is about $100,000 in debt, net. So where is that added money to come from?

    There are not enough rich to soak, nor young workers to provide the work. The only real choice is to kiss off those retirement promises and the socialized medical care. The “Right Wing” (God I hate the ‘wings’ labels, they are so broken…) wants to “kiss it off” by admitting it is broken. The “Left Wing” will kiss it off via paying every dollar, and $1,000,000 will buy a loaf of bread… The battle is all about HOW the “kiss off” will be done. There isn’t any other path open…

    So I’m just looking at how best to “duck and cover” and shovel “value” between asset classes as the various bubbles and busts, taxes and takeaways, and outright thievery happens. It will require dynamic positioning to make it work, not a single static answer. Always ‘recandling’ one step ahead of the thieves (especially those from the government looking to fund their pensions and socialist benefits).

    Land will work for a while (but watch for growing property taxes…) and metals from time to time (though they are prone to ‘bubble and bust’ so you need to step out ahead of each bubble and back in at the bottoms spikes). Bonds have long term slow inflation erosion, but during panics rise nicely.

    Constantly hopping from stone to stone is the only way to cross the river…

    Per time: I just could not sleep without getting this out, even though the posting took me to 3 am and I was running on 4 hours sleep today. The “calls” were pretty good, but the afternoon “rise” was more of a trivial pause in the dropping. That implies more tomorrow… IMHO, we are IN the “Double Dip”… It’s 1932 now… watch for those patterns. A BIT different, but highly similar. Bear Raids will be winners…

    At the very bottom, the person with SOME cash left will make a killing.

    But that’s just “My Story”… It is the charts that call the tune. Watch for the patterns that tell which story is true and which is confused…

    @Boballab:

    That kind of sums it up… When he talks with the markets open, they go down…

    And watching how the lies mutate after the fact is a very good way to spot who is the better lier and who is honest, even if wrong…

    Oh, and while I admire Mr. Buffett, he is not above playing political games for his pals in the crony capitalism arena…

    @Richard Ilfeld:

    It took me a few decades to figure that out. We are used to thinking in terms of “buyer” and “seller”. Binary and two sided. In the stock market, it is a three cornered trade. You must add the “market maker”.

    In exchange for being able to see the ‘trade book’ of ALL offers to buy and sell, a market maker is tasked with “making a market”. In theory, they are required by the exchanges to “make a market” as a term of keeping their seat… BUT “at what price” is their choice…

    So on a ‘normal day’, they wiggle prices up and down during the first 30 minutes to measure buyers and sellers, then pick a direction to “expect”. If that is “down” they drop prices and load up on cheap stocks. Later in the day they raise prices and sell out that inventory a bit higher. On the other side, they will sell shares they don’t have into excess demand (selling short) then drop prices in the afternoon to trigger some ‘stop loss selling’ to cover their shorts at a profit.

    On crash days, it’s all sellers. They tried a little rally up to sell and go creamed with more sellers. So they will likely continue down tomorrow, then late tomorrow or Wednesday, run up some to sell out at something of a profit on the worst of it. The rest they may carry for a week until a return to the SMA stack when the clear it out at a gain, then short ahead of expected panic selling (so the panic selling covers their shorts). There may even have been some of that today with market makers selling at -400 to cover at -600…

    So “who’s buying” is usually institutions (like “value funds”) and the Market Maker(s). Some ‘day traders’ too, looking to do “friend of the Market Maker trades” by trading along side them… (It helps to be a floor broker to do that, with a $Billion Line Of Credit behind you, but I’ve done some “friend of the Market Maker” trades in very thin stocks that just plunge on down days.

    This also explains why Floor Brokers are being quite honest AND correct when asked “why did the market” (rise or drop) and they answer that there were “more buyers than sellers” or “more sellers than buyers”. THEY already have the mind set that the difference is made up by the Market Maker, who is neither a “natural buyer” nor a “natural seller”…

    At any rate, I was thinking of making a posting about the interday action, but watched Eureka instead… and I’m short slept…

    At any rate, by now folks ought to know how to read the charts and I’ve had a lot of ‘live charts’ posted. So just watch for the reversal day, and when things get back to the SMA stack from below, sell… The ‘reversal day’ will have a giant volume spike, a sickening feeling to it, and at the end, a modest recovery off the bottom. Like today, but ending “only” down a couple of hundred points. Until that, stay clear…

  24. H.R. says:

    @boballab
    Time to see how well the WAG was:

    The Dow closed down 634.76. I Wagged a 675 and that might have been low if there hadn’t been that mini rally between 3 and 3:30 pm Est
    ======================================

    That’s close enough that you should be allowed an “I told ya so” for it.

  25. DirkH says:

    E.M.Smith
    “Folks were seduced by the promises of The Socialism Shiny Thing into thinking they could have no kids and society at large would provide everything needed in their old age. Yet that requires kids to do the providing. And there are not enough of them.”

    As long as you have enough unemployed, you can always hire one of them.

    When Adenauer put the German pension insurance system into law, the guy who designed the law had introduced a demographic factor; punishing people without kids and rewarding people with kids. Adenauer had this passage removed and said “The people will always have kids”.

    Well, but nevertheless, just put an unemployed person into work when you run out of kids. Germany is about to import some Spanish unemployed because we’re running out of usable ones. (And out of kids)

  26. E.M.Smith says:

    @H.R.: I’d vote for “I told you so, you idiot!”…

    Damn fine shooting, IMHO.

    @DirkH:

    Doesn’t work that way. The unemployed of NOW are the folks who will be on the Medicare / SSI dole “soon”. That’s when the problem hits as there are simply not enough bodies to change all the bed pans…

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