Some interesting observations on global markets

This is an interesting chart:

EZU the EMU ETF vs selected other markets

EZU the EMU ETF vs selected global markets 2yr daily

EZU the EMU ETF vs selected global markets 2yr daily

There are several things of interest on this graph. First up, is the Green line for the Ireland ETF (Exchange Traded Fund). Rising nicely, then keels over at the March / April point. Notice that other lines have a notch then. Something happened. A bit of digging shows this more or less lines up with the banks of Europe failing their “stress test”.

Now look at the egg yolk yellow line. That’s EWO the Austria ETF. It goes flat then, then keels over later. Austria has a lot of banks too…

For a moment, skip down to the EEM and EWZ lines (Emerging Markets ETF that is a mix of Brazil, China, and some others) and the Brazil ETF. Not much happening in the Emerging markets, and Brazil is moribund.

Now back up to the middle for the USA and the rest of the EU. Usually I use blue for SPY, but this time I have gold as the SPY (S&P 500) and the Dow Jones Industrial Average is blue. Just a bit easier to pick them out that way.

At about that same time, the Dow (DIA) goes mostly flat. Yeah, it rises some, but not a whole lot. SPY is rising better, but it can not rise for long without the other markets validating it. We saw earlier that RUT (Russel 2000 small caps) has gone flat to a small down trend. The USA markets are now split, with RUT / DIA down to weak, SPY flattening in a rise, and only QQQQ rising nicely. That can’t hold up forever, especially in the context of a weak global market.

So back to the rest of the EU and Japan. Japan is EWJ. Just announced massive stimulus (again…) and not much to show for it. EWJ is that oxblood color line that starts in the green at the left and ends about flat at the right dancing with EZU. Just dead money, at best.

Now the main ticker is the EMU basket. There is also a part of it shown. EWG is Germany. They track fairly closely. Plotting EWQ France and EWI Italy and others is left for an exercise. They don’t diverge much at all from the average. Europe has rolled over in July / August. The bank rich and weaker countries went first, but even the Big Boys are not making it now.

Given all this global rollover / flat; I don’t see how the USA can hold up (especially with 1/2 of our markets already showing weakness and commodities in the dumper as seen in the prior posting). I’ve run many other charts, with a lot of other tickers. Not quite exhaustive, but at least a dozen or two major markets and some minor. It looks like “end game of stimulus” to me. That The Fed has also announced reduction of purchases, I’m not seeing the driver for this market.

The USA has about 2% growth, and IMHO that is mostly definition games with changes metrics. In real / historical terms, I think we are in mild recession with about 5% inflation (just SWAGs at present – I’m too lazy to look up shadow stats right now).

Finally, a look at the indicators shows MACD below zero and DMI red on top. RSI is bouncing from midline to bottom. Until RSI has a ‘higher low’, it is saying stay out. Also note that the EZU ticker has broken through the 200 day SMA (orange thin line) and is now clearly in a bear market relationship. The EU is just not looking good.

So what’s the point?

In Conclusion

The only positive news is that the Republicans might be able to fix things some in the USA. Frankly, I think Obama will be an absolute roadblock to any Republican success just to try to make them look bad. ALL he cares about in the political machine and servicing it, not the people nor the country. That means “no cookies” for Republicans. That means 2 years of “go nowhere and blame Republicans” while they do “blame Obama” and our economy stagnates in the context of a global cesspool. And that’s the positive news…

IF (and it is a big if) Japan continues to shrink, China continues to be mercantilist, and the EU continues to do the slow implosion: with the USA paralyzed politically, we can’t pull things back out. At best it MIGHT get a fix in 2 more years…

So what’s a body to do?

First off, I need to do a full series of market compares and see if ANYTHING is going up. A quick look shows pretty much all commodities diving, bonds at near zero interest so dead money (or a big loss if interest rates start to rise as the near zero interest bonds get discounted) and with banks paying less than inflation on money in the bank.

So my “move”? While searching for some play (on the long side, clearly ‘shorts’ work in a down market, but most folks don’t or won’t do them and stay on the long side) I’m just going to take cash and pay off any debts possible with it. Lighten risk (move to cash with $US being the best of a bad set of choices – even the Swiss Frank is tracking the Euro lately, so if the Euro has issues, the Swissy might track it for a modest time. The Japanese Yen is weak too.)

I think it is time to cut risk, raise liquidity, and take a new look at “investments”. I’m not seeing the reason to buy “paper assets” at this point, and think some “things I can use” might be the best “investment”. At least for ‘new money’ for ‘a while’. (I’m still keeping my Berkshire Hathaway share, though; just because if I sell it, I can likely never buy it back ;-)

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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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9 Responses to Some interesting observations on global markets

  1. philjourdan says:

    Just a few months short to retire my remaining debt. Guess I will move everything to CDs. I agree with your assessment on the Politics of the US. The bad news for Obama is he will get the blame. So it will be 2008 in reverse. But he does not care as he stated this year (let me be clear, while I am not on the ballot, my policies are).

    AN interesting contrast between Bush (never speak ill – so do not speak) and Obama (never say anything good regardless). At the end, it looks like they will both be in the same place.

  2. p.g.sharrow says:

    Even Berkshire Hathaway’s run must come to an end. I think Warren Buffet has run out of rabbits to draw out of his hat. Maybe you need to run a chart on Berkshire stock as an investment and not a trophy. Of course it may be a collecter’s item ! ;-) pg

  3. omanuel says:

    I do not pretend to understand the details of “economics,” but I strongly suspect human weaknesses have corrupted “economics” at least as much as the physical and medical sciences.

    If the investigative reporter, Jon Rappoport, is correct . . .

    http://jonrappoport.wordpress.com/2014/11/17/the-medical-shadow-government/

    then the AMA President and the NAS President merit adjoining prison cells.

  4. Larry Ledwick says:

    I have mentioned David Stockman in some previous links, here is a 28 minute video in this link which discusses in simple terms some of the issues involved with the current Fed Policy and how it screws up fair pricing and valuation of stocks etc. It is a bit of a commercial pitch for his book but frankly I think his book “The Great Deformation” is a very good read for someone interested in what is going on in the economy.

    It is a bit deep, as David tends to use a lot of financial jargon (he was on wall street for almost 30 years). You have to sort out what the jargon means to understand what he is actually saying but this video strips most of that away and cuts to the basics. It also has a couple simple graphics that help visualize some key concepts.

    http://davidstockmanscontracorner.com/david-stockman-interview-on-hedgeeye-tv-the-bubble-is-global-and-its-already-popping/

  5. E.M.Smith says:

    @P.G.: BRKA chart looks rather nice. Yes, I do run charts on it. Someday the run may end, but there is more to it than a chart. You see, Warren Buffett learned his craft form Ben Graham:
    https://en.wikipedia.org/wiki/Benjamin_Graham
    who literally wrote the book on value investing. So BRKA isn’t a ‘trade vehicle’. It is a leverage investment in carefully selected deep value companies with a long work out and fundamental value to the brand. It is, in short, THE major focus of what I did for most of my years with investments. Only in the last 20 years or so have I done trading rather than value investing (and even then I have about 1/2 value investments at any one time). They are very different arts.

    For a Ben Graham type value, you must buy when markets say ‘trade out’; but then hold for long terms (sometimes a decade). To muddy that philosophy with layering trade rules on top of it would be, er, hard to do and unlikely to be productive. (Though, with that said, I bought my BRKA share for $2800 during the market panic of ’87 at a deep value ;-) My only regret is that I didn’t buy 2 of them ;-)

    Also, it is there partially to remind me of the real merit of value investing, and not to get too caught up in trading mindset.

    I strongly recommend Ben Graham “The Intelligent Investor” for everyone. It is a core understanding…

    https://en.wikipedia.org/wiki/The_Intelligent_Investor
    http://www.amazon.com/The-Intelligent-Investor-Definitive-Investing/dp/0060555661

    The basic premise is to keep a chunk of cash ready (sometimes for years) and wait. During that time, identify a set of franchises (companies with enduring market presence) that are fundamentally sound and have some amount of brand monopoly (like Coke or Mercedes or Boeing – companies with strong names and dominance in their field). Wait for their share prices to be priced insanely low for now good reason (perhaps for some reason they ought to be down some, but not that far, and for a reason that will be fixed). Then buy and hold, perhaps for years, for that value to be realized in the market. Once the value is fully in (or better yet, the value is overvalued…), sell to raise new cash.

    Notice that these strategies can take a decade to ‘work out’. So BRKA today will be realizing value from things bought in the bottom of 2008 / 2009 at deep discounts, slowly returning to normal valuations. To sell out of that for a trade is to go against the ‘inner strategy’. W.B. will be selling out those holdings when they mature anyway… and I’m sure I don’t know the timing to do that better than him…

    But yes, IFF BRKB is ever ‘crazy low’, I buy some more. (Can’t afford more shares of BRKA…)

    @OManuel:

    Economics is a “Queer Duck” (in the classical pre-PC days sence). It allows for all sorts of divergent, often antithetical and conflicting ideas. Part of why I like it ;-) So it can’t really be ‘corrupted’, since it is internally conflicted and has several feuding camps. Yet some of it is clear and known.

    So the Keynesians are in conflict with the Austrians and both of them dispise the Communists while the Socialists think them all daft… (Yes, socialism and communism are economic systems, so part of the ‘field’…) Any one part might be ‘corrupted’, but the ‘turf’ is all forms of economic system, even the wrong / ineffective / evil ones…

    Yet in all those maco-economic systems, the micro-econ tends to be a clear and accurate “descriptive science”. There is a ‘supply curve’ for a good, and a ‘demand curve’ and the market clearly price IS where they cross. For communism that ‘supply curve’ might well be a virtical line ( the 5 year plan saying to make 1,000,000 widgets regardless..) but yet, it exists. As a descriptive art / science, it is not prone to ‘corruption’. “Reality just is. -E.M.Smith”. It might be inaccurate at times, but that’s just measurement error.

    It is on the “political economy” or macro sides where you might make a case for bias… but then you run right into the fact that there IS an Austrian School and there IS a Communist School… Each side is represented and all sides have a forum. How can that be “biased” or “corrupted”? (Yes, there is an attempt to ‘Poo-Poo’ the Austrians (and Chicago School derivative) by the “mainstream Keynesians”, but that, IMHO, is the normal stress of dynamic growth.

    At any rate, this posting is more about markets and trading than about Economic Philosophy. If folks are interested, I can do an “Econ 101” series, but most folks won’t be all that interested ;-)

    For trading purposes, it is only about how people behave. Rationally, irrationally, emotionally, driven by external forces, whatever. Markets move in emotional waves. It is better to be in touch with how most of the players FEEL than to know a lot about economics.

    I use charts to better visualize that aggregate behaviour. Folks buy, or sell. Those move prices and volumes. Changes in those two things reflect the decisions and emotions of the aggregate. That’s all we’re looking for in charts. Clues about what the “average of all dollars” is saying about the folks with those dollars. Spending? Pulling back? Panic? Greed? Then do the opposite for a value investor (i.e. ‘buy when blood is running in the streets’) or ‘pile on’ for a little while as a trader (i.e. Silver being hyped and rising, ride for a month or three until the spike up, then bail.)

    What this postinjg shows is that a lot of money globally is not finding much joy in stocks, only the USA up ‘lately’, and the USA has a weak segment (small caps) showing selling pressure (as it does first). This implies, to me, broader selling pressure and likely time to get off the ride for a while. Not economics, so much as reading the dollar flows…

    But to your point: If a large government is involved… It’s likely things are being done wrongly, and for the benefit of a well connected minority.

    @Larry:

    I’ll watch it this evening. Bit busy now.

    Yeah, the Fed jerking interest rates back and forth destabilizes the natural price discovery of just about every single thing that depends on interest rates and rate of return… which is about everything with a 1 year or more time horizon.

    Essentially every investment depends on the interest rate to determine the ‘discount rate’ used to find out net present value of a future income stream (i.e. what is it worth to me to have $1000 in 10 years? In terms of price to pay for it today… ) So jerking around interest rates makes that ‘net present value’ go to strange places at times… and causes misallocation of resources and more. All from a misplaced sense of “control”…

    The idea behind a Gold Standards and no central bank was to prevent exactly that. FIXED money supply and nobody ‘adjusting’ interest rates. Unfortunately, we now have a world where the Hamiltonians have won and the Jeffersonians are few and scattered. (Yes, this ‘issue’ has been around since the founding…)

    Essentially you can let prices guide markets to make decisions ( the “free market” approach preferably with a fixed money base and no Fed jerking things around) or you can have manipulated prices and interest rates that are a ‘control system’ (of poor design, with long lag times and with idiots at the controls) under Government Guidance… Each has “issues”, so pick your poison. Business cycle of boom / bust or government corruption and currency collapses.

  6. p.g.sharrow says:

    @EMSmith; If BRK-A was very under priced at $2800 in 1987, does that mean that it is not overpriced at $219,000 today or is it a victim of over exuberance as well. pg

  7. philjourdan says:

    @p.g.sharrow – definitely! In another 2 years. As long as he has the ear of the emperor, it will stay strong.

  8. A C Osborn says:

    I am sorry that this is off topic, but I think you may feel vindicated about ebola concerns.
    Please read this –
    http://junkscience.com/2014/11/18/dr-salia-dies-of-ebola-tested-negative-when-he-had-it/

    [Reply: Probably would go better here: https://chiefio.wordpress.com/2014/10/16/the-exponential-of-ebola-rolls-on/ ]

  9. E.M.Smith says:

    @P.G.:

    In 1987 it had peaked near $4,000 then plunged. I bought the plunge (almost on the exact day!). Now, over a 1/4 century of compound growth later, and a similar degree of inflation, it ranges between about $170,000 (at the plunge of 2008-9 I think it hit near $150,000 ) and up to near $230,000. Now if you know the range, you know to buy around $180,000 or less, and sell about $225,000 or more (as a trade) or buy the low price and wait 1/4 century more ;-)

    At a P/E ratio of 17 it is, by Ben Graham value metrics, overpriced. It will likely stay that way for decades. Applying P/E to what is essentially a value mutual fund is not a very good rubber ruler, though. My “downside risk” is likely to about $140,000. Since that is about what it was in the last crash, I’m OK with that. My only complaint, really, is that I can’t buy another one if it DOES drop to that point…

    @PhilJourdan:

    Yes. One of my most sad moments was when I realized Warren had left ‘value investing’ (for at least many of his ‘investments’) for the more lucrative art of buying and pandering to politicians and purchasing access to the Public Trough…
    https://chiefio.wordpress.com/2011/09/23/when-admiration-dies/

    FWIW, he has announced that he has prostate cancer. As an ’80 something’ with cancer, it is unlikely he will live much longer. But he has a ‘deep bench’ of trained folks waiting to take over and continue to follow his methods…

    There comes a time when the sheer size of a financial entity guarantees ongoing growth (as long as internal political bull shit doesn’t sink it…). So I’d give it at least another decade or two before that process can set in. By then it is likely that both the share I own, and myself, will be ‘disbursed’…

    BRKB looks to be running about $146 / share (which implies they split it again… some years back it was $3000 when BRKA was about $90.000 and they were a 30 shares per share ratio) so I could always trade it (and do sometimes). But it’s just not the same as BRKA (that has a particular charm to it ;-)

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