This week, I still hear people talk about the DJIA having its biggest up move since 1938. But since 03 April, the DJIA is up only 1.38%! So let's drop this talk of this being a Bull market. The only thing in sight on the charts is a contented cow minding his own business, and ignoring the world as best he can during an historic Bear Market.
These quiet moments are not going to last forever. In this week's market comments I've included some charts on volume and the 30 year T-Bond. Bearish market forces are gathering over the horizon. Not that this dumb cow cares about that. Still, he might even go up a bit if he sees something that looks tasty above the 8300 area.
Below is my volatility chart comparing 2007's 40 & 200-day moving average closing price volatility with 1929 bear market volatility.
This week's volume has been really low. If this is a new trend being established, lower volatility will favor the Bull. But personally, I still think it's a young Bear Market. I really don't believe we've seen the worst of what's coming our way. And it's not just the charts, it's the "policy makers." They just refuse to let the market do what must be done to repair personal and corporate balance sheets after Washington's housing fiasco. Sadly, the fix needed is brutal. But currently, too much wealth is only a legal fiction. Blame that on big government, not the Bear.
Note: 2007 values are actually positive. They were inverted so 1929 would fit on top and 2007 on the bottom. So for 2007, please forget the negative valuations and focus on the percentages.
Historically, daily 1% swings from the previous day's closing price in the DJIA, while not uncommon, should not occur on an almost daily basis. The stock market is running a fever with its "Persistent, Extreme Volatility."
This week's volatility is the lowest since December of 2008. That was 4 months ago, and it proved to be the quiet before the storm. The DJIA broke down only a few weeks later and became the #2 Bear Market since 1885 in early March.
In Week 75 of my Bear Market Report, I covered the DJIA and NYSE Volume trends from 1900 to 2009. After examining 100 years of daily data, it's obvious Bull Markets are associated with rising volume, while Bear Markets are associated with declining volume. But suspiciously, this 100 year relationship has broken down since 2000.
The Charts in Wk75 show how weird the post 2000 market's price and volume trends have behaved. The most logical explanation for this 9 year abnormal market behavior is the US Government is fixing market prices.
Currently, whether the market is up or down, the volume trend is stagnant. From past historical norms, the DJIA 2007/09 -50% Bear (second worst since 1885!) should have crushed NYSE Volume. But it did not. This is historically abnormal, and anomalies by definition don't last, no matter how much money the "policy makers" throw at the stock market.
As the market in Wk81 is taking a pause, after advancing from its 09 March lows, taking a look at volume may offer us a clue of what is ahead of us.
The chart below is not a BEV Chart. I just indexed the DJIA and the DJIA's Volume to the last all time high for the 2007 Bull Market top of 09 Oct 2007.
Note how the DJIA bottomed and then rebounded from 09 Feb to the 20 March 2009 on rising volume. Since 20 March, the DJIA has advanced, but on decreasing volume. This market is very vulnerable. If volume doesn't pick up, the DJIA appears ready to test the lows of 09 March. I still have 20 trading days before June is on the calendar. If the 2007/09 DJIA Bear is to beat the 1929/32 Bear to the BEV -60% line by June, he has to speed it up.
But that assumes the Bear is concerned about my reputation. I called for a DJIA -60% Bear by June last Winter. I'm beginning to think this Bear doesn't care about me anymore than he cares about Doctor Bernanke or the Treasury Dept. Hopes die hard in Bear Markets, but they do die.
If market volume continues to fall from its highs of 20 March, I expect the Bull to weaken as the Bear grows stronger.
Another factor to consider is the T-Bond market. A falling Treasury bond market exerts downward pressure on the stock market too. Below is my BEV Chart for Feb 2036 @ 4 ½. This long bond's interest rate have risen by 1.5 percentage points since December. As the BEV format makes clear, this bond price has also lost 22.5% in only 4 months! The current yield of 4.12% does little to motivate me, or foreign central banks to buy this bond on the dip. I think Mr Luo Ping of the Bank of China said it best last February.
"We hate you guys (US "policy makers"). Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."
- Luo Ping, a director-general at the China Banking Regulatory Commission, 11 February 2009
But that was in February. Maybe in May, The Bank of China has changed their minds about US's "monetary policy." If not, we must expect the yields on US bonds to rise significantly in the months ahead. At some point, CPI inflation and dividend yields will rise in sympathy.
When stocks become valued by their dividend yields, rather than by inflationary expectations, the above chart shows exactly the kind of downward pressure rising dividend yields will place on the DJIA's valuation.
But never forget Dr Bernanke! If he intends to nip the Bear's raid in the bud, the above charts show it's time for the Doctor to give this Bull a shot of "liquidity."
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum will rise. When bearish, it falls.
Think of the "Step Sum" as the sum total of all the up and down price "steps" in a data series over time; an Advance - Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days while bear markets will have more net down days. Understanding the Step Sum is no harder than that.
A picture is worth 10,000 words. So I thought I'd save some text this week with a few charts on basic economic indicators. Here is US Steel Capacity.
The steel industry of 2009 is very different from its 1982 predecessor. After decades of labor and environmental problems, the US steel industry almost gave up the ghost in 1982. US Steel (the company) was so down on its own, that it purchased Marathon Oil in the 1980's so it could show a profit. They've since sold Marathon and have become a significant steel producer again.
Here is a chart of the US Steel Industry from 1938 to 2009. The Data is a composite of the discontinued Barron's Stock Groups (1938/1988) and the DJ Total Market Industrial Groups.
Steel in the 19th and early 20th Centuries was the backbone of American industry. But after 1959, steel provided the poorest return on any major industry until 2002. Then it had a very nice bull run, until Congress's Sub-Prime fiasco hit them too.
Consumers in 2009 have not been this sour on the economy since 1993.
But there is good reason for consumers to harbor doubts about their future. Washington and Wall Street's "Growth Policies" have degenerated into chronic credit abuse. And like all substance abuse, credit addiction is a messy thing to witness in its terminal stages. Take the Insurance Industry as an example.
This is a crazy chart! These insurance companies were one of the best investments in the 20th century. The first data point in February 1938 was only 58.73. There is good reason to believe these companies were solid investments, until they made major commitments in OTC credit derivatives during the 1990s. And who told these insurance companies that OTC derivatives were a good idea? I really don't know. But most likely, it was lawyers and economists who wrote the risk assessment papers giving management the OK on the new business model for the insurance industry.
The Federal and State Governments have plenty of lawyers and economists taking the taxpayers' money too. Some of them must have been aware of what was going on in the insurance industry. Some of these lawyers and economists were even in positions of authority, and could have prevented this derivative catastrophe had they spoken against derivatives. What stopped them?
The cover story for Barron's 19 August 1985 issue was on Interest Rate Swaps. They called the market "The 150 Billion Dollar Baby." In 1985, a 150 billion dollar market was significant. So no one in Government reads Barron's? How about the issue of Business Week, or was it Fortune, that ran an extensive article on derivatives in the early 1990s? It's the issue with crocodiles on the cover. Government officials seemed to have also missed Warren Buffet's 2002 proclamation that derivatives were "financial weapons of mass destruction."
"The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear....[They] are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
-Warren Buffett, 2002 letter to shareholders
But then most likely, the biggest problem with our government regulators' ability to effectively deal with derivatives, was the Government itself was a major player in this market via Fannie Mae and Freddie Mac. Barney Frank and Chris Dodd could not have their sub-prime mortgage bacchanal without credit swaps.
Since 1985, the interest-rate derivative market grew by a factor of 2300! The financial industry's addiction to these derivatives was pleasantly profitable at first, but ultimately proved disastrous to vital sectors in the economy. How many people are paying insurance premiums to companies with significant derivative issues? How many people are servicing a $300,000 mortgage, while living in a $200,000 house? And then, the US Government's direct involvement in the debt markets made "AAA Rated Debt" a standing joke to fiduciaries world wide.
Look at my chart of Feb 2036 @ 4 ½. Here is a T-Bond yielding 4.12% but returning 22.5% of capital losses in 4 months. There is nothing safe anymore, thanks to Washington's political classes. I take that back. Gold and silver are made for a market like this.
You most likely have not considered the possibility that the financial company you depend on, might have a toxic derivatives issue. Have you? I suspect "Trust-Fund Babies" and Hollywood's "Moguls" haven't either. Derivatives are not just a banking and AIG problem! Directly or indirectly, everyone in the world has a potential derivative problem in 2009!
Most people receive a monthly statement from their trust or mutual funds informing them of how much wealth they have. That is true for Oprah, or the Average Joe. I expect the day is coming when all of us receive a nasty-gram from our funds because of these derivatives. What else can I say about this? I could say that under the advice of academic "social scientists" the US Congress became involved in the financial markets. As a consequence of Washington's involvement in the financial markets, private wealth will one day turn into a stinking pile of you know what. That is not good for state and local government's tax base.
This is political corruption. And political corruption has been practiced for thousands of years. The results are always the same.
"The government mints issued unprecedented quantities of cheap coins; in many instances the state compelled the acceptance of these coins at face value instead of their actual worth, while it insisted that taxes should be paid in goods or gold. Prices rose rapidly ---. Other provinces suffered much less (than Egypt & Palestine) but in most of them, inflation ruined a large part of the middle class, nullified trust funds and charitable foundations, rendered all business discouragingly precarious, and destroyed a considerable portion of the trading and investment capital upon which the economic life of the Empire (Roman) depended."
- William Durant: Caesar & Christ, pg 632-33
Consider the above quote from William Durant and then look at the chart below. Lord Keynes' comments on inflation are worth reading.
If it wasn't for Dr. Greenspan's "liquidity injections" and the OTC derivative market, (that the Federal Reserve and US Treasury championed) do you think the current destruction of private wealth would be happening? But Dr. Greenspan is not 100% to blame. Before he appeared on the Congressional Dog and Pony Show, the decision allowing the derivative market to expand unhindered was already made by Keynesian Economists advising the Corrupt Lawyers in Congress.
Wall Street's economists come from the same schools that Congressmen and the Federal Reserve Board Members. America's university system receives ample financing from taxes paid by high-school graduates who don't mind, since they believe the funding of "higher education" is money well spent. History will show for the most part, it was money ill-spent.
Do you think I'm wrong? Then here is a BEV Chart of the Insurance Index. Defend this! This destruction of wealth will not stop with just the financial companies. There is still a lot of financial garbage laying around for the Bear to eat. And he's not going away until it is all gone!
As we can see below, "policy's" bull market in unemployment is coming along nicely. Now if Obama and the Congress can just get their "Cap in Trade" Carbon Tax passed, this bull will really start to rage! A tax on carbon dioxide will bankrupt electrical utilities and shut down assembly lines across America. I expect this bull market in unemployment will receive as much support from Obama and Bernanke as the high-tech bull market received from Clinton and Greenspan.
The best way to play this bull is by shorting the US Treasury Market and going long on gold and silver. But don't go long on gold and silver on the COMEX. The COMEX is a "policy thing."
We are witnessing a crime scene below in the Auto Stocks.
The law is a series of technicalities and procedures. To understand this point, let's look at how law is created, executed and judged in a country where the rule of law is respected. Congress makes the law; the President can only enforce laws the Congress passes. And when someone breaks a law the Congress wrote, and the President's FBI apprehends, it's the Judicial Branch of government's responsibility to discover guilt in a defendant assumed innocent. No single person or agency is allowed to be lawmaker, judge and executioner all rolled into one. But with GM, this has changed.
Bankruptcy proceedings have hundreds of years of legal precedent in the English Common Law. But to understand what is happening to General Motors, one must leave Common Law and study the legal procedures of a Banana Republic.
President Obama, with Congress's consent, and no opposition from the courts, (so far) has divided the financial assets of GM with his political cronies in the labor unions and the US Treasury. The rightful owners of GM's assets (the bond holders) were prohibited from accessing their legal rights in a legal bankruptcy procedure.
After the cut Obama took for himself and the Unions, the bond holders were left with 10% of the company in the form of common stock. These shares will be worthless as the government will run what is left of GM into the ground. This is a Third World operation.
There will be repercussions from this act of theft by the American Left. Charities, pension funds and insurance companies all have these bonds as assets. The work charities once did, but can no longer do, will be thrust upon the government, or more likely not done at all. Pension plans that have lost these assets will apply to the government for financial assistance. If the pension is non-union, it is doubtful if any re-imbursement will be coming. And the insurance companies? They're not banks, so what about them?
Ultimately the UAW union members will also suffer. With Obama's people taking control over GM's strategic planning, UAW union members will soon be making cars no one will want to buy. What happened to GM is going to give many American's a reason to buy foreign cars manufactured by non-union labor in Tennessee.
What happened to GM is going to be repeated. Lenders to asset rich, but financially unsound major companies (thank you Dr Greenspan!) will increasingly find it difficult to have their day in bankruptcy court. If you're a corporate bond holder, this is a "Change" you better believe in!
Where are the journalists on this issue of private property rights? They are on the same side as our leftist President and Congress. It has never been more apparent American schools of journalism produce physically attractive young people with Marxist leanings committed to support the Democratic Party and Globalism.
The United States is now a defacto Banana Republic. Let's see what the journalist do when their paychecks and retirement benefits are disbursed in worthless money.
We continue to see "economists" on CNBC urging consumers to increase "consumption." These academics are actually urging deeply indebted consumers to become ensnared more deeply in debt. And for what purpose? So charts like the one below can reverse their trend?
It should be clear to every American citizen in 2009 that Washington and Academia currently believe the middle class is a "human resource" needing the constant attention of "policy makers." This is self-serving nonsense by people who really do have too much time * and tax payer's money * in their hands.
Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."
Dow Jones Industrials Average Market Volatility is the source for my volatility studies.
The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.