29 May 2009
Color Key to text below
Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
From October to January, the BEV -40% Line proved difficult for the DJIA to cross on the downside. Now it's offering resistance to the upside. The DJIA will not stay there forever. So what's next, the BEV -30% or -50%? The key will be the yield on the US Long Bond.
If the bear market in US Treasuries continues, I expect to see the DJIA at its BEV -50% line next as money from both markets start to walk quickly to the now rising commodity markets. As hard as the "policy makers" try, their "liquidity injections" are no longer flowing into financial assets. Those who comprehend this fact will prosper; those who don't will suffer in the months and years to come. This has happened before.
I have a special write up next week dealing with the last time CinC Inflation stopped flooding into financial assets and switched into the commodity markets. That was from 1959 to 1980. Precious metal assets, such as South African gold mining shares and the Barron's Gold Mining Index companies were the places to be 50 years ago.
Below is my volatility chart comparing 2007's 40 & 200-day moving average closing price volatility with 1929 bear market volatility.
The 200 Day M/A has been hugging its 2.11% line since early April. The 40 Day M/A is coming down again. This is good information, but these M/As are slow in reacting to big moves in the DJIA. My new DJIA 2% Volatility 8-Day Count, or "8-Count" is a much superior volatility measurement. Also, the 8-Count works well with the DJIA BEV Chart. In future reports I'm going to drop the weekly M/A Chart and post the 8-Count in its place. I'll still post it once a month or so and will continue to post the 200 Day M/A value each week.
As far as the 8-Count goes, the number of 2% DJIA Volatility days in the 8-Day Count is off the high of a few months ago. That is good for the Bulls. But I suspect the 8-Count will rise if the US Treasury Yields continue higher. And that will be very bad for the Bulls. There really is nothing more to be said.
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.
(Remember, with the 2007 data, up is down and down is up!)
1929/32, Wk 85 200 Day Moving Average Volatility: 1.57%
2007/09, Wk 85 200 Day Moving Average Volatility: 2.11%
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."
On Friday 29 May, the bull was minding its own business, munching his green shoots below the BEV -40% line. Then in the last ½ hr of trading, Doctor Bernanke runs out from behind a tree and administers the beast a "liquidity injection" in his rear shank. That got the Bull's attention! So he ran up 100 DJIA points and closed with a BEV -39.99%. All and all, today's market action for the DJIA was a sorry chapter in central banking and animal abuse.
The Step Sum above appears more bullish than I believe is justifiable. Today's trading could easily have been a negative step in the Step Sum if it wasn't for that "injection." As far as I'm concerned, the Step Sum is still pushing down hard on the DJIA. Remember Fudd's Law: Push hard enough, it will fall down.
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.
Large Spike in Companies Cutting Dividends
The following graphic is from Charles Schwab. I don't know which companies are cutting dividends, but it's the trend that's important.
Companies are loathe to cut dividend payouts. In the chart below, we frequently see dividend paying companies isolate their dividend payouts as best they can during periods of falling earnings.
With a BEV Chart, each 0% data point is a new all-time high. Whether the jump is from 1 to 1.10 or 1 to 100, the BEV plot records all advances to new all-time highs as zeros on the plot. BEV Charts don't inform us of how far things go up, but how far things go down from their last all-time high. Remember, BEV is an acronym for "The Bear's Eye View." This is exactly what we are seeing above with the Barron's 50 Stock Average's Earnings and Dividend Payouts. When Earnings and Dividend Payouts fell in the Barron's 50 Average, how far did they fall? The BEV Chart above tells us in precise percentage terms.
The Barron's' 50 Stock Average is a weekly series entirely exclusive to my Bear Market Report. Thank Barron's statistics department for maintaining this important historic weekly data series during seven decades of neglect, until yours truly compiled the data and is now giving it the respect it deserves. It dates back to before WW2. As no options or futures contracts are written on it, the Barron's 50 is possibly the least manipulated market data in today's "regulated" financial markets.
The big question in my mind is: which way will Dividend Payouts swing in the months and years ahead? We've seen wild oscillations in Earnings since early in the Greenspan Fed. "Liquidity injections" do that. Still, it's remarkable how small the Dividend Payouts' corrections have been. I expect that to change. Companies will find it difficult to maintain their dividend payouts in next year or two.
How could this affect the stock market? In the past, I've remarked on two different valuation models:
- Inflationary Expectation Model
- Dividend Yield Model
These two valuation models are logical, as there are only two things stocks can do to attract buyers:
- Go up in price, with CinC Inflation
- Pay an attractive dividend to investors from profits derived from operations.
In a sane world, with prudent banking and a stable currency, the Dividend Pricing Model is the biggest game in town.
As with much of my writings, this is not my original idea at all. I'm just popularizing ideas, notions and concepts I've gleaned from issues of Barron's, spanning almost 90 years. But I've added to the wisdom of these now long gone financial writers with data I've since compiled.
A rule of thumb using DJIA Dividend Yields for timing the market was to buy when the DJIA yielded 6% and sell when it yielded 3%. What made this rule work was the Federal Reserve, as they loosened or tightened monetary policy. As the DJIA went up, few cared about dividend income as larger profits were made in capital gains, fueled by CinC inflation flowing into the financial markets. At a DJIA 3% Dividend Yield, the Fed would take the punch bowl away from the party by tightening monetary policy.
Interest rates would rise, stocks would fall and dividend yields once again become paramount in the market. At a +6% DJIA Dividend Yield, it was time for the Fed to start the cycle again.
Examine the Chart Below. With the exemption of the 1929-32 Crash, anyone who bought stocks when the DJIA Dividend Yield was over 6% and sold when the DJIA's yield fell to 3%, caught every bull & missed bear market from 1925 to 1987. This rule kept people out of the markets from 1959 to 1975, but the DJIA's after-inflation adjusted returns were negative during this period. So investors missed nothing.
For the record, I'm not saying that the Fed actually looked at the DJIA's Dividend Yield in formulating "monetary policy." But the above chart strongly suggests it did, until Doctor Greenspan became Fed Chairman in August 1987. I can say for a fact Doctor Greenspan totally ignored the DJIA 3% Dividend Yield's line in the sand as he inflated a massive bubble in financial assets during his tenure at the Fed. I'm sure his reasons were political.
Congress is just as guilty of destroying America's financial markets as is their creature, the Federal Reserve. As the DJIA and/or housing values increased, the pressure was taken off the Social Security system. Our elected officials in Washington hoped the stock and real estate markets would make good the obligations of their fatally-flawed Social Security Ponzi Scheme.
Barron's wrote about Social Security over the years too.
Back to Dividends. The tables below lists the value of the DJIA, S&P 500 & the Barron's 50 at various Dividend Payouts and Yields. I high-lighted the 6% yield for the DJIA as it's the traditional bottom for a Bear Market. But the DJIA bottomed in 1932 with a 10% DJIA Yield while its Dividend payout fell by over 77% - Ouch!
I don't know if I would trust the 6% DJIA Yield for a bottom in our current bear market. The lawyers and social scientists who manage "policy" have really screwed up America's financial markets. If Treasury bond yields go double digit (and they will), we might see the DJIA's Payout at $150, yielding 8%. In the table below, the Dividend Valuation Model would fix the DJIA at 1875. That would be a BEV of -86.7% from its October 2007 Terminal Zero (last all time high).
You might think this is impossible, but I would point to the lights burning late into the night at the Federal Reserve and US Treasury's office buildings. The "policy makers" are busy 24 hours a day, seven days a week. Destroying our economy is hard work.
The chart below shows the 1929-32 DJIA Dividend's Payouts and Yields. I don't see into the future, but I fear this is coming our way.
When the DJIA's valuation model switched from inflationary expectations to dividend valuations in September 1929, falling DJIA Dividend Payouts with rising Dividend Yields became the hammer and anvil of the 1929-32 Bear Market. I follow the DJIA's dividend data very closely. You should too!
Gold & Long Term T-Bond Trends 1971-2009
Rising gold prices indicate increased risks in the financial markets. Lower Long-Term US Treasury Bond Yields indicate decreased risks in the financial markets. In the chart below, Gold and T-Bond Yields were in general agreement, until 2001.
Since 2001, we've seen massive political intrusion into the US Mortgage, and derivatives markets. Enron, Fannie Mae, Freddy Mac, Bear Sterns, Lehman Brothers, Merrill Lynch, AIG, Bernard Madoff and the entire US Automotive industry were either humbled, or vanished under the supervision of Federal Regulators. US Federal deficits are at record highs as Washington promises ever more spending in the trillions of dollars. The US's largest creditor stated "we hate you" twice (!) in the same press release to Washington's political establishment for debasing the US dollar. Washington doesn't give a damn! The coming strains on the US dollar from pending Social Security and Medicare obligations will break the system. The political leadership of Washington must know this. Still they promise to spend even more trillions to save the Earth from Carbon Dioxide by reducing domestic economic activity and increasing unemployment. That is * not * dollar friendly! Washington is a Zoo with the baboons calling the shots!
The US Treasury, which funds this insanity, has been unable to produce an audited financial statement for decades. No one really cares as long as checks issued by the US Treasury can be cashed into Federal Reserve Notes (aka US Dollars). But the Federal Reserve, since 1914, has never been audited. The Federal Reserve swallowed a trillion dollars of toxic waste from "unnamed favored financial institutions" for reserves backing an ever diminishing US dollar. The Federal Reserve's Inspector General continued quoting Sergeant Shultz's (from Hogan's Heroes) "I Know Nothing" for 5 minutes before a congressional committee. Again, no one cares (in the US) as long as the Federal Reserve Notes (dollars) can purchase imported gasoline and electronic equipment.
Keep all this in mind as you return to the chart above. The gold market, without a doubt, has a better grasp of America's problems in the first decade of the 21st Century's than does the US Treasury Market. And what is America's problem? The lawyers and social scientists now control the Federal Government. They have usurped their lawful constitutional authority and are destroying the United States' ability to feed itself. But you may disagree.
Gold & the Dow Jones Industrial Average 1971 to 2009
Effective financial writing must have a good foundation of simple truth. This is what I've found:
- High DJIA volatility is good for Bears and bad for Bulls.
- High NYSE volume is good for Bulls and bad for Bears.
- Since 1913, Monetary Inflation has been a constant feature in American Finance.
The Keynesian Economists have muddied the water by identifying "inflation" with CPI, while denying the 1982-2007 financial asset bubble was an inflationary event. But recall how these same Keynesian hired guns, from the Fed, would appear on CNBC (the establishment's network of choice) during the late 1990s and early 2000, every time the DJIA was having a -2% day. They would comfort investors with reassuring promises that Chairman Greenspan would cut rates, or note how empty or full Chairman Greenspan's briefcase was as he entered the Federal Reserve building. This was called the "briefcase indicator!" Then out of nowhere, the buying would start and a bad day for the DJIA would have a happy ending, again, and again and again.
If the Federal Reserve's CinC inflation had nothing to do with value of the DJIA, why did the financial media a decade ago identify these miraculous stock market recoveries as "Greenspan Puts?" Come on, wise up! Don't let the Fed leak their "liquidity" on your pants' legs, and then believe their economists when they tell you it's raining outside.
"Liquidity" from the Fed flows either into CPI Inflation or Asset Valuations. But a dirty little secret is the Fed is not always in control of where their CinC inflation flows to. Once a sector of the economy is saturated with "liquidity", further "injections" will flow elsewhere. This was true with CPI Inflation from the 1960s to early 80s, the stock market from the early 1980s to 2000, and the housing bubble of 2001 to 2007.
The best indicator I've found for detecting where "liquidity" is currently flowing (CPI Inflation or Asset Valuations) is a 10-Week Moving Average of Gold and the DJIA. Since 1971, when the US dollar was decoupled from gold, price trends for gold and the DJIA clearly identified those periods when either CPI Inflation or Financial Assets were soaking up CinC Inflation.
The price of gold and the DJIA are countercyclical to each other. Note that since 1971, bull markets in gold have been more profitable than those for the DJIA. Look at the chart. This is a very dangerous stock market. Gold and silver are the places to be.
29 May 2009
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.
Email this Article to a Friend 
Printer Friendly Version
