14 August 2009
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Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
The bounce from the March lows continues. If my market views were solely based on index price charts, I would be very bullish. After all, that dip around WK72 made this the second worst Bear Market in DJIA history (1885 to 2009). But the government is up to its eyeballs in this market. When one considers the hopes, dreams and retirement plans people in my age have locked up in their IRA and 401K accounts, plus realizing the Social Security Trust Fund is empty, and cannot offset these market losses, I don't see how the "Policy Makers" can afford not to be inflating stock prices higher.
However, when you read my comments on stock earnings and dividend trends below, I don't see how the government's efforts to inflate market values can ultimately prevail against the Bear. Problems caused by uneconomic debt creation, will not be cured by additional increases in uneconomic debt. But currently, they are successful in forcing stock valuations higher.
Below is the 8-Count & DJIA BEV Chart
The 8-Count is on its zero line, and it will stay there until we get some 2% days in the DJIA. What will it take to increase daily volatility in the DJIA? We only have to wait until Mr. Bear comes back into our lives.
As I've noted before, extreme volatility is a Bear Market phenomena. The chart above shows that. I suspect as long as daily volatility stays low, this market is going to have an upward bias, although we can count on some down days and weeks in the market. I just want to remind everybody what last autumn's problems were: toxic waste, from Congress's affordable housing program on the balance sheets of large and small financial institutions.
To my knowledge, little to none of these nonperforming assets has been written off. Weekly we see banks going under. The Feds then have a stronger bank assume the bad assets of a weaker bank in a merger. The stunt Bernanke and Geithner pulled with forcing Bank of America to merge with Merrill Lynch is typical of how the government is containing Wall Street's financial-toxic spills. The taxpayers buy these guys new shoes and send them to college, and this is what we get? It seems to be.
Note to the "Policy Makers": Bears have a purpose in the markets. They clean up after the Bulls' drunken parties so the economy can once again become productive, with profitable companies with clean balance sheets. By not allowing banks to fail, or toxic-financial assets to be written off, you are not just delaying the inevitable; you are also making the final reckoning even greater.
This is the last week I'm posting the Table below. The DJIA's 40 & 200 Day M/A have both fallen far from these record levels, so what's the point of showing this weekly?
The chart below shows us that the DJIA Volatility's 40 & 200 Day M/As are not going to make new highs anytime soon.
Below we see the collapse in the number of 2% days in the DJIA Volatility's 200 Day Moving Average. (Red Plot below) It's been weeks since we've seen a 2% day and the 8-Count has laid down flat. But with the Bulls in charge we should expect this. Technically, all my charts are damn Bullish! But for reasons I've been noting for years, I just can't believe what I'm seeing is real.
If volatility rises again, and it will when the Bear comes back, I'll bring this Table back.
Okay, so I'm a big bad Bear. But I'm not blind; the stock market is going up, and if you want to make some money, don't ask why.
I don't write this report intending it to be financial and investment advice to the public. I'm only making my personal research available to the public. The risks and rewards you have in the market are all yours. With that in mind, it seems right now the Bulls are having more fun than the Bears. A pull back in the DJIA seems in order, but after that I expect the DJIA to see higher prices. Just keep an eye out for those 2% days. If daily volatility increases, it's not a Bullish thing.
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.
US National Debt 1939 to 2009
US Treasury Debt is marketed as AAA Rated, risk-free Bonds. It's interesting knowing who's purchasing Washington's obligations on a wholesale level, and how much we owe them. Data from the US Treasury.
Since the Creation of the Federal Reserve, and the introduction of the Federal Income Tax in 1913, the accumulation of debt by the Federal Government has been dreadful. The US National Debt was only $2.92 Billion in 1913. It's now over $11 trillion.
In 1913, by law, a $20 bill was exchangeable for a $20 US Double Eagle gold coin, or $20 in silver. Since 1913, the US Government has reduced the dollar to a legal fiction. For decades, dollars in circulation have been dictated not by economic necessity, but the necessity of American political incumbents to win their reelections.
The chart below plots the growth of Washington's debts. This money will never be repaid in the same coin it was lent. Historical experience warns us that at some future point, the dollar will become universally recognized as a rapidly wasting asset. The prices of * all * US dollar denominated financial assets will be discounted accordingly.
The chart below plots Washington's annual deficit, on a weekly basis, from 1938 to 2009. There are 3711 weekly data points in my National Debt Series. I took each data point and subtracted from it the value of the National Debt 52 week earlier. So each data point displays the accumulation of debt over the past 52 weeks. Starting with Bush, in September 2008, and continuing with Obama in August 2009, Washington's spendthrift ways has become obscene!
The current leadership in the Congress, and President Obama, has committed themselves to government programs that will accelerate this alarming trend in the National Debt. This trend cannot continue without consequences. The day is coming when the purchasing power of the US dollar will fall faster than the Federal Reserve can create and Congress can spend them.
The chart below is a BEV plot of the above chart's data. With any data series where negative numbers are present, BEV values below -100% will result. Those few times the US National Debt has actually been decreased, (values fall below those of 52 weeks prior) BEV values under -100% occur. Note how the national deficit trends increased after the US broke the dollar's link to gold in 1971.
President Truman & Eisenhower reduced the national debt for a few months during their administration, as did President Clinton. But in the case of President Clinton there were no national emergencies during his presidency. Also, the US Treasury borrows money from the Social Security trust fund, (trillions of dollars that has to be paid back), but it doesn't record this debt in the US National Debt. So Clinton's reduction of Federal Spending is a dubious distinction.
Comparing the DJIA to Gold and Silver: 2000 to 2009
Unreported in the financial media, gold, silver and the Gold Mining Shares (Barron's Gold Mining Index: BGMI) have outperformed the DJIA by a wide measure since 2000.
This is expected as gold and the DJIA have been countercyclical to each other since the US dollar was taken off the Gold Standard in 1971.
In Wk86, I proved how financial assets and commodities were countercyclical to each other by using the DJIA's Dividend Yield as an oscillator in this cycle. Read my Wk86 for the specifics going back to 1948. Simply put, when the DJIA's Dividend Yield declines from 6% to 3%, financial assets are in a Bull Market, while Real Assets like gold, silver and commodities are in a Bear Market. Rising DJIA Yields have the opposite effects.
So, in Wk96, how goes the DJIA Dividend Yield? It goes as all Bear Market corrections do: down against the primary trend of rising yields.
Is it possible for our current Bear Market to be over without the Yield on the DJIA rising above 6%? Since 1925, it never has before! But as we can see in the chart above, the Bear can take his time to the 6% line as he did from 1959 to 1974.
I expect gold, silver and mining shares to outperform the general stock market until the DJIA's Dividend Yield peaks somewhere above 6%. The current Bearish rise in the DJIA's Yield has been a 9 year trend. But after 9 years it's back down to the 3% yield line! The current rise in the stock market is no reason to become a committed bull in financial assets.
The chart above tells a story of manipulation and price fixing since 1987. When Alan Greenspan became Chairman of the Federal Reserve in August 1987, the DJIA's Dividend Yield was 2.68%, and stock valuations were ripe for a Bear Market. But that didn't happen. Instead, Greenspan inflated a massive bubble in financial assets (the biggest up to that time), and drove down the DJIA's Yield down to 1.30% in January 2000.
The chart below is for the S&P500 and its Dividend Yield from 1986 to 2009.
Stock Earnings & Dividend Payouts in Declining Trends
For the following, I'm using the S&P500 instead of the DJIA. The DJIA has seen many changes in its construction in the past two years, so the S&P does provide better data for the following analysis.
Bond purchasers are very aware that rising yields = falling bond prices. Stock purchasers, prior to 1982, were aware this rule held true for them too. But unlike bonds, whose payout is fixed, the payout for stocks (dividends) can be reduced without a corporation defaulting on its debts, as dividends are shared profits. During periods of financial stress, companies experience a reduction in earnings and sometimes cut their dividend payouts. The S&P Companies are doing so now.
The S&P broke above the 1000 line last week. But the S&P finds its dividends and earnings in a very Bearish Trend. So it's prudent to wonder how much further the S&P has to go before it's once again priced realistically. And how would the market price the S&P to reality? The old fashioned way: using dividend yields and payouts.
The S&P's earnings have fallen 92% since October 2007. The 500 leading companies that comprise the S&P500 are not profitable. How long can they maintain their dividend if there are no profits to share?
Using the data from Barron's 10 Aug 2009 issue,
the S&P's
Value -----------------: 1010.48
Dividend Payout ---: $21.52
Dividend Yield ------: 2.13%
Using these values in the table below, we see the table correctly places the S&P at around 1000.
It's important to realize that stock values are fixed by one of two pricing models:
1. Inflationary Expectations (Bull Market).
2. Dividend Yield (Bear Market.)
During Bull Markets, investors totally ignore dividend considerations as "liquidity" flows into the stock market, producing double digit capital gains. Since last March, the S&P is up 50%. Who today cares if the S&P is only yielding 2.13% on earnings that have crumbled 92% since 2007? Obviously not the Bulls!
HOWEVER, during Bear Markets, investors become very aware of dividend considerations as "liquidity" now flows out of the market as fast, or even faster than it flowed in. When share prices decline in earnest, a good dividend yield will do much to put a floor under a stock's valuation.
Question? When the Bear returns and stocks are once again valued by the Dividend Model, what if the S&P's Dividend Payout falls as far as its earnings have? Using the table above, reducing the dividend payout from $20 to $5, while keeping a 2% Dividend Yield, would place the S&P at 250. This is a decline of 75% from its current valuation of 1000. That would be quite a Bear mauling, but during Bear Markets Dividend Yields also tend to rise. So let's keep the payout at $5 and move the Yield up to only 6% (not an unreasonable yield in a Bear Market). This would value the S&P at 83, for a decline of over 90%!
Are corrections of this magnitude possible? They sure are! This is exactly what happened during the 1929-32 DJIA Crash.
The only thing saving the market is the "liquidity" the "policy makers'" are "injecting" into it. So right now everyone is looking to make their profits by flipping stocks for some quick capital gains. Expecting the S&P to rise significantly above 1000 is a pure play on inflation. Wednesday's DJIA gain of 1.30% was credited to the Federal Reserve on CNBC. That should tell you something of the current market psychology!
So in mid August 2009, Mr. Market is living the highlife and doesn't care about earnings, income or yields. But the day is coming when Doctor Bernanke will over medicate the market, and the S&P and DJIA will again upchuck dollars just as they did last October to March. That's when these tables will provide a guide for pricing the S&P (above) and the DJIA (below). Until then, enjoy the bacchanal.
FYI: Here is the DJIA's Chart for Earnings and Dividend Payouts. I don't think the worst is over for the DJIA.
14 August 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.
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