21 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.
It's hard writing a Bear Market Report when the DJIA is going up like this! So when does an old Bear, such as myself, toss in the towel and call it quits? I don't know. I suspect it will be sometime after CNBC stops crediting Doctor Bernanke for every 1% rise in the DJIA, as they did today and last week. If you listen to them, Bernanke does much for investors. I don't disagree with CNBC that Doctor Bernanke should be given full credit for the current Bull Market in stocks. I just don't believe market manipulation by the government is something to celebrate. This fool's paradise will not have a happy ending for most people.
Let's have a look at a longer term BEV Chart.
So how is the Good Doctor doing with his "Bull Market?" He has a good way to go until we see a new all-time high in the above BEV Chart. I can tell he likes his current job, so he's motivated to keep the stock market going up. Word from the Central Bank convention held this week at Jackson Hole, Wyoming, is Bernanke has been successful in turning the economy around, and the recovery is around the corner.
I doubt that, but the stock market sure likes what he's doing, and what he's doing is monetizing the US National Debt. The Fed just picked up another $76 billion in T-Bonds this week. I have to suspect that somehow, Bernanke is kicking back a significant amount of his "liquidity injections" into the stock market. It takes a lot of money to make it go up like this.
How long can this go on? I haven't a clue. I still think rising interest rates will spoil the Bull's bacchanal.
I never hear comments on the Bear Market in Bonds. Since December, this 30-year T-Bond is down 25% in US Dollar terms. That's a big loss for a "risk-free investment!" Back in the old days, when money was something real, government bonds did not experience stock market volatility. The losses for foreign holders of US T-Bonds could be even worse when exchange rates are taken into consideration. One of these days our foreign creditors are going to be so fed up with the US debt market, they will start liquidating their US Bonds. It will become a matter of survival. But so far they haven't.
But who knows what they are doing with their US T-Bond portfolio? Wasn't it Japan who tried to sneak something like 80 billion in old US T-Bonds (paper bonds) into Switzerland just a few months ago? What was that all about? This is actually a big story. I know it was as no one in the financial media followed it up!
Anyways, historically good times for stocks have also been good time for bonds. So, the current DJIA-Bull Market is doing something really weird: rising 50% while long US T-Bonds are down 25%.
Word to the wise: when two multi-trillion dollar markets diverge from a multi decade-long pattern, something not right.
But the stock market is going up, and there is nothing wrong in making money in a rising market.
Below is the 8-Count & DJIA BEV Chart
We had a -2% day on Monday, so we now have one 2% day within the past 8 trading days. This gives us a "1" for the 8-Count, and is darn bullish! But not as bullish as in the above chart where the 8-Count was zero for over a year (only one 2%-trading day from March 2006 to July 2007). Capital gains were good! Notice how the 2% days started to pile up just prior to the blow-off top (Terminal Zero or Last All-Time High) of 15 October 2007? A year later, 2% days (+ & -) came fast and furious as we approached the DJIA's BEV -40% line in October, and as the DJIA became a BEV -50% market in March.
As long as we keep a low 8-Count and, I should add, few 70% NYSE A-D Days, we should assume Doctor Bernanke has control of the stock market and sit tight in stocks. When we again see the 8-Count registering 2s & 3s, I think we are close to the top of the 2009 Bernanke Bounce. There is anything wrong in taking some profits and buying some gold and silver.
The DJIA's Step Sum is a very pretty picture! It is going up and taking the DJIA with it. We can't ask any thing more from it; remember, sometimes the Step Sum can go up when the DJIA is going down. This is what happened during the Great Depression.
Why is this chart important? Because no previous DJIA Bear Market has seen its end without its Step Sum falling into a selling climax. The 2007-09 Bear at its March Bottom had only net 25 days down days. This was the most pathetic selling climax in the history of the DJIA! In every report, I have my article on the Step Sum linked at the bottom so my readers can see past Bear Market's Step Sums.
Why is the 2007-09 DJIA so different? I agree with CNBC; it is Doctor Bernanke's successful management of the stock market. Treasury Secretary Geithner should be given credit too.
The DJIA had a little correction, and then snapped back upwards; very good! The DJIA could rise far above its current levels. But as I've said before, I think it's onward and upward for the DJIA, and just about any other stock sector, until those nasty old 2% days start piling up in my 8-Count.
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.
Consumer Credit & Basic Production
From one day to the next, we experience little noticeable change in our lives. But from decade to decade, changes really stand out. In the 1960s, credit cards for the masses were not only unknown, but unthinkable. Diners Club and Cart Blanc cards were the first to make plastic a cash equivalent. But for the most part, these cards were used by businesses for travel and business expenses. Credit card issuers did not court the general public. Adults were in control of the banking system.
After Alen Greenspan became Fed Chairman (August 1987) credit became "democratized", and "liquidity" was now targeted directly at the masses. Credit cards became ubiquitous. Remember in the 1990s when banks sent unsolicited credit card offerings in the mail? There were stories in the news of banks sending credit cards to the family dog, or someone decorating a wall from floor to ceiling with the credit cards sent to them.
Why did banks do this? Because banks could go to the Greenspan Fed, borrow unlimited amounts of dollars at the Fed Funds rate, and lend it to credit card users at double-digit rates above Fed Funds. Who was there to stop them? In the 1990s, the best and the brightest in banking, and the US Congress, refused to consider the consequences Greenspan's "liquidity" for the masses would bring a decade later.
The chart below shows the impact Greenspan's "cheap credit" has had on the balance sheets of the aging Baby Boomers. Consumer Credit (Consumer Installment Debt) and the production data is from Barron's statistical department.
It's a shame Barron's editorial content doesn't focus more on Barron's greatest strength: its in-house historical database. Feedback from my weekly reports tells me people are hungry for hard data in graphic form.
So what are we looking at? The data for gasoline and petroleum (Green and Black Plots) are domestic weekly inventories, while steel (Red Plot) is in tons per week. Energy inventories have been effectively constant since 1987, while US steel production is more sensitive to economic activity (booms and busts). Note the big drop-off in steel production in September 2008. The bursting of the High-Tech Bubble (2000-02) impacted steel production, but not as sharply, or deeply as last year's "credit crisis." Since 1987, the only series plotted above that experienced positive growth, is consumptive debt. This is positively not good.
Any economic benefit credit card debt offered was short-term in its effect, while the negative consequences are proving to be long-term and structural. Social Security is a massive Ponzi scheme, as are the other governmental programs the aging Baby Boomers are counting on. National affairs have been bungled by Congress. So the two things people can count upon in the years to come is their wide-screen TVs will break, and the debt they assumed during their most productive years will become a millstone hanging around their necks.
Subsidized Mortgages Rates
There's only one reason the Federal Government enters the market via subsidies or regulation: they intend to fix prices above or below those set by the free market, to curry favor with influence peddlers. Government's effect on market prices is perverse. Regulation raises the cost of business, costs passed on to consumers. Subsidies, whether in the form of grants (the government pays for it directly) or by extending credit at low interest rates, flood the targeted market with money, inflating its cost structure. The perfect example is the current situation in the housing market.
The chart below plots the Mortgage with the Prime Rate. Understand both rates below are base rates. The credit standings of any particular borrower will determine the actual rate used in their particular loan.
Anyone familiar with the credit curve is aware short-term rates are lower than long-term rates. The Prime Rate is a business rate, typically used for purchasing inventory. A dealership borrows $50,000 a line of credit to purchase units for sale they expect to move in the next month or so. So they borrow money, and pay back the loan as soon as they sell their inventory. However, Mortgages are for decades, and serviced by wages. Logically, mortgages should be priced significantly higher then the prime rate. However, as we see above, and below, this is not the case.
So why are Mortgages lower than the Prime Rate 34% of the time in the charts above? The US Government subsidizes the mortgage market. The Government's intention is to lower housing costs by lowering mortgage rates. But that is not what has happened.
By lowering mortgage rates 1%, a $300K home becomes "more affordable," or so the theory goes. But the theory is faulty as it assumes the mortgage's rate is the key variable. In reality, the key factor in the mortgage market is the ability of the market (you and me) to make our monthly payments. So by subsidizing the mortgage market with lower interest rates, the government has only increased the size of the mortgage's principal (and home valuations) any given monthly payment will support. The jump in prices didn't happen overnight. Home values rose as banks wrote increasing larger loans for any given monthly payment. "Home buyers" were happy to pay more, as home prices kept going up as mortgage rates declined.
The table below displays the effects of a 1% drop in interest rates on a monthly payment of $1799. In this example, there is a 10% increase in the principal of the mortgage. This is precisely how Congress, with its creatures (The Federal Reserve, Fannie Mae and Freddie Mac), inflated the world's financial system with toxic waste.
The key thing to understand about the housing market, is that it's * not * a market of houses. Today's "housing market" is actually a mortgage market where the house is only the collateral on a 30-year loan. After all, the bank doesn't care how much a home costs, but whether a prospective "home buyer" can make the monthly payments' for the next 30 years. 30 Years is a long time! Any 30-year loan with a less than 10% down-payment is a risky, leveraged, financial transaction. The world, to its dismay, has discovered this is especially so for 30-year loans based on shaky collateral: a house.
Why is a home shaky collateral? Because a home's valuation is dependent upon a 30-year leveraged financial transaction, which in 2009, is illiquid. After Bear Sterns was taken down by US mortgage defaults, the wholesale aftermarket for "AAA Rated Agency Debt" (repackaged US mortgages) has largely disappeared. Large financial institutions, the world over, are wary of using American mortgages for assets, or taking part in a credit-default-swap mortgages. That includes the bank writing the mortgage, and for good reasons!
- Rising unemployment
- Rising interest rates
- Pool of qualified "home buyers" has almost disappeared
1. Rising unemployment will lead to mortgage defaults. It's a dangerous thing to have wages service a 30-year loan. 30- Year mortgages, at current rates, are not properly priced for the risks.
2. Rising interest rates devalue all debt instruments, including the mortgages held in your pension fund's portfolio!
When you realize that base rates for adjustable rate mortgages are based upon US Government Bond Yields, and see the effects of rising interest rates in the table above, the prudent person has to be suspicious the Federal Reserve, and US Treasury, are manipulating the entire debt market to artificially high prices (artificially lower interest rates) to prevent the US Mortgage market from imploding.
3. The table above assumes there are no shortages of "qualified home buyers" (demand) in the housing market. But that's not true. Most people who were going to "buy a home" have already done so. To the great regret of many, their home's valuation is now below their mortgage. In the aftermath of the previous housing bubble, the "policy makers" have ruined the credit standings of a significant percentage of the public.
With or without the "policy makers" permission, home prices are going to deflate. And in a just world they should! Look at the tables above. The principle is the actual cost of labor and materials to construct a house, but the bank's take in the transaction (interest payments) is equal to or larger than the contractor's! The 30-year mortgage is another huge swindle government regulators have allowed to be foisted upon a trusting public.
People have been conditioned to think in terms of dollars. The above table seems to suggest that this lower principal would purchase a smaller and less desirable home. I suspect the exact opposite is true, as inflation typically results in purchasing less for more.
Global Central Bank US Treasury Reserves
Foreign CBs' appetite for US Debt seems sated, while the Fed is purchasing US Treasury Debt at an amazing rate. Since December 2008, the Fed has monetized an additional 7.5% of the US National Debt.
For your information, the decrease in the Fed's US T-Debt from 2007-09 has been the result of the Fed swapping its US Treasury Reserves for toxic mortgage products from "unnamed favored financial institutions." We know who these institutions are: they're the same institutions the US Government bailed-out with a trillion dollars of inflation. Exactly who these institutions are is a mystery even to the Fed's Inspector General.
Federal Reserve's Balance Sheet Blow Out
Amazingly, the chart below shows that only a few months ago over half of the reserves standing behind the US Dollar were sub-prime mortgage toxic waste. The crisis peaked last October as the Fed only had so much T-Debt to swap. So Congress bailed out Wall Street with a cool trillion, taking the pressure off the Fed's balance sheet. The Fed's been buying T-Debt since last December.
We see the finer details of "high finance" in the chart below. The Red Plot is Total Fed Credit, or the total reserves backing the US dollar. That quick rise in Total Fed Credit (Red Plot) is the Fed taking on over a trillion dollars of Toxic Waste from Wall Street.
The corruption of government and finance is total. It has become so bad, I have to laugh! Market prices we see today are all phony. This will be the case until our foreign creditors put an end to the monetary and fiscal insanity of our Keynesian "Policy Makers." Expect lower asset prices and higher CPI Inflation to result from this.
21 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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