13 November 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.
"Bear Market Race?" In Wk 109, the DJIA is going the wrong way if it wants to compete against the 1930's Bear. So what's going on here Chief? You and those D*** Charts of yours have been scaring the hell out of a lot of people for over a year now. Is there some point where you just say "Uncle" and toss in the towel? There sure is: when the Bank of China informs the world that it has forgiven the US Government of $1 Trillion dollars of its debts.
I've said it before; the United States Government has created a False Vacuum in the Global Financial Markets. It's a real mess for all concerned. Our Global Creditors know they are getting robbed in the full light of day; and they don't like it one bit. But the current situation is unprecedented in the history of finance. What if Central Banks stop buying US T-Debt, or, God Forbid, Foreign Central Banks start selling off what they have; what happens then? That's the problem; no one knows. There is no guarantee a Gravitational Black Hole can't form in the US Treasury Building, sucking in the Bank of China, and taking the Three Gorges Dam with it.
Our Leaders in Congress and the White House understand the problem: 2010 is an election year. As our democracy needs foreign money to buy domestic votes, it's important that our foreign creditors cooperate and stop their whining about investing in the "World's Wealthiest Economy." As far as Congress is concerned, the only thing better than the Bank of China having a Trillion Dollars for their currency reserves, is the Bank of China having 2 Trillion dollars. From Washington's perspective, that is darn generous.
So if some of the funds from the sales of US Treasuries are diverted to the stock market, what can be wrong with that? Let me tell you what is wrong with that! Ultimately, having Washington mixing their political fantasy with economic reality will prove to be catastrophic to the lives of billions of people.
Gold is looking very good with lots of new BEV 0%s. You know; new all-time highs. You can be sure that wealthy people, who intend to wealthy people 10 years from now, are buying Gold and Silver.
Below is the DJIA Volatility's 5 Day M/A & BEV Chart
It's not unusual seeing volatility increase in the terminal phase of a Bull Run. As we can see above, this is exactly what happened before the DJIA's 2007 Terminal Zero. So I'm still very bullish on the stock market. I just don't want to touch it.
The 8-Count went up to a 4 on Monday, but by Friday it was back to 2. Next week it may come back down to zero. The point is that it was up to 4 this last Monday. Seeing a 4, in an 8-Count is something associated with a Bull Market's End Phase or a Bear Market.
It's not unusual seeing an uninterrupted string of 0s in an 8-Count, running for years. But since our troubles stated in July of 2007 (almost 2 ½ years ago), seeing a 0 in the 8-Count is unusual. Beneath the Stock Market's surface, a volcano is stirring.
No doubt about it, no matter how poorly the Earnings are for American Companies, their share prices are heading up. If poor Earnings and a slowing economy aren't issues with you, take the plunge and buy some stocks. But under the present financial market's circumstances, gold and silver investments are all I'm comfortable recommending.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum rises. 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.
The Barron's Inflation Index
Today it's hard to believe, but 30 years ago, the DJIA was stuck in a 20-years trading range. In 1979, no market "expert" expected a historical break out just three years later.
The 1979, US Bond Market was deep in a massive Bear Market. Thirty years ago, there was even talk of the US dollar losing its reserve currency status.
Commodities were in a Bull Market for over a decade, and for good reason: the US monetary printing presses were running overtime at the Fed and US Treasury, and these dollars were flowing into Consumer Goods and Service Prices. The Chart below tells the story.
President Nixon got the heat for abandoning the US dollar's link to gold in 1971. But when we examine the data, President Kennedy and Johnson's programs for "Social Engineering" ignited an inflationary cycle that consumed the later presidencies of Nixon and Carter. I often wonder what this chart would have looked like had Nixon won in 1960. As you might guess, I'm not an admirer of the Kennedy Family.
But American Presidents, after all, are only Presidents of the United States. Unelected "Policy Makers" have a much greater, long-term influence in government policy than most people are aware of. Blocks of power in labor, finance, academia, and the government's bureaucracy itself, compete for government funding by inserting key paragraphs or clauses in monstrous, inflationary 1000-page Legislation Bills. The House's Health Care Bill was 1,900 pages long, and will cost well over a trillion dollars. To keep all of the "Policy Makers" funded and happy, it had to be.
If over the past decades, these "Policy Makers" controlled themselves, and not pursued their parochial self-interests when influencing pliable legislators, Gold would still be at its 1913 price of $20.63 an ounce. But they couldn't, and so its not. These makers of "Policy" really have no choice in going about their business in this fashion. They offer the public nothing anyone would desire, if left to people's free choice. So the "Policy Makers" need the force of law to compel the public to pay for their services.
From 1913 to 1980, gold had risen from $20.63 to 825.50 an ounce. $800 gold was a failing grade for Big Government, and the Keynesian School of Economics in 1980, as is our current Gold price of $1100. So was the year 2000's 11,722 DJIA, yielding only 1.30%, and the 2000-07 real estate bubble.
Within this maelstrom of monetary madness, Barron's came up with an interesting inflation index in its 02 August 1982 issue: the price of Barron's itself. Like all free market prices, the issue price of Barron's contained information on Expenses, Fees and Income necessary for a company (Barron's) to compete in the American economy. What I like about using Barron's subscription prices as an inflation index is, Barron's goes back to May of 1921, just 7-years after Congress created their Engine-of-Inflation: the Federal Reserve.
Barron's Inflationary Index tells the story of how Congress confiscated the wealth of those who placed their trust in "The Full Faith and Confidence of the United States Government." Since 1913, if you don't know the name of the member of Congress who placed your exact paragraph or clause in a bill passed by Congress, and signed into law by the President, you're a loser in the American economy.
The abrupt changes in the price in Barron's after 1971, is more than just increases in the price of a financial-news paper; it's also a chart of the Government taking a larger role in the economy, and people's lives. Prior to 1971, for a company to make money, its main focus was to serve the needs of the consumers of its products or services. This made a company's advertising to the public more important than spending the company's funds lobbying Congress. In 2009, we may have reached the point where it's now vital for a large company to spend its advertising funds lobbying Congress, rather than advertising its goods to the public.
After ninety six years, the Federal Reserve with its inflation has impoverished the pubic. American Business must now be careful not to offend the Government, as the Government will soon be the only customer with the ability to purchase the private sector's goods and services. Unlike any other time in American history, now is a time when it's good having friends in Congress.
The table below lists the specific prices for each issue of Barron's, needed to construct the Barron's Inflation Index.
Keeping an inflation index independent of the US Government's CPI and PPI Indexes is an excellent idea. Using the price of Barron's actually has more going for it than CPI or PPI. After all, the US Government has a natural bias to understate the rate of inflation, as much as it has a natural bias to overstate economic growth. The latest published GDP figure of 3.5% is so flagrant, even the pro big-government press had to question it.
Flaw in US Data Overstates Growth, Productivity
Published: Monday, 9 Nov 2009 | 7:37 AM ET
By: Louis Uchitelle,
The New York Times
A widening gap between data and reality is distorting the government's picture of the country's economic health, overstating growth and productivity in ways that could affect the political debate on issues like trade, wages and job creation. ---
- End NY Time Snippet -
To see how far out US Government "growth" figures are, you may want to review my table on this exact topic from Wk 108. The market's positive reactions, just two weeks ago, to the above "widening gap", published by the Commerce Department, tells us current market valuations are not grounded on economic reality. The same is true for the Government's figures on Inflation.
But as long as Congress, at the behest of the "Policy Makers", is successful in constructing their Pyramid of Debt with inflationary dollars, the investing public will find an excellent view of the Progressives' necropolis from the banks of Denial.
Stock Market Pricing Models Update
In Weeks 80 & 85 of my reports, I addressed how the Stock Market values share prices. There are only two ways for the Stock Market to value share prices, as there are only two ways for investors to make profits when owning stocks.
- Inflationary Expectation Model (Capital Gains)
- Dividend Yield Model (Dividend Payouts)
In today's inflationary markets, the best way to understand these two models is as follows.
During Bull Markets, inflation-driven capital gains make dividend payouts a non-factor in investors' profit calculations. So the Inflationary Expectations Model is also the Bull Market Valuation Model.
During Bear Markets, the relentless inflationary flows from the Fed divert from Financial Assets, and investors see only capital losses. Dividend payouts now become the only source of profit possible in owning stocks. So the Dividend Yield Model is also the Bear Market Model.
There was a time, before Monetary Inflation became a national political priority, when the value of a stock was related to its company's economic success in providing goods and services at a profit. An investment was primarily understood as a source of income to an investor, and investments in the stock market were priced by Dividend Yields, according to how safe a specific Dividend Payout was, and/or its prospect for future Payout increases. This is how the stock market operated during the Gold Standard.
As we can see below, the Federal Reserves impact on financial asset valuations was almost instantaneous after its creation in 1913.
In 2009, inflationary gains are the only game in town. During the High-Tech-Bubble Market of the 1990s, how many millionaires, and even billionaires, were created by inflationary price gains in companies, whose officers scoffed at the any suggestion of paying a dividend to its investors?
Congress's creation of the Federal Reserve, in 1913, started a chain of events that eventually changed the way the capital markets functioned. Purchasing shares in profitable companies to participate in its shared profits via dividend payouts was out. Trading volatility, with leverage, was in. The Federal Government, and its Federal Reserve, transformed the American Financial Markets into a craps game, played with the Government's loaded dice.
This is how the stock market has functioned since 1971, when the last vestige of the Gold Standard was abandoned. Inflationary flows from the Federal Reserve are the key to all market prices. But there are two channels this river of inflation can flow into, but typically not both at the same time:
- Financial Assets.
- Consumer Goods and Services.
When Inflation flows into Financial Assets, we experience bull Markets in Financial Assets, while Consumer and Commodity Prices rise in line with wages and income.
When Inflation flows into Consumer Goods and Services, Financial Assets deflate in a Bear Market, while Consumer and Commodity Prices rise significantly above wages and income.
Currently, the Fed's river of "Liquidity" wants to jump channels from Financial Assets to Consumer Prices. Economically, this will result in price trends not seen since the mid 1960s to the early 1980s: rising Consumer & Commodity Prices, with stagnating / deflating Financial Asset Valuations.
With the aging American Baby Boomers rapidly approaching their retirement age, and the Government's Social Security and Medicare Programs woefully under funded, the "Policy Makers" are attempting to counter these price trends with massive spending via bailouts, "Economic Stimulation" and direct market intervention in an effort to raise Asset Valuations and depress Commodity prices.
With all that as background, let's look at some charts of the Stock Market.
NYSE Margin Debt
Only a committed Bull would purchase stocks with someone else's money, so tracking NYSE Margin Debt allows us to get a pulse on the Retail Investor's animal spirits. This is a contrary indicator. When NYSE Margin Debt peaks, it indicates a peak in Retail Investor's Bullishness. But the public, in general, loses their money in the stock market, while margined investors lose their money even faster, as the public buys at market tops, and sells on the way down.
Currently, NYSE Margin Debt is telling us retail investors are not excessively leveraged in their positions, and that is a good point for the Market's Bulls.
Like all charts spanning decades, inflation makes nonsense of data from decades ago. So let's look at the above data with a BEV Plot.
Remember, with a BEV Plot, each new all-time high is registered as a zero. Any data point not a new all-time high is registered as a negative percentage from its last all time high. Note below how the 1929 all-time high in NYSE Margin Debt was not exceeded until 1972. It took 43 years before the pain of the Great Depression was to be forgotten by the public. I'm expecting something similar to happen at the bottom of our current Bear Market: a 95% drop in NYSE Margin Debt and a handful of decades before the Stock Market once again has a significant Retail Business.
When the current Bear Market is over, Wall Street will obtain the same patina as Detroit's Auto Industry's, and for the same reason: the Federal Government got involved.
Think I'm overstating the point? Look at the above NYSE Margin Debt data. The public lost a bundle in the 2000-02 High Tech Crash. But they were still players, coming back in for the 2007-09 Crash. And now we can see them taking advantage of 2.00% call money rates, to again purchase stocks on Margin. At their core, the Public is still Bullish. If the lows of last March were a true Bear Market bottom, the Retail Investors would at least have a pause of several years before taking up again with Margin Debt. But look at NYSE Margin Debt since last March. It took only a week or two before the pubic began to purchase stocks with other people's money. Dr. Bernanke is encouraging this speculation by setting Call Money Rates down to levels not seen in 58 years!
Chairman Bernanke, like Greenspan before him, is probable a nice guy. Over a cup of coffee, I might even enjoy a conversation with him. He is clearly an intelligent, if not a wise man. But the perverse incentives Greenspan and Bernanke have created with inflation and interest rates have destroyed any hope of a secure future for an entire generation of aging boomers. They've devastated the general public's finances by creating one financial bubble after another. At some point what they, and Congress are doing with the money supply, and financial markets, will become recognized by the general public for what it is; fiduciary malfeasance and criminal fraud.
Obviously three passes (boom/bust cycles) through the Greenspan/Bernanke Inflationary Meat Grinder have not made the point to the Baby Boomers; the point that they are only an exploitable human resource to the people who control the Federal Government. It does seem the Boomers need a forth pass through the Meat Grinder before they understand they are staking their futures at a crooked gambling table.
DJIA Dividend Yield
To be a long term Bull in the Stock Market in November of 2009, it's not a matter of believing in the "Free Market", you need to be totally ignorant of market history.
Buying at the bottom, and selling at the top, has always been a winning strategy in the Stock Market. And for decades, serious students of the market used the DJIA's Dividend Yield to time the Stock Market.
DJIA Yield over 6%, Bear Market Bottom --: Buy
DJIA Yield near 3%, Bull Market Top -------: Sell
Except for the horrendous 1929-32 Bear Market, which bottomed with a +10% DJIA Dividend Yield, on crumbling Earnings and Dividend Payouts, this simple timing mechanism kept investors out of Bear Markets and in Bull Markets. That was until Alan Greenspan became Chairman of the Federal Reserve.
Dr. Greenspan is very knowledgeable of the stock market. I find it hard to believe he was unaware of the DJIA's Dividend Yield history on display in the Chart above. He knew, and he admitted as much when he gave his famous "Irrational Exuberance" speech at the NY Economist Club in December of 1996. The DJIA was Yielding only 2.08%, and falling, when he asked: "But how do we know when irrational exuberance has unduly escalated asset values?"
My guess is Dr. Greenspan knew the market was in a bubble as soon as the DJIA was yielding less than 3%. By the time the DJIA was yielding 2.08%, he fully understood his culpability in blowing a bubble in Financial Asset Values and the future ramifications of his actions, which I don't believe have been fully expressed even 13 years after he gave this speech.
Dr. Greenspan, over a decade ago, set in motion events not seen since the Great Depression. When the Bear comes back, and the Stock Market once again values share prices on the Dividend Yield Model, we will see the DJIA's Yield increase as its Dividend Payout collapses, possibly to zero.
What that would mean to the Stock Market can be seen in the tables below. I highlighted the DJIA's 6.0% Dividend Yield, as 6% is the traditional Bear Market bottom. The valuations for the DJIA in this table are mathematical, and so set in concrete. If the DJIA has a Yield of 10% with a Dividend Payout of $50, the DJIA must be 500.
The Next Table is for the S&P 500.
These tables' relationships between Yields and Payouts are always binding. But in Bull Markets, stocks are valued by the Inflationary Expectation Model, and Bulls always ignore dividend considerations. Ten years ago, Greenspan must have looked on with horror, as the DJIA Yield fell to only 1.32%, on $151.76 in Payouts. But the Bulls on CNBC and elsewhere were whooping it up. There was even an academic who received much media coverage in late 1999, for his book on the DJIA rising up to 36,000. But, like all Bulls, the professor ignored what this would have done to the DJIA Yield, then only paying out $151.76. For a Raging Bull, a DJIA Yield of 0.42% is no reason not to buy stocks.
In the past 18 months, there have been many changes in the composition of the DJIA, so the following chart of the S&P 500 is a better graphic to use.
Currently, the companies in the S&P 500 are struggling to stay in business, let alone earn a profit. But as noted before, Bulls ignore Dividend and Earnings. But at some point, even the Bulls' "Irrational Exuberance" can no longer overcome market gravity. That said; the Bulls can ignore an awful lot for a long time! And most importantly, in 2009, the US Government is not only the biggest factor in the economy, Congress's Wall Street Minions are also the biggest Bulls in the Stock Market, with ample buying power from the Fed to buy troubled companies at top dollar prices. There is only one thing that can derail the current Bull Market in Stocks - Rising Interest rates.
As long as interest rates behave, this Stock Market is going up. The day is coming when the 2007-20?? Bear is going to rival the 1929-32 Bear. But not right now, it's an election year.
13 November 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
