Market Forces

Remember the chart I put up that showed we were heading for a 2000 point gain in the DOW (DIA)? And remember the direction change caused by the structural movement of the unified central banks?

That shows the importance of structurals. Anybody trying to time the cycles or count inflection points will be unable to rely on the periodicity of the structural inputs from governments (eg “thou shalt take a bond haircut”) and central banks (eg LTRO’s, TARPs, simultaneous announcements), and the market direction caused by them. That’s why DeMark blew his prediction.

Remember, it’s hard to short a market where the structurals keep popping it higher. That may also be why we see substantially lower volumes, with no one shorting and covering because the overwhelming structural pressure is up.

I decided to look at the SPY from this viewpoint. Here it is:


It’s hard to see, but there’s a black line centered in the ranges, and vertical on a pop to the new range.

As you can see, we operate in a range for a number of days, then Pop to a new range. For the last month or so, we’ve operated in 3 ranges, of 11 days, 9 days and (so far) 6 days. So it appears as though we’re nearing the end of this day-cycle. Looks like a couple more days in this range before we get a pop. Let’s see, what’s happening in a couple of days in the Structurals? Why, the next LTRO, of course.

And we all know why this is happening, right? It’s simply a move by the financial community to take a more firm hold over the actions and direction of governments. Look at Greece: they are ceding their sovereignty in return for money to keep their government jobs. This is an interesting trend. Future governmental financial policy will be contractionary. How will the financial community best make money in that environment? Answer this question correctly, and you will make a lot of money.

So how will I trade this market? Well, as I said, the financial community wants the Bucky to devalue, so I moved a lot of money into the RMB. It’s made me quite a lot since I started this activity. But what about risk assets? As I said above, the market pressure is up. So I will buy dips and sell blips.

But also, I want to look at the depressed sectors. Here are a few charts (weekly) of my herds list that are depressed: Now, I’m not saying these are good investments, and will likely rise. I think we have to answer the above question: how will the financial sector make money in a governmental contractionary environment?

I removed the charts. If anybody wants them back, let me know.

But here's a chart. It's the one I referred to in the top paragraph. It's amazing, we're absolutely on-track.

15 Minute H&S

I'll be interested to see where this goes.

Good volume at the head. Would like to see increasing volume on the right shoulder, but don't see it yet.

Triparty Repo Market is Failing

While I've been resting, I am doing some research on our financial system, and how MF Global failed. So I thought I’d put together a post about that for your perusal, as we see what the market brings us today.

MF Global’s failure is basically due to risk-taking by lenders (typically banks) on the permitted re-lending of borrowed assets. And the market in which this is done is failing, according to the Fed. In a lead article by Michael S Derby, Dow Jones Newswires, you will find some of the quoted excerpts below. Some are my thoughts.

First, read an eye-opening article about the Repo construct.

http://soberlook.com/2012/02/increase-in-triparty-repo-usage-and.html

Now we understand why the FED buys RMBS's. A bank-owned RMBS can be relent to other banks (less the prescribed haircut) and therefore it's worth becomes greater, due to the relending leverage. If the mortgage backing the RMBS fails, this leverage comes crashing down.

Remember, the Fed has bought RMBSs and will hold them to maturity (or until the troubled asset packed into the security is repurchased by leveraged buyout (Private Equity) or by foreclosure). If the income from the security is not adequate to pay the interest, the Fed can simply issue liquidity (print money) to pay the interest, keeping the system afloat.

In the long run, the Fed can be the winner, because the RMBS will mature, all the properties under the RMBS will mature, the interest will be paid. And there’s the reason for inflation, it’s hoped that with enough inflation, (2% minimum per year) there will be enough appreciation so the RMBS is not retired at 0 worth, but at full value worth. (That's (simply) why Bernank said deflation is our greatest enemy.

If you’ve got deep enough pockets, and a long enough time, and the ability to create inflation, you will be the winner. The Fed has all these. Albeit some trouble on inflation….

Today, the NY Fed said the triparty repo market is failing.

Because fixing RMBSs doesn’t fix the problem. The problem is that originally, only Treasuries were “Repo-able”. But that didn’t fit bank’s requirements for profits, so regulators (not the law) changed the rules so that basically any AAA rated security (or other not so high rated securities) can be repo-ed. As long as you can find a buyer, you can repo it. A repo is simply a financial product created to make money. In other words, it makes money out of money. It does not create wealth, it creates liquidity. Liquidity (like debt) can create the appearance of wealth. But true wealth only comes from productivity funded by capital. There’s no productivity in a repo.

So here’s the problem: the Banksters have created liquidity, funded by the 0% interest rate they can get from the Fed, and profits of money which they dole out as bonuses to their salesmen selling these created repos on their trading desks. These Wall Street guys are simply used car salesmen, with an Earl Scheib repainted rustbucket they put lipstick on and sell.

Today, Mr. Derby’s article said that “At issue is the state of the triparty repo market….And because the market is dominated by short-term activity, a loss of confidence in a particular firm can kill its access to credit and potentially kill the institution, which can, in turn, create problems for the broader functioning of financial markets…...The effort to repair the market came to a head Wednesday with the release of a report by the Tri-Party Repo Infrastructure Reform Task Force, a private industry group operating with the support of the New York Fed. The report was to offer the group's final recommendations,” but the NY Fed said “ … the amount of intraday credit provided by clearing banks has not yet been meaningfully reduced, and therefore, the systemic risk associated with this market remains unchanged,"

Simply put, there are too many Earl Scheib rustbuckets, too few Used car salesmen, and even fewer tire-kickers.

Mr. Derby continues “As a result, the bank (The NY Fed) said it "will intensify its direct oversight" of the triparty repo market.”.

Are you frightened? You oughta be. Because direct oversight will not eliminate rustbuckets, hire qualified salesmen, and drum up customers, It will only get in the way, and make things worse.

The systemic risk with this market remains unchanged. What is the market? Sovereign debt. Treasuries. Bonds. Corporate stocks. Anything the worthless rating agencies rate AAA. The liquidity of the system depends on this market, and it can be brought down by any participant. That’s exactly what happened to MFGlobal.

If somebody looks cross-eyed at the wrong CEO, the system is toast. We’re toast. We will take the haircuts as the banks fail, as did the customers of MFGlobal.

Somebody didn’t like Corzine. That’s the cause of the MFGlobal failure. That’s the cause of the investors losing their retirements.

The other thing that can bring down the system, as I explained about the RMBS above, is the reduced value of any of the repo'ed securities. Like sovereign debt. I mean, that could never lose value, right?

You oughta be scared.

Lowered Earnings

I would like to refer to an article that was pointed out by TBP. I think this article points toward a pretty bleak future, as I understand it. See

http://www.chron.com/business/article/Corporate-profits-aren-t-what-they-seem-3079696.php

They allude to some numbers from another company, without quoting directly the numbers or the method used to derive them, so like anything else, this may be inaccurate when taken out of context. So this may be another example of yellow journalism, but it agrees with what I’ve been looking at and fearing.

Earnings are coming down. It’s hard to explain why job numbers are going up, but earnings are coming down. To paraphrase the article, if AAPL and AIG were removed, the S&P earnings would be about 1.1% higher for the 4th quarter of last year (2011). A rate that is substantially below the first 3 quarters.

I don’t look at earnings, because the books can be easily cooked, making earnings look better (or worse) than they are. Like DMND didn’t pay for their nuts on time. But it is scary to think that without the two big guns, the total increase in the S&P is 1.1% in the quarter. Cooked books or not.

This quarter, around 66% of the reporting companies met or exceeded analysts’ expectations for earnings. But as the article points out, and as we pointed out last December, those estimates were being reduced. Even Bloomie had a vignette on that in January.. But until this article came out, I had no idea it was that drastic.

My indicator is to look at operating cash flow and levered cash flow for a determination of the health of the company. A company like GOOG has a huge 25% of revenue reported as levered free cash flow. (Levered free cash is kind of what’s left over, that you can invest back in your company or put in the bank). If I have time, I would like to see the ratios for the last several quarters, but I can’t find that information compiled and published anywhere, except in the balance sheets of the corporations on Edgar. That’s painful to extract..

The other thing I’d like to point out is that the article said “In cutting profit forecasts for 2012, Procter & Gamble and Pfizer both cited the stronger dollar.” I looked at the dollar curve, did a simple piecewise linear integration of 2010 and 2011, got it that the dollar went down by 12% in 2011, but PFE’s earnings only went up 4% (from the TDAmeritrade “earnings” graph). Doesn’t make sense to me. (But of course, earnings are simply cooked books, but you’d think they’d have to live with their untruths, wouldn’t you?) In any case, it looks like the companies want to say that lowered earnings “ain’t our fault”.

We know fundamentals don’t matter in our market today. But if one day they do, the article’s author’s conclusion might be right.

On Track

Remember Mutt asked if there could be a 2000 point rally in the DIA? My reply was yep, and here’s why.



We’re on track. Extend the green line to where the black line meets the red line. Poof. 2000 points. (Chart courtesy of TDAmeritrade's StrategyDesk)

So where from there? Everyone will be looking for a pullback, so I suspect we will get one going into the election. Who knows what the reasoning will be. It may be unsuspected, like China (remember they just increased liquidity a lot there, could be a sign of the times, and their GDP growth is slowing. Maybe it would slow a lot without that liquidity. Or maybe it’s a war with Syria. We often (without QE(n)) have pullbacks in the slow summer season, so maybe it’s that.

If this is the case, Mr. Obama will lose. The next relatively equidistant timing cycle will extend into the first of next year.

What do I like during the next few months? The herds report tells me to get out of precious metals, but into the metals and mining stocks like CENX X (yes, that will beta along, I guess) and the KOLs. I like many of the retailers like TIF that had a big pullback, and COH that didn’t . Maybe ANF.

I think the future revenue guidences are important in choosing. So I’m looking for white-collar retail stocks (TIF, COH, ANF etc), and B2B corporations like Oracle, IBM, Cisco etc to do well.

Notice the pink vertical line on the DIA chart. It appears as though there was a pullback cycle starting that if allowed to complete, would mean the DOW would fall below the 10000 point. Unthinkable! You remember what happened to turn that around? All the central banks got together and promised TBP (no, this time it means The Big Put), that is, liquidity forever. So with 0% interest rates promised forever, of course, everybody bought, and will continue to buy. Soon you’ll see the funds start getting in big time, then it’s time to ride, boys. Or as Mannwich likes to say, “Rally on, Wayne!”.

At the time of the pink line, I think the boys at the Fed saw the downturn (resulting from sentiment about Eurozone finances and sovereign debt repayment) and didn't want the Ubers value to drop, so the simultaneous announcement was created. I mean what other reason could there be to orchistrate a simultaneous announcement? So the cycle price direction was interrupted.

Could happen again in June/July timeframe. Maybe the US and China will have a simultaneous announcement of plans to save the Eurozone.

Unemployment and the Market

We saw the unemployment numbers improve pretty dramatically on Friday. We all know the dramatic improvement was due to a lot of people dropping off the edge of unemployment reports: that is, they are no longer counted, and may not be looking.

As we pointed out earlier, during Mr. Obaba’s reign, the use of food stamps has increased by 33%, or more. Mr Newt said that it was the biggest increase ever under one president, but he was wrong. It was the second biggest (Bush’s was bigger), but when the Jan numbers come out, Mr. Newt may be right. In any case, for leaders of our country to let this happen is inexcusable.

I have heard many many talking heads on Bloomberg say that we won’t improve the economy until we let the housing sector recover. Many say just let the bottom fall out and recover naturally, some say support it to keep our spirits up and confidence high to support spending.

You can’t spend what you don’t have. And aren’t making. And we all talk about the discrepancy between the haves, and have-nots, and it’s getting bigger, and worse. Even to the point where billionaires say “I volunteer to pay more taxes” which is of course meaningless in the long term, without spending cuts. “you can’t spend what you don’t have” should apply to the US Government, but as we see, it doesn’t.

So what is all this ramble about? It’s about housing, and the recovery as applied to improvements in the housing market.

Prices have come down, but as the blue collar workers lose ground, they still can’t afford to buy houses. Many white collar workers have houses, maybe underwater, but do possess them. As Mannwich’s article pointed out, many feel caught at higher interest rates since banks won’t let them refinance. We all know banks are mostly all insolvent if the government decided to make them mark their assets to market value. So the banks need this high interest rate revenue. The question is, what do banks do with the foreclosures, which are a drain on their revenues from their securities?

The answer was given to us Thursday. There are some private equity firms negotiating with Fannie and Freddie to take the troubled properties off their hands and fix them up and offer them as rental properties (since rentals are on the rise).

This will be a disaster for the housing market. Here’s why: I have looked at a bunch of repos here in the bay area, They are all dumps, where anyone with 600K-1KK price range would not want to live. And even after dumping 100K in upgrades into the property, you still end up with a hacked-up layout, a fixed-up camp. A dump. How will this hurt the housing market?

Fannie and Freddie will sell the securitized properties to the private equity firms for substantially less than their value. You and I can’t invest in this, because we can’t buy an entire security, we could only buy one or two of the components. So we won’t be allowed to participate. Anyway, we can’t afford to buy the property paying 4.25% mortgage, + property tax, + lost revenue on the down payment even with a 90% rental rate, because even at that rate, we will not have a positive yield, and it may be years and years before we can get our money out. What will happen when the PE firms buy is that the taxpayer will pay for the Fannie and Freddie losses (either directly or through AIG), and the PE firms will own the dumps.

The dumps aren’t necessarily concentrated. If they are, they will be slightly repaired and offered to the Blue Collar workers (who are dropping out of the jobs market, remember), and will ultimately likely become ghettos. If they are not concentrated, they are scattered throughout YOUR neighborhoods. And the blue collar workders will be moving in. Next door to you.

Unintended consequences could be ghettos (as I said earlier), lower property-tax income for towns, poorer schools, higher crime (I mean, even in my white-collar neighborhood, my Christmas lights were stolen), and an even brighter and more focused spotlight on the have-have not disparity.. Most of the new building permits are for multi-family dwellings, and this effort to provide low-cost rental property will stop those permits for sure.

Bottom line, your property values will go down, and your tax rates will go up. And, of course, we’ll all have to pay for the losses taken by Fannie and Freddie, and we will give all that money to the PE firms.

Sounds like a deal.

This, I think, is your future. Luckily, it is not Rock’s future, but I weep for my children, and for you. I am desperately sorry I helped bring this about.