Bearish Information

[bart]

Re: Bearish Information Re. Equity Markets Top

I can't get my chart to post so try http://0301.netclime.net/1_5/P/R/8/b...reads_1110.tif which is a chart of the BAA-TNX spread only back to 12/30/99.

I suspect that its just that the TIF format is very unusual and most browsers will not resolve it. Try PNG or GIF and it should work.


By the way, very nicely done on the analysis. I tend to agree that all the ducks aren't in a row yet for a top, and also think that the Jan 1-Mar 15, 2007 period is the most likely period for a top... and as usual YMMV - Your Mileage May Vary.

[Jim Nickerson]

Re: Bearish Information Re. Equity Markets Top

I suspect that its just that the TIF format is very unusual and most browsers will not resolve it. Try PNG or GIF and it should work.


By the way, very nicely done on the analysis. I tend to agree that all the ducks aren't in a row yet for a top, and also think that the Jan 1-Mar 15, 2007 period is the most likely period for a top... and as usual YMMV - Your Mileage May Vary.

Thank you, Bart, the .gif worked, at least for the moment.

I thought you would jump in on my OEX comments and shed some serious insight on them, either con or pro. I really would like disagreement more than I would agreement.

[bart]

Re: Bearish Information Re. Equity Markets Top

Thank you, Bart, the .gif worked, at least for the moment.

I thought you would jump in on my OEX comments and shed some serious insight on them, either con or pro. I really would like disagreement more than I would agreement.

I had to smile on the disagreement comment - welcome to the club. This is a pretty bearish board so when you post along those lines, its not very likely you'll get significant disagreements.

There's not a lot I can really say - your facts are correct and the market has not had a serious break of any significant trend line. It literally is that simple - the rest is just window dressing and educated (or not) guesstimates.

You already pretty much know my views on recent manipulations with TIOs and Fed Open Market Operations. There are some indications that they'll continue and we'll have a "normal" end of year Santa rally. On the other hand, the total "piggy bank" balance now is about $60 billion, of which $30 billion is TIOs and they haven't moved the market up much in the last few days.

The biggest issues with my best guess for when it will top are the areas of black swans or unexpected events, and there sure are plenty of them out there.

Here are a couple more charts that point at an after end of year peak:



The global 8.6 year business cycle with its 2.15 year sub cycles:

[Jim Nickerson]

Re: Bearish Information Re. Equity Markets Top

I had to smile on the disagreement comment - welcome to the club. This is a pretty bearish board so when you post along those lines, its not very likely you'll get significant disagreements.

I was not and am not badgering you or anyone out there to disagree with what I put up about observations of the OEX p/c numbers, meager and as of short a duration as they are. I was hoping someone might tell me I was totally wet behind the ears, or that someone might offer more profound insight along those lines. I am not suggesting I expect you to fulfill those desires; I just thought you might.

Thanks for your comments and charts.

[bart]

Re: Bearish Information Re. Equity Markets Top

I was not and am not badgering you or anyone out there to disagree with what I put up about observations of the OEX p/c numbers, meager and as of short a duration as they are. I was hoping someone might tell me I was totally wet behind the ears, or that someone might offer more profound insight along those lines. I am not suggesting I expect you to fulfill those desires; I just thought you might.

Thanks for your comments and charts.

No problem at all - it didn't at all seem like you were badgering me or anyone else. Sorry I came across poorly, it was just a wry smile of agreement and understanding from many prior times when I have gotten zero feedback from a post into which I'd put a lot of effort.
I truly think that you did a very good job and the primary reason for little feedback is that most here would basically agree with you - here's your gold star (seriously).




I just realized I have put/call numbers back to 1996 - here's a quick chart for what its worth:

[Finster]

Re: Bearish Information Re. Equity Markets Top

What are likely or possible indicators of a top in the equity markets? ... which is a chart of the BAA-TNX spread only back to 12/30/99. That chart shows that the BAA-TNX spread reached a low of 154 basis points (1.54%) at the end of Jan 2000 and then accelerated sharply until the time our income tax returns were due, corrected a bit and then continued higher until finally peaking at the markets' bottoms in Oct. 2002 ...

Jim, there is a little less to the BAA-TNX spread than meets the eye. First, remember that high yield (junk) bonds have always been equity-like in behavior. Like stocks, they are corporate securities and their price reflects the market's perception of forward corporate prosperity. Second, recall that yield is mathematically related to price. Invert the yield, and you essentially have a chart of price.

So if you were to invert the the plot of the BAA-TNX yield spread, you'd have a price chart of a group of equity-like securities. If you were then to plot that against a price chart of equities, it would be surprising indeed if the charts didn't closely resemble one another.

In other words, much of the apparent correlation we're looking at here is a mathematical necessity, and the rest due to the fundamental resemblance between junk bonds and equities. If you were to, say, plot the S&P 500 index against the reciprocal of another major equity index such as the MSCI EAFE index or NYSE composite, you'd see a very similar picture. It would show a striking inverse correlation. But to conclude that therefore any deep or predictive insight was implied would be a mistake.

To infer a deeper meaning from observed correlations than is justified by the fundamentals is a common error among technical analysists. Correlations often appear and then vanish as soon as the investor acts upon them under the assumption they will continue. Other, such as what we see here, are at least in part due to two series actually tracking the same variable. In this case, both the bond spread and the equity index track the same underlying expectations of corporate profits.

Not that it is totally useless; any signifcant divergence could reflect a mispricing of one or the other asset class and therefore hint at a possible positioning opportunity. One could then examine the situation for any potentially confounding factors that might explain the divergence. Then assuming a case could be made for mean reversion one might have the basis for concluding there was some meaningful predictive value. But in no case should one proceed straight from correlation to conclusion without critical examination of the source of the relationship and whether indeed it has any predictive relevance.

[Jim Nickerson]

Re: Bearish Information

Finster,

Your note is incredibly enligthening, and I thank you for it.

[Finster]

Re: Bearish Information

Finster,

Your note is incredibly enligthening, and I thank you for it.

Thanks for the kind words, Jim. It's also worth noting that by subtracting the risk-free bond yield from the BAA yield, what is left is even more equity-like, because you've essentially removed the 'pure' fixed-income component.

[Jim Nickerson]

Re: Bearish Information

The PPI, Gold, and Dr. Copper
by Mike Shedlock

http://www.safehaven.com/article-6312.htm

Shedlock has casts his lot with deflation, from the above,

"There's no inflation.," said Marty McNeill, a trader at R.F. Lafferty Inc. in New York. "If the PPI is down, gold usually would go lower."

"These writers need to brush up on history. Gold tends to do very poorly in disinflation but very well thank you in deflation. Gold shocked everyone when it rose along with the U.S. dollar in 2005. It will shock everyone again by rising along with treasuries when deflation sets in."

He concludes with, "Along with a Plunging PPI, plunging copper, plunging home prices, plunging housing starts, a plunging GDP, and plunging consumer credit there should be no doubt which way the economy is headed. The only unanswered question is: When does the stock market get the message?"

[Finster]

Re: Bearish Information

These writers need to brush up on history. Gold tends to do very poorly in disinflation but very well thank you in deflation. Gold shocked everyone when it rose along with the U.S. dollar in 2005. It will shock everyone again by rising along with treasuries when deflation sets in.

WRONG! Gold does even worse in deflation. Unfortunately, many financial writers look at the early 1930's period for precedence on the performance of gold during deflation. But in that period, the US government guaranteed the price of gold!

Now it is possible gold may do well in a weakening economy, and possibly even rise with bond prices, but if so only because the markets are looking ahead to the Fed's reaction: cut rates and print more money.

[Jim Nickerson]

Re: Bearish Information

WRONG! Gold does even worse in deflation. Unfortunately, many financial writers look at the early 1930's period for precedence on the performance of gold during deflation. But in that period, the US government guaranteed the price of gold!

Now it is possible gold may do well in a weakening economy, and possibly even rise with bond prices, but if so only because the markets are looking ahead to the Fed's reaction: cut rates and print more money.

Finster,

You prove the value of putting things up for discussion, Thanks.

[Finster]

Re: Bearish Information

Finster,

You prove the value of putting things up for discussion, Thanks.

But am often guilty of less explanation than perhaps warranted. One additional confounding factor is the different meanings of the term "deflation" in use. Sometimes it is used to refer to a contraction of money and credit and other times a rising value of the currency (evidenced by falling prices). You can even further subdivide the first case into a contraction of nominal money credit and a contraction of the real volume of money and credit.

Depending on which of the three meanings of deflation is being used, the environment can look very different. Usually a contraction in the volume of money and credit is associated with a rising value of the currency. Less money supply naturally goes with the money being more valuable, which we notice in the form of lower prices. In this circumstance, it doesn't matter much whether you're using the term deflation to refer to money contraction or rising currency, because they go together like hand and glove.

Suppose, though, that the nominal amount of money and credit grows, but that the value of the currency falls even faster, such that the total real value of money and credit is actually falling. In this case you have rising prices (inflation) at the same time as the real supply of money and credit is falling (deflation).

Sound confusing? Unlikely?

Maybe so, but it is an extremely important phenomenon. This is what happened in the 1970s. It also happened in 1933-1949. In both cases, the Federal Reserve sought to counter the effects of a real deflation with nominal inflation. In fact, what is called "inflation" usually happens in a period of real deflation. In this sense of the word, Shedlock is correct - the price of gold tends to rise strongly in a period of "deflation". I gave him an emphatic "WRONG" because his use of the term "deflation" would only be consistent with his use of the term "disinflation" if he was referring to currency value.

Many gold bugs make this same mistake. They fail to distinguish between the pre-1933 and post-1933 periods of the deflationary 1930s, which were polar opposites in terms of currency value even while both were the same in terms of the contraction of real money and credit. The pre-1933 period - which is what most people think of as "deflationary" (in all three of the above senses), was characterized by falling prices and a rising value of the dollar. Gold prices held up only because gold and the dollar were tethered to each other by the government. The prices of silver and other commodities, fell, and so would those of gold were it not for this government enforced peg. After that link was severed in 1933, however, the thirties much more closely resembled the 1970s, and gold prices (where it was freely traded) rose in dollar terms as the dollar lost value.

In the sense of the term used by most market commentators and understood by most investors, however, "deflation" means falling prices and a rising currency. This is most certainly NOT a tailwind to gold prices, and in fact the last time we had such an experience - in the twin deflations of 1997-1998 and 2000-2001 - gold prices fell. Right along with those of most other commodities.

So be wary of any gold bug trying to tell you that gold prices will rise in a deflation. He is either flat-out wrong, or using a meaning of the term deflation that most of us would think of as inflation.

[Jim Nickerson]

Re: Bearish Information Re. Greed?

November 18, 2006
Technical Market Report
by Mike Burk http://www.safehaven.com/article-6333.htm

I find Burk's comments each week interesting because he analyzes things a bit differently than does anyone else I run across.

Quoting Burk, "The market is overbought with some of the indicators approaching the highest levels they have reached at any time in the last 3 years. Even if the indicators are at their highs and turn downward, prices should continue moving upward for a few more weeks. Beginning Wednesday there is a strong positive seasonal bias."

"Over the past 50 years the annualized return of the SPX, excluding dividends has been about 7%."

"From its low in October 2002 the annualized return of the SPX excluding dividends has been about 15%."

"From its low last June the annualized return of the SPX excluding dividends has been 36%."

On a comparative historical basis, what this is saying to me it that it would seem presumptious to think one may end up with more gains than might be currently garnered by expecting this sort of market action to continue well into the 3rd presidential year. But then who knows when possible irrationality will cease?

It seems a "lot" (I do not know how many that is) expecting the lows of this year to occur in October were wrong, and it is suggested at least by Swenlin http://www.decisionpoint.com/ChartSp...61117_4yr.html that the four year cycle low occurred in June and July after only a 7.5% drop. I think his assessment is worth reading.

How much higher will the equity markets go from here, that is the question? I am posting an article by Mark Hulbert in the bullish forum which discussed bullish 9-to-1 up volume days as occurred on 6/15 and 6/29/06. Since the close of 6/29/06 SPX =1273, the SPX is up 10% SPX= 1401. And since the summer lows, SPX is up 16.14%, DJI + 17.34%, Nasdaq +24.07%, NDX + 27.63%, and RUT + 20.46%.

[Jim Nickerson]

Re: Bearish Information

Sy Harding offers what to me is a realistic assessment of where the equity markets are presently. I think most of his comments each Friday are worth reading.

http://www.decisionpoint.com/TAC/HARDING.html

[Jim Nickerson]

Re: Bearish Information Re. Bonar is week's biggest turkey.

Peter Schiff discusses a potential declining scenario of the bonar.

http://www.safehaven.com/article-6367.htm

Schiff says, "This week the U.S. dollar was carved up like a Thanksgiving turkey. Against the Swiss franc, euro, British pound, and Japanese yen, the dollar lost 3%, 2.2%, 2% and 1.8% of its value respectively. To put those declines into perspective, in terms of the euro the Dow Jones's 60 point plus decline this week translates into the equivalent of a 320 point decline when measured in euros. In fact, year to date the Dow is only up by about 3.5% when priced in euro's, compared to its 14.5 % advance when measured in depreciating U.S. dollars. From its high in 2000, the euro price of the Dow is down by over 27%. In terms of gold, the world's only legitimate money, the picture is even worse. Priced in gold the Dow is off better than 50% from its 2000 peak, and actually down over 7% thus far this year. So much for Wall Street's phony rally!"

His final target for the bonar's decline (using the US $ Index) is 40 which he says is equal to more than 6,600 points down in the DJI. He thinks this could occur in just two years. If such a decline is not mitigated by the Fed, Congress, and the President, and hyperinflation sets in, the drop of the bonar index could reach the single digits.

Of course, Schiff is selling his services to "protect your wealth and preserve your purchasing power," so he is probably just trying to scare the bejeebers out of anyone who reads this article, but on the other hand, I guess, the guy could be on to something worth heeding.