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Friday, August 5, 2011

intra-day: August 5, 2011


Okay, so post-S&P downgrade...  ignore everything I wrote today.  It doesn't matter anymore.  I think.

Was this priced into the market?  Question du jour, possibly l'année.  My gut says it was.  I think most institutions that are required to divest themselves of anything less than AAA will do so over time, if at all.  Investment policies are, by and large, set by people who understand the downgrade doesn't create new risk; it reflects existing risk. 

Those investors subject to specific ratings-related regulations (insurance companies, escrow accounts, etc.) are likely be granted exemptions in the case of instruments that carry the full faith and credit, etc.  Ditto with bank and brokerage capital requirements.

So, who's going to dump treasuries?  China can tell you, it's not easy.  There aren't a lot of good alternatives.  After the dust settles, interest rates will probably be a little higher.  Bonds and stocks loath uncertainty, so will likely sell off very sharply, bounce back, then resume the declines they were pursuing anyways.

Going to do a lot of thinking about this over the weekend.  Should be a very interesting Monday!

EOD:  I'll be traveling this weekend and Monday, and will probably not get a chance to update this blog until late Monday night.  Hope everyone has a great weekend!

Last note:  I'm thinking about starting a petition to change "the trend is your friend" to "the trend line is your friend."   TL's were very good to us this week.


There are now no fewer than three IHS patterns setting up on SPX -- two that have completed that indicate 1252 and another that might mean 1256, if they play out.

My best guess, heading into the weekend, is we'll probably close fairly flat on the day, then pick up the "everything is just fine" mantra from Jackson Hole next week.  Investors counting on QE3 will likely be disappointed, and this week's decline should resume.

This is all pure conjecture, of course, and is subject to revision based on today's close and news over the weekend.  Economic news is light early in the week, with productivity on Monday and wholesale inventories on Tuesday.  Initial claims comes out Wednesday, and after today's employment fairy tale news, will be closely watched.  Most attention, though, will be on the Fed.  Just the way they like it.

One last look at gold:  I really like this fan line configuration and divergence, and picked up a few GLD puts during the day.


Consumer credit just came out at a 7.7% increase (June over May).  Non-revolving grew at 7.6%, while revolving grew at 7.9%.  If it were new cars or refrigerators that were charged, rather than groceries and electric bills, this would be good news.  Note the rather alarming increase of late.


Insider sales disclosures are popping up faster than Berlusconi mistresses.  Here's a couple that just went by:

$2.3 million in proceeds, from an exercise price of $35K.  $11.5 million for $200K.  Not shabby.  Guess I'd be thinking about cashing in, too, if my stock had done this in the past year.  You have to think they know their company pretty well.  Why do you suppose they're dumping their stock en masse?


Here's the inverse Head and Shoulders pattern on SPX.  If it plays out, it could mean a bounce to 1253 -- awfully close to the 1258.07 Fib level and our previous pattern low.

That makes 1258 my top candidate for this move if it really gets going.  What might really get it going?

As most know, the Fed meets in Jackson Hole next week.  According to Pimco's Bill Gross, they will unveil the next iteration of QE -- probably in the form of language designed to reassure investors that interest rates will remain low for a very, very long time.   Other Fed-watchers are wondering if something more stimulative is coming.

As damaging as it might be to the economy long-term, it would most certainly create some upward momentum for stocks.   Needless to say, anything less than a full-bore stim job by the Fed will send stocks and gold south in a jiffy.


So, another bounce has arrived, courtesy of the ECB.  Seems they're so impressed with how well QE has worked in the States, they're going to run it up their own flagpole.

Like here, it will purchase a lot of bonds that no one else wants.  It will also inject a lot of cash into an otherwise credit constrained market.  And, it will save a lot of (especially German) banks that would otherwise be looking at unbearable losses  (by "unbearable" I mean not just unpleasant but capable of inducing systemic failure.)  And, like QE1 and QE2, QEe will do absolutely nothing to resolve the root causes of the coming Euro-zone implosion.

Whether this blip turns out to be more than 40 points is anyone's guess.  Watch the Fibonacci levels, seen here in yesterday's post...

...and both the Fib's and the TL's on the daily chart.

There's strong upcoming TL and Fib resistance at 1231, and additional Fib resistance at 1258 and 1269.

There's also an inverse H&S pattern that just completed on the S&P futures.  If it plays out, it indicates 1249 or so on the upside.  Kudos to 200DayMA on Daneric's blog for pointing it out.

Interestingly, Gold is not participating in this rally.  It completed a little head and shoulders pattern this morning that might well trigger either of two larger patterns.  If it plays out, GC could be on the brink of a nice tumble to the 1600 level or lower.  [see: All That Glitters].


Got a great question from Zimzeb on last night's post that I wanted to address...

"What potential development which would derail the 2007 analogy most concerns you right now?"

From a technical standpoint, I am slightly troubled by the divergence between yesterday and its 2008 equivalent.   But, my gut is that the faster/stronger move was simply because we were there, just 3 1/2 years ago, and we remember how nasty it can get.  Shouting fire in a crowded theater always produces a panic; we're like an audience sitting in a theater where a fire broke out last week, and now someone's shouting fire again.

Fundamentally speaking, there are some differences between now and 2007.  My crystal ball is no better than anyone else's, but I think this will be worse.  At least back then, when TSHTF, the system wasn't as stressed.  Total debt was only $9 trillion and inflation was nowhere to be seen.  I keep wondering, if I were BB, what would I pull out of my arse to make this all go away?  Policy is as accommodative as possible, dollar is cheap, inflation lurking out there somewhere...

I just don't think there's much he can do.  I'm sure he'll try another QE at some point; but jeese, if it doesn't work then we're really screwed.  Right now, the threat of QE is all they have.   And, I just don't think it would work a third time -- even if they had the balls to try it. 

To me, 2007 was about over-leverage.  And, while there've been some adjustments, we're still massively over-leveraged in many ways.   Big corps are sitting on lots of cash, but consumers sure as heck aren't; they're using credit cards for cash flow.  Homeowners, who kept the economy humming until 2005 through the miracle of home equity lines, don't have any more home equity -- let alone the lines.  And banks, if you look very closely, have massive understated -- or, in many cases, unstated -- liabilities that are just plain scary.

This problem started with housing, and it won't end until housing is fixed.  In the meantime, every aspect of the economy that depends directly on housing -- construction, finance, consumer credit, employment, consumer durables, municipal finances, property taxes (a biggie that no one's talking about), education -- those areas will take it on the chin until the root problem is solved.  And, just about everything else is at least indirectly dependent on housing.

In the 30's, the New Deal offered recovery, relief and reform.  Our response, thus far, has been to send more boatloads of cash to Wall Street to replace the hundreds of billions they stupidly blew.  We've offered ordinary Americans no real relief; thus, the recovery ain't happening.  And, as for reform, ask Elizabeth Warren how that's going so far.

As we all know, the stock market isn't the economy.  It's not difficult for corporations to book increasing profits in the face of a poor economic backdrop.  Some, like Apple, have quality products that consumers demand.  Others, like GM, will channel-stuff the living daylight out of their dealers to keep the illusion alive.  But, most of the rest are ultimately dependent on industrial and/or consumer demand.

When that demand falls off, as it has in this country and the Euro-zone, those companies are up a creek.  They can play accounting, M&A, tax and currency games to "meet expectations" but eventually someone has to be willing to buy something.  Who?  Right now, there's demand in Asia.  But, will that hold?  How about in the face of a stronger dollar?  How about post-contagion when global demand falls off?  I suspect China has its own problems that we won't know about until they're patently obvious.

In my opinion, the only solution is to let the crash that started in 2007 play itself out.  That means hitting the great big red "reset button" and aligning debt with actual asset values, not to mention debt servicing capabilities.   It'll be doubly difficult if rates bump up at all.   "Aligning" is one of those euphemisms that really means "write-downs."  It means lower asset prices, stocks included.


Jobs report just out, and despite ample evidence to the contrary, the Labor Department reports a decrease in the unemployment rate to 9.1% and the creation of 117,000 new jobs in July.

"Created" is the operative word, as in "out of thin air" as the Dow plunged 500 points yesterday.   But, that's okay, we know how the game is played.  The S&P will likely run up 20 points, the Dow 150; the crises will have been averted.

Watch the key price levels we discussed last night.  There will be ample opportunities to play the bounce and/or establish new bearish positions.  No matter what unfolds today, the trend is still down.  Smart investors will remain glued to their computers and/or use stops.  More later.


  1. Thanks for the detailed response and all the great info you share. Safe travels!

  2. US: S&P, re its US downgrade, says: We have lowered our long-term
    sovereign credit rating on the United States of America to 'AA+' from
    'AAA' and affirmed the 'A-1+' short-term rating. We have also removed
    both the short- and long-term ratings from CreditWatch negative. The
    downgrade reflects our opinion that the fiscal consolidation plan that
    Congress and the Administration recently agreed to falls short of what,
    in our view, would be necessary to stabilize the government's
    medium-term debt dynamics. More broadly, the downgrade reflects our view
    that the effectiveness, stability, and predictability of American
    policymaking and political institutions have weakened at a time of
    ongoing fiscal and economic challenges to a degree more than we
    envisioned when we assigned a negative outlook to the rating on April

  3. Boy howdy. Monday should be interesting!

  4. Two areas of thoughts for you.

    Kevin Depew of the TD analysis that I read started buying Thursday and is presumably buying more today and Monday. The analysis he follows is that this move down is liquidity driven, rather than debt/solvency as in 2008. The weakness from May to August he was calling for months in advance, and on a daily chart he is basically saying the downside could be over with a particular action on Monday (I think it might be a lower open). The suggestion is that this summer weakness was actually the last gasp of the bear, and that the bull for equities is coming, with a bear for bonds. Seems possible after the S&P downgrade.

    The other area I have is that I flew from Dulles to Chicago to bring the nieces to Lollapalooza. Full flights, full airports, and completely 100% sold out Lollapalooza with record crowds and attendance.

    I'm still not convinced that the bear is back, and this coming from perhaps the absolute first person on the Daneric board to suggest that the market had topped for months in premarket the night bin Laden was kilt.

    Overall there are so many things wrong with the economy that we can all see. But the stock market is not the economy, and there are some good things happening with some companies.

  5. Always enjoy your writings.

    A few comments.

    "they're using credit cards for cash flow"
    If you mean now, I am not completely sure about it. Revolving credit is still anemic.

    "This problem started with housing, and it won't end until housing is fixed"
    Completely agree. I don't think housing can be fixed for another 3-4 years.

    "It means lower asset prices, stocks included."
    Well it gets tricky here doesn't it? The Fed's main mandate now is "fight deflation". This is a monumental fight that has cheered the bull into a false sense of a bull market for a couple of years now. I think it will complicate things, delay the inevitable and make the final outcome far worse.

    "Non-revolving grew at 7.6%, while revolving grew at 7.9%"
    I think they are billions of dollars, not %. 7.6% credit increase will make the world ecstatic.

  6. JP,

    I am not entirely in agreement with the thought that the bull market will resume after this leg down. There are reasons to argue that if a bear market has started. Your observation in the airport is telling.

    At most, I can't see we take out the 1370 top, not this year. The global slow down is here, is real. It can not be avoided and there won't be any chance that can change this year. Achuthan's long indicator is a strong quantitative indicator of this.

    Another point in mind is retail sales. I would say these retail sales have been one puzzle that I find it hard explain. Many retailers prosper with strong sales and earnings in the last 6 months. This is in direct contradition with the weakening ISM and GDP. This is the same phenomena as the busy travelers you see. I don't know if this is discount driven, most squeezing profit margin of Chinese exporters (who are suffering no to negative margins), or something else, like the payroll tax cut.

    There are key differences between this year and last. I think the previous year's stimulus was still playing out last time. China was in full expansion mode then. China was the driver for a manufacturers led recovery of the ISM rebound in
    September. Now China is out of the question. We are lucky if it doesn't fall apart. In addition, Europe is far more weakened than last year. This can not possibly help the U. S. economy.

    Then the payroll tax cut and the Bush tax cut are mostly cancelled out by QE2 (don't think the public has a clue about it) by higher commodity prices. That was a disaster.

    Another signficant difference is that we are now in austerity mode. If there is a way to see the U. S. economy move forward, it will has to be more stimulus. Now the overshadowing atmosphere is austerity. Hard to see stimulus coming. Look at what are the reamining options:

    (1) Payroll tax cut extension. The big divide in politics proved to be so destructive that I don't see the Tea Party agree a payroll tax extensino without corresponding spending cut, though the Republicans as a whole have a better chance to like it.

    (2) Corporate tax holiday. This is a hard sell because companies have no track record to use it to create jobs. Besides, if there is no demand, how can companies hire just to get a tax credit? They would argue it is better to pay a dividend and put the money in consumers' pocket to give the economy a boost. We all know how that goes. The wealth effect does not work because of the wealth concentration. This can not lead to consumption driven expansion.

    On the technical side, Caldaro, a long time bull and bull favorite, think we are in a bear market, just needs some more confirmation.

  7. On the S&P downgrade, I also think a short term (can be as short as a week, just need some bounce) low is in, though we may test 1170 again on Monday (I am somewhat not sure if the market has priced this in. That's why we need to test 1170 again.). If we test 1170 and it holds, seems to be a good risk/reward to go long.

    The most important thing to see is if there will be a liquidity squeeze i the credit market. The REPO market will be the best measure of it (don't have any resource to monitor it live).

    If dollar falls (expected) and bond futures holds Sunday night, that will be a strong indication that a short term bottom is in. FOMC and G7 meeting will produce an excuse for a bounce. Also seeing 1250 likely target. But sellers will come in at that level. The public must be completely disgusted with stocks now they will get out no matter what.

  8. George, I'm not convinced either.

    The way I see it though, quite a large part of the population of companies and individuals in the U.S. and elsewhere have taken the past few years to strengthen their positions. Many underwater folks walked away and/or declared bankruptcy, many companies shored up cash and improved efficiency. Some part of the record S&P profits is actually a reflection of good business practices.

    But like you are describing, there are the many other factors at play, and just because some (including, I suspect, many of Daneric's readers) have strengthened positions the past few years, does not mean the whole system can't drag everything down in a collapse.

  9. Oops, it seems we are certain to test 1170 again as Germany just said it won't bailout EFSF (for Italy and Spain).

  10. Your analysis and commentary is going to make this blog one of the most read blogs very soon.

    I appreciate your efforts.