ECRI’s Achuthan – Recession is Here

Thursday, July 12th, 2012

While the technical definition of recession commonly used is negative GDP two quarters in a row, it is actually something far less simple.

ECRI has been calling for recession for a few quarters now and with the data coming in, it is looking more accurate now – especially if you use the definition on the NBER website:

The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).

Lakshman Acuthan visited Bloomberg early this week for an extended interview – email readers will need to come to site to view:

Tags: Definition Of Recession, Economic Activity, Economy, Ecri, Federal Reserve, GDP, Lakshman, Measures, Nber Website, Quarters, Real Gdp
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Investor Sentiment: Bull Signal Awaits

Sunday, June 10th, 2012

by Guy Lerner, The Technical Take

The “dumb money” indicator is now showing that investors are extremely bearish, and this is a bull signal. On average, the best time to buy is 1 week after the signal. Several caveats are worth noting.

First, about 80% of the signals will produce positive results within a reasonable draw down. What is meant by “reasonable”? The SP500 should bottom within 6% of next week’s buy point. If the SP500 drops below next week’s buy signal by more than 6%, then this is a failed signal. A failed signal is the market’s way of saying that what we expect to happen has not happened, and failed signals can lead to very strong moves opposite to those expectations.

Second, the current extreme reading in the “dumb money” indicator is not supported by other measures of investor sentiment. For example, the Rydex market timers are still showing extremes in bullishness and in some sense, they have been unwinding their bullish positions over the past several months. By no means are they bearish, and this data series is looking more like a market top than a market bottom. Corporate insiders did hit extremes in buying 2 weeks ago, but like the current “dumb money” indicator reading, these were only “mild” extremes. So what does it mean? The resulting snap back rally is likely to be weak and unlikely to carry as far as a rally that begins when all of our measures of investor sentiment are showing much greater extremes of bearishness.

The market has bottomed where one would expect it to have bottomed — near its 200 day moving average. I am sure this has brought a sense of order and relief to the bulls and to those investors who were buying the kool-aid only 2 short months ago. Ahh, this is how bull markets function. Now that this temporary blip (mis-pricing) is over, we can get back to the business of being bullish. I am not trying to discount the current bull signal. A bottom is being forged. It would be nicer to have seen greater extremes in bearish sentiment at the bottom as this leads to stronger future returns. I could just as easily make the case that this is the last gasp of an aging bull market.

The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator is showing extreme bearishness.

Figure 1. “Dumb Money”/ weekly

Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “S&P 500: Sentiment Remains Positive But Volume Declines…. Russell 2000: Number of Buyers Drops But Sentiment Remains Positive. ”

Figure 2. InsiderScore “Entire Market” value/ weekly

Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 62.78%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 71%.

Figure 3. Rydex Total Bull v. Total Bear/ weekly

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Tags: Bearish Sentiment, Best Time, Blip, Bull Markets, Bulls, Caveats, Corporate Insiders, Dumb Money, Extremes, Guy Lerner, Investor Sentiment, Investors, Kool Aid, Market Bottom, Market Timers, Measures, Moving Average, Rally, S&P500, Signals, Snap Back
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Goldman Previews ECB “Hope For Best, Prepare For Worst”

Tuesday, June 5th, 2012

Germany remains vehemently opposed to any euro-wide deposit guarantee scheme as the head of the association of savings banks believes it: “would lead to a spreading of risks to the detriment of German financial institutions” and that this would “increase the burden for national protection schemes, which is not in the interest of German banking clients“. Not exactly encouraging and along with the fact that Goldman notes that Germany’s ‘growth plan’ (which includes increasing EIB capital and redirecting existing funds to the periphery) with which it will attempt to bolster its opposition to soaking up more peripheral risk, contains ‘nothing really new in it’. For this reason Goldman is far less sanguine heading into the ECB meetings as they hope for the best and prepare for the worst. They expect Draghi’s forward-looking statements on being ready to act, conditional on events in the periphery, will be the most important headlines but expect him to remain stoic in his position on governments contributing to the solution. Goldman’s view remains that, at least for the time being, the ECB has to play a leading role in stabilising the system (though SMP remains marginalized given its potential to sit outside of the ECB mandate) given that it can operate more quickly and more effectively, given the many political constraints governments face. A genuine long-term solution, however, falls once again in the domain of governments.

German government prepares “growth package”; nothing really new in it. According to news reports, the German government has been working on a list of measures to support growth in the Euro area. The list includes measures such as increasing the European Investment Bank’s capital by around €10 billion and redirecting existing money in EU funds towards the periphery. There seems to be nothing really new on the list and there is no indication that the German government would now be in favour of any large public spending programme. The German government will use this list for its forthcoming discussion with the opposition on the fiscal compact, scheduled for June 13. The government needs the support of the opposition in order to get the fiscal compact through parliament. The opposition has demanded that, in exchange for its support, the government should come up with specific measures to support growth in the periphery.

German banks critical on proposed support measures for peripheral banks. The head of the association of savings banks, Fahrenschon, wrote in an op-ed in FTD that a Euro area wide deposit guarantee “would lead to a spreading of risks to the detriment of German financial institutions” and that this would “increase the burden for national protection schemes, which is not in the interest of German banking clients”. The association of private banks, BdB, at the same time has rejected in a written statement direct financial help for peripheral banks from the EFSF. Such help would be conditional on a restructuring of the banking sector and only national governments would ultimately be in a position to ensure that such conditions were met.

Portuguese government to inject €6.63 billion into banks. Portuguese Finance Minister Gaspar said yesterday that Portugal will use money from its current EU/IMF programme, earmarked for supporting banks, to bolster the capital position of its three biggest banks.

Focus: ECB preview: Hoping for the best, preparing for the worst

Bottom line: We expect the ECB to keep rates on hold this Wednesday and also expect no announcement of further non-standard measures. Further ECB actions are to a great extent conditional on events in the periphery, and on the implication these events will have for the wider Euro area and the financial system. ECB President Draghi is likely to use the press conference as an opportunity to signal that the ECB will in principle stand ready to support the system if needed. However, Draghi is also likely to remind governments forcefully that they must contribute to the solution and that the ECB can only accommodate what in the end is a political process.

Growth outlook (a lot) more uncertain

Growth at the beginning of the year was somewhat stronger than we had expected and the Euro area economy ‘only’ managed to stagnate, after a small decline in economic activity at the end of last year. Stronger than expected numbers out of Germany and Spain – although the Spanish economy still contracted by 0.3%qoq – were the main reason for this, more than offsetting a negative surprise in Italy.

However, the latest monthly indictors coming out of the Euro area suggest that the economy is losing momentum again and our Current Activity Indicator, which uses information up to April, is consistent with a small decline in GDP. The May business surveys imply this downward trajectory continued last month (for more on the outlook see our latest European Views).

In the May introductory statement, the ECB’s Governing Council’s view was that the “latest survey indicators for the euro area highlight prevailing uncertainty. Looking ahead, economic activity is expected to recover gradually over the course of the year”. This outlook, according to the Governing Council, “continues to be subject to downside risks”. We think the June statement will now acknowledge that an easing in economic activity during the summer is likely, but will at the same time still expect an improvement by the end of the year. Thus, we expect “gradual recovery” to remain part of the Governing Council’s main scenario.

We also expect the deterioration seen in the data since March to be reflected in a downward revision of the June staff projections. While a revision to our more pessimistic outlook for Euro area growth of -0.5% for this year seems unlikely, we could see the staff now forecasting – after -0.1% for 2012 in March – a more pronounced weakness in the coming two quarters, leading to an annual growth forecast of around -0.3%.

A downward revision of the 2012 annual figure to around -0.3% would imply that the ECB’s staff expect the current weakness to be temporary, followed by a stabilisation by the end of the year and a return to positive growth in 2013. Next year’s growth forecast of +1.1%, in this scenario, is unlikely to be changed much (GS: +0.4%).

A more significant change in the staff projections would signal a more fundamental reassessment of the current situation, and would also, everything else equal, make further policy easing – including a reduction in rates – more likely.

As far as the inflation outlook is concerned, the May statement saw inflation staying above 2% in 2012, but “over the policy-relevant horizon, we expect price stability to remain in line with price stability” and “risks to the outlook for HICP inflation rates in the coming years are still seen to be broadly balanced”. This risk assessment is unlikely to change, although we could see the Governing Council signaling a small reduction in the underlying inflationary pressures by deleting “still” from the sentence in the statement describing the risk assessment.

The somewhat more benign outlook for inflation should also be reflected in a moderate downward revision of this year’s forecast of 2.4% on the back of weaker growth and lower energy prices (for example, back in March the staff assumed a price for Brent crude oil of US$115 for this year) and a broadly unchanged figure for next year (+1.6%; GS: 2.4% in 2012 and 1.9% in 2013). Again, a more substantial downward revision of inflation would signal a fundamental reassessment of the outlook for the Euro area.

ECB to remain on hold in our base case scenario…

ECB actions remain to a great extent conditional on developments in the periphery at this point, and on the implications these events will have for the wider Euro area and the financial system. Ultimately, it is the implications for the Euro area as a whole that the ECB cares about. Our base scenario foresees a ‘muddling-through’ in Greece, with the newly elected government unlikely to choose an exit from the Euro or implement the EU/IMF programme unconditionally. Meanwhile, it is likely that Spain will eventually have to ask for external financial help to support its banking system. All this is likely to be accompanied by slow progress – mostly consisting of announcements – on deeper policy integration and the building of higher financial firewalls.

We expect the ECB to keep rates on hold in this ‘muddling-through’ scenario. That said, the ECB will stand ready to provide liquidity to banks, as it has in the past, and we expect the ECB to extend the deadline up to which it will operate its current full-allotment regime in its refinancing operations significantly, potentially until the end of the year. Emergency Liquidity Assistance (ELA) should be the main tool through which additional liquidity needs will be met (see our European Daily Comment from May 31 for more details).

President Draghi is likely to be asked during the press conference about the preparations the ECB has made in the event Greece leaves the Euro. While Draghi will probably simply say that the ECB expects Greece to remain part of the Euro area, he may want to use this opportunity to stress the ECB’s willingness to support banks in the event of a liquidity shortfall.

…but would come out in force if needed

We could see the ECB engaging in a wide range of non-standard measures in order to safeguard the system should events turn out to be more disruptive. Liquidity measures such as additional LTROs, possibly beyond 3 years, and a further widening of the collateral framework would be part of the ECB’s response to a sharp rise in tensions on the back of, for example, a disorderly Greek exit from the Euro.

Outright purchases of financial assets are also conceivable in such a scenario. The hurdle for reactivating the SMP seems high at this point and several Governing Council members have been sceptical about whether the SMP would fall within the ECB’s mandate and about the overall effectiveness of the programme. Moreover, with the EFSF now in a position to buy government debt in the secondary market, the ECB is unlikely to be eager to use its balance sheet to stabilise peripheral yields.

The ECB could therefore consider outright purchases in other market segments, including bank debt. But depending on the sharpness of such moves, the SMP may very well be reactivated on short notice.
Political coverage necessary

Implicit or explicit approval by Euro area governments would be required for the ECB to engage in a new round of additional support measures in a disruptive scenario. Whether this support for the ECB would take the form of a common declaration by governments or individual statements is difficult to say. But whatever shape or form such political backing took, it would clearly increase the ECB’s effectiveness in dealing with the situation. Our view remains that, at least for the time being, the ECB has to play a leading role in stabilising the system given that it can operate more quickly and more effectively, given the many political constraints governments face. A genuine long-term solution, however, falls once again in the domain of governments.

Tags: Deposit Guarantee Scheme, Detriment, Draghi, ECB, energy, European Investment Bank, Favour, Financial Institutions, German Government, Gold, Goldman, Governments, Heading, Long Term Solution, Mandate, Measures, Nbsp, Opposition, Periphery, Political Constraints, Savings Banks, Smp
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Will ECRI’s Call for Recession Prove Accurate?

Sunday, May 13th, 2012

ECRI’s Lakshman Achuthan was making the rounds yesterday, with yet another defense of his firm’s recession call – the first claim which came early last fall.  I do think (from memory) he has pushed out the time frame a bit from when the initial call came, but since early this year has claimed we will see it by mid year.  Perhaps the very warm winter hurt the call as well – who knows with these black boxes.  Below we have a video with CNBC and there is one nugget in there I did not know.  Conventional wisdom is a recession is back to back quarters of negative GDP… but according to the NBER (and Achuthan) that is but one of a group of potential signals.

The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP).

10 minute video – email readers will need to come to site to view

Tags: Black Boxes, Cnbc, Conventional Wisdom, Economic Activity, Economy, Federal Reserve, GDP, Lakshman, Lakshman Achuthan, Measures, Memory, Nber, Nugget, Quarters, Real Gdp, Recession, Signals, Time Frame, Video Email, Warm Winter
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There is No Such Thing as Harmless Price Inflation

Monday, March 19th, 2012

This article originally appeared in the Daily Capitalist.

A “little” inflation will destroy capital, rob you of your savings, disrupt all of your long-term financial planning, create market instability, and leave you unprepared for retirement. You can protect yourself and you must.

Price Inflation

The Bureau of Labor Statistics released their official Consumer Price Index for February on Friday (up 0.4% MoM; up 2.9% YoY):

We also have the BLS seasonally the so-called “core” measure of prices ex. food and energy (up 0.1% MoM; up 2.2% YoY):

According to most economists including the Fed, this “inflation” is modest and acceptable, if not desirable. The 2.9% annual rate is more or less within the Fed’s target for “inflation.”

There is much criticism about the CPI indicators. But, you can pick other measures. In fact inflation can be whatever you want it to be.

For example, if you are wary of the BLS measures, then there is John Williams of Shadowstats who has two measures. One is based on the same methodology that the BLS used in 1990 (up 6.2% YoY):

Or, if you prefer, there is his version of the BLS’s 1980 base year methodology (up 10.2% YoY):

Or you can use the MIT Billion Price Project annual index which is up 2.8% as of February 1:

Another way to look at it is this way, the devaluation of the dollar since the creation of the Fed:

Today the value of the dollar is about 3¢ as measure from1913 when the Fed became our central bank.

Understand that there is a lot of criticism of each of these measures of prices. What each one is trying to tell us is how much our dollars have depreciated from month-to-month and year-to-year.

I don’t know which of the above is the correct measure. In fact I don’t think there is a correct measure because it is a very complex problem to measure prices over time and everyone spends differently. I think the better measure is more related to money supply, but that is a different topic. In general I personally believe that prices are higher than what the BLS reports, but I’m not a statistician.

I think the most important thing for us to know is (1) whether or not prices are constantly increasing at whichever method you choose, and (2) how fast the monthly and annual rates change. Steady price inflation will kill you over the longer term. Rapid changes in the rates of change can wipe you out.

I don’t mean to state the obvious here, but we all need to protect ourselves from the dollar’s devaluation or we will become poorer and poorer over time. I bring this up because I don’t think most people understand what a “little inflation” can do to one’s long-term financial plans. If prices rise a steady 3% per year, for example, I know my $1,000 savings is going to have to be $1,344 in ten years just to stay even (i.e., it’s worth 34% less).

And if you think assets and wages always keep up with prices, the past two recessions should dissuade you from that thought. Right now we have a situation where the dollar is continuing to devalue and workers wages are actually going down. Here is Friday’s report on real (i.e., inflation adjusted) earnings (down 0.3%):

If the Fed keeps on creating these booms and busts which first lead people down a path of wealth destruction (what’s your house worth now?) and then they devalue the dollar (i.e., “print” money) in order to try to stimulate a recovery but which further destroys capital, how can one get ahead? From the data, it seems that most people aren’t getting ahead. In fact the system is now geared more toward the One Percenters who thrive on the financialization of the economy.

The Fed knows exactly what it is doing. While the official line is that the U.S. wants a “strong” dollar, the Fed and the federal government are doing everything they can to devalue it. Chairman Bernanke believes that a little bit of inflation is an acceptable trade-off because it spurs economic growth. Why he thinks the destruction of wealth is the road to wealth is not a mystery: it is the foundation of contemporary economics of which he is an advocate. He understands that printing money causes prices to go up, and thus he is consciously devaluing the dollar.

If printing money were the elixir of prosperity, bankers would have made us all rich long ago. It is too bad that Chairman Bernanke does not understand that Federal Notes are not wealth, but economic nanobots that consume and destroy that scarce resource, savings. Only the savings from the profits of production can create wealth.

What Do I Do?

“What do I do?” is the question I am asked most often. It depends on your level of wealth, but … It is likely that the longer-term will see higher price inflation than what we are now experiencing so this is a serious question.

I’m not trying to avoid the issue on how to protect your wealth, but we don’t give investment advice here. DoctoRx who follows markets at the Daily Capitalist has an excellent track record on investments, so I urge you to pay attention to him.

I will give you some categories of investment that anyone seeking to protect themselves from price inflation should consider:

Gold. You can buy physical gold or shares in companies that hold gold. The Doc has recommended PHYS in the past. The point is that gold is money, and is a refuge against instability.

Oil and Gas. This product will be in demand until cold fusion or the perfect sun-powered battery is invented. I like the idea of actually owning production and there are reputable drilling programs one can invest in.

Agricultural production. Food will always be in demand in an unstable world. This usually means investing in ag land, but there are farming partnerships one can invest in if one isn’t a farmer.

Stocks and bonds. I’m not a big believer in buy and hold, so you’ve got to know what you are doing, or you’ve got to invest in someone who does. I personally follow DoctoRx. There are many others, but you’ve got to do the research. Be wary of “track records.” There are still more Madoffs out there. The irony is that anyone with a fabulous track record (hedge funds and investment advisers) can require millions to hundreds of millions to get in. Most of the rest who invite you in eventually go to the mean (at best) or blow up (worst case).

Offshore assets. This is a bit of a snake pit, but investing in fast growing companies in friendly economies is a way to diversify out of the U.S. You can’t hide assets from your Uncle Sam, but … you can get good returns.

These suggestions aren’t new and many advisers who follow the Daily Capitalist or sites like it (are there any?) say the same things. So I am not telling you anything new.

This is a serious game. It is no secret that most Boomers don’t have enough assets to allow themselves to retire. I fear that most retirees will be reliant on the government to take care of them (Social Security and Medicare). If you have saved, but stuck the assets in a CD, you are getting poorer and poorer as those nanobots destroy your savings. It’s not an easy task and you can thank the Fed and the federal government for that.

Here are my basic rules:

1. You’ve got to have a plan and you must save. You must not spend all of your income. This seems so simple, yet few people really do it. There are many books on the topic of planning for retirement and how much you need to save. There are retirement counselors who can help you devise a plan. Just be careful of what they are selling.
2. You’ve got to do your own research and do not accept anything on the basis of a word or promise.
3. You must check advisers out. Don’t accept a demonstration portfolio, rather ask to talk to other clients and see their real-time results. If they can’t provide the information, go elsewhere.
4. Don’t give anyone your money to invest without keeping it in a segregated account. I understand that there are partnership deals and mutual funds where this isn’t possible. Investment advisers can have discretionary authority, but the money should remain in your name.
5. Does the person or firm giving advice have deep pockets? Are they audited by a prominent company?
6. Don’t pay attention to those who sell fear. We’ve all seen the ads on the Web about the certainty of imminent collapse. I’m not exactly an optimist about the economy, but fear as a sales tool has a false ring.
7. Generally those who have been around a long time have some credibility and staying power. Of course Madoff was a Wall Street fixture, but there is a good example of accepting his word on faith.
8. Stock brokers sell what their company tells them to sell. If they were really good, they would be running their own investment firm. As we have seen even the “great” companies such as Goldman Sachs can fail to serve their clients’ interests.
9. Pay attention to the business cycle. This is one of the things we try to analyze here at the Daily Capitalist. Where you are in the cycle is one of the most important thing an investor can know. Buying a home in 2008 would have been a bad move. Buying groceries.com before the Dotcom crash would have been a bad move.
10. If it’s too good to be true, it isn’t. Of course this is the Ponzi scheme hook. My theory is that boom-bust business cycles have created a meme of constant speculation in our society. People think that “the Big Guys” always have the inside scoop and that’s why they get rich (but see Lehman Bros.). They lose out on one cycle and when the next one starts and making money seems easy, they want in. This leads to susceptibility to Ponzi artists and advisers who confuse their boom phase success with intelligence (they quickly blow up in the bust).

This is hard work. But remember that we are all in the same boat.

Good luck.

Copyright © Daily Capitalist

Tags: agricultural, Annual Index, Bls, Bureau Of Labor, Bureau Of Labor Statistics, Capitalist, Consumer Price Index, Core Measure, Correct Measure, CPI, Devaluation Of The Dollar, Economists, Financial Planning, John Williams, Market Instability, Measures, Methodology, Money Supply, Price Inflation, Shadowstats, Target
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What’s Next For Gold?

Wednesday, March 14th, 2012

by Dominic Frisby, Moneyweek.com

I’m not unduly worried about the gold price.

But when I saw it had dropped $40 yesterday from $1,700 an ounce to almost $1,660 in the space of just a few hours, I’ll admit a concerned eyebrow was raised.

So I suppose a bit of hand-holding is in order in today’s Money Morning – even if it’s only my own.

Gold may not see fresh highs for at least another year

Let me start by re-visiting my forecast of several months back. By my reckoning, we wouldn’t see new highs in gold for at least another year, ie not before autumn 2012, if not later.

I based this forecast on a simple, repeating pattern that gold makes when it gets ahead of itself. In the chart below, you can see gold’s action since 2001. It’s plotted on a logarithmic chart, as the pattern is clearer that way. (A logarithmic chart, by the way, measures percentage gain on the y-axis as opposed to an arithmetic chart which measures price. So on a logarithmic chart, a move from 200 to 400 looks the same as 400 to 800 and so on).

You can see what a lovely consistent ascent it’s been.

But even within this steady uptrend there are times when it’s got a little ahead of itself and then pulled back as I have indicated in yellow on the above chart. One example is in early 2003, another is in May 2006, another February 2008, and of course the same thing happened again in September 2011.

Each time it’s done so, it’s had a nasty fall, followed by a period of consolidation and digestion. And the more it’s got ahead of itself, the bigger the fall and the longer the subsequent consolidation phase. I’m thinking in particular about the 18 months or so that followed the highs of May 2006 and February 2008.

On both occasions it was well over a year before gold made new highs. I believe we’re in just such a period now. The high gold made last September at $1,920 was a typical example of gold going too far too fast. Now we have the consequent period of digestion.

So that’s how I’m interpreting the big picture.

Gold measured in sterling is far less smooth

Out of interest, I present to you now the same chart, but of gold measured in pounds. The graceful ascendency is gone. This chart is hiccuping its way higher in steady, annual burps.

The inverse of this chart – which shows just how much the pound has fallen against gold – has the look of a geriatric stumbling blindly to his coffin.

The short-term outlook for gold

Now let’s zoom in and take a look at the nearer term. Here is a one-year chart of gold.

My famed 144-day moving average (blue line) has now become resistance, unfortunately. I see good support in the $1,550 zone, where I have drawn the light blue band. And I see resistance at $1,800 where I have drawn the red band.

These will be, I suspect, the two lines in the sand for the time being, probably until the autumn. Of course, these are just guesses – I know no more than you.

But again, staring at the chart and guessing, I suggest a retest of at least $1,600 looks to be on the cards before gold’s normal, upwardly-mobile business can resume. But such a re-test, should it occur, would give a nice symmetry to the chart and add to that decent-looking base at $1,550.

Could the miners finally start to outperform?

As for silver, I see a similar picture with strong support at $26, but resistance at $38. Silver does seem to be displaying some relative strength, which is positive.

Also on the positive side of things, I am seeing some buying coming in to the junior resource sector. This is probably because of broader stock market strength, but I’m hoping we’re in the early stages of one of those periods when the stocks outperform the metals. Not before time, that’s all I can say.

I’ve just come back from the PDAC in Toronto, which is the world’s biggest mining conference. I must have spoken to over a hundred different companies while I was there. I’ll be publishing my notes from the conference, as well as my pick of the PDAC in a new report, so watch this space.

And, finally, I’ve banished my inner Luddite and signed up for Twitter. I have 136 subscribers so far, so plenty of room for upside. If you’re on Twitter, please follow me @dominicfrisby.

Tags: Arithmetic, Ascent, Autumn, Axis, Consolidation Phase, Digestion, Dominic, Eyebrow, Frisby, Gold Price, Last September, Measures, Money, Nasty Fall, Nbsp, New Highs, Occasions, Ounce, Percentage Gain, Typical Example, Uptrend
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Warning: A New Who’s Who of Awful Times to Invest

Sunday, March 4th, 2012

by John P. Hussman, Ph.D.

Last week, the estimated return/risk profile of the S&P 500 fell to the worst 2.5% of all observations in history on our measures. This is not a runaway bull market. Rather, it is a market that again stands near the highs of an extended but volatile trading range. I am convinced that the breakdown of the market from this range has been deferred only through repeated and extraordinary central bank actions.

Importantly, the market is again characterized by an extreme set of conditions that we’ve previously associated with a “Who’s Who of Awful Times to Invest.” The rare instances we’ve seen this syndrome historically are reviewed in that previous weekly comment. They include the 1972-73 and 1987 market peaks, and several instances since 1998. The more recent instances of this syndrome are shown by the blue bands on the chart below. Note that each of the separate instances in the 1999-2000 period were followed in short order by intermediate market declines of between 10-18%, and of course, ultimately by a plunge of more than 50% in 2000-2002. Likewise, the 2007 instance was followed in short order by a correction of nearly 10%, and a few months later by a plunge of more than 50% in 2007-2009. The more recent instances in 2010 and 2011 have also been followed by substantial market selloffs in each case, though with a longer lag in 2011 (due to ongoing QE2 operations). Aggressive monetary policy did not prevent the ultimate declines, though massive central bank interventions have undoubtedly helped to short-circuit the more violent follow-through that occurred in 1973-1974, 1987, 2000-2002, and 2007-2009, at least to-date.

A word of caution. While a few of the highlighted instances were followed by immediate weakness, it is more typical for these conditions to persist for several weeks and even longer in some cases (for example, the wide blue strip in late-2010 and early 2011). When we look at longer-term charts like the one above, it’s easy to see how fleeting the intervening gains turned out to be in hindsight. However, it’s easy to underestimate how utterly excruciating it is to remain hedged during these periods when you actually have to live through day-after-day of advances and small incremental new highs that are repeatedly greeted with enthusiastic headlines and arguments that “this time it’s different.” For us, it’s particularly uncomfortable on days when our stocks don’t perform in line with the overall market, or when the “implied volatility” declines on our option hedges.

We can narrow the blue bands to a range within a few weeks of the exact peaks in 1999, 2000, 2007, 2010 and 2011 by further restricting to periods where the Shiller multiple was above 22 and advisory bullishness was above 50. While that restriction is so tight that it excludes several critical market peaks in history, such as August 1987, it actually still retains the present environment.

Even so, my greatest concern as an investment manager is the possibility that some number of our shareholders will grow so exasperated with remaining defensive during these periods that they capitulate and take a significant position in the market at the worst possible point. In a market that has now underperformed Treasury bills for more than 13 years, with two plunges of more than 50% in the interim (all of which we anticipated), my hope is that shareholders recognize our record in identifying major downside risks, and understand – if not fully agree with – my insistence on stress-testing our methods against Depression-era data in 2009 in response to the credit crisis (see the semi-annual report for more on that subject).

The S&P 500 has experienced repeated bouts of volatility since early 2010, when even our existing ensemble approach would have moved to a defensive stance, but it is notable that the S&P 500 would have to decline all of 11% to return to its April 2010 level. The completion of the present bull-bear market cycle (and it will be completed) will undoubtedly present strong opportunities to play offense, but today stands among a Who’s Who of the worst historical times to do so. Particularly for investors who do not have a large number of future cycles between now and the point they will need to draw significantly on their assets, a defensive stance is crucial here.

While our defensive stance may seem interminable, it is important to keep in mind exactly where we are in terms of valuations, and exactly where we have been over the past decade. Since we can easily examine the investment positions that would have been supported by our ensemble analysis throughout market history, a few benchmarks may be helpful.

In market history prior to 1998, the ensemble methods that we presently use in practice would have supported a mostly or completely unhedged investment stance about two-thirds of the time. In contrast, since 1998, they would have supported such a position less than 20% of the time – periods which included 2003 (when in fact we lifted about 70% of our hedges), as well as much of 2009 and early 2010. Conversely, a tightly hedged investment stance was appropriate in pre-1998 data well under than one-third of the time, while a full hedge has been appropriate the majority of the time since then. As for “hard negative” periods where we find ourselves openly using the word “warning,” we find only 3% of pre-1998 periods that justified such a view, but fully 23% of periods since 1998 – including today – where our market views would have been so unfavorable. As noted at the outset of this comment, the present situation is actually somewhat worse than that, standing in the bottom 2.5% of all historical periods in terms of the prospective tradeoff between return and risk.

In short, the period since 2008 has been extraordinary in terms of how often a hedged investment stance has been appropriate. The validation for such a defensive stance should be obvious given the fact that stocks have underperformed Treasury bills since that time, including two separate market plunges in excess of 50%. While much more frequent hedging has been required, even the past decade supports the expectation that the completion of the present bull-bear cycle will produce substantial opportunities to accept market risk. Our present defensiveness is unlikely to persist a great while longer, but my hope is that the basis for our current position is clear.

A Menu of Bitter Pills

“Over the past 30 years, an offensively minded Federal Reserve and their global counterparts were printing money, lowering yields and bringing forward a false sense of monetary wealth. Successful investing in a deleveraging, low interest rate environment will require defensive in addition to offensive skills. Interest rates have a mathematical bottom and when they get there, the washing of the financial market’s hair produces a lot less lather when it’s wet, and a lot less body after the blow dry. At the zero bound, not only are yields rendered impotent to elevate P/E ratios and lower real estate cap rates, but they begin to poison the financial well. Low yields, instead of fostering capital gains for investors via the magic of present value discounting and lower credit spreads, begin to reduce household incomes, lower corporate profit margins and wreak havoc on historical business models connected to banking, money market funds and the pension industry. The offensively oriented investment world that we have grown so used to over the past three decades is being stonewalled by a zero bound goal line stand. Investment defense is coming of age.”

- Bill Gross, PIMCO March 2012 Letter

“You simply cannot create investment opportunities when they’re not there. When prices are high, it’s inescapable that prospective returns are low. That single sentence provides a great deal of guidance as to appropriate portfolio actions. Investment risk comes primarily from too-high prices, and too-high prices often come from excessive optimism and inadequate skepticism and risk aversion. Contributing underlying factors can include low prospective returns on safer investments, recent good performance by risky ones, strong inflows of capital, and easy availability of credit. That same pattern of taking new and bigger risks in order to perpetuate return often repeats in a cyclical pattern. The motto of those who reach for return seems to be: ‘If you can’t get the return you need from safe investments, pursue it via risky investments.’ It takes a lot of hard work or a lot of luck to turn something bought at a too-high price into a successful investment. Patient opportunism – waiting for bargains – is often your best strategy.”

- Howard Marks, Oaktree Capital, The Most Important Thing (2011)

The present menu of investment opportunities continues to be among the worst in history. Treasury bill yields stand at only a few basis points. The 10-year Treasury yield is just 2%. The 30-year Treasury yield is just 3.1% to maturity. Corporate bond yields are at 3.2%, the lowest level since 1955. Meanwhile, we presently estimate that the S&P 500 is likely to achieve an average (nominal) total return of just 4.3% annually over the coming decade.

With respect to projected stock market returns, our standard valuation methodology has provided an extremely accurate guide, both historically and even over the decade through last week. The only notable exception was the result of the late-1990′s bubble, which was so unusual that we have now seen 13 years of sub-Treasury-bill total returns for the S&P 500. We did observe a brief period of undervaluation in early 2009, but at present market levels, valuations continue to be challenging. Better valuations will emerge as the present market cycle is completed. Arguments that stocks are “cheap on the basis of forward operating earnings” fail to adjust for the record high level of profit margins (about 50% above their historical norms), and also apply bubble-era norms for price-to-forward earnings multiples. This is the same argument that analysts made in 2007, and it is dangerously wrong.

Now, just because stocks are likely to achieve a total return of only 4.3% over the coming decade, we can’t conclude that it is impossible for prices to move higher and prospective returns to move lower (as they did during the late 1990′s tech bubble and the housing bubble ending in 2007). It’s just that with market conditions now extremely overvalued, overbought, and overbullish, the declines that generally follow have easily wiped out the speculative “tails” of already mature advances. Indeed, the typical bear market wipes out more than half of the preceding bull market gain.

Even assuming that reasonably positive economic growth is more than enough to offset any tendency for record profit margins to normalize, a further 10% market advance over a period of a year would reduce the prospective 10-year return for the S&P 500 to somewhere between 3.3% and 3.6%. Nothing in the evidence suggests that outcome, but should we speculate on that hope, given that previous ventures to such low prospective returns were ultimately followed by violent losses that wiped any temporary speculative gains? For our part, the answer is simply no.

Economic concerns remain difficult to escape

It’s worth emphasizing that our concerns about the financial markets here are distinct from our economic views, in the sense that the present syndrome of overvalued, overbought, overbullish conditions would be hostile even if we were more optimistic about economic prospects. But it is also worth emphasizing that many aspects of recent economic data have been more favorable than we observed last summer.

For my part, I have no interest in overstating the case for recession risk, but I am also convinced that these concerns have been abandoned much more vigorously by investors than is really warranted by the evidence.

In terms of coincident indicators, we can get a good overall picture of the improvement in the recent data by taking the average standardized value of multiple regional and national surveys. The recent bounce is clear, but we are still very close to the zero line, and of course, we observed a similar bounce in the lead-up to the 2007-2009 recession. So the recent coincident data certainly feels better, but we know from historical correlation profiles that there is not a great deal of leading usefulness in this data (see Leading Indicators and the Risk of a Blindside Recession ).

A week ago, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) reiterated his own case for an oncoming recession saying “Consider it reaffirmed.” Achuthan observed that given a broad aggregate of GDP growth, real sales, personal disposable income, industrial production, and other measures, we’ve never observed a similar decline in year-over-year growth without seeing a recession. Note that Achuthan does not simply consider the extent of the decline from a growth peak, but instead defines a downturn based on what he calls the “three P’s” – pronounced, persistent, and pervasive. On this feature of the data, we are in agreement with ECRI – we’ve observed a uniformity of recession warnings in a broad set of leading data that we simply haven’t observed across history except in association with recession.

At the same time, we’ve also seen an improvement in some measures – particularly new claims for unemployment – where the extent of positive progress we’ve seen is not at all typical of pre-recession periods. Similarly, while year-over-year employment growth remains quite tepid, that growth rate has been rising rather than falling (though we also saw that just before the 1981-1982 recession). While we know that payrolls and new claims for unemployment are actually lagging indicators, not leading ones, we still generally see new claims for unemployment creeping higher before recessions, unlike today.

So from our standpoint, the essential question is whether the improvement in job growth negates the evidence from leading indicators, and from coincident indicators that are now at year-over-year growth rates also associated with oncoming recessions. As uncomfortable as it is to contemplate a renewed economic downturn, the weight of the evidence still leans to the leading indicators and coincident growth rates. Achuthan made this point very precisely, noting that “downturns in job growth lag downturns in consumer spending growth, which is very clearly in a downturn. That’s the sequence: jobs growth follows consumer spending growth, not the other way around.”

Tags: Amp, Blue Strip, Caution, Hussman, Interventions, Invest, Market Declines, Measures, Monetary Policy, Plunge, Rare Instances, Risk Profile, Selloffs, Short Circuit, Substantial Market, Term Charts
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Chartbook: China by the Numbers

Wednesday, January 26th, 2011

By Dian L. Chu, EconForecast The following is a slide presentation summarizing a look back at various economic indices and measures of China for the year 2010, plus some of my observations, and thoughts regarding the country’s path forward.

Tags: Chartbook, China, Chu, Dian, Economic Indices, Measures, Path, Presentations, Slide Presentation
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El-Erian: “Fed Policy is Not Enough”

Wednesday, August 11th, 2010

Despite all the anticipation over yesterday’s Federal Reserve meeting, there was little else the central bank could do now to help the economy recover, Pimco’s co-CEO Mohamed El-Erian told CNBC.

Speaking just hours before the meeting of the Federal Open Market Committee (FOMC), El-Erian said the central bank can only do so much to foster growth and avoid deflation. The Fed has spent the past three years on a route of aggressive rate cuts and purchases of trillions in various securities but is running out of measures it can take.

“Fed policy is not enough. You need to do more than that to get off that road,” he said.

Asked what needs to be done, he said, “First, selling a vision, a long-term vision as to what the policy response is to restore growth and employment. And second, to fill it out with proper structural policies.”

“The country is facing structural issues and it needs structural solutions,” he added. “Just focusing on the Fed is like sending in a wide receiver to play quarterback. Yes, the wide receiver is a good athlete. But he’s not a quarterback and we need to focus on structural issues.”

Source: CNBC, August 10, 2010.

Tags: Anticipation, Athlete, August 10, Ceo, Cnbc, Economy, Fed Policy, Federal Open Market Committee, Federal Reserve, Fomc, Long Term Vision, Measures, Mohamed El Erian, Open Market Committee, Policy Response, Running, Structural Solutions, Trillions, Wide Receiver
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Eric Sprott Speaks Out About Physical Gold

Friday, April 16th, 2010

Here is a transcript of Eric Sprott’s interview with Maria Bartiromo, on CNBC.

I haven’t bought in and I’ve been wrong since March ’09. I still have a deep deep concern about the leverage in the banking system, a view which I’ve expressed over the last decade. I look at the inability of the government who are spending vast amounts of money to generate much growth in GDP.

In fact, there’s been some excellent work done on how the marginal value of a dollar spent by government is now negative. I can give you the example of running a $1.5-trillion deficit last year, and GDP goes up $200-billion, so we’re not getting much bang for our buck, but we still owe the buck at the end of the year, as we will at the end of this year, so I very much worry about that.

I also worry about what’s going on in China. The Chinese government has asked the banks to cool down the lending. The latest data in March shows that lending’s gone from 300-billion in the month, to $100-billion. I just look at $200-billion less each month, that’s $2.4-trillion less per year if it was to stay that way, and it obviously has to have an effect on their economy, as the lending of $2-trillion did, positively, last year.

When you look at China in 2009, they had a $4-trillion economy; they lent $2-trillion to people, they had a $600-billion stimulus, should generate some GDP growth. I’m not even convinced that 10% growth, which would be maybe $400-billion is a very good response to all the measures that we’re taking.

Re: Sprott Physical Gold Trust (PHYS)

Toronto is the capital for mine financing in the world, and in fact some people think, for resource financing in the world, and we’ve been a big part of it. Our view was that we wanted to could come up with a better vehicle than the SPDR Gold Trust (GLD). We think that we have a much better vehicle than the SPDR Gold Trust (GLD) for THREE main reasons:

1) You can actually get physical gold with your Sprott Physical Gold Trust (PHYS) units. You can’t with the SPDR Gold Trust (GLD)

2) the Tax rate on capital gains on our vehicle (PHYS) is 15%, in SPDR Gold Trust its 28% because the IRS considers it a collectible, and therefore taxes it differently.

3) The counterparty to owners is the Royal Canadian Mint, where we store the gold, and I would assure all your listeners that every bar is there. Its not a leveraged financial institution, its part of the government of Canada, and the risk of that institution not having the gold is remote.

Why Gold? Why gold now after the run its had …
Its been the investment of the decade, hands down, not withstanding central bank selling in it all decade long. I would say that gold looks better today than its ever looked. We have sovereign risk on the economic map today, that we didn’t have on the economic map before, and as I look at the problems in Greece, and I see people taking $4- or $8-billion out of the banks because they’re worried about the government, so they’re taking their money out of the banks, and maybe it’ll move to the other PIG countries, where do those people put those currencies? I think we can see that lots of people are putting it into gold, including some of the smartest investors in the world today.

Do you like other mining related commodities?
We love Silver, obviously as an offshoot to gold; Silver will act better than gold. There’s not as much silver inventory in the world as there is gold inventory. I’ve not been as big a proponent of the cyclical-based metals, copper (has doubled or tripled off the bottom), nickel, zinc, (some have tripled or quadrupled off the bottom), but I haven’t been there, because I worry that the economy, that the financial crisis that we went through, that we are supposedly out of, that we’re probably not out of it.

We’ve moved things from the private company space to the public company (sector) space, you know with the government taking over Fannie, the Freddies, and the AIGs, the Europeans bailing out the banks, the British bailing out their banks, and now the focus goes back to the government; so we’ll just see how long people will continue to buy their sovereign debt. If they stop buying their sovereign debt, then the reason we’re owning gold will just become more apparent.

How should a portfolio be positioned (or rather, how are you positioned)?

We run hedge funds, so you can be long and short at the same time, and as long as your longs are doing better than your shorts you’re okay. How deeply should you be involved in precious metals. I’m only going to give you my own experience:

We are 40% long precious metals, and we’re another 35% long precious metals stocks. We’re 20% long in Oil and Gas, and the rest miscellaneous. So, we’re essentially all in. We probably have the most levered position to those products that you could possibly imagine.

What’s the catalyst to move stocks lower?; I know you’re looking for this market to crack.

I think if a problem of slowing in China happens – you know the market in China peaked out in August last year, hasn’t gone anywhere. Their market doesn’t look like its buying into the Chinese experience as much as we’re buying into the Chinese market experience.

Source: CNBC.com

Tags: Banking System, Banks, Canadian Market, Chinese Government, Cnbc, Commodities, Economy, Eric Sprott, GDP, GDP Growth, GLD, Gold, Last Decade, Lent, Leverage, Marginal Value, Maria Bartiromo, Measures, Phys, physical gold, Silver, Stimulus, Trillion, Value Of A Dollar, Wince
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