Posts Tagged ‘Stimulus Package’

Cashin On Rumor Versus Reality

Wednesday, May 30th, 2012

 

The avuncular Art Cashin opines on the roller-coaster of unreality that has been the equity markets for the last few days as outcomes become increasingly binary and investors increasingly herded from one direction to another. His sage advice – as if spoken by the most-interesting-person-in-the-world – “Stay nimble”, my friends.

Via Art Cash of UBS,

Rumors Versus Reality With Rumors Resurgent At The Wire

Yesterday, there were rumors about that Chinese authorities were working on a new stimulus package. That cheered Asian markets and allowed European bourses to tiptoe around a deteriorating situation in Spanish banks.

Even before the U.S. markets opened, the semi-official Xinhua news agency of China began pooh-poohing the rumors. The rumormongers would have none of the denials.

A package would be announced after the markets closed (presumably in Europe – circa 11:30).

That backdrop allowed U.S. stocks to open better in a rather sharp, sigh of relief, oversold rebound.

They even shrugged off some lousy consumer confidence numbers at 10:00. Since the confidence data sharply countered Friday’s University of Michigan numbers, traders deemed them likely inconclusive.

The rebound rally held into the European close.

The rumors apparently morphed again. Simon Hobbs on CNBC said his sources suggested some announcement might come after the European close. The sense seemed to be that it would emanate out of Europe – not China.

After the 11:30 European close, U.S. stocks began to fade and rather rapidly at that.

The Euro fell through a trapdoor.

Was it just disappointment at no announcement? It looked a little too sudden and sharp for that.

Attention shifted to the cut in Spain’s rating by Egan-Jones. The timing was certainly coincidental, but did the somewhat small agency have that much clout?

Also contemporaneous with the Euro drop were analyses of an odd switch in a weekly ECB report.

There was a decline of over 25 billion Euros in collateral posted on the most recent LTRO. In another part of the ledger there was an increase of over 34 billion Euros in “other claims” (frequently smoke for emergency loans).

That raised speculation that the ECB may have “called” a loan, as the value of the posted collateral deteriorated. The bank, perhaps, could not find valid replacement collateral and shifted to emergency loan status.

While that seemed rather technical, if true, it raised fears that the banking situation in Spain, and elsewhere could even be worse than we knew.

The Euro-led selloff petered out around 1:30 EDT after cutting the morning gains in half.

As the day wore on, the China stimulus story began to resurface. That led to a bit of a flurry in the final half hour. Also, helping were media reports that election polls in Greece were shifting toward Euro-safe sentiments.

Overnight – EU Proposal Starts Roller-Coaster Ride – Pre-dawn this morning the situation in the Spanish banking community took several sharp turns.

The FT had reported that the ECB had vetoed the Bank of Spain’s plan to recapitalize its banks, particularly Bankia.

The Euro fell to a two year low before the ECB tweeted that there was no veto. European markets stabilized.

Then, the other shoe dropped.

Around 7:00 EDT, the EU commission issued a surprise plan to channel aid directly into European banks rather than through the treasury of their sovereign.

The announcement caught the European markets off-guard and sharp spike rallies erupted, erasing all, or most, of the earlier selloffs.

Then the doubts began to pop up. Would this clear the Merkel wing? Could it be set up within existing treaties?

The doubts stopped the rallies and prices faded but failed to go into freefall. That’s why I keep stressing staying nimble.

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Richard Koo: Are We the Next Japan?

Wednesday, September 28th, 2011

by Trader Mark, Fund My Mutual Fund

Richard Koo is a well respected economist, but he does not get much play on the major U.S. business infotainment channels.  He is probably considered the foremost expert on the malaise that has been Japan the past 2 decades.  Money magazine just published an interview with the man, and his comments are quite interesting.  Warning for those leaning right: on first glance, he sounds like Krugman-lite, although his framework is a bit different.

——————-

  • There’s no shortage of debate as to whether the Obama administration and Congress have done the right things in attempting to avert a debt crisis and revive the stalled economy. Richard Koo, the chief economist for the Nomura Research Institute, a Japanese think tank, says that government spending is the key to getting the economy back on track — and that 2009′s massive stimulus package didn’t go far enough.
  • While Koo’s kind of thinking is decidedly unfashionable, there are good reasons to listen to him. A Japanese-born Taiwanese-American, he worked at the Federal Reserve Bank of New York in the 1980s. For the past 27 years he’s lived in Japan, studying its economy in depth and writing what many consider the definitive analysis of Japan’s “lost decade” – “The Holy Grail of Macroeconomics: Lessons From Japan’s Great Recession.” Koo, 57, recently spoke with MONEY senior writer Kim Clark; their conversation has been edited.

Why do you say that this recession is different from others the U.S. has had?
Typical recessions are part of normal business cycles, when overconfident businesses overproduce and then have to cut back. This is what I call a balance-sheet recession. It’s caused by an overload of debt.  It’s a very rare type of recession that happens only after the bursting of a nationwide asset bubble, like a real estate bubble. Once the bubble bursts, the debt remains. The assets, in this case homes, are underwater; their prices are way down, but all the consumers’ original debt remains.

The Federal Reserve recently said it won’t raise interest rates for two years. Won’t that help?
No. Monetary stimulus doesn’t work until balance sheets are repaired. Right now consumers are using their cash to pay down their debt. The economy is depressed because no one is borrowing or spending. Consumers don’t want to borrow, even at [very low] interest rates. And lenders don’t want to make loans to consumers who will struggle to pay them back. You need fiscal stimulus. That means the government should borrow and spend the money in the private sector.

When Japan fell into recession about 20 years ago, we had no idea what was happening. Interest rates were lowered to zero, but the economy still did poorly. Every time the government stimulated the economy, it rebounded nicely. Then when they pulled back, it lost steam again.

Some people look at Japan and say the government spent huge sums on public projects and there was no real growth, so spending didn’t really cure the economy.
The early ’90s recession in Japan was far worse than people realize. Commercial real estate prices nationwide in Japan fell 87% from the peak. Imagine U.S. housing prices down 87%. The fact that the Japanese government halted what could have been an enormous drop in GDP in the early ’90s speaks to the success of its economic policies.

But Japan did suffer a major recession again in 1997.
The Japanese made a horrendous mistake in 1997. The Organization for Economic Cooperation and Development and the International Monetary Fund said to Japan, “You are running a huge fiscal deficit with an aging population. You’d better reduce your deficit.”

When the government cut spending and raised taxes, the whole economy came crashing down.
I see exactly the same pattern in the U.S. today. If the government acts to cut the deficit while people are continuing to pay down their debts, then we could have a second leg of decline that could be very, very ugly.

Since 2008 the Fed has been trying to boost the economy — and prevent price deflation — by buying Treasury bonds. What has that done?
The Fed’s so-called quantitative easing has failed to contribute to economic growth. By taking the new Treasury supply away, it forced the private sector to put its money into equities, commodities, or real estate.

With real estate in a tailspin, the money went to commodities and equities on the assumption that the economy or profits would pick up. The effect was to push stock prices to higher levels than could be justified by genuine cash flow or corporate growth.  Now, with fiscal stimulus disappearing and GDP growth slowing, people have realized that equity prices are essentially overvalued, and that is the correction we are currently seeing.

So are you saying that the stimulus package didn’t go far enough?
Obama kept the economy from falling into a Great Depression. But you never become a hero avoiding a crisis.  The economy is still struggling, so people say that money must have been wasted. Not true. The expiration of that package is behind the economy’s weakness right now. Yes, the Bush tax cuts were extended last year, but tax cuts are the least efficient way to support the economy during a balance-sheet recession because a large portion of the cut will be saved or used to pay down consumer debt. Government spending is much more effective.

MONEY recently interviewed Carmen Reinhart, an author of what’s now thought of as the authoritative history of financial crisis. She warned that economies that build up gross deficits in excess of 90% of GDP weaken significantly. The U.S. recently passed that mark.
Before the next balance-sheet recession comes, you’ll have plenty of time to cut the deficit. (Mark’s note – in theory the government should cut back in good times, and spend in bad times.  The reality is the government never cuts back during good times, because everyone is drinking Kool Aid and wants to get re-elected)

Of course, Congress recently committed to slash our deficit by $2.5 trillion as part of the agreement to avoid default.
It is good that Congress managed to avoid default. But they should keep in mind that Japan’s deficit actually increased when the government tried to cut the budget while the private sector was paying down debts. The cutback caused a second recession.

Think about the Great Depression; war spending is what finally pulled the economy out.
The Japanese government didn’t do enough spending in the early 1990s and added another 10 years to the problem. If the U.S. avoids that mistake, maybe in a couple of years you will be out of this mess.

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Bridgewater Associates – How Ray Dalio Built the World’s Richest and Strangest Hedge Fund

Tuesday, July 19th, 2011

by Trader Mark, Fund My Mutual Fund

If you are into the world of hedge hoggers, the New Yorker has a pretty fascinating piece on Ray Dalio and Bridgewater Associates.  Technically, Bridgewater is the world’s second largest hedge fund ‘firm’ behind JP Morgan but JPM has a few other (minor) businesses like being the country’s largest TBTF.  We almost never see Dalio speak, but I’ve referenced his March 2011 CNBC interview. [Mar 3, 2011: Rare TV Interview with Manager of World's Largest Hedge Fund - Ray Dalio]

This is quite a lengthy piece, but I’ll post some of the items that are investor specific.  Indeed, he might be more dour than I am. ;)

  • This spring, he told me that economic growth in the United States and Europe was set to slow again. This was partly because some emergency policy measures, such as the Obama Administration’s stimulus package, would soon come to an end; partly because of the chronic indebtedness that continues to weigh on these regions; and partly because China and other developing countries would be forced to take drastic policy actions to bring down inflation. Now that the slowdown appears to have arrived, Dalio thinks it will be prolonged. “We are still in a deleveraging period,” he said. “We will be in a deleveraging period for ten years or more.”
  • Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said.
  • Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said. (where I differ is I believe eventually the ECB will be backed into a corner and ”print” and follow the Fed model)  The recent deal to avoid an immediate debt default by Greece didn’t alter his pessimistic view. “People concentrate on the particular thing of the moment, and they forget the larger underlying forces,” he said. “That’s what got us into the debt crisis. It’s just today, today.”
  • Dalio’s assessment sounded alarmingly plausible. But when one plays the global financial markets a thorough economic analysis is only the first stage of the game. At least as important is getting the timing right. I asked Dalio when all this would start to come together. “I think late 2012 or early 2013 is going to be another very difficult period,” he said.

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China’s Housing Bubble: New Evidence

Friday, July 15th, 2011

by Christian Dreger and Yanqun Zhang, via VoxEU.org

15 July 2011

For a while now, analysts have been arguing there is a bubble in China’s property market. Using records from 35 major cities this column finds evidence of a housing bubble. It compares house prices to cointegrated fundamentals and finds that property in China is in general overvalued by around 20% – and even more so in the boom towns.

For many observers, the Chinese economy has been spurred by a bubble in the real-estate market, probably driven by the fiscal stimulus package and massive credit expansion (Nicolas 2009). For example, the stock of loans increased by more than 50% since the end of 2008.

In reaction to the global crisis, the government urged banks to increase lending (Cova et al. 2010). Mortgage loans have played a significant role, as they account for one third of total lending activities. Banks have provided easy credit for housing development, probably without sufficient evaluation of risks. In addition, state-owned enterprises have stimulated the development, having access to low-cost capital and believing they are too big to fail.

There are several indications that the market might have overheated in recent years. In some cities, buyers are picked up by the seller in a lottery. The rapid increase in house prices triggers exuberant expectations and speculation. Some real-estate developers have started hoarding houses by delaying their sales hoping for higher profits. Due to higher-price expectations, families are stretching to pay prices at the edge of their means or beyond.

To dampen the evolution, the People’s Bank of China has increased its nominal interest rate. The Chinese government has also introduced measures to combat record prices, including mortgage rates and down-payment requirements for second homes. In some cities, house owners are restricted in new house purchases. Many state-run mortgage lenders have cut mortgage discounts. Additional taxes on property are in the pipeline. While housing prices in the first-tier cities stopped rising further, they are still at record levels. Housing prices are not only a problem from an economic perspective, they’re also an issue of the people’s livelihood that can affect social stability. Households with average income increasingly feel that they cannot afford to buy a house (Deng et al. 2009).

A burst of a house-price bubble can be harmful for the real economy. Due to the low leverage, the risk that people are not able to fund their mortgage commitment might not be very high. However, housing investment accounts for 10% of GDP, and is crucial for economic growth. Because of the integration of China into the world economy, a bursting bubble can cause negative spillovers to other countries, particularly in the Asian region. The challenge for the government is to scrap out speculative activities without  killing an engine of GDP growth.

While accelerating house prices may indicate the presence of a bubble, its existence is rather controversial. Urbanisation trends, rising incomes, and low interest rates may all have triggered the rising prices. The ongoing trend for smaller families may have created strong demand. For many Chinese, especially for young couples, renting an apartment is not very popular. The regulation system does not give tenants much protection. Renters will lose their apartments if the home owner decides they want the building for a different use. Due to fast economic growth, millions of Chinese join the middle class each year, thereby contributing to high housing demand. Because of high saving rates, many households are able to buy a house with cash and are rather independent on mortgage loans. In addition, the uneven development across the regions has enhanced the housing demand in first-tier cities where there are better living conditions, more job opportunities, and better public resources. Overall, high house prices may be in line with the fundamental socioeconomic factors (World Bank 2010).

New evidence on the bubble’s size

In recent research (Dreger and Zhang 2010), we use a dataset for 35 major cities to estimate the size of the bubble relative to the equilibrium level implied by the panel cointegrating relationship. We suggest that positive deviations from the long run might indicate the presence of speculative bubbles. However, many analysts have argued that a bubble has emerged only in recent years, probably spurred by the recent fiscal stimulus package (Wu et al. 2010). Hence, the evidence can be misleading if the cointegration relationship is considered over the entire period. In a first step, we estimate the long-run relationship only up to some point in time. The fundamentals include real per-capita income, real interest rates, real land prices and population. Cointegration between these variables and the real house price can be established. City fixed effects are embedded to control for unobserved heterogeneity.

In the second step, the house price evolution is predicted over the rest of the sample, i.e. the last two years, where perfect foresight is assumed with respect to the fundamentals. This gives an estimate of the fundamental development of house prices, and the size of the bubble can be addressed. As an exception, land prices are held constant throughout the forecasting horizon to reduce endogeneity problems.

Our results indicate the presence of a house-price bubble. In Figure 1it can be seen that increasing imbalances have emerged over the past two years. For example, real house prices in Shanghai have been 28% above the long run equilibrium in 2008, and 35% in 2009. While the evidence is similar for Beijing, the increase is more spectacular in Shenzhen. Compared to the cointegrating relation, real house prices are overvalued by 66% in 2009, after 23% in 2008. In general, the bubble is more pronounced in the special economic zones and the south-eastern coastal regions. Overall, the size of the bubble is 20% in 2008 and 25% in 2009, regardless of whether GDP or population weights are applied.

Figure 1. House price bubble in major Chinese cities

Note: Size of the bubble expressed in% of the fundamental value implied by the cointegrating relationship.

Further analysis indicates that changes in real house prices cause inflation, but not vice versa. In contrast, there is no causality from house prices to GDP growth. Therefore, a decline in house prices may contribute to a lower inflationary environment without huge negative effects on real economic development.

References

Cova P, M Pisani, A Rebucci (2010), “Macroeconomic effects of China’s fiscal stimulus”, Inter American Development Bank, Working Paper 211.

Deng L, Q Shen, L Wang (2009), “Housing policy and finance in China: A literature review”.

Dreger C, Zhang Y (2010), “Is there a Chinese real estate bubble? Regional evidence and implications”, DIW Discussion Paper 1081.

Nicolas F (2009), “The global economic crisis. A golden opportunity for China”, Institut Français des Relations Internationales, Asie Visions 15.

World Bank (2010), China Quarterly Update, March.

Wu J, J Gyourko, Y Deng (2010), “Evaluating conditions in major Chinese housing markets”, NBER Working Paper 16189.

 

Copyright © VoxEU.org

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“The Big Interview” – Jim Rogers on debt, China, energy and gold

Monday, June 13th, 2011

In an interview with WSJ’s Simon Constable, famed investor Jim Rogers weighs in on what it will take to solve the U.S. debt crisis, why he’s shorting U.S. tech companies, why the stimulus package was a bad idea, the looming energy crisis, and some thoughts on gold and silver.

Part 1: Only a crisis can fix U.S. debt problem

Source: MarketWatch, June 10, 2011.

Part 2: U.S. not prepared for China’s rise

Source: MarketWatch, June 10, 2011.

Part 3: Shorting U.S. tech companies

Source: MarketWatch, June 10, 2011.

Part 4: Rogers talks gold, silver, oil

Source: MarketWatch, June 10, 2011.

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Update on Japan (Mobius)

Wednesday, March 23rd, 2011

by Mark Mobius, Vice-chairman, Franklin Templeton

I’m saddened by the devastation and the lives lost in Japan as a result of the massive earthquake, tsunami and multiple aftershocks. I worked in Japan during the 1960s and have been visiting the country at least on an annual basis to meet with clients, even though our emerging markets-focused portfolios do not invest directly in Japan. Living on a fault line, many Japanese people have experience with disaster drills to prepare for such natural disasters. If there’s one thing that I’m confident of, it is the ability of the Japanese people to bounce back from this disaster, as evidenced by their quick recovery after the 1995 Kobe earthquake, which occurred in a more economically vibrant area.

The fiscal stimulus package to get the Japanese economy back on track is expected to be much bigger than that for the Kobe earthquake. Although Japan has a large fiscal deficit, unlike the U.S. or European countries, it also has one of the largest foreign reserves in the world, second only to China at almost US$1 trillion.[1] Most of the Japanese debt is also domestically funded.

Some concerns have been raised on the impact to commodity prices. Demand for iron ore or steel from affected plants in Japan is likely to decline in the aftermath of the earthquake, but could be balanced by the higher demand for raw materials used in the country’s widespread rebuilding efforts. Hence, I believe the net impact on the demand for raw materials is unlikely to be significant in the long term.

Panic selling in the markets is a common knee-jerk reaction in times of crisis. At Templeton, we believe in looking beyond short-term events and volatility to consider the longer-term picture. Our investment philosophy instills in our managers and analysts the discipline to re-evaluate our holdings with a five-year investment horizon in mind.

[1] Source: IMF, WEO, as of October 2010.

Copyright © Franklin Templeton Investments

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Goldman’s Jan Hatzius Turns Quite Bullish, Helps Drive Rally – Financials Also Surge on Goldman Note

Thursday, December 2nd, 2010

by Trader Mark, Fund My Mutual Fund

An interesting day today – a lot of the go to ‘momo’ plays are doing little or reversing while there is a rotation into some laggard groups – most notably financials and housing.  Goldman’s Jan Hatzius (a very followed man on Wall Street) has made what appears to be a complete 180… or least 90 degree turn from his views from just two months ago. [Oct 6, 2010: Goldman Sachs - 2 Scenarios for U.S. Economy in Next 6-9 Months (a) Bad or (b) Very Bad]  This was released yesterday so either it was late in the day, or there had to be an excuse to drive up stocks today, and this was a convenient one.   Last bear left, turn off the lights.

Target for S&P 500 end of 2011 = 1450.

Via Business Insider:

  • “The most significant shift in 2011 and 2012 is likely to be stronger growth in the US. Five years ago, our US economic outlook was very pessimistic….Even one year ago, we still had a below-consensus view and predicted a slowdown in GDP growth to a below trend pace in 2010. The reason for this was that the improvement in GDP growth in late 2009 had been due to temporary factors, namely the inventory cycle and the impulse from the 2009 fiscal stimulus package.
  • With underlying final demand still stagnant, we thought that growth would slow through 2010, as indeed it has.  That was then. Now, however, we expect a substantial acceleration in real GDP growth over the next two years to a 4% pace by early/mid-2012. What has changed? Most strikingly, the performance of underlying final demand, or ‘‘organic growth.’’
  • Why such a sharp acceleration? Our best explanation is that the pace of private-sector deleveraging is slowing in an environment of somewhat lower debt/income ratios, improving credit quality and moderating lending standards.
  • Goldman’s economists now forecast 2011 GDP growth of 2.7%, up from a prior 2% view. They see 2012 GDP growth of 3.6%
That said, it will remain feeling like a recession for many of the citizenry:
  • “It is important to emphasise what we are not saying. We are not saying that the US economy will now embark on a V-shaped recovery. We believe that the drag from inventories and fiscal policy will still keep real GDP growth at a moderate pace of 2½% in the next couple of quarters.  And even the 4% growth pace that we expect for much of 2012 is still quite moderate relative to typical post-war recoveries.
  • We are also not saying that deleveraging is over. Indeed, private-sector debt/income ratios are still likely to decline further. But it is the pace of deleveraging——which corresponds to the level of the private-sector balance——that matters for GDP. As the pace of deleveraging slows, the private-sector balance falls, and this implies a positive impulse to GDP growth.
  • Finally, we are not saying that the economy will feel good from a ‘‘Main Street’’ perspective. We only expect a gradual decline in unemployment as growth moves above trend, to 9¼% by the end of 2011 and 8½% by the end of 2012.
—————-
As for the financials, a lot of strength as the higher 10 year yields go (mentioned this AM) the better the spread banks can make by simply turning on the lights.  Bernanke keeps short term rates at 0% so savers are destroyed banks can borrow ‘nearly free’, and then go buy 10 year US bonds for 3% (and rising), and we they all win. [Mar 31, 2010: Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors]  Of course the other side of the equation is the non stop losses incurred on past loans will slow down as the greater economy improves.
  • Goldman’s U.S. portfolio strategy team lifted financials to overweight, the first time it has been positive on the sector since the credit crisis shook global markets in 2008. “Stronger economic growth, higher equity prices, and a more supportive interest-rate environment are positive for many subsectors of financials,” they wrote.
  • Goldman Sachs cited four reasons to be positive on the sector heading into next year: (1) Loan demand should start to show signs of improvement amid a better macro backdrop; (2) Pressure on long-term rates should subside, benefitting banks and insurance companies; (3) Capital clarity (and hence redeployment) should improve in a positive growth environment as tail risks subside; (4) Higher equity prices should drive higher capital markets activity.
No positions
Copyright (c) FundMyMutualFund

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Unthinking Economic Parrots and Deflation Fighting Madness

Monday, November 29th, 2010

Unthinking Economic Parrots and Deflation Fighting Madness

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

The ineptitude of Japan’s policies hoping to combat deflation is staggering. Worse yet, unthinking economic parrots talking about the “economic damages of deflation” have no idea what they are even saying.

Please consider Japan passes new $61bn stimulus package

Japan’s parliament has passed a stimulus package worth about $61bn (£39bn), designed to kick-start the country’s fragile economic recovery. The stimulus was designed to create jobs, Prime Minister Nato Kan said, through measures to help small businesses and boost consumer spending.

Earlier, figures showed that Japanese consumer prices fell for the 20th month in a row in October.

The vote in favour of the latest stimulus measures represents a victory for the government, which has struggled to get the package through parliament. The move is in marked contrast to European governments’ policies, which are focusing on cutting spending to secure growth.

Japan has been struggling with weak growth, a high yen and deflation.

The core consumer price index fell by 0.6% in October compared with a year earlier, official figures showed. This was a slight improvement on the 1.1% price falls seen in September.

Deflation is particularly damaging to economic growth as consumers delay purchases until prices fall further.

Idiotic Premise

I stopped quoting the article on the frequently repeated premise “Deflation is particularly damaging to economic growth as consumers delay purchases until prices fall further.”

I wish economic writers had the ability to think rather than parrot ideas espoused by Keynesian clowns.

Series of Questions

  • If your refrigerator conks out, will you buy a new one or wait 6 months to take advantage of lower prices?
  • If the transmission on your car fails will you wait 6 months to get it fixed?
  • If your pantry is bare, will you wait 1 month to buy food even if you expect food prices to drop?
  • If you need a new winter coat, will you wait and if so, how long?

The answer to that last question is “Perhaps for a bit, but you will not wait 3 years even if you expect prices will be even lower 3 years from now.”

Short of assets like stocks, bonds, and housing (and except for periods of hyperinflation) it is tough to cite any examples where inflation expectations mean a damn thing.

Unthinking Economic Parrots

Yet week in and week out, articles like the above parrot misguided ideas about inflation expectations. Worse yet, they spew forth nonsense that falling ideas are a bad thing.

Ask anyone on fixed income if falling prices are a bad thing. Ask students or those on minimum wage if falling prices are a bad thing.

Think you will have many takers? From either group?

The only people who say falling prices are unwelcome are the bankers, the stock brokers, government and economic parrots who misguidedly trumpet economic claptrap from the bankers, the stock brokers, government, all of whom benefit from inflation because of rising taxes and/or because they have first access to money.

In effect, parrots serve as pawns for the wealthy, for central bankers, and for government officials who wants a bigger piece of your paycheck via rising sales taxes, rising property taxes, and rising income taxes.

In reality, inflation is theft from the middle and lower classes for the benefit of government, the wealthy, and also public union workers who have inflation adjusted benefits written into many of their contracts.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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Absense of Direction? Focus on Stock Selection

Wednesday, August 11th, 2010

The comments below were provided by Kevin Lane of Fusion IQ.

Over the last few trading sessions the S&P 500 has had its upside progress capped by the 200-day moving average (1,126 area) and its downside moves supported by the 100-day moving aver­age (1,115).

Trading volumes remain very tepid and aligned with the typical summer slowdown as we approach mid to latter August and the deep dog days of summer. It is hard to imagine the market mustering a lot of headway with trading volume so light. The one catalyst that could create a squeeze effect would be an ad­ditional stimulus package dished out by the government. At this point it still remains tough to take any big bets with regard to long/short asset allocation tilt.

We believe active and nimble trading strategies on select names remain the best way to take opportunistic shots at return un­til the rest of the market commits more to a direction with in­creased volume.

S&P 500 Index with trend lines (Daily Chart)

As seen above the S&P 500 continues to stall in the area of its 200-day moving average (red lines). The In­dex remains in an up-channel having sold off to its up-trend line (1,109 area – lower green line) again and bouncing back. This is the fourth test of that minor up-trend line in recent trading. The number of suc­cessful tests of this line suggests it is a valid trend line. Thus any violation of it would be a negative.

S&P 500 Index 31-day chart with trend lines

As seen above on the 31-day chart the S&P 500 is holding support in the 1,110 to 1,103 area (sol­id and dotted orange line). This line marks the difference between the summer rally holding or coming apart.

Source: Kevin Lane, Fusion IQ, August 9, 2010.

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Technical Talk: Trends still remain up on the S&P 500 as index hits 100-day moving average

Friday, August 6th, 2010

The comments below were provided by Kevin Lane of Fusion IQ.

The S&P 500 recently took out a resistance area (see chart below) near 1,115. The 100-day moving average (1,128) and the intraday highs near 1,131 stand in the way of a deeper breakout to the upside.

Near term the seasonal summer strength and the oversold rally continuation are the main trading themes. Many believe the ral­ly is predicated on a secondary stimulus package being tossed around Washington. Either way, the path of least resistance for now remains up and dips have been shallow. Investor sentiment remains dour (only 30% bulls in the recent AAII survey) and has helped stocks move higher as investor sentiment tends to be a great contrary indicator. The old saying is that the market exists to confound the majority and reward the minority, and certainly the majority lies in the skeptical camp.

That said, near-term momentum still remains up and until we get a dramatic shift towards negative internals traders are best re­warded with long strategies, albeit with reduced exposures and not full investment. The glaring negative is that the move up has been on light volume.

As seen above the S&P 500 has worked back above resistance in the last two sessions (red line) and remains in the context of a minor up-sloping channel (purple dotted lines). As long as the index stays above the lower channel line near 1,115 the bullish trend will remain in place.

Source: Kevin Lane, Fusion IQ, August 5, 2010.

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