Emerging Market Cyclical Decline, Developed Market Previous Investment, Looks Bigger Than Greece

I've never witnessed a candlestick in the Dow Jones Industrial Average of today's kind. What's more is that this candlestick formation is common among all indices and heavily traded stocks. Learned observers seem to have a common opinion that this is not only unusual, but also historical.

The bizarre dynamic happened with market futures opening with indications of a significant decline, 800 points down for the Dow. Next was a climbing opening for the Dow, reaching about only 400 points negative, then a nose dive of up to 1,100 points. That is a capitulation to sell. Then I saw the sellers capitulate to higher pricing and the Dow reached a point of being down only 140 points.

Volatility shot through the roof, and the prices of options also shot up. Then down, then up. In fact liquidity in options seemed rather slow due to the rapid and extreme movement in index pricing. Such pricing difficulty presents complication for one seeking to open a new position at this time. Even exiting a profitable position was difficult today. But really not bad at all, with these price movements. Essentially, the exits got clogged today, then the entry got clogged, then market makers didn't want to undersell the market or oversell the market.

Market pricing at this point isn't just an issue of a couple day's sentiment. Reality is in the equities of China collapsing. China is the 2nd largest single country economy in the world. By itself, China's stock can do what they do. But when China's stock market makes significant moves, one must search for implications. The most ready implication is confirmation of pricing discrepancy between China's real GDP performance against China's equity earnings performance.

Perhaps China's stock market got well ahead of itself. And maybe China's policy makers realize that.

What appears to be most concerning for U.S. markets is emerging market currency decline, due to cyclical demand declines. This dynamic pressures pricing of all commodities. Should emerging markets really be entering the decline aspect of their economic cycle, the yield hungry investors from developed economies provided substantial debt to the emerging markets. Today, the combination of emerging market debt and emerging market cyclical decline bring a ration of reality to U.S. equities. That seems to be what we see.



 

China is Once More Disturbing Markets

I trade the markets, and I've found an unsettling development this week. Where last week I found the markets respond in deep decline to China's currency devaluation, that same market came back the next day in a seriously bullish action. In fact, the market closed up considerably. This last price action happened on Wednesday of last week.

Since Thursday of last week, the major indexes are flat. Essentially, the bulls showed major resilience, but no capacity to follow-through over a few days now. Same with the bears, which got their back broken on Wednesday of last week.

Otherwise for the Dow, Walmart guided down and Home Depot outperformed. I think Disney was downgraded, by someone (ESPN cable issues). Disney owns the franchise. Yet, the only proprietary franchise merchandise I care to get off ESPN is during college football season (cancel and reconnect).

Looking at Monday, the indexes were up and finished with a little rally at the close. That looked bullish going into Tuesday, and looked promising for a follow-through increase. But on Tuesday morning, the indexes were down, and finished the day down, and more pointed is the indexes were down only marginally.

Today of August 19, for the first time in several days, a significant decline was observed in all indexes. Such a decline was not linear. Rather, the decline occurred after a major rally, but the push up ended in considerable decline given the range since last week.

Causation certainly appears to be China and it's stock index losing 6% on Tuesday, only to lose 4% today but find a 1% gain at closing today. This leads to the appearance of the Chinese government support of their stock market not being the salvation once thought.

Probably more concerning is that the People's Bank of China released more money to their associated central banks than since January 2014. That by itself is meaningful. Especially when this release of funds occurs at a time after a currency devaluation.......How much money did China expend in preventing a collapse of their currency. How much more money will be needed for a second resetting down of currency price.

Perhaps an appropriate question is whether China devalues again. Market pressures seem to want more devaluation. And, China wants their currency to reflect markets. Their stock market, however, isn't so much based on a market. Large stock holders can't sell and the government today took a step back on Tuesday from supporting prices. Perhaps China's troubled state owned enterprises are buying stock to support the market. Yet, if China follows the policy of their currency, and remain consistent with their stock market intervention limitations, that stock market is going to follow market influences in a fashion similar to their currency.

Further Chinese yuan/renminbi devaluation only increases the cost of China's bloated foreign currency debt. It also makes China's exports comparatively cheaper. Between the two "onlys", which is more powerful?

By devaluing a currency, a country makes debt burdens more difficult for domestic businesses that hold foreign, especially U.S., denominated debt. This situation namely arises in China for its property development businesses, which seem to be a Potemkin village. However, most of this debt is held by state enterprises, which is ultimately China's corporate debt, and not the state held debt.

Memorial Day

Given Memorial Day, we must remember those forever loved, now lost, in the service of our Country.

https://www.youtube.com/watch?v=BB2Ad04mukI

Just last Monday, Fed Chair Yellen said equity prices are high. Yes, that seems to be a rational conclusion. After all, the S&P 500 P/E appears around 20, plus some change. Nonetheless, I hear that historically such a number isn't too high.

Reality is that in the past, even with equity bubbles, there was the prospect for increasing business propositions. Namely, the internet in early 2000's. A bubble occurred, popped and finally did realize a profound growth potential. Which by the way created super technology to create the banking bubble realized in 2008 with Lehman and others.

Now, banking is probably way too conservative on lending criteria. Yet they have to be to comply with capital requirements and the balancing of equity versus lending. That dynamic leads to stunted growth in capital development in business.

We also have a condition of net loss of jobs globally, due to automation. That obviously leads to a net loss of consumers. I've mentioned previously what Henry Ford did for his company, and the market, many decades ago.

Today, consumers remain as real as they did yesterday. So often, a corporation will automate a job once held by a human, to be replaced by a machine. Like I've said, the machine doesn't buy any products, while the human will ultimately by products, if not a Ford pickup.

To make sales, one needs buyers. Therein resides the difficulty of this present day economy. Corporate revenues, a.k.a sales, are flat to down. That does not simply imply a flat buyer of products, it screams a flat and down buyer of products.

O.K. I will play the game.....who the hell do you sell to when all jobs are gone.....How about selling to call center folks all day long. Thank God they can hire a plumber.

Tell you what, after lifting about a ton for exercise and running a few miles, there is nothing I adore more than a  McDonald's hamburger and french fries. No ice cream, I save the appetite for meat and potatoes. I get my ice cream in the morning. If I wake up in time.
 

Fed Did Talk Down the Dollar, But we are Bid Up All Other Assets

You got me. The Fed statements were....shall I say very dovish. In fact, I heard substantial commentary that the Fed came out unexpectedly dovish. My view is that the Fed talked down the dollar overall, with immediate market results. Perhaps the Fed took a page out of the ECB's play book, is what it looks like.

What disturbs me is how equities went wild on a fatter hog rally. Reality is, the Fed will not be pumping more cash into this system. The ECB will be pumping cash into the euro system. How does that cash translate into U.S. dollars given the current trade difference of currencies between euro and U.S. dollar? Not like it used to be.

People that make a living off this stuff will have to play the game. In the mean time, I recall Chair Yellen saying equities aren't BEYOND historical norms. Does it really take pricing beyond historical norms to prove a problem? Prevention of bubbles is the first teaching to learn. Second is deflate the apparent bubble in order to prevent an explosion.

Certainly a bubble was occurring with the U.S. dollar. That was talked down today by the Fed, and good work. That is the best thing I can take out of the historical message. Otherwise, it's bid up on other asset's high prices.  

Where Will Markets be Upon Fed Remarks: Disappoint Equities and the Dollar

Tomorrow at 2:30 Eastern Time, the U.S. Federal Reserve will hold its press conference that will announce its monthly decision. This meeting is especially crucial due to whether the central bank will increase interest rates or not. Most particular in investor curiosity is guidance, or language of some sort. From the Fed suggesting when the inevitable rate increase will likely occur, to when it might not occur, are the signals. That is, will the interest rate increase happen this year or next, or this Spring or Fall. Also of note are indications of under what circumstances a rate increase might occur. These matters are of considerable import in bull/bear market debates.

Where the Fed has been using a word, being "patience", on their timing of increasing interest rates, market consensus is that the Fed will eliminate the word "patient" from their often elusive "message" to the markets. The entire question does reside in how the Fed fills the hole left behind from abandoning "patient". Does the Fed replace the idea of patience with "light this candle" and rush interest rates (unlikely, they look like s.m.art.). Or does the Fed say they are going on light throttle touching increases, to see how the ship flies. Or, do they speak with a big stick and walk lightly with a month to month review of interest rate increases. This approach would really be learning how to fly through this unprecedented valley of history.

Ultimately, given the rise in the U.S. dollar and the rise in U.S. equities, the Fed needs to disappoint both asset classes. Increases in the U.S. dollar have been untold for nearly a half century. The rise in U.S. equities produce a consensus regarding a needed correction of considerable depth outside of channel up trajectories. Look at IPO's (especially among technology companies), falling earnings projections, sustained stock pricing, and challenges to revenue quality.

Small capitalization stocks see a weakness as well. How many services do these small cap companies offer to the employees of big capitalization companies? Or, how many services do these small caps offer to the big caps? Or, how many small caps are looking to be acquired by a big cap? These are drip down feelings for small caps, if big caps get hit too hard with our global environment.

To further make the point, for a big cap company to appropriately acquire a small cap, a condition of health should exist in the big cap. Consequently, a disturbing condition would occur should a big cap start acquiring small caps to help hide global weakness produced by dollar strength and declining global demand. By the way, dollar strength and weakening global demand are trends that don't look very transitory, unless the Fed acts to arrest the dynamic in some fashion.

Looking at actual influences on Fed decision making, perhaps a look at the last CPI data will help on perspective.

Strongest perspective is to say that while the headline CPI from the BLS for January, last reported on February 26, 2015 was -.7%, and for the year ending January it was down -.1%.  But the story isn't over. Food for the months of July to last December held a run rate of price increase in the area of .3% to .2% and found a flat .0% in January, 2015. Overall, for the 12 months ending this last January, the rate of price increase for food resulted in 3.2%, well above a 2% Fed mandate. Out side of energy, most elements of the CPI increased more than 2% for the 12 months ending January. The increases beyond the Fed's 2% inflation mandate are:

Home food ending 12 months January increasing  3.2%.
Away food ending 12 months January increasing  3.1%.
Medical care commodities (same period)             3.9%
Shelter (same period)                                          2.9%
Transportation services (same period)                  2.1%
Medical care services (same period)                    2.3%

How about this versus petroleum, natural
gas and coal 's substantial decline: (shocked by this)

Electricity (same period)                                     2.5% (increase)

Keep in mind, energy in general has declined over the last year from 20% to 35%, depending on products. The meaning to be taken is that petroleum prices are essentially the only element that prevents the Fed from exceeding its inflation target of 2%. Last Fed meeting, Chair warned of "transitory" energy prices...meaning petroleum and gas. These two elements are children on the play ground of where the reality exists.

I've heard every day for the last 3 months about a bottom for petroleum, or no bottom. Petroleum is in a transitory dynamic driven by its own market cycle, which is a new cycle given U.S. production. Consequently, petroleum's influence on inflation can, and will, change based on that sector's response to the market.

These facts show the importance of the service industry in the U.S. and its association with the real U.S. economy. Looking at BEA reports, services in the U.S. have exceeded goods in sales by about 50%. Further, most of the above GDP areas that are exceeding 2% inflation are service industry related. Consequently, most of the U.S. economy is motoring above 2% inflation. It's only when one factors in giant drops in petroleum that one sees a muted disinflationary environment. Taking out the oil influence, the U.S. is experiencing a level of inflation generally well above the target of 2%.

Why oil is transitory are common and daily debates on where, when, who and at what consequence any price of oil will be realized. These debates could finally be realized on the side of inevitable market stabilization. Any stabilization will probably be increasing petroleum costs, that add to existing inflation that already exists through other areas of the economy. Overshooting the target by the Fed is their risk at this point. After all, petroleum is going through a cycle that will be self-correcting by its own giant market, without the Fed raising or lowering rates.

Where Fed Chair Yellen mentioned transitory energy prices in terms of interest rates, it appears real. Tomorrow's announcement seems to be setting up to be more aggressive than just removing the word patient. More like, see how the motor works on an aircraft never having reached this elevation.

Reality is, the U.S. dollar needs to be disappointed by "not enough", equities need to be disappointed by "too much", and bonds need to hold ground by warming up to their month long yield increases. At least until the Fed's next review of circumstances. Perhaps, if the buck gets talked down a little, with enough doubt on movement, equities will perhaps respond. Bonds can be let down at their choosing in their own confusion. Let's see how it plays out.

Markets Now Seem Risk On, But Fundamentals Have Not changed

Did you see that market reversal? It looked so bearish, but then there was a complete pattern change. How about that. Once oil stopped its fall, everything went risk on. While I absolutely agree that American innovation is at work every day, I can't agree that the American company is an island unto itself.

The American consumer is proving tepid, except with, of all things, SUV cars. I like any vehicle with a wide foot print and a comparatively low profile. I like this feature for safety reasons. That really limits my options to a couple of companies.

Looking at the chart of the U.S dollar, we can see stability. Take a look:

From oil and the U.S. dollar, compare high risk assets, such as high yielding bonds:



We do have a risk on attitude. My posit is that two causative points exist for a rally in risk on assets. First, and for some reason, a bottom in oil has been thought to be found. Excluding fires and strikes, the fundamentals have not changed in oil. Where gas pricing can be seasonal, the fundamentals also have not changed. Even if SUV sales increased, reality is this idea of "subprime" vehicle loans. Frank reality is, versus the real estate market, those vehicles get repossessed over night and sold the next day. Second is why not buy in a bull market where any news is good news, despite U.S. multiples advancing on stock pricing.

Confusing the issue is the drop in U.S. treasury values. Stated otherwise, the spike in U.S. treasury yields. Look at the 10 year:



Any person with a conscience can see that rise in the 10 year yield, which means a drop in the price of the 10 year U.S. Treasury Bond, is a whole bunch really fast, despite trends and changes in fundamentals.

The guard to put up now is despite no real change in economic fundamentals over the last month, one should become cautious. This looks so much like a strange head fake to be caught on an over-head cross punch, if you've ever boxed. Maybe not. But look at the fundamentals.

Looking at currency markets, we are seeing in equity and debt markets, what I think is a bull's head bounce on risk assets, not a real issue that will deviate from stronger cross market trends. I could certainly be wrong.

Always remember, I offer opinions only, no investment advise. For investment advise, learn from ideas and ask of the person holding your money.

Reality of Markets, Look at European sustainability

Equity markets were down today. I don't like to say bearish chart patterns might be gaining more conformation. If you please, see yesterday's post on this space.

I must, however, notice fundamental data. Germany"s industrial production disappointed by showing a December number of advancing .1% v. an expectation of .5%. Year over year, Germany's industrial production is down -.4%. Combine this with CPI data from Germany, and a point should be evident.

Today, France showed a growing trade deficit for December, despite a persistent decline in their currency, being the euro. France's trade deficit actually grew in December by 3.4B euro. But, to be intellectually honest, I must explain that France grew in exports by 1.8%, and this does reflect a 5th rimonth of continued gains. France needs that. But France also shows a 2.6% rise in imports. I have key chains France might like.

United Kingdom (England), similarly showed a merchandise trade (balance of trade) number of -10.2B sterling. Anticipation was only -9.1B euro.

We need to see this data for what it is. Essentially for me, I was surprised that my chart patterns proved out today. Now, more data must be considered. Any reader of this internet, or mobile communication space, must become astute and self responsible.

I write opinions. Which, in the course of  how opinions develop, need to be challenged. I have to welcome all thoughts, ideas and people that want to review the previously spoken....If there is something to be said, bring it, my friend. I will treat you with respect, dignity and I will try to answer any question.

Market Volatility: A View on Markets, Based on Bonds and Charts

Obvious for markets today is the volatility associated with price movements. My first exhibit is this chart of the S&P 500, which looks rather "whipsaw" in fashion:

Evident from the chart is how the S&P has went up and down in fast gyrations. Such movement would certainly dissuade me from having any association with this market at first glance. Yet, as one can see, a range has been set. Second observation is that a chart pattern might be proving itself. If one opens the chart, today's high of the S&P remains lower than the last high. The last high was on January 22 at 2063, today's high, on February 5, reached only 2062. That sets into place a bearish descending triangle pattern, given two essentially equal lower price points of 1992 on January 15 and January 30. One can argue a third horizontal price point on January 6 at 1992 on the lower end of the candle.

Such a set up tends to portend rather bearish. Same can be said for the Nasdaq, but not as technically precise, here's a look:

Nasdaq reveals also a falling triangle pattern. Open the screen up and one can see more clearly...being falling highs for the Nasdaq, with a February 5 close at 4,765 versus its previous high on January 26 of 4,771. Add to this the nearly equitable triple bottom of December 16, January 6 and January 16, and we have a close to perfect descending triangle.

By themselves, no one can rely on but a few chart patterns to see the tea leaves. Reality is that the Dow can look rather bullish. A cautionary tail for all stocks is the out-performance of Disney for the Dow and Apple for the S&P, and certainly for the technology space.

 Consequently, I have to visit the VIX to gain a better understanding. Let's see:

What I see are higher lows and lower highs. In the chartist's form of understanding, and if I'm not mistaken, this looks to be a defining form of a bullish symmetrical triangle. Meaning the VIX could go up, based on chart patterns. When the VIX goes up, stocks go down.







Charting, I suppose, is based mostly on past behavior that has proven itself reasonably reliable over time. The question raised by that proposition is how reasonable. I looked for other indicators to spell out this issue.

I couldn't help but notice the yields for short term U.S. treasuries. Those yields have been resiliently high in anticipation of an increase in short term interest rates by the Fed, and have helped to flatten the yield curve. Because of this, we need to look at the charts and see what they say. Right below is a chart of the 5 year U.S. Treasury:

Next below is the 10 year U.S. bond, which really provides a baseline, being longer term, this chart provides dimension for our next diagrams:

 Did you see the progressing drop in yield of the 10 year U.S. Treasury bond over 2014. In 2014, money liked the idea of low yield and safety. Most noted, however, is the drop in the 10 year yield at the start of 2015, steep. Does that drop in yield betray a deeper issue, perhaps of global implications?






This 10 year U.S. Treasury yield countervails, but eventually meets, sentiment in short term treasuries. Let's look again at the 5 year U.S. bond:

One can see how the five year treasury bond held its yield so well through 2014, but sacrificed so much ground at the start of this year. What do you suppose made the 5 year treasury lose so much yield? Or, stated otherwise, gain so much in value nearly over a month?

This question is confirmed in its need for an answer by taking a gander at the U.S. Treasury 2 year, we need to see:

This 2 year treasury bond increased in yield through 2014 like nobody's business. Only in the stock market "correction" of October, 2014 did it break its trajectory. Now, it has once more broken its trajectory.

My observation is that short term treasury yields fall when, in the short term, economic prospects look weak, safety is needed, and uncertainty exists. Such prospects result in a later than expected increase in rates by the Fed. Further, such increases in the price of short term treasuries typically are associated with stock market weakness. But, it is here that we are witnessing a divergence. Despite short term treasuries breaking their trend line, stocks are simply too volatile to touch.

Viewing treasury  bond activity along with the activity in the stock exchanges, and VIX signals, one can expect a decline in markets. In fact, tomorrow will tell if the chart patterns for stock exchange indexes such as S&P and NASDAQ get further confirmation, or lost. The chart pattern for the VIX looks disturbingly resilient.

Overall, fundamentals need to be noticed, and these fundamentals seem to be leading indicators based on short term treasury yields.

Conoco Phillips, Occidental Petroleum earnings, lets learn from the Guilded Age.

Oil earnings in the morning, with a Q4 price squeez.

In the morning starts the 4th quarter earnings announcements for oil and refining companies. While most of these companies did well through the end of Q3, 2014, the price of oil started its sell off really on September 30 last year. Since that time, West Texas Intermediate as gone from a September 30, 2014 value of $91.32 to a December 31, 2014 price of $53.71.

Comparables for oil companies will be Q3, 2013, when West Texas traded at $94.25 on December 31, 2013. For Q4 of 2014, the West Texas grade of crude traded down, but experienced deep losses in December. Basically West Texas started Q4 at $90 and ended on December 31 at $53.71. That involves a steep percentage loss in market value.

Where the U.S. consumer stands, they fill more volume on the same budget.

Congruent with this fall in oil prices has been a notable decline at the pump for gas prices. This could explain an expansion of consumer confidence, which posted a sharp increase outside of analyst estimates. Last month, the gauge posted at 93.1, expectations were for 96, and the reality returned a 102.9. Better than the most optimistic of expectations.

Despite this lift in consumer confidence, we have three U.S. metrics to address, and were reported just recently. The first is the -.9%  decline in retail sales for December. The second is a reduction in durable goods orders of -3.4% for December and a -.01 decline in industrial production.

Overall, the American consumer is skeptical of job condition improvement and wages. Also, and most noted, is the American consumer is filling up their gas tank at cheaper prices. You see, as prices decline, one can use the same previously budgeted dollars to gain more volume. This explains the decrease in the Energy Information Administration's volume of distillates, including gasoline. People are simply filling up at the same price point, but getting more volume.

Ultimately, consumers will not have to fill up for considerable periods. Because they have more volume in their tank, at the same budget price point, versus a few months ago. Also, better MPG is a fact.

We also have the reduction of capital expenditure from oil producers, a noted fact. Then we have job cutting occurring in the once vibrant and job generating oil space. This is also a noted fact. These developments come from perhaps one of the most vibrant spaces of the American economy. Consequently, any producer of oil production would want to see a return in real demand from consumers. That is, without a doubt, a matter of competitive price advantage.

So, let's see what American oil producers say in the morning. Obviously, margins will be stretched. Certainly, for a few production and refiners. We've seen where some airlines hedged at high prices, and have to pay back those hedges.

The real need of economies is for consumption, equating to why jobs happen.

No economy in this world can afford to spend too much on the concept of simple transportation at this time. Global economies need the consumer and jobs to grow, with a little pricing power of wages, therein will reside the power of company earnings. Pricing demand can occur outside of financial engineering (stock buy backs and dividends) , QE, or EQE, and also outside of routinely depressed interest rates. My proposition for this is Apple, how about that? They expanded sales, despite the cautions of others.

To be certain, so many companies for the last many years have relied on returns to stock buyers, without regard to the consumers of their products. Do we have to go back to the Guilded Age. I think Henry Ford gave people a wage to buy products. What an idea. Now companies hire robots that will never buy, but instead consume a company's maintenance budget and cap ex budget. All the while these robots save considerable dollars, ultimately to deplete the work force that consumes. The logical result is a net loss of available consumers to buy the product.

We are entering a static state of a real economy, and an artificially financed economy. Today, Bill Gross put it best by saying this economic situation we are in hurts capitalism.

Dow down, consumption surplus, investment in delivery

Today, the first real trading day of the year,  markets saw nearly  a 2% decline in the U.S., and that happened firstly in Europe, and Asia. Real issue is a global transition from investment and creation of production, to who is going to consume.

I saw Rick Santelli on CNBC talk about no real rise in 10 year yields. He said it, and his time horizon is very reasonable, he provides a very good perspective.  Follow him on http://www.cnbc.com/id/15837966 .

A point to review is capacity of consumption. QE has certainly provided the investment to build capacity. Now that the U.S. has been through a strong cycle of money that grew production capacity, can the American consumer buy it up? Chinese consumer is nascent at best, Japanese consumption is notorious. Europe can be a likely card. Greece leaving the euro at this point wouldn't really matter, save for further deterioration of the countries constituted to honor the currency.

Fact is, the investment cycle associated with QE is confronting that next day. Next day is who buys that invested production? That is a question of global implication,  only because it's the U.S. Dollar.... That next day view of hoped growth wanted a rise of demand. All of us wanted to see, and expected,  global growth of demand, but it didn't happen. There is an inclination to deflation.

That is why oil and markets went down today. What I see, and look forward to, is the second stage of growth across the globe. That is, transporting  production and the technology to do it. But, this time, more efficient and effective.