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I was invited to speak at a luncheon yesterday and outlined the merits and drawbacks of the Healthcare Reform Act of 2010. The talk was well received however I discerned that there is so much frustration in people that they feel like they have no voice and they are angry.
Each person that posed a question really needed an outlet to vent. In fact, the majority of the questions were rhetorical.
I've tried to position this presentation in an even handed fashion where we examine the good stuff about the bill and point out the things that need improvement. At the end of the day no one will argue that the current system doesn't really stink. Unfortunately I still have not heard anything that convinces me that we can come close to paying a portion of the future liability we are signing up for.
Face it, if I wasn't concerned about the future cost and long term fiscal solvency of my family I would drive new cars every year, live in a house that was 5 times larger, trade for a living, write a blog, and take two week vacations in Paris and blame it on a volcano. However, I am pragmatic and focused on reality therefore I weigh the risk and the cost of each purchase.
Our government's leadership does not possess the same value system that I do and this is why this program is doomed never to make financial sense. When we raise taxes and add a VAT it still will not be enough to meet the future obligations created in this plan.
Don't get me wrong, I want everyone to have insurance and be healthy, I just want someone to show me the money!
The presentation was divided into two parts. The first 18 slides were the subject matter in my talk, the remaining 40 slides provide details about the timeline of implementation and highlights the provisions as they are scheduled which I did to cover. - I did not include the additional slides here, but I will attempt to make them available on along with the actual vocal commentary when I post it on You Tube and post on my blog.
In February 2009 (when the Dow-Jones was hurtling towards 6500) I made a startling prediction:
"The Obama stimulus package, worth some 800 billion USD, the 1.9 trillion USD in TARP funds and the endless Fed injections and auctions are bound to revive the moribund American economy by the third and fourth quarter of 2009. The Dow-Jones is likely to touch 10900, consumption will recover, as will housing starts and, in some markets, housing prices. But this 'recovery' will prove to be a false dawn. It will last 2 quarters at most and will be followed by a recession so deep and dangerous that it would truly qualify as a Depression. The current recession is merely a prelude to the depression of 2010-5."
(Quoted from my article titled "The Next 18 Months: Recession, False Recovery, Depression", dated February 22, 2009).
In December that year (2009), in an article titled "Dow Jones: On the Way to 4800", I modified my prediction and called the end of the rally at DJIA 11200. On the week of April 28, 2010, the DJIA reached 11200 and reversed sharply.
From the February 2009 and December 2009 articles:
"The Dow-Jones may yet see-saw between 7800 and 11200, but as the dimensions of the crisis emerge more clearly, it will head to its next technical target: 4800.
Here are the reasons:
(i) The stimulus should have been more sizable, taking into account the dimensions of the crisis.
The fate of modern economies is determined by four types of demand: the demand for consumer goods; the demand for investment goods; the demand for money; and the demand for assets, which represent the expected utility of money (deferred money).
Periods of economic boom are characterized by a heightened demand for goods, both consumer and investment; a rising demand for assets; and low demand for actual money (low savings, low capitalization, high leverage).
Investment booms foster excesses (for instance: excess capacity) that, invariably lead to investment busts. But, economy-wide recessions are not triggered exclusively and merely by investment busts. They are the outcomes of a shift in sentiment: a rising demand for money at the expense of the demand for goods and assets.
In other words, a recession is brought about when people start to rid themselves of assets (and, in the process, deleverage); when they consume and lend less and save more; and when they invest less and hire fewer workers. A newfound predilection for cash and cash-equivalents is a surefire sign of impending and imminent economic collapse.
This etiology indicates the cure: reflation. Printing money and increasing the money supply are bound to have inflationary effects. Inflation ought to reduce the public's appetite for a depreciating currency and push individuals, firms, and banks to invest in goods and assets and reboot the economy. Government funds can also be used directly to consume and invest, although the impact of such interventions is far from certain.
(ii) The US government should have nationalized the big banks, let other financial institutions that are not too big to fail do so, and force mergers and acquisitions on the rest. Half-hearted measures intended to provide balance-sheet relief are unlikely to restore trust in financial intermediaries. In the absence of such trust, banks will not resume their traditional roles of capital allocation and interbank lending. As it is, we are likely to see a run on some of the banks, including at least one or two majors (probably Citigroup and Wells Fargo).
(iii) Europe's real economy as well as its financial sector are a mess. France, in sliding officially into a recession, has joined Spain, Ireland, and, now, the United Kingdom and Germany. The "recovery" there is feeble as false as the one in the USA. Battered by a strong euro, expensive energy, and mighty competition from China, the US, and India, European exports have stagnated. As opposed to the USA (where exports constitute 18% of GDP), Europe is dependent on foreign carbon fuels and foreign markets for its goods and services. Exports constitute more than 40% of Eurozone GDP.
Moreover, Europe's commercial banks are in horrible shape – far worse than America's. This year alone, European banks must pay 1.41 trillion US dollars in principal and interest, mainly to bondholders. They don't have the money and they cannot borrow it from other banks because interbank lending has all but dried up. Many of them are already technically insolvent. They are also over-exposed to emerging markets in Eastern Europe, Latin America, Africa, and Asia as well as to profligate eurozone members such as Greece and Spain, Italy and Portugal, and, outside the eurozone, to the crumbling economy of the United Kingdom. Austrian, Greek, Swedish, and German banks are exposed to default risks throughout Central and Eastern Europe. Consumers and businesses in Serbia, Ukraine, Hungary, and other teetering economies owe Austrian financial institutions $290 billion – almost the entire GDP of this country!
As local currencies depreciate in the near future (when the US and China sink into Depression), debts, denominated in foreign exchange, will grow more expensive to service. As the real economy contracts, in the first phase of what appears to be a prolonged recession, bad loans mushroom and reserves are exhausted. This requires cash-strapped governments to recapitalize major banks. Faced with current account and budget deficits, some of these sovereigns are scrambling for outside infusions from the likes of the IMF.
Europe's recession will be profound and protracted. Asia is likely to follow suit: Singapore, Japan, South Korea, and Taiwan are already technically in recession and China's growth rate is a fiction, fueled by massive and indiscriminate lending by state-owned banks. A contraction of GDP in both India and China is no longer inconceivable. It seems that yet again, the USA will be faced with the daunting task of dragging the rest of the world back to growth and profitability.
(iv) To finance enormous bailout packages for the financial sector (and the auto and mining industries) as well as fiscal stimulus plans, governments will have to issue trillions of US dollars in new bonds. Consequently, the prices of bonds are bound to come under pressure from the supply side.
But the demand side is likely to drive the next global financial crisis: the crash of the bond markets.
As the Fed took US dollar interest rates below 1% (and with similar moves by the ECB, the Bank of England, and other central banks), buyers are likely to lose interest in government bonds and move to other high-quality, safe haven assets. Moreover, as countries that hold trillions in government bonds (mainly US treasuries) begin to feel the pinch of the global crisis, they will be forced to liquidate their bondholding in order to finance their needs.
In other words, bond prices are poised to crash precipitously. In the last 50 years, bond prices have collapsed by more than 35% at least on three occasions. This time around, though, such a turn of events will be nothing short of cataclysmic: more than ever, governments are relying on functional primary and secondary bond markets for their financing needs. There is no other way to raise the massive amounts of capital needed to salvage the global economy."
Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant Self Love – Narcissism Revisited and After the Rain – How the West Lost the East. He served as a columnist for Global Politician, Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory and Suite101. Visit Sam's Web site at http://samvak.tripod.com
The general market finally started the consolidation. Here are some updates on SPY and IWM.
SPY Daily
I have a short term downside target of 115.17.
IWM Daily
IWM has already broken the Tuesday's low. My short term target is 69.80.
GS Daily
I shorted many financials together with GS and they are all doing quite nicely. GS is the key for the general market to make a new higher high for the coming months.
XLF Daily
BIDU Weekly
BIDU made exactly the two folds from the breakout point and closed right at a=c target.
AAPL Weekly
Whatever happened to BIDU would happen to AAPL if the pattern holds. This is a great opportunity to look for a good long entry for the long-term AAPL position. I would be probably looking into the recent gap fill to put on the Jan 11 butterfly position.
Note: I had published this material in August of 2009 on my former blog. I "discovered" these indicators on my own, but after the fact I did find that the VIX:VXV ratio has been conceived by others in the past. The charts are out of date, but they still illustrate the major points.
The following is a research report on two unique technical indicators for timing swing highs and lows in the S&P 500. The report analyzes the constitution of volatility indexes, and then uses the insights drawn from that analysis to develop market timing indicators.
INTRODUCTION
The mechanics behind the VIX are taken for granted. The VIX, or Volatility Index, is constructed by the CBOE to index the implied 30-day volatility of the S&P 500. This means that if the VIX is at x, certain arithmetic yields that the market is supposed to move +/- y% in the next 30 days. That is all that needs to be said of this indexes’ intended purpose.
The VIX is known as a fear gauge because it spikes during panics, which coincide with market bottoms. Analyzing the reason behind this fact and then discovering and exploiting its predictive value is the purpose of this research report. Surprisingly, the answer to why the VIX is a fear gauge is: a bi-product of simple number properties.
THE EQUATION
Above is the equation for how the VIX is calculated. Don't be intimidated. Don't be distracted. You don't even need to know what all the variables stand for to get the key takeaway. All you need to know to understand the volatility equation is in the green circle and red circle that are drawn.
The green circle shows you that the VIX is based on the weighted sum of many values. Those values are based on S&P 500 option prices and strikes. Essentially, each S&P option with a bid greater than zero contributes its weight to the VIX. In the red circle, K is the variable for the strike price. A mathematical property of 1/K^2 is that the greater the value of K, the smaller the weight, and vice-versa.Think of deep out of the money put strikes versus deep out of the money call strikes.
The former will have a much greater weight; e.g. 1/600^2 >> 1/1500^2. Therefore, put options must have a greater weight that call options in the calculation of the VIX. So, when enough investors are buying puts that expire within 30-days with incredibly low strikes, you can expect the VIX to soar to heights as lofty as the horror is profound. That behavior is important because it signals profitable buy points– that is the heart of the matter. Most other volatility indexes, such as those on other equity indexes or commodities, are calculated with the same formula.
One last thing I would like to add to further illustrate the point is a simple schematic I have made. It gives a visual of the result of the mathematical property described above. The Y-axis is for the weight of an option in the VIX calculation. The X-axis represents the strike prices, ranging from out of the money put options, to at the money options, to out of the money call options. Notice how the weighing mechanism is not symmetrical.
When a mad scientist creates a beast with an intended purpose, that beast often turns and surprises its maker with displays of its own unique will. CONCLUSIVE EVIDENCE FOR BEHAVIORAL INTERPRETATION OF THE VIX
In a university lecture on technical analysis, Robert Prechter said, "The stock market is efficient at expressing the herd mentality."
For those of unfamiliar with Google Trends, it tracks the volume of Google keyword searches. I am not the first to write about it as being a useful sentiment indicator, nor the first to present the chart below. That chart is a plot of the weekly VIX against the search volume for the term "stock market". It dates from early 2005 to the end of August 2009 (Google Trends publishes delayed data.) Most analogous terms, like "Dow Jones," "stocks," or "recession" produce similar results.
Note the incredible, high correlation between Google keyword search volume and a financial index with a complex equation and dozens of inputs. I have yet to encounter better evidence that the market is an expression of behavior, as opposed to the continual pricing of a stream of material information. With the VIX, the behavioral element behind levels is very pure.
THE HEART OF THE MATTER
The prior sections on volatility indexes have served as an introduction. The insights I have drawn have led me to ask: since the VIX is a very pure expression of behavior, and behavior can aid in the prediction of short term (ST) and intermediate term (IT) market movements, how can I best isolate the predictive value of volatility indexes, just as VIX at 30 was a reliable buy signal in the past?
S&P 100 VS S&P 500 OPTIONS PARTICIPANTS, PART I
The basic sentiment interpretation of volatility indexes' peaks and troughs is that at peaks, fear is high and one should buy, and at troughs, complacency forebodes some sort of decline in the prices of the stock market. This strategy works because markets tend to turn directions at the extremes of both emotional states.
The original volatility index, VXO, was based on the S&P 100 (OEX). Later, the VIX, based on the S&P 500 (SPX) was created and gained prominence. Comparing these two different groups of options participants revealed that consistent behavioral qualities can be identified.
In the chart below, I took the ratio of VXO to VIX, and plotted it against SPX, (to be exact, the 9-day SMA of the ratio, for clarity's sake.) You can see that the ratio and SPX are nearly mirror images. During market troughs, this ratio is higher, indicating that VXO is out-performing the VIX. In other words, at these instances, OEX option traders are more fearful than SPX option traders, as they purchase more or deeper out-of-the-money puts.
The same is true for relative highs in the market; OEX traders are more complacent than SPX traders. This behavior is consistent throughout the history of these volatility indexes. It is not random. One cannot attribute this difference to a higher volatility in OEX; if this were the case, there is no reason why this ratio should be lower at market highs. We can therefore induce a specific quality of OEX vs. SPX traders, as well as another indication that these indexes very accurately quantify the emotional states of the collective whole.
The next section demonstrates how this ratio can give buy and sell signals. S&P 100 VS S&P 500 OPTIONS PARTICIPANTS, PART II: THE VXO TO VIX INDICATOR
Just as price-based horizontal resistance and support lines as well as parallel channels provide accurate signals in financial indexes and commodities, so do they with sentiment. Emotions can be relative; humans build tolerances and are adaptive. During a sustained run up you will see higher highs in optimism; in sustained declines, higher levels of pessimism. There are also certain absolute levels of fear, such as the former VIX 30 level. Channels capture relative levels whereas horizontal lines capture absolute levels.
VXO:VIX best provides signals with channels. For this indicator, I like using the 9-day EMA as opposed to the actual ratio. I drew some circles to make it simpler to detect some the signals.
THE VIX TO VXV INDICATOR
The VXV is the 90-day volatility index of the S&P 500. The ratio of VIX:VXV (below) is the expression of sentiment about the near future relative to sentiment of a more distant future. Since VIX and VXV are both based on SPX options, there is surely an apples to apples comparison. In times of panic, people become a lot more focused on the immediate future, therefore, the shorter term index, the VIX, should out-perform VXV, raising the value of the ratio to indicate panic.
This indicator provides good buy and sell signals on horizontal levels and on channels. (However, it gave a false sell signal in July.) I believe that when it reaches that level again, it will be a potent sell signal. This chart plots the actual ratio, not a moving average. Notice the sell signals near the bottom of the ratio’s range, and the buy signals along the descending green trend line.
COMPLACENCY AND PANIC SPIKES
Throughout my blog you will find various examples of using bars that are buy and sell signals. There occur infrequently, which improves their accuracy. With the creation of a liquid ETF to trade the VIX, ticker VXX, I expect these spikes can be taken advantage of for a trade to a greater degree, as they indicate absolute and relative overbought and oversold levels for volatility.
That concludes this study. My goals have been to 1) provide insight into the workings of volatility indexes 2) use these insights to argue that they are a very pure expressions of behavior based on the simple emotions of fear during stock market drops and elation/complacency during rises and to 3) introduce valuable timing indicators.
