My fellow Slope-a-dopes;
As SOH's self proclaimed Idiot Savant, It is my distinct privilege & dubious responsibility to advise you, that the moment of recognition we have all been anxiously anticipating is now most assuredly close at hand. Initially, I had thought we would make one last push up above the 200MA, setting us up for the traditional Pere Noel jingle bells rally into the new year. We would then plunge into the seminal swoon sometime in the first half of Q1. However, as the popular Bob Dylan song goes, "Things have changed". A powerful confluence of perilous macro & micro developments have now formed a critical mass, which in my estimation, can no longer be contained, and may well force the market's hand right here right now………afterall this is Evil Plan 29.0! (1929 crash)
THE MACRO WARNINGS
The tiresome uninspired European summit just concluded, has once again succinctly demonstrated that Europe's problems are far from resolved, and that there is clearly no quick remedy to the deeply ingrained structural problems facing the Eurozone. No matter what new fiscal constraints, monetary largess, & leveraged funding is put forth, one thing remains undeniable, the EU can not escape the irrefutable manifest fact that the majority of the Nation States within their union are either now insolvent, or well on their way to becoming so. Furthermore, most of their largest financial institutions remain crippled by the very holdings of impaired debt that these Nation States have issued. There is no easy way out of their quandary. It is clear that they will try a combination of monetary largess & fiscal austerity to attempt to rectify their perilous dilemma. But, in the end, the massive amounts of outstanding debt obligations will simply overwhelm their efforts to contain it. The only possible way out, would be an acceleration of GDP growth, which given their present circumstances is clearly unachievable, and simply not in the cards at this point. The coming inevitable deep Eurozone recession will only exacerbate the untenable situation. Before long, each Nation State in the debilitated EU will have to answer to its infuriated citizens. Angry calls for EU defection & default by populist nationalistic politicians will emerge, and they will soon sweep into power. The European Union as we know it, will be critically compromised. Any realistic observer of the current situation, knows this to be true. The Eurozone today, is the largest economic block in the global economy. The often heard naive notion that the USA, and the rest of the world, will simply decouple from the economically depressed EU, is simply not credible. Dupont & Texas Instruments issued stern outlook warnings this week, soon many other global players will follow. Multinational corporations comprise nearly 25% of the S&P 500. The market will react!
China, that perfect centrally planned paradigm / engine of global economic growth continues to show warning signs of a serious slow down. Growth in Chinese exports and imports slowed in November, further evidence of the faltering demand abroad and at home. Saturday night's lower than expected export data only added to the slew of weaker numbers that have been steadily rolling out of the Chinese ministry of truth as of late. Fresh customs data showed exports expanded 13.8 percent year on year in November, the lowest in nine months, and it was the most sluggish performance since November 2009 when the traditionally volatile month of February is stripped out. Some will say that this opens the door to further stimulus initiatives by the central planners, but those will be limited in scope, constrained by their ongoing need to keep inflation in check. It is worth noting that Jim Chanos, an astute investor, continues to very publicly hold firm to his "hard landing" thesis. This from Reuters; "The famed short-seller said he's puzzled by the readiness of Standard & Poor's to downgrade the sovereign debt of countries like the United States and much of Europe while continuing to give a nod of approval to China and its banks. "The rating agencies are getting this one really wrong," Chanos, the founder and president of hedge fund Kynikos Associates, told the Reuters 2012 Investment Outlook Summit." What do he and his team know?
Russia, that bastion of economic and political stability, is once again showing the fragility of its sham democracy. Is the Putinator finally losing his indomitable iron grip? This from Forbes today; "Tens of thousands of Russians took to the streets from the far and cold eastern coastline all the way to Red Square, chanting “Russia without Putin!”…….In the elections, the ruling United Russia party lost 77 seats in the state Duma, taking them out of a full power position which enabled them to change the Russian constitution without needing votes from other parties. The Communist Party, the number two party in the Parliament, also known as the Duma, rose from around 50 seats to over 90, its biggest jump since the fall of communism in 1992." And from this morning's WSJ; "Fear gripped the market again on Friday as investors sold on the eve of what may be Russia's largest demonstration in years near the Kremlin on Saturday. The RTS slipped 4.3% Friday, compared with a 2% drop for the MSCI Emerging Markets Index and little movement in Brent crude-oil prices. The ruble dropped against the dollar and the euro."
What about Brazil? Well, its much heralded, unabated economic growth model seriously stalled in the third quarter, as the eurozone debt crisis dragged on global demand, and the country's increasingly indebted consumers retreated after nearly three years of buoyant spending. Demand has slowed for Brazilian exports like iron ore and soybeans at the same time that domestic consumption, a real engine for growth in recent years, has tapered off. Last Tuesday, the government announced, that Brazil posted zero growth from the previous quarter, a very sharp slowdown from the breakneck annual growth of 7.5% in 2010. Economists have revised down their forecasts for growth in Latin America's largest economy to around 3% this year, a far cry from the robust heady days of 7.5% in 2010. And this from the WSJ of Dec 6th; "Undercut by the continued deceleration in the country's industrial segment that is now affecting the services sector, Latin America's largest economy slowed to growth of 2.1% in the third quarter versus the year-ago period. Worse, economic activity was flat from the second quarter, with both industry and services contracting."
India's economic decline is way under reported. The Bombay stock exchange has been one of the world's worst performing stock exchanges this year. The BSE-30 index is off 18% year to date, worse than the stock market of any other BRIC economy. Inflation has stayed above 9%, and even more alarming wage inflation is also on the rise. The Reserve Bank of India continues hiking interest rates. India's finance ministry recently released a statement showing that rising interest rates caused industrial growth to drop to 5% from April-November, a significant drop from last year's 8.8% growth. Another very alarming development, is the massive capital flight in the wake of the European debt crisis and India's corruption scandals. Foreign investors have invested a net $550 million in Indian equities so far this year, down from $28.9 billion during the same period last year! The rupee is at its lowest levels since the currency was allowed to float against the dollar in the early 1990s. Furthermore, Moody's recently cut India's banking sector outlook to negative, from stable; "India's economic momentum is slowing because of high inflation, monetary tightening, and rapidly rising interest rates. At the same time, concerns have emerged over the sustainability of the recovery in the US and Europe, and the rise in the borrowing program of the Indian government, which will drain funds away from the private credit market." The market will react to the BRICS' demise!
Well, according to many pundits in our esteemed financial industry, we are the last standing lynch pin of global economic stability in the OECD countries, since our consumer driven economy apparently will simply never die. Not so sure I can go along with that upbeat characterization, as the reality is that at best our economy is sputtering along at anemic growth levels. In its fourth quarterly report of 2011, the UCLA Anderson Forecasts outlook for the nation sees gross domestic product growth at a "below-trend rate" for the next five quarters. Specifically, the forecast calls for a 2% growth rate for the current quarter and a sub-2% growth rate for most of 2012. And, let us not forget that Q2 came in at a paltry 1.3%, followed by Q3 GDP of 2%, which was revised down from the previously estimated 2.5%. Not exactly blazing saddles, nor anything to write home about. Some will point out, that the recent economic data points spewed out by the BEA, ESA, BLS & others are indeed improving. I have seen the numbers, yet remain very skeptical. Is the data reliable? Should we believe these economic indicators? Don't the figures always get revised downwards at a later date? The recent, seemingly out of nowhere, sudden reduction in the unemployment rate from 9.1% to 8.6% does not inspire much confidence in any of the Government's statistics. Even our notorious chief cook and bottle washer himself, acknowledges that our economy is mired in a protracted slump. In his 60 minutes interview airing tonight, according to Bloomberg's advanced transcript, he states the following; "Make no mistake, restoring the US economy to robust economic growth, is a long term project, and will take more than one term, and likely more than one president." To which I reply, "no shit sherlock". On a more serious note, the very well respected Economic Cycle Research Institute's ECRI Index, continues to forecast a recession directly ahead. In an interview with Tom Keene on Bloomberg TV yesterday, Lakshman Achuthan of the ECRI said the two dips were different. “The downturn we have now is very different than the downturn in 2010, which did not persist,” Achuthan said. “This one is persisting. Give us a year, and you’ll see If we’re right on our recession call." ECRI's pessimistic prognosis, does indeed seem in-line with the most recent much weaker outlooks that have been just announced by key multinationals Dupont & Texas Instruments. There is no reason to doubt that others will soon follow. The market will react!
THE MICRO WARNINGS
4. HFTs: According to some estimates, high-frequency trading by investment banks, hedge funds and other players accounts for up to 70% of all trades in U.S. stocks. Apparently this was true as far back as 2007, and interestingly at that time, the new dominance of borg trading was also being praised for its significant contribution to much higher trading volumes on the exchanges. Yet, what I find puzzling, is that I constantly hear that today's trading volumes are way below the norm of the past 5 years, and is steadily decreasing year over year. What gives? If the HFT borgs have added volume, where is it? It's not like they are less prevalent in today's market. If anything, with the incessant advances in technology, and programing methodology, there should be more of them, and accordingly more volume. Yet oddly enough, the volume on the NYSE continues to decline. That leaves only one other possible explanation, and that is that the other 30% have left the building entirely. Apparently, we Slopers still valiantly trading against the borgs, are now close to extinction. Perhaps, this lack of volume, combined with the dominance of the HFT borgs explains why the tape acts as it does. I closely watch each tick go by all day long. It seems so utterly automated to me now, almost void of any human character. The direction of the tape is obviously difficult to predict, yet the daily overall action of the tape seems completely mechanical and redundant to me. On a typical day, starting from the open the market swings back and forth 50-60 points for the first 60 minutes, and then settles into a directional range. From Noon to about 2PM, it slows down to a crawl with little movement at all, and then at aproximately 2:30PM it makes a sudden powerful lurch in the direction it wants to go, which usually establishes the day's outcome. Finally in the last 5 minutess it now often makes a quick 30 point spurt up or dive down. On other days, which you guys call trend days, it opens and quickly establishes a set direction, then goes into painfully exasperating auto pilot mode. Two to three ticks up followed by one to two ticks down, with an occasional 10-20 point move, all in the same direction, all damn day long. So what's my point? Well, I am now convinced that this market can be, and is controlled by a very few select hands, which know exactly where and when they want to move. How often have we reached important key technical support/resistance levels, which should hold on the first attempt, and yet we cut right through them like butter. Or the inverse happens, as we test support or resistance levels for a 2nd and 3rd time, which should be breached, yet the market seemingly out of the blue, violently reverses and changes course. Also, when an established daily trend seems finally in place, it is suddenly inexplicably quickly snuffed out, and the borgs go on a busting rampage, quickly taking out a gazillion stops in a few minutes, only to return back to that same established trend 30 minutes later. So where am I going with all this? Well, if the market is indeed getting so thin, that a handful of powerful reprogrammed HFT computers can move the market at will, what will it eventually lead to? My take, is that the borgs actually distort the market to such an extreme, that they move it significantly away from its otherwise normal trend. This then leads to ever increasing insane volatility, as the market desperately tries to find its proper level, in an attempt to fight off the borg's wicked pre-programed, automatted, mechanical opportunistic distortions. I believe the market in some sense is now broken, and the longer the borgs control it, the further it may be getting away from its true value. To me, it feels very much like the day is near, when the market becomes so stretched beyond its proper value, that it will simply implode, violently reaching its true natural level without very much notice at all. That time may have arrived.
5. Complacency: I must say, I continue to be amazed how unphased most people seem to be regarding the impending economic realities & difficulties clearly unfolding before our very eyes, which I believe can not be escaped. Sometimes, I ask myself, what's wrong with me? Why am I so obsessed with this? I often force myself to shake the feeling off, so as to join in and enjoy the ebb and flow of daily life. Don't get me wrong, I do and have enjoyed my life very much, yet the warnings appear everywhere I look, and I can not hide from them. A slow motion economic train reck is directly ahead, and I always seem to hear the rumblings of the train on the tracks wherever I go. The extreme complacency in the market is equally amazing to me. I mean why in Gods name would any thinking person, come to the conclusion that we can actually race up here, and make new highs in the market. And yet I know, that many way more intelligent people than I, believe strongly in just such an outcome. I am familiar with the arguments for making new highs. Argument #1, the FED can continues printing, sending all risk assets to the moon. But, come on now, does anyone honestly believe that we can print our way back to prosperity? And, that the market can simply launch higher, in the face of every real world fundmental economic health indicators which continue to deteriorate. How can anyone think we are better off today than we were at this Summer's highs? Have we not learned, that QE gets us virtually nowhere in terms of improving economic realities on the ground, as in gainful employment for the many, and the creation of real growth for the entire economic system that sustains us. Argument #2, technology, and productivity gains will propel us to a higher order. Admittedly, this one is tougher to refute. However, I don't buy it either. Sure technological advancements have vastly increased productivity in terms of automated production, supply chain management, communications, as well as the myriad welcome new discoveries in many fields. However, these innovations also have a down side, as they have rendered many hands formally on deck, now obsolete, useless, and no longer needed in our high tech / service oriented economy. Can we now all instantly become chiefs with no Indians? And if not, where do the Indians go, and what do they do? Perhaps this explains why so many are spending so much time on the new fangled social networking platforms. To me this use of technology is questionable, as I see it as a somewhat unproductive narcissistic distractions. Still many others, are using the new technology to overdose on mindless entertainment. Don't get me wrong, I enjoy a good movie like everyone else now and then. But, come on now, some of us are clearly losing ourselves in many of these suspect new mediums, and activities. Argument #3, we are smarter today, and will not let things get out of hand, like our ancestors before. This one is not even worth reponding to. The market will react to this abundant complacency!
6. Seasonalitiy: I realize that the Saint Nick rally is almost a wall street institution at this point, but I just don't see it as something one should pin ones hopes on this year. I mean really, do the algos celebrate Christmas? Well, I guess their programmers might embrace the holiday season, but they don't exactly seem like the charitable types. What about the all important political economy? It's an election year afterall, and we always go up in election years right? Well, I think we could quite possibly be in for the opposite surprise this year. The economy will be front and center all over every form of media medium we have, and we do have many. The US economy will be batted about like a pinata on a string, its weakness will be repeatedly, and relentlessly exposed for all to see. Even those in complete denial, will be made aware of our dismal economic plight. Furthermore, what can the FED, and or the administration really do at this point to revive this critical patient? They have pretty much exhausted their bag of tricks. I'm afraid the little black doctor's bag is empty, all the psychotropic drugs & narcotics have already been administered, only the morphine syringe is left to use. The market will not be impressed during this election cycle. The market will react!
So yes my brothers in arms, I am expecting the resistance to be formidable up around the 1265 level, should the market even get there. And, If it is so bold to attempt another run back up towards 1300, unlike the Maginot line of the hapless French, the blockade will hold, and firmly reject the market's advances.
Behold Evil Plan 29.0…….The Crash Landing is close at hand!
BDI SOH's Idiot Savant
p.s. Should I be completely off target, I have my natgas call options, as a hedge to fall back on;-)