Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

The Beauty Of Symmetry (by MacroStory.com)

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There are no other words to describe the symmetry between these two chart patterns than simply beautiful.

I purposely left the scale and dates off the charts as to not distract your eyes. It is simply too powerful to ignore yet that is what many have done, self included over the past two weeks as the 200MA blurred our vision. A somewhat meaningless number took our eyes off the pattern playing out before us.

Again as to not distract your eyes I color coded three distinct phases (phase 1 in orange, phase 2 in purple and phase 3 in blue). Notice the symmetry once again. But to me what is most powerful at this very moment is the position of the last few candles and the moving averages.

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Q1 GDP Advance (by MacroStory.com)

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The first look at GDP for Q1 2011 came in at 1.77% in real (inflation adjusted) terms, a decline from 3.11% in Q4 2010 and 3.72% in Q1 2010.

Below are the highlights.

A big drag was government that actually contributed a negative 1.09% to growth driven mainly by state government and national defense.

Inventory bounced back slightly and contributed 0.93% from a prior quarter contraction of 3.42% but clearly the inventory build cycle is declining.  Should retailers grow concerned about business conditions it is probable inventory will contract in Q2.

Trade was flat at negative 0.08% from the prior quarter where it actually contributed to growth by 3.27%.  The trade deficit contracted in Q4 2010 but the first two months of data in 2011 showed this trend reversing and thus highly probable to be a larger drag on GDP in Q2.

Looking forward to Q2 2011 GDP contraction is very possible and at risk due to government, inventory or trade.  This assumes consumers stay relatively strong as in this current report although a big portion of consumer income growth was from the government.  As government austerity becomes reality the Federal government will be a big drag on future GDP and very likely a cause of the next recession.

The next recession is the scary one when you consider labor is already in a difficult position and the government will be even harder pressed to stimulate or face the risk of rising bond yields.  This is when things get scary and I am of the opinion that Q2 could in fact be the next negative GDP print.

Charts below for your viewing pleasure.

 

 

 

 

Submitted by MacroStory.com – to read more please visit - MacroStory.com

COT Report Week Ending 3/8 (by MacroStory.com)

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The commitment of traders report for the week ending March 8, 2011 is a rather interesting one and shows the value in using the report.  Copper, followed by many has been signaling a move down in equities for a few weeks now.  It is off its highs by 10% while SPX has held in for the most part (down about 3%).  The question many would like to know is where is copper headed?  What about oil? Oil pulled back a few times (after Egypt and again on Friday after the failed "day of rage"). The answer to both of these will give insight to future equity price action.  Let's look at the charts below from this week's COT Report.

Copper: Commercial continues to lighten up their net short position (they short strength and buy weakness). Since copper hit its high in February commercial positions have not stopped in lightening up their short position as shown below, a negative for equities.

Oil (WTI): After Egypt oil pulled back but commercial positions indicated this was not the future price action of oil as they continued moving net short.  They have continued this week as well and are more net short than any other time since January 2010.  Further oil strength looks to be at hand, a negative for equities.

SPX Consolidated: Note the divergence between the SPX consolidated commercial and the SPX.  I don't read a lot into this chart but the large and sustained divergence would imply SPX weakness.

USD: If anyone can figure out the direction of the USD please write a book.  Case in point on Thursday the USD had a big move up and recaptured a three year trend line only to reverse the entire move (and the trend line) on Friday.  Per the chart below it does look like commercial net and non reporting (retail) are positioned similarly for USD weakness.  From a technical standpoint this seems to be the probable path but group think is usually wrong so that would at least raise some doubt.

Thirty Year Treasury: Another tough one to read.  Commercial net did increase their net short position which means 30 year rates may fall back this coming week but it certainly does not signal a trend change and any drop in rates may simply be a technical bounce before another move down (down in price, up in yield).

 

Submitted by MacroStory.com – To read more please visit - MacroStory.com

January Trade Deficit (by MacroStory.com)

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For a country trying to export itself to prosperity, we seem to have the trend wrong.  The trade deficit for January 2011 increased by $6 billion as imports outpaced the growth of export at a faster rate than in prior months.  This will have a negative impact on Q1 2011 GDP forecasts.   Although well off its 2005-07 highs, the trade deficit is nearly 50% greater than it was just a year ago. Additionally China reported their first trade deficit in seven years which begs the question who will be the source of increased US export growth?

 

 

 

 

Submitted by Macro Story.  To read more, please visit - MacroStory.com

AAII Sentiment Survey (by MacroStory.com)

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AAII Investor Sentiment for the week ending March 9, 2011 showed little change over the prior report. Those with a bullish outlook over the next six months fell to 36.0% versus 36.8% the prior week and below the historic level of 39.0%.  Those with a bearish outlook fell to 32.3% versus 33.1% in the prior week and above the historic level of 30.0%.  This report has correlated very well with the SPX and implies a move down in equities in the near term.  The question now becomes though is this yet another correlation that has broken down?

 

 

Submitted by Macro Story.  If you wish to read more, please visit - MacroStory.com

2008 Financial Crisis European Sequel (by MacroStory.com)

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The European Union is facing a similar set of events as those leading up to the 2008 US financial crisis. In 2007/08 the US economy was teetering on the brink of recession and the talk among many was that of a goldilocks soft landing. Economic data was still somewhat positive including job growth while equity markets were still holding up.

The housing market was beginning to show signs of exhaustion. Manufacturers were confronting rising input costs while consumers were paying more at the pump. The Federal Reserve introduced a new chairman who tried to calm markets with his infamous quote on March 28, 2007, "the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained." 

Today Europe is faced with a subprime crisis of their own in terms of sovereign debt.  Greece and Ireland have been bailed out and Portugal is only weeks from joining the esteemed list.  Spain and Italy are a shock event away from joining as well.  The EU also has their overconfident leadership as witnessed by the ECB Chief Economist Jurgen Stark on July 9, 2010 "The worst is over” (for Europe’s sovereign debt crisis).  

According to a 2009 BIS report EU creditors had over 1.5 trillion euros in exposure to Spain, Ireland, Portugal and Greece.  Of that amount, Germany and France accounted for 493 billion euros and 465 euros respectively. This is not a PIIGS "problem."  In reality the debtors have equal or greater negotiating power over the creditors.  TARP bailed out the insolvent banks at the expense of the taxpayer while the EFSF is bailing out the German and French banks at the expense of the PIIGS taxpayer.  The similarities don't stop though.

The EU produced positive economic data in the latter part of 2010 while the euro was trading on average 1.28 (eur/usd).  Over the past six months the euro has traded 6% higher at 1.36 which will reverse that positive trend.  The impact of a rising euro on export driven economies like Germany which have been the only real source of growth in the EU will be negative.  Rising input costs have been a worldwide phenomenon of late and the EU is not immune.  Watch for shrinking corporate profits in the near future. The consumer is not immune either as record gas prices are now hitting the pumps across the EU.  What will the shock event be though?  In 2008 it was Lehman.  

The US was able to delay the inevitable after Bear Stearns and so did the EU with Greece.  Will Ireland be the Lehman failure that forces a massive hit to creditor and not taxpayer balance sheets?  If so it will force a similar credit contraction among various credit facilities from commercial paper, interbank lending and more as witnessed in the US in 2008.  In July 2008 oil was moving up very quickly until topping at 147 on July 14 (Bastille day, another similarity), just months before Lehman failed.  Today as the global economy faces rising oil prices, the impact on the EU are far greater with Ireland and Italy alone importing over 20% of oil from Libya.  With Libyan oil production all but shutdown, it is arguable that $147 oil has already arrived.

The US economy will not be immune to a sovereign debt crisis as the EU was not immune to the subprime crisis.  It is not a "Greek debt problem" nor is it a "Middle East problem."  The world is more connected today than ever before in history.  We have seen this movie before and as we all know the sequel is usually far worse than the original.  

Submitted by Macro Story.  If you would like to read more, please visit - MacroStory.com

Sovereign Debt Exposure By Nation (by MacroStory.com)

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Sovereign bond yields in Portugal, Ireland, Greece and Spain continue to move higher and have shown no sign of reversing.  Portugal is now well above the 7% threshold on a 10 year bond which was the breaking point for Greece and Ireland to request aid.  Spain although in the 5% range has not come down and only 150 basis points away from the threshold as well. Just like the current global protests are not a Middle East "problem," sovereign debt is not a Greek or Irish "problem." In fact in the bailout negotiations it is arguable that the debtor has more negotiating power over the creditor for the sheer size of the exposure.

As of December 2009 total EU debt exposure to Spain, Ireland, Greece and Portugal was $1.58 trillion euro (per the Bank for International Settlements).  Of that France has $493 billion euro and Germany $465 billion euro in exposure.  So when you hear mention of a Greek restructure or default (they've spent about half their existence in default by the way) you begin to see how desperate the EU is to push back on the taxpayer within the country receiving aid.

PIIGS bailouts are truly about bailing out Germany and France.  If Ireland for example pushes back to restructure their debt German and French banks will take a massive hit to their capital.  Similar to the 2008 affects of subprime in the US banking system interbank lending, commercial paper  and other credit facilities within the EU could follow a similar route.

 

Submitted by Macro Story.  To read more, please visit - MacroStory.com