On The Varieties of Investment Experiences

If you don’t know who you are, the market
is an expensive place to find out

—Adam Smith
aka George Goodman

Investors are fools. Rational people, if they bother to invest at all, soon tire of the logic-defying gyrations of  the markets and head for the exits. Fools have staying power. They cling to the absurd idea that the fortunes that have already been made (they always come in late) will be available to them, too. They stay, and, in the end, have their wealth taken away by the bear market they never expected.

It would seem to be all for naught. For most fools, the experience conveys ultimate truth: don’t gamble. One bull-bear cycle is all it takes to turn them into savers. My friend, Dick Diamond said that ninety-five percent of the men and women he trained in speculation failed to get it right and went on to other things.

Survivors of this brutal process are fools, too, but of a different order. Reflecting on their foolishness, they realize that emotions drove them to pay what turned out to be high prices for assets that, rather than intrinsic value, have only perceived value. They were drawn in when perceived value was high because they were pumped up emotionally. Further thought, and they will realize that everybody is excited or optimistic at the same time, and the thing to do is to buy when the crowd is selling, and vice versa.

These educated fools are like court jesters. The jokes continue, but at someone else’s expense. Today, these men and women are either out or have close stops under their positions.

The fools that remain, folks that came into the markets in the late nineties or later, are mostly being guided by investment advisors who have no skin in the game. The standard recommendation is for the investor to be a  fully invested fee-generating client. The basis for the recommendation will be  a plausible bullish story published by the firm.

This works until it doesn’t. For the past year, investment results  have barely covered advisory fees in many if not most accounts. Now, returns are going negative. Global equity market investors have lost a stunning $16.2 trillion in the last six months:

World Equity Market Capitalization

Per Zero Hedge, the average developed market is down 23% in the last year, and dividend cuts are on the rise:

dividend cuts
Markets in Europe and Asia are collapsing. The secondary indexes in the U.S. are in bear markets. The S&P 500 Index has dropped below the August low and is now in an Elliott Wave bear phase. The Dow Jones Industrial Average, as  the last man standing, masks the overall market weakness.

Janet Yellen will be speaking this morning. The futures are up, anticipating that the Fed will back down on near term interest rate rises. Hedge funds will buy on the premise that what hasn’t worked, will, putting off the day of reckoning for another day.

What kind of fool are you?

Rod

 

 

Posted in On Markets | Comments Off on On The Varieties of Investment Experiences

On the Unobvious Nature of Topping Markets

Just remember this, my girl, when you look up in the sky,
You can see the stars and still not see the light

—The Eagles

“Lastly,” he said, “we believe the quality sector will inevitably catch up to the rest of the market.” He, being my investment advisor former colleague, desperately putting lipstick on the pig that was the disgruntled client’s portfolio.

Can’t say that I’m sorry that I no longer have to do that sort of thing. Defending the firm’s boneheaded research was torture in my day. No different now, obviously. The problem with being an investment advisor is the requirement to defend the indefensible.

Catch up to the rest of the market? Tell the client the truth, for God’s sake. Most of the market sucks, probably more than the portfolio in question. This histogram prepared by GKCI, an independent money management group, shows that only 521 out of 2850 stocks in their proprietary All Country World Index are up since the 5/21/2015 peak. The red group, roughly 82% of the index, are down anywhere from 6 to 90 percent.

most stocks are down since may 2015

Domestically, barely a handful of stocks, institutional favorites, are painting the tape, making the Dow Jones Industrials and the S&P 500 look far better than the market as a whole. This is typical ending action: a long bull market running out of gas.

Meanwhile, Dow 15,000 has not been breached yet. This is the Maginot line that supports the Elliott Wave prospect of another new high. It is a surprising thing, given that data on the economy continues to deteriorate:

The four week average in initial jobless claims has pushed to new cycle highs at 287,000.

Durable goods orders crashed 5.1% month over month, with the core non-defense shipments segment down 7.5% year over year, the worst reading since Lehman (’09”).

The entire mining sector is now so financially suspect, that Moody’s states, “We believe that the current environment is not a normal cyclical downturn but a fundmental shift…a wholesale recalibration of ratings in the mining industry is deemed necessary. Whoo, boy!

So why would the market go up? We will probably read that traders are going to bet that the Fed will not raise rates and may even lower them again in a weakening economy. My take is that a rise here is a reflection of social mood, which may be turning sour on spending, but is still hanging on to hopes that “tomorrow” will be better.

Weirder things have happened.

Cheers,

Rod

Posted in On Markets | Comments Off on On the Unobvious Nature of Topping Markets

Bear Market in Remission

“I find the whole thing astonishing
and what’s remarkable is
the amount of anger, whether
it’s Republican or Democratic.”
Blackstone CEO–Self-satisfied Billionaire Hedge Fund CEO of Blackstone

 

The jackass quoted above is a classic DAVOS man: A soulless man, technocratic, nationless, cultureless, severed from reality. Operating from a managerial capitalism that reduces economics to mathematics and separates it from human action and human creativity (Mike Krieger).

This dude is one of about 85 men whose money and influence buys politicians and makes policy in this country today. The middle class has no chance of re-emerging until every last one of these sonsobitches are gone. Or gelded.

So much for my rant. Now, about the market. For all the furor this week, the near collapse on Wednesday did nothing to alter the likelihood that we will see a new high in the Dow Industrials before rolling over into the serious part of the bear market. This is my feeling, and here’s why:

The pattern: The August decline was incomplete. It came down in three waves. A fourth and fifth were needed to turn the primary direction down. The crash this week held at a critical uptrend line, setting up the possibility of a triangle sequence, with a wave up, a reaction, and a final wave to a new high.

Momentum: As the market was coming down in the days before the big event, momentum was slowing in my short term studies, indicating exhaustion. On Wednesday, the extraordinary downside momentum of the early morning was stopped by noon, and the aggregate figures  at the end of the day showed even less momentum than the day before.

Sentiment: On Wednesday, Zero Hedge was posting gobs of negative comments from all the usual suspects and some that never comment. Since the turnaround, the prevailing view of the bears seems to be, “Sure, we’ll get a bounce, but it won’t go far before we really crash!” The contrary opinion would be that we’ll keep going like the Wave Principle suggests, and get to a new high before turning back down again. Contrary thinking is tricky, but I favor it in this instance.

Whether we head back down right away or otherwise, it makes no difference if you’re in cash. But the value of knowing the possibilities lies in what happens to your state of mind. If the market does the unexpected and makes a new high, bears will be disgusted and discouraged (maybe even turning bullish), and bulls will have their hopes falsely renewed, even though they didn’t make any money on the way up, owing to the narrowness of the market: fifth waves are typically not dynamic, with very few stocks following the average to the top. Grist for your mill.

Cheers,

Rod

Posted in On Markets | Comments Off on Bear Market in Remission

Cliffhanger

Nearly all men die of their remedies,
and  not of their illnesses.

—Moliere

Here we are, staring over the abyss. And for the day, the market held up at the critical level of Dow Jones 16,000, give or take a few. Based on pattern, if the market holds right here, it should rally in three waves over the next few months to a new all time high. After that, the inevitable crash.

Frankly, I’m rooting for a rally here. A new high in the Dow in a couple of months would make for a more elegant ending of the pattern, but that’s just the Elliott Wave geek in me coming out. The next few days will tell. Meanwhile, every data point in the economic picture is crashing in a big way.

From Zero Hedge:

U.S. Freight volumes fall year over year for the first time in three years.

Business inventories to sales ratios are at levels that signal recession ahead, with inventories stuffing the channels and sales falling 1.6% year over year.

Industrial production crashes most in eight years.

The consumer is tapped out, as retail sales end the weakest year since 2009.

Commodities are falling hard, oil is now $29, the lowest level since 2004.

Little international shipping moving in commercial bottoms, as the Baltic Dry freight rate drops to depression levels.

By rights, we should be owning up to the recession at hand right now, but denial is the official stance, although rumor has it some of the members of the Fed’s board of governors are getting spooked.

And I haven’t seen where a single one of the country’s most respected economists are coming off their bullish forecast.

So be it.

Cheers,

Rod

Posted in On Markets | Comments Off on Cliffhanger

2016 in Markets: The Probabilities

Ohhh, this is gonna hurt!

Batty Coda, in Ferngully

This time a year ago, 17 economists, thought to be the financial industry’s most knowledgeable professionals, unanimously forecasted an up year in the markets. The result: All the secondary averages were down 10-15%, the average stock in the S&P 500 Index was down 20%, Berkshire Hathaway, Warren Buffett’s stock investing firm, was down 12%, and the Dow Jones Industrial Average posted a 2.23% decline. Cash, with an infinitesimal 0.11% gain was the winner in the asset sweepstakes

This year, the dudes are again unanimously forecasting stocks to be higher at the end of 2016. So far, the first four days of the New Year were the worst ever for the S&P 500. That said, there remains the possibility in the Elliott Wave studies that the S&P and the Dow Industrials work their way to a new high over the next few months. Not essential, but if it happens, the overall market will be even more divergent than in 1929, when market wags noted that “Only the generals were moving forward, the troops  having long since quit the battlefield.”

The Elliott Wave outlook, per Prechter and company, is unambiguous: A horrific year for stock investors ahead. This is a C wave. Here’s what the book says about C waves: “Declining C waves are usually devastating in their destruction…It is during these declines that there is virtually no place to hide except cash…”

In addition to the Wave’s pattern, three very large trading cycles, a fifty year, a thirty four year, and a 7 1/2 year cycle are coming into simultaneous lows during the summer. The C wave should hit a bottom around DJ 3,200, before bouncing for a bit and then heading down to the projected Grand Supercycle Wave bottom well below 1,000. The latter could be years away, but it would not surprise me, given the severity of the cycle pressure, to see 3,200 in the Dow this summer. 1929 was almost that bad.

Meanwhile, every “expert” the media has brought on to comment on the carnage this week has insisted  that the selloff, supposedly due to the weakness in the China markets, has been overdone here, “We’re just fine, our economy is rock solid,” was the comment on NPR this morning.

Bullshit.

Cheers,

Rod

Posted in On Markets, Socionomics | Comments Off on 2016 in Markets: The Probabilities

The Economy In The Economy

Why complain about life
If you are looking for good fish
And have followed some idiot
Into the middle of the copper market?

–Hafiz

Tiki died the day before Thanksgiving. She was my housekeeper. She and her team of Hispanic ladies came on Wednesdays. They whipped through the house in two hours, leaving it spotless. Tiki was a marvelous woman, but she was morbidly obese and suffered a fatal heart attack on the way to her doctor’s office.

Tiki cleaned our house for ten years. The person we wanted as her replacement is very good. The fee she quoted was twice as much as we were paying Tiki. I decided to clean house, myself.

Instead of going for a jog in the afternoon, I clean bathrooms. Not so bad. I’m reminded of a line in the film, The Razor’s Edge. The man says to Bill Murray, “To you, this is washing dishes. To me, this is a spiritual experience.”

Yes, well.

This is the kind of decision you make when your income hasn’t gone anywhere for a while. Data on the economy indicates that thousands of similar decisions are made every day now. Given the rapidly deteriorating economic data, I look for the trend to pick up speed.

This from Zero Hedge: For the third month in a row US Industrial Production dropped Month over Month, crashing 0.6% in November (against expectations of a mere 0.2% drop). This is the 9th month of 2015 with no Month over Month increase in industrial production and is the biggest drop since March 2012.

For the first time since Dec 2009, Industrial Production fell Year over Year (down 1.2%), signaling America is deep in recession. The excuse, blame, is “unusually warm weather” which sent the utilities index down 4.3% as demand for heating tumbled. Meanwhile, Oil & Gas Well Drilling Output is the lowest this century

Zero Hedge reported this week that economic growth is currently running at the lowest average growth rate in American history. Somehow, the Fed has managed to put a positive spin on reality and raise interest rates for the first time in nine years. This can’t be good when the nation is in the midst of a revenue and profit recession. This is exactly what they did in 1937, sending the nation crashing into a secondary depression.

In the midst of all this, according to Bloomberg, “Virtually every Wall Street Strategist expects no end to the bull market.” The hell are they smoking??

The turndown comes at a time that the nation’s basic industries are loaded with debt. Bankruptcies are starting to bring down the mining and oil and gas industries. Layoffs are coming fast. Huge mergers in the pharmaceutical industry are taking place. Mergers mean more layoffs.

The rosy picture in labor is a sham. The disappearance of good paying jobs is the ultimate consequence of debt deflation, and the cure for high prices is high prices. Eventually, the price of labor is rationalized.

I just bought a great vacuum cleaner for ninety-nine bucks, half the price of two years ago when we first looked at it at Sam’s Club. I will use it, myself, for a time, while I wait for the cleaning ladies in our neighborhood to rationalize their rates.

I hope Santa treats you right.

Cheers,

Rod

 

Posted in For Traders, Uncategorized | Comments Off on The Economy In The Economy

In Search Of A Different Way

No problem can be solved by the same consciousness
that caused it in the first place.

–Albert Einstein

What a year this has been for mass murders! Worse, the question of how to deal with them is one of the most divisive in my memory. My  position on it is as hard-wired as is that of those on the other side of the argument.  My view hasn’t changed in thirty years, and in that span of time, we, as a nation, have seen the annual numbers of mass killings skyrocket. We have had more mass killings than days this year.

Thirty people per million will be murdered in mass killings in the U.S. this year. In Japan, it’s two per million. Most European countries will have fewer than ten. Is this the exceptionalism we Americans aspire to?

I think it’s time to do something different about the matter. I don’t know what that means, except that it is certain that unless we let go of our self-righteousness-on both sides of the issue-and open our minds to all possibilities for change, we  will be bogged down in this same intractable situation for the next thirty years.

It is a very bad time to hold on to unworkable ideas on gun massacres. Socionomics long ago forecasted the decline in social mood we are experiencing today, with its accompanying rise in hate crimes. The bear market that is coming will make matters even worse than they are now.

So, what is my position on gun control? It doesn’t matter. It hasn’t contributed to any improvement in the risk of exposure to random murder.  Gun control is a very emotional issue. Conversations about it never get anywhere, and usually devolve into shouting matches. So I propose we look at the matter in a different way.

Pope John XXIII said, “In essentials, unity. In non-essentials, liberty. And, in all things, charity.”

What is the essential thing we can be unified about? It must be reducing the senseless loss of life. How will we do this? I propose that we talk, and that we leave all pre-conceived ideas out of the conversation. At the very least, we should ask what  social science has to say about the cultural differences between us and the countries that have significantly lower rates of hate crimes.

Finding a real solution is probably more difficult than arresting climate change. We need innovative ideas and open mindedness. We need to tinker with systems, which is how most  breakthroughs occur. But it’s got to start with talk, and unity about our goal of making our country safe for ourselves, our kids and our grandkids.

It used to be said, “If we can put a man on the moon, we can do anything!” I believe that is true. It must be true.

On Sunday our pastor, Dr. Bob Baggott, preached on the amazing qualities of Mary of Nazareth. She was very young, perhaps twelve or thirteen.  It would normally have been shocking for a girl to be told she would have a child conceived out of wedlock, a prospect that, in that era, could have gotten her stoned to death. But when told that she would birth the Son of God, she accepted the responsibility with a child-like belief in miracles, and an incredible will to carry out God’s plan.

Then, departing from his prepared text, he spoke on the tragedy of the San Bernardino massacre. He suggested that, in order to bring about an end to these awful killings, we would do well to give up our present way of thinking, recall our child-like belief in miracles, and have the will to work together on a plan and see it though to a good outcome.

“What about you,” he asked, “Do you think you could do that?”

Rod

Posted in Socionomics | Comments Off on In Search Of A Different Way

At Christmas

I Go Down To The Shore

I go down to the shore in the morning
and depending on the hour the waves
are rolling in or rolling out,
and I say, oh, I am miserable, what shall–
what shall I do? And the sea says
in its lovely voice:
“Excuse me, I have work to do.

–Mary Oliver

Prayer (mine)

Dear God, may we, by your Grace,
be grateful for the challenges you give us.

May we not complain too much,
else we miss the opportunity to gain compassion
and love for those whose needs are greater than ours.

Amen

Because I love this song:

My very best wishes to you and your families this season!

Rod

Posted in Uncategorized | Comments Off on At Christmas

Accident Waiting…

banana peel

Better watch your step, Mr. Market! I know you don’t give a damn about the economy these days. You’re all about momentum and the Fed put. Well, the momentum guys, the hedge funds, are losing their asses chasing ever slimmer returns with ever greater leverage.

The sexier hedgies with the most aggressive strategies (buy distressed super-junk bonds with borrowed money) are folding, while the more established funds are getting complaints from institutions around the country over high fees and negligible returns. Two of the marquee names, Greenlight Capital and Pershing Square are down, year-to-date, 21% and 20.8%, respectively (Zero Hedge, 11/2/15)

More money is coming out of hedge funds than going in presently (in my notes, but I can’t locate the source), Who’s left to buy stocks? Clueless 401K investors. Oh, and corporations buying their own shares back to shrink the capital base so that diminished earnings look good and CEOs can exercise stock options that put their earnings at 257 times the average worker, (up 40% in the last five years, while worker’s wages are flat to down over the same period). (Zero Hedge, 5/28/14).

As for the so-called “Fed Put,” the Fed’s money printing to pump up the economy, it ain’t working: per the latest reports aggregated by Zero Hedge:

…Carnage in commodities, a revenues recession (corporate), plunging EBITDA (“Earnings before interest, taxes, depreciation, and amortization.” In other words, bullshit reports), a collapse in US manufacturing, housing rolling over, and auto sales fading… 

If you are better off than you were five years ago, you’re either a CEO, or you live in a wealth pocket with superzippers for clients/customers. It is to be hoped that you’re putting money aside. Rich people seriously quit spending when the market goes south. The ’07-’09 period was a clear warning for anyone servicing that sector.

Last week, Bob Prechter said he was leaning towards one more high in the major stock averages. The market has not shown any verve during selloffs, but then, the rallies are sickly affairs with poor breadth and volume. No time to be complacent-which is what the sentiment figures say is the case among investors and economists. I don’t blame investors, but economists? Puh-leeze.

Cheers,

Rod

 

Posted in Uncategorized | Comments Off on Accident Waiting…

Letter To A Fellow Trader

Tom,

Bob Prechter was in town this past weekend for Dick Diamond’s memorial service. Over dinner, he gave me a rundown on his views of the markets. As is sometimes the case, there is room for more than one interpretation in the patterns of the major indices. The analysis I gave last week is still a possibility, but Bob is leaning to one more new high in the DJIA and the S&P 500.

While the secondary averages (Value Line and Russell 2000) traced out five waves in their drops into the August-September lows, the Dow Jones Industrial Average and the S&P 500 Index bottomed in only three, allowing room for more rally. The advance since then has been strictly a big cap affair, with the small caps and the Transports lagging badly.

The good thing about this is that one more new high will clear up the ambiguities in the leading averages, setting the stage, finally, for the bear market we have been preparing for. Bob thinks the final top may come early in 2016.

Meanwhile, the European markets have entered bear phases. The World Stock Index dropped in five waves this fall, and look to be completing a countertrend move of the type I have tried to ascribe our market. The stage is set for Europe to fall sooner than us.

Looking over the recent reports from EW International, it’s clear that the global economic fundamentals are continuing to lose ground. The global commodity markets are a train wreck, and major mining companies are going bankrupt every week. Bloomberg reports that $9 billion of junk-rated debt is coming due in the mining industry next year. Most of it will default.

German prices for raw materials and semi-finished goods have been falling for 2 1/2 years. Hedge funds specializing in distressed junk debt are experiencing losses, liquidations, and outright closings.

Despite relative stability in the global services sectors (if you can live with wage stagnation), mining and manufacturing are the driving forces in economic growth, and there just is no growth in those sectors. It’s just a matter of time before the waiters and bartenders of the world have no patrons to serve.

There is one, perhaps surprising, up-from-the-ashes story in the global markets: Japan. The Elliott Wave folks have certainly called this one right. They called for the end of a 22 year bear market in Japanese stocks in August 2012. Since then that market has risen seventy percent.

I’m not sure, at this stage of my life, whether I want to get involved in foreign markets. I expect the dollar to remain strong and that tends to reduce the ultimate returns. Besides, Japanese stocks have not traditionally paid much in the way of dividends.

So, it looks like the opportunity for the big short sale has to be put off for a bit. Meanwhile, I will continue to trade futures in both directions intraday. Results lately have been good, owing to greater intraday volatility and, frankly, improved performance by yours, truly.

Happy Thanksgiving! Best to you and Jean.

Cheers,

Rod

Posted in On Markets | Comments Off on Letter To A Fellow Trader