Exciting times. And are stocks worth the risk?

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Now let's talk about the markets ...

Are stocks worth the risk at these levels?

A friend of ours, Terence Brogan at Brogan Group Research, passed a chart along to us this morning. He gave me permission to share it with you. It shows the recent action in the US dollar index futures. More importantly, it shows that money flows barely budged during the recent short-covering rally we saw:

[Click on thumbnail to view full-size image.]

Here are some additional comments from Terence:

There has been very minimal accumulation of the USD since June ... from a price and volume perspective. The USD has been closing below its daily mean price more days that not, and on the days that it has closed above its daily mean price it has not been on persistent high volume. This tells us that there have been more sellers than buyers of the USD since June this year.

Basically, considering the money flow models developed by Brogan Group Research, this all suggests the US dollar is in for renewed downside pressure.

We'd have to agree. In fact, Jack's analysis is suggesting further short-term weakness (at least) is in store for the buck. And he's already recommended ways subscribers of his Black Swan Forex service -- BSFX -- can trade this price action. (Click here to subscribe or read more about BSFX.)

This US dollar action, as one might suspect, probably feeds into the general risk appetite mood of markets. In other words: because financial markets have become so tied to the flow of dollar-based liquidity around the globe, a falling dollar suggests this outward flow of dollars in search of return will persist.

All that in mind, the continued rise in the stock market prompted Jack to ask Terence if we'll see risk aversion rear its head ever again.

That's certainly the question of the day. Commentary is swirling something fierce about potential unintended consequences of Federal Reserve monetary policy, e.g. asset bubbles.

Meanwhile US stock markets are railroading higher and dragging global stocks higher alongside. Take a look at this weekly chart of the S&P 500 -- I've drawn in key trend channels that go back as far as 2009:

I also applied a Fibonacci extension to the first part of the bull market rally that began in 2009 and went through March 2011. It shows we've now fully extended (100%) that initial wave as trend channel congestion now may begin providing resistance. 

Does this mean the S&P can't or won't go even higher from here? Of course not.

But I think it does add to rationales for why the upside might be exhausted at these levels. With all the talk of bubbles circling the markets, and the continued speculation about the integrity of economic recovery around the globe, do items like this not create further doubt?

I believe a sell-off could materialize as enthusiastic investors and traders start asking themselves: is it worth the risk?

You can debate valuations back and forth till the cows come home. But up until recently, the landscape of global economics and financial markets has proven that investing in the US stock market was easily worth the risk.

But just as rising feed prices influence demand from livestock operations, rising asset prices reduce the demand from investors and traders who see potential risks growing and potential rewards dwindling.

One final chart -- margin debt on the NYSE:

Basically, the point of showing the rise to record levels of margin debt -- i.e. traders borrowing in order to invest in stocks -- is to highlight the fact that there are probably many weak hands in the market right now. It is they who will run scared at any sign of heightened market uncertainty. It is they who'll add to the selling momentum in any "abnormal" downturn.

It is they who threaten the risk appetite mood. Thus, it is they who threaten the money flows that are keeping pressure on the value of the dollar. When investors run scared in a herd-like fashion, these money flows tend to reverse as they accumulate US dollars. 

This isn't necessarily something to act on now. But it is something to keep in mind, all things considered.

Remember: Stay tuned!

-JR Crooks


Soros: The BOJ “did something so dramatic ... people can’t ignore it!”

Click here to read this issue in PDF format.

Are we there yet?

Are we at the point where people might ignore the central banks?

Thankfully, maybe.

George Soros made a valid point to a CNBC interviewer recently. He noted the Bank of Japan made a dramatic move with monetary policy stimulus so that it wouldn’t be overlooked.

I think that idea was obvious. But Soros lends a lot of credibility to an idea based on his investment track record.

But he also may signal something more.

Being longer in his years, and evermore notorious as a left-wing political beacon, it seems Mr. Soros strains to toe the line laid down during media training.

In other words: he wants to say what’s on his mind but must choose his words carefully.

What I believe Soros would say if he were not in front of a camera is this:

“The influence of central bank stimulus policy is at risk of wearing off. While some may admit central banks did help to boost sentiment and loosen up credit markets, the measly pace of stop-and-go recovery is threatening to reveal that the effectiveness of central bankers’ tools is limited. The real risk now is that people aren’t encouraged to play along and money truly never makes it into the real economy as promised.”

Ok, that’s enough of pretending to be George Soros for one day.

The ongoing deliberations among Eurozone leaders and Troika officials tell us that austerity isn’t so popular and neither is dumping bailout liability onto taxpayers. Achieving the proposed resolution of a banking union will be difficult and should keep the European Central Bank very-much hogtied.

The measures undertaken by the Bank of Japan this week to target the monetary base have been tried before, to a degree. The measures didn’t work then.  Now it seems the Japanese government is desperate and hopes the measures will succeed this time. Their overly-confident rhetoric also reeks of desperation.

The Federal Reserve is fully committed, but they can only do so much while they hold their breath and hope the unemployment situation improves sufficiently. They’ve got to be thinking the deflationary forces must be strong for their policies to have not turned up any inflation worth speaking of.

Earlier this morning the March US Nonfarm Payrolls were reported. It was a disappointment.

Instead of adding anywhere near the anticipated 200,000 new jobs, the economy only added 88,000. There were, however, upward revisions to January and February numbers.

The market is acting poorly, as one might have predicted.

I went into it thinking today’s report represented a bigger downside risk for markets than it has in a long time.


Because market mood has deteriorated this week. And markets seemed very vulnerable to a potential disappointing jobs number. Though we’ve seen widely-accepted “improvement” in the labor market, even the hiccups have been met with optimism; we’ve come to assume even a bad number is good because it means the Fed will keep on keeping on.

While no one expects the Fed to be planning its exit, the “Fed to the rescue” mentality may be overdone insofar as it influences short-term reaction to data and reports.

The expectations for US economic outperformance, relative to its peers, seems to have been the only crutch keeping the US market from giving way to Cyprus uncertainty and underwhelming price action in other asset classes.

So it’s not hard to see why today’s jobs number is pressuring US stocks (and even the US dollar at the same time.)

Besides, the market is certainly ripe for a correction and the technicals looked poised to drive the market lower (regardless of the jobs number). Below is a daily chart of the S&P 500 futures showing a fifth-wave extension/rising wedge set-up that suggests a significant reversal; first level of Fibonacci support comes in at 1,478:

It very much looks like the much-anticipated correction has begun.

I think that’s the way we have to play it right now, remaining open to more downside than generally expected.

But going forward, I suppose the question is this:

Do central banks have anything left in the toolbox the people can’t ignore?

I certainly don’t want to underestimate the potential central banks will concoct some sort of new and unprecedented strategy. Like I said of the BOJ above – I think policymakers (and politicians) have become desperate.

Of course, if the influence of central banks has truly run its course, then the market may have the opportunity to take over.

It’s just a correction for now. Play it. And reevaluate later.


-JR Crooks


If it works for the ECB it can work for the Fed. Be happy!

040312 cartoon resized 600

"The only thing that saves us from bureaucracy is its inefficiency."

– Eugene McCarthy

We foolishly find ourselves asking: when will Federal Reserve quantitative easing reach its limit?

Considering the consequent boost to risk appetite that flows from QE, enriching those who hold financial assets while doing little for those holding welding torches and spatulas, we are happy to tell you that the Fed has plenty of room to maneuver the printing presses still.

And if you’re wondering just how much credit they can pump into banks or how much government debt they can buy up in order to keep the Keynesian desperados operating, it’s at least 26% more of total government debt – that would take them to even with the ECB efforts that have to this point “succeeded” in suppressing severe risks:  

040312 cb assets resized 600

While the Fed has only taken on assets in proportion to government debt increases of 37%, the ECB has matched about 63% of the increase in government debt.

And it’s likely the Fed won’t be stopping anytime soon. From The Contrary Investor,

As we’ve written about many a time, credit is the lubricant that makes really any economy move forward.  In a generational credit cycle deleveraging environment, which we believe is still the correct macro, if credit contracts in one sector of the economy, that contraction must be offset by another sector continuing to take on leverage at a rate at least equal to the sector contraction in question simply to keep macro economic growth stable.  To the point, Government sector credit (debt) expansion has offset household credit contraction in the current economic cycle so far. 

The household sector, while there has been some marginal improvement in consumer credit numbers, has been reluctant to leverage back up.

We took the following three charts from  

040312 inflation gdp resized 600 

040312 household resized 600

Clearly the current surge in growth and recovery talk may be overstated, if you consider inflation’s impact on GDP (chart 1). And the state of the consumer is still a big question market, if not still a major sore spot. Without the household sector to fall back on, the public sector will likely continue to compensate for households thriftiness. Well, maybe.

There are clouds on the horizon—the Paul-Ryan-Cumulus-Cuttis cloud, for example.  If those dastardly Republicans, such as Ryan, are serious about putting our massively bloated government on a diet, it could be very scary for the Keynesians in our midst.  But, they should not fear.  After all, Ben Bernanke told us recently how he saved the world once; why should we even dream he couldn’t do it again should fiscal stimulus be stymied. 

So, stocks traders; don’t be concerned about the fact this is the most tepid economic “recovery” from a major recession we have ever seen.  Don’t worry that a one good push will topple the Eurozone into the abyss.  Don’t even think about further unrest in China, they have plenty of jail space and eager comrades to beat the bushes to ferret out evil doers. 

Be happy.  We are sure Apple can hit $1,000 in no time.  

Apple Computer Daily 1996-2012:  Rocket launch!  

040312 appl resized 600

Have we seen a similar trajectory before?  And did everyone want to buy it and quit their day jobs back then?  Yes!

Nasdaq 100 Index Daily 1996-2000:  

040312 ndx incomplete resized 600

And in case we forgot how badly that “buy Nasdaq 100 then retire” idea worked out, here is the rest of the story...  

040312 ndx complete resized 600

Don’t worry.  Be happy! 



Jack and JR


DJIA and USDJPY: Is this correlation telling us something?

dominoes“I grieved to think how brief the dream of the human intellect had been. It had committed suicide. It had set itself steadfastly towards comfort and ease, a balanced society with security and permanency as its watchword, it had attained its hopesto come to this at last. Once, life and property must have reached almost absolute safety. The rich had been assured of his wealth and comfort, the toiler assured of his life and work. No doubt in that perfect world there had been no unemployed problem, no social question left unsolved. And a great quiet had followed. It is a law of nature we overlook, that intellectual versatility is the compensation for change, danger, and trouble. An animal perfectly in harmony with its environment is a perfect mechanism. Nature never appeals to intelligence until habit and instinct are useless. There is no intelligence where there is no change and no need of change. Only those animals partake of intelligence that have to meet a huge variety of needs and dangers.”

- H.G. Wells, The Time Machine (1895)


Interesting how tight this correlation has become lately.  I have removed the labels to allow you to focus on the visual only at first look. Can you name these two price series?  

040212 dji jy resized 600

If you said Dow Jones Industrial Average and Japanese yen, you nailed it!  Below, DJIA is in black (right scale), the USD-Japanese yen in blue (left scale):  

040212 dji jy scaled resized 600

Now take a look at the same relationship, around the same time of year back in 2011.  Back then, USD-JPY peaked in early April and led US stocks lower; eventually dragging the Dow down about 2000 points into September 2011 where it bottomed:    

040212 dji jy scaled long resized 600

You may be asking: Well, what about 2010?  Well, we saw a similar pattern back in 2010 also! USD/JPY topped in early May, the market topped in late April, both moved sharply lower together:    


Just saying ... stay tuned!


Reader Mail on Germany:

I got some excellent feedback on the piece I wrote on Friday, in which I purposely chose a provocative title: Germany: Heroes or Hubris-filled Control Freaks?, in order to summarize some key views that portray Germany as a bit more of manipulator of the Euro structure than they are savior or hero. I agree with one of our readers who wrote “they are neither.”  

Germany - neither heroic nor hubris-drunk, as far as I can see. And by the way - who is stopping other countries' industries to develop new and cost-efficient production-lines? Who is thwarting scientific research resulting in product-developments? Look at the institutional frameworks (which are far from optimal in Germany, anyway) of the weaker EZ-countries. By the way, the € was invented by M. Mitterrand hoping to rein in German economic prowess.

Germany has interests, as any country does; this stuff is not about altruism, never was. The piece on Friday was not meant to “chastise” Germany for doing what is in its best interest.  But I do think it is important to understand: a) there could be much more blowback (economic and political) as Germany expands its control over the Eurozone region to a degree that was never imagined when countries initially signed up for this union; b) Germany’s export focus may not serve them as well as they believe in a world where demand still seems quite tepid relative to past cycles; and c) there are strategic consequences as Germany deepens its relationships with both Russia and China as export markets to replace sagging demand in Europe (the US, a country whose foreign policy is almost always hubris-filled, will react). 


It's a lay-up: buy stocks!

cowboy bull“He may look like an idiot and talk like an idiot, but don't let that fool you -- he really is an idiot.”

- Groucho Marx

John Ross asked me this morning if I could create a scenario whereby stocks fall.  I laughed and said, "Well ... no!" And maybe that is the point. No doubt 'if you are not long, you are wrong' is playing out in spades. But we’ve seen that sentiment many times before near tops.  

The primary thematic shaping up seems the idea that bonds have topped and as this money leaves bonds it will power stocks higher—globally. The idea seems to make sense; but often it is never that easy.  Taking a look at the chart below, there doesn’t seem a heck of a lot of correlation to hang your hat upon, only to say the long-term trend higher in bonds (lower in yields) has been met by a corresponding big run in stocks.    

Let’s consider some reasons why US stocks might NOT go a lot higher and, for grins, maybe even, dare I say it, “correct.”  

  1. A recovery in the US economy could mean finally financial assets will start competing for funds and the Bernanke Put, i.e. QE moral hazard liquidity juice, fades. Bonds would get hit here, but stocks might at least correct.

  2. Bernanke’s concern the job market is still not healed may play out because fiscal stimulus fades as the year progresses. Thus, we have well below trend growth and rising prices for energy and food leading to at least a mild case of stagflation; that isn’t good for either stocks or bonds.

  3. Germany decides to go “all in” and throws its full faith and credit behind a Eurobond for the Eurozone. Immediately, the risk profile improves in Europe. S&P and Moody’s decide it’s time to upgrade European paper and at the same time downgrade US paper given that Washington can make no real cuts amidst ideological squabbling. Lots of capital flows back to European bonds and stocks and out of the US; a possible triple-whammy out of US assets (stocks, bonds, and the dollar).

  4. China financial and social unrest ramp up and the Communist Party is at odds on stimulus given their concern about inflation; therefore it’s better to have security locally than worry about Western markets; the additional stimulus never arrives as growth and demand forecasts for China ratchet lower. Likely bad for stocks, but maybe good for bonds.

  5. Eurozone. 'Nuff said!

  6. Rising emerging market capital controls a la Brazil (tacitly condoned by the IMF) are met with rising trade tariffs from developed countries.  Money flows out of risk assets (stocks), quickly from the periphery, and back into bonds as global trade falls.

  7. Republicans win the White House and Congress, fire Ben Bernanke, and make Ron Paul Fed Chairman. They cut the budget deficit twice as much as what Paul Ryan is lobbying for. Ultimately it would be the best thing that happened to the US financial position in a hundred years, but there would be hell to pay as US credit drains from the global economy (and we have to listen to the moochers whining and crying about “fairness” day in, and day out). US bonds rally big time, so does the US dollar; stocks would likely be hit very hard initially, then stage a gargantuan rally.  [I know; but a guy can dream.] 

For now, “don’t fight the Fed” and “the trend is your friend” are winning the day. And if the bulls are right about US recovery, European healing, and new Chinese stimulus soon on the way, it could keep running. No doubt.  


Are stars aligning for a big break in commodities?

mining truck“According to analysts at Credit Suisse, the consensus has "severely" underestimated the amount of housing supply set to hit the market in coming years. Chinese developers own enough land to build almost 100,000,000 new housing units. Together with the sale of some empty apartments, this would be enough to satisfy China's housing demand for up to 20 years, the analysts have warned."  

Financial Times, 22 March 2012  

I woke up this morning and checked my charts, as always. I have been expecting a downturn in risk appetite to manifest in crumbling asset prices, at least until correction happened.  

I’ve been getting a bit discouraged with this call, as most everything has stayed relatively buoyant. But today after looking at the commodities I think we could be getting very close to a substantial and playable drop, technically speaking.  

CRB Commodities Index, daily: a convincing break below critical support at its 50-day moving average today? It seems so ...      

032212 crb resized 600

And the newswire this morning suggests global growth expectations could add pressure and break the camel’s back. Let’s go to Reuters:  

The euro zone's economy took an unexpected turn for the worse in March, hit by a sharp fall in French and German factory activity that even the most pessimistic economists failed to predict, business surveys showed on Thursday.  

The purchasing managers indexes (PMIs), which capture how thousands of companies have fared over the month, effectively quashed any lingering hopes the euro zone might avoid falling into a new recession.  

Most worryingly, the surveys suggested business activity in economic heavyweights France and Germany is starting to flag, with job losses mounting across the bloc at the fastest pace since March 2010.  

Markit's Eurozone Composite PMI fell to 48.7 in March from 49.3 in February, slipping further below the 50 mark that separates growth from contraction and capping the first quarter of the year in disappointing style.  

The “resolution” that secured Greece’s second bailout brought more calm to the market than I expected ... up to, during and after the process. Thus, it seemed it would take a noticeable downturn in growth numbers to change the sentiment ... since all the PR measures will certainly fall short of actually stopping recession.  

Back to Reuters:  

The HSBC flash purchasing managers index, the earliest indicator of China's industrial activity, fell back to 48.1 from February's four-month high of 49.6. New orders sank to a four-month low, an expected rebound in export orders failed to emerge and new hiring slumped to a two-year low.  

Clearly, China has been on a steady and gradual downward growth trajectory. But thanks to eurozone commotion and a gravity-defying US stock market, the slower growth in China has not been met with much scrutiny.  

These PMI numbers, however, are a favorite among analysts considering China’s lasting dependence on manufacturing. PMI reports do not go unnoticed, especially when they are south of 50. Granted, this is the HSBC number and not the “official” number reported by China which usually comes in a smidge higher. Nevertheless, here is a chart that encapsulates it all: 

032212 china pmi stuff

This theme of the eurozone falling into recession followed by lower-than-expected Chinese growth has been part of our fundamental story for some time now. And for those who follow me more closely, and those who subscribe to my Commodities Essential newsletter, know, I expect this dynamic will ultimately hit commodities hard.  

Another take away is the improving US growth differential. With investors of an increasingly international mindset, investing has become very much a relative game at times (note: it’s always a relative game in the FX market.) That said, we could continue to see a relative outperformance in US assets relative to those in Europe and Asia.  

US jobless claims fell to their lowest level in four years, as reported this morning, for what it’s worth.

This means US stocks could continue to outpace foreign stocks on the upside. I am just waiting to find out if US stocks will ever succumb to any downside.   We could be close.