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Today's Market WrapUp 11.27.2007 Mon Tue Wed Thu Fri Barbera Archive Financial Upheaval This morning the bad news continued to permeate the financial news with Associated Press releasing a report on the Standard and Poor’s S&P/Case-Shiller Home Price Index which fell 4.5% in the third quarter versus a year earlier, the sharpest quarterly decline since S&P began the nationwide home price index in 1987. So much for all the bullish euphemisms as to how Real Estate will “never go down.” Guess what? It’s going down like a submarine with jammed dive planes, with the index also showing a 1.7% decline versus the previous three-month period. Within the index, 15 of 20 cities were down with the biggest year-over-year decliners; Tampa at 11.1%, Miami at 10.00% and San Diego down 9.6%. Elsewhere, a report compiled for the US Conference of Mayors prepared by consulting firm Global Insight, forecast continued rise in foreclosures for 2008 among some of the largest metropolitan areas, with New York, Los Angeles, Washington and Chicago all anticipated to see a continued rising wave of foreclosure activity. The report also projects that “property values will decline by 1.2 TRILLION dollars in 2008 with home price declines averaging 7%. No wonder with both Real Estate and now the stock market falling sharply, that Consumer Confidence is on the wane. At 7am PST, the Conference Board released its survey for Consumer Confidence for the month of November. Overall, the headline index fell to 87.3, down from 95.20 in October, with the Present Situation Sub-Index falling to 115.4 from 118.00, and the Future Expectations Index falling to 68.7 from 80.00. To try and put these numbers in perspective, we start today with a look at the headline Consumer Confidence figure, which at 87.30 is now well below the longer range 20 Month Moving average. This downside acceleration represents the same type of negative kick off that was seen prior to the 1990 recession (when Oil spiked to $40 in the Gulf War) and in early 1980 when Inflation exploded and Short Term Interest Rates soared. Yet, to this point, headline Consumer Confidence is not yet in a recession mode, as historical readings under +70 (see the fat horizontal line) have been the demarcation point for recessions. Are we moving in that direction? You bet. Are we there yet? At least by this measure, not yet.
Next, let's look a little bit deeper at the Sub-Components, the Present Situation and the Forward Expectations. To this end, both are below there 20 month moving averages with Expectations having moved above the moving average months ago, while Present Situation has broken down only more recently. Note the long standing bearish divergence between Expectations and Present Situation. This is common at major turns. Even more important, and a figure unlikely to be discussed in your mainstream press, is the reading of the Expectations figure. At 68.70, down from 80.00, that is a virtual collapse in progress, a positively stunning decline on a month-to-month basis. Historically, when Forward Expectations declines below the 70 mark, the economy is heading toward recession and with this months huge down move, it now looks like we are building huge downside momentum toward a recession. As readers of this column are now aware, this is no surprise as we have been expecting a recession and writing about the negative impact of the global credit crunch since late January -- well before any of this started making headline news.
As we noted last week, this upcoming economic downturn looks especially menacing as things are shaping up. One likes to write about and use the word “Recession”, because, let's face it, none of us, myself most definitely included, wants to think about anything really negative. It just gets too depressing. So with the optimist in me hoping that this is not going to turn out as bad as it looks, the truth is, things really don’t look at all encouraging. Once US Growth evaporates, what will happen to the US Dollar? That's a really scary thought worthy of the best horror movies. For years, it has been the image of a robust US economy with rapidly growing business sector that has underpinned confidence in the Dollar despite unbridled money and credit creation. Yet, a look at some of the world's lesser observed currencies does not show an encouraging outlook. In the chart below, we show you a picture of the Saudi Arabian Riyal, which ever since Dr. Bernanke cut interest rates back on September 18th, has become unhinged from its Dollar Peg. Note the long period of time where the picture of the Riyal was a sideways, horizontal line with an occasional small squiggle. Now look at it, over there on the right side of the chart., That is NOT a collapse in the Riyal, but rather an ADVANCE in the Riyal which is buying more dollars. The fact that the line is moving down might give some the impression (understandable) that the item in question is declining. In the case of currencies, and the way we plot them, that is NOT the case and what looks like a decline in the Riyal is really a robust advance and a huge decline in the Dollar. In fact, a look across the entire spectrum of Gulf OPEC Oil States shows the same picture, with the currencies of Gulf State countries advancing in unison against the greenback.
So what does it all mean? For one thing, it means that the easy money policy of the US Fed is stoking the fires of domestic inflation throughout the OPEC Gulf States. It means that the Fed’s easy money is going to force these countries to re-align their currencies with the Dollar, and right now, that the free market is in the process of ushering in that outcome. When pegged currencies start to drift off there pegs, it is never by accident; there is always a compelling and driving reason for a sustained drift. That is what we are seeing right now, is sustained movement, week after week, off the pegs. In the case of Kuwait, they have already moved off a Dollar peg. True, the Saudi’s have been “allied” with the US for some time, and to a large degree the presence of US troops in Iraq is at the behest of the Saudi Sheiks, who above all else do not want Iraq to become a radical Shiite regime, let alone the puppet of Iran. To that end, if the US Dollar has any real “backing” at all, it is the backing of the US military, a powerful striking force that stands “behind” the greenback. Unfortunately, if the Dollar collapses in value in the weeks and months ahead, the same fate which befell Russia in 1998-1999 could befall the United States. Namely, in the wake of a horrific currency crisis, the Russian government was forced to downsize and lay off most of the military, for a long time ‘de-fanging’ the Russian bear. In 1997-1998, the President of Russia's monthly pension of 3,000 Rubles per month was considered lavish. By 1998, 3000 Rubles per month would not even buy a single loaf of bread. Such are the ravages of hyper-inflation unleashed.
Above: the collapse of the Russian Ruble in 1998-1999 led to hyper-inflation in Russia and a complete military collapse as the fiscal situation in Russia spun out of control. While no one can know with real certainty what will happen to the US Dollar, even continued periods ahead of the same type of steady weakness seen in recent months will over time jump start domestic inflation into over-drive. It’s already happening at the Super Market where prices for virtually all products are moving steadily higher. This year, the cost of Thanksgiving Day dinner rose by 11% year-over-year, leading one to wonder precisely, is that 2% Core Rate, Dr. Ben? (Read "Cost of Thanksgiving Dinner Rises with Fuel, Grain Prices" by Randy McClain, Business Editor from the Tennesean.com.) Over time, higher Oil prices and especially higher gasoline prices will act like a tax on the US Economy, and that is likely to put serious downside pressure on the US Dollar as the Federal Reserve will have little choice but to continue lowering rates. In our view, the Fed is in an inescapable box; if they don’t cut rates, the downside momentum in the economy is likely to continue to build, and the odds of a financial derivatives accident will rise. If they do cut rates, they risk an accelerated Dollar decline. For the time being, the outlook across any number of markets is simply turning flat out bearish. In our work, we always keep an eye on the market leadership, because when leadership starts to fail that is always a sign that the final end game is playing out. To that end, anyone notice the 2% decline in Shanghai last night? That market peaked on October 16th at 6,092.06 and closed last night at 4,861.11. That’s a decline of 20.20% in just 6 weeks with the index now below (a) the rising medium term to long term trendline, (b) below a declining 50 day average, and (c) below the now flattening 100 day moving average. We have been stating all year that the speculative bubble that is the Shanghai Stock Exchange was unlikely to survive 2007, and with the decline in Chinese share prices, which ramped up in a parabolic bubble, we would say that Shanghai is in the process of starting some serious downside fireworks. In addition, other cycle leading indices ranging from Mexico and Brazil, to Hong Kong and South Korea, to our own Base Metals Share Index, all look like an important down turn could be getting underway. This is not to say that over the very short term, with stock market indices oversold, these stock indices could not experience another trading rally. What we note is that on all of the charts, seen from a more medium term perspective, evidence of topping behavior is becoming clear. At present there are many who still believe that these markets will be immune, or less vulnerable to the downside of this credit cycle. In our view, this is very much unlikely to be the case as foreign markets have always been hammered in larger scale bear markets, and right now the bear is emerging first in the US and will spread to the rest of the world.
Above: the Brazilian Bovespa --- beginning to top out? -- no decline yet of any material nature… does this mean more problems ahead for the Financial Markets? Of one thing we can be sure, after a 685% advance in the last five years, the Bovespa is due for a serious decline at some point in this down cycle -- hasn’t happened -- yet.
Above: the Hang Seng Index – a blow off exhaustion move, could it retest the highs or will it try a small rally, fail and then resume the downtrend? 29,200 looks like strong resistance.
Above: the South Korean KOSPI Composite Index, a good leading gauge for NASDAQ. Looks like a large Double Top, new lows from here would be very bearish
Above: the GST Base Metals Index, another leader this cycle looks a lot like the South Korean stock market with growth and final demand all tied to China. In addition to the loss of upside momentum in foreign markets, we see signs of ongoing deterioration in the US Market with each passing day. In the chart below, we show our own unweighted version of the Dow Jones 65 Composite, which has already broken below the August-September lows. Here again, a large and complex H&S – Rounding Top appears to be in the act of breaking down. While it is again very possible to see a reasonable bounce in the American share market off an oversold condition near term, the bigger picture is one of distribution and a building top.
Supporting the case for a still unfolding decline in US Stocks in the months ahead are a series of long dated Time Spans. In the chart below, we show the S&P 500 with a curve that indicates a rolling 52 Week New Low. The American Stock Market has not seen 52 Week New Lows in some time, and historically, like all markets will from time make fresh 52 week New Lows. On the next chart, we place a Time Span Counter on the S&P and tally up the number of weeks the S&P has gone without hitting a fresh 52 week New Low. Through this writing, it has now been 268 weeks without a New 52 Week New Low for the S&P, and historically, going back to 1950, this is the 2nd longest streak in 57 years. In order to tag a 52 week low in the next few days, the S&P would need to print 1364 or lower; that’s an additional 4% decline from current levels and more importantly, would require a major breakdown below the August lows and major support between 1400 and 1415.
Above: the S&P with the New Low marker on the top clip, going back 57 years, with a Time Span Counter on the bottom clip showing the long span of time that has transpired without a 52 week New Low -- this market is still overdue for more heavy selling and that augurs for a major Breakdown ahead in coming weeks. Finally, for a bit more historical perspective, we show the monthly chart below using the S&P 500 going back to 1870. On the chart we have plotted a 20 Month Moving Average and on the bottom clip, a Time Span Counter that shows the number of consecutive months above the 20 Month Moving Average. Guess what? At 53 consecutive months above the 20 month MA, we again see a time span that was surpassed only at the top of the 1929 stock market and the top of 2000 stock market, both generational bull moves. At present, where more cyclical rallies are concerned, this four year cycle is one of the most extended, time wise, and as a result, now most overdue for a major correction. To hit the 20 Month Moving average, the S&P needs to close below 1400 with moves below that important moving average usually indicating the start of something ugly, not the end. As this week's headline states, ‘downside momentum on all fronts is still building.”
That’s all for now, Frank Barbera Copyright © 2007 All rights reserved. CONTACT
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