• Print

So what's a measly $61.70 Billion dollar loss in these days of Trillion dollar bailouts? To the world of the ordinary masses, probably just another headline to be quickly dismissed in the blizzard of financial headlines that seems to be falling like a strong arctic blizzard. Of course, we are only being the slightest bit wry as the world has never seen a company record this kind of loss as was announced on Monday by AIG. The once gilt-edged blue chip Insurer is still the key lynch pin it seems, in holding up the last vestiges of today's shattered financial system. After all, with a loss that big, it forces one to consider why the government acted so rapidly and with virtually no public discussion for yet another round of life support bail out funds. One can only wonder what would happen to the financial system if the government hadn't ponied up another $30 billion dollar equity line from the $700 billion dollar TARP. It seems that even with its equity almost zeroed out, AIG is still too large a player, too big a cog in the wheel to be allowed to fail. Of course, the epicenter for all the high anxiety continues to reside in the market for Credit Default Swaps where AIG is the kingfish. One can only presume that were AIG to fail, or to see its vaunted Moody's Credit Rating actually downgraded to junk, the chain reaction financial holocaust which would be unleashed would probably force a global system-wide heart-attack of the non-revivable variety. Paddles! Clear! Flat Line…

Of course, all of this begs the question, what about Citi, or BofA, or Barclays, or Lloyds, or even HSBC – where on Monday, we see the once proud and irreproachable HSBC, whose lineage includes the vaunted Hong Kong Shanghai Bank Corp (inception March 1865) foundering under the weight of staggering losses.

HSBC hsbc

On Monday HSBC, which is based in London, reported a 70% drop in profits, which came in at $5.72 billion, down from $19.1 billion the prior year. Attending the sharp decline in profits was a reduced dividend and the announcement of 6,000 job cuts and the exit from mortgage lending in the US. For HSBC, it was the ill advised acquisition of Household International in 2002 which owned both Household Finance and Beneficial that led HSBC to become the largest owner of US Sub-Prime mortgages, a move which the CEO Michael Goeghegan lamented in the conference call stating, "With the benefit of hindsight, this is an acquisition we wish we had not undertaken."

While HSBC may have been humbled by the global collapse in asset values over the last 18 months, it is a reasonable guesstimate that with the bank still actually profitable, the next recovery cycle should give HSBC a whole new lease on life. Unlike profitable business which can be resuscitated, the US Automakers probably won't be so lucky. In this case, a flat-line is the likely end result with GM announcing that sales plunged in February by 53% year-over-year and Ford with sales down 48% year-over-year. Toyota, Honda and Nissan all announced sales down approximately 40%. For the big three, even the strongest electric charge is unlikely to produce a ‘pulse' as years of gross mismanagement, unwieldy cost structures and huge pension liabilities are likely only solved with a pre-packaged bankruptcy and radical hierarchal surgery. In a very fine article showing the history of General Motors by James Quinn on Financial Sense, Quinn makes the case that "as GM goes, so goes the nation," and indeed at the rate the US Government is going, Uncle Sam may be next in line.

According to the Peter G. Peterson Foundation, the Real National Debt is presently 56.40 Trillion dollars or the equivalent of $483,000 dollars per US household, or $184,000 dollars per person. Prior to this collapse, it was already growing at the rate of $7,000 to $10,000 per person and with what has happened in the last few months, the growth rate may now be too difficult to actually calculate.

 real national debt in 2008

According to Bloomberg business news (Mark Pittman and Bob Ivry), the US government has now pledged more then $11.60 Trillion dollars during the last 18 months. What's more, the Obama Adminstration is now projecting deficits that will soar toward $1.75 Trillion per year embodying 12% of US GDP. Combined with a huge deficit in the Current Account, this is a recipe for a currency market disaster.

Over the centuries, history is replete with currency market seizures developing when a nations current account moves beyond 4% to 5% of GDP. For the US, the last few years have seen the Current Account at more then 6% of GDP and now, with a huge fiscal deficit on the way, one wonders how long foreign capital will continue to finance Uncle Sam. For China and the US, it seems to be a potential nightmare scenario brought on by the speed and scope of this crisis. Call it the financial market version of "MAD" (Mutually Assured Destruction), as both economies seem to be on a collision course with derailment.

Think about it, if China is enabling the US to spend like a drunken sailor, if China pulls away from the US, it could cause a deeper crisis; while if China doesn't pull away from the US, the runaway spending train will just keep picking up speed and moving down the tracks. In the case of China, the analogy is that of a creditors cartel, surrounded in South East Asia by a number of smaller creditors, all of whom have lent money to the same bad credits. In this instance, cartel dynamics predict a cheater's temptation at work where smaller countries will seek to diversify their exchange reserves by slowly exiting US Dollars. At some point, the slow trickle can build to a flood and at that point, the primary cartel players are forced to react. In the case of the US, both China and OPEC will play a key role. As the largest holder of dollar denominated treasury securities with reserves of 2 trillion, China has "only one percent in gold and nearly all the rest in US Dollars" states Marcus Grubb, the Managing Director of Investment Research at the World Gold Council. Just how long Hillary Clinton will be able to keep the Chinese "on board" the US runaway train is hard to tell, but one thing is clear; if the drive to diversify central bank reserves begins in earnest, it seems that Gold and other precious metals should benefit in the most profound way imaginable as the yellow metal is the only currency whose money supply grow rate is limited, in this case, to the neighborhood of 1% annually, which represents the decaying rate of output for world mines.

No surprise then with so much debt and potential default sloshing around in the global credit markets, that equity market investors have remained in a foul mood. For the US Stock Market, calls for support at the 780 area, at the 740 area, and very likely now at the 700 area have all been obliterated in rapid succession. As readers of the Gold Stock Technician and this column are aware, for the last 18 months we have been in the super-bear camp with any number of major warnings posted as the US stock market was moving into, recording, and descending out of, its final top in the 1560 area basis the S&P. The links below recap just a few of my prior scribblings ending with a detailed commentary I put forth on March 11th, 2008, just over a year ago.

Back then, in our article entitled "Iceberg Ahead…SOS" we stated:

"While Bulls may rejoice at what looks like the start of "something serious," chances are high that this is just another short covering rally within the context of a major bear market tightening an already firm grip. Viewed against the likely full spectrum of where prices could eventually go, it is a good bet that we are still early innings of the bear market, which could have as much as 50 to 70% still in front of us, (ex: 1576 peak to say worst case low 500, 1076 S&P points total, 1576 to 1272 recent low = 304 Points down so far, 304/1076 28% of potential worst case total or 71% of bear still ahead of us.) both in terms of running time and total price decline. While such predictions are by nature subject to constant review and possible changes, from what we can tell, this looks like a monster bear market underway with a lot of room to run.

At the time we showed the chart below suggesting that, "For the S&P, it is not at all uncommon for a Primary Wave C to be equal to or 1.618 times the size of, Primary Wave A. In the chart below, we see that Wave Equality is reached at about the 780 level, the area of the 2002-2003 bottom, while a 1.618 times decline is not seen until 500 on the S&P".

s and p

From March 2008 -- Above: Wave C is 1.618 the percentage decline of Wave A at about 500 on the S&P, say late 2009--that's potentially a long way down.

In the chart below, we update the current view of the S&P 500 which has now definitively broken down below the 2002-2003 major stock market lows in the range between 788 to 800. Over the last few days, the Weekly MACD has now reversed lower and continues to reside in ultra negative territory. This is NOT a good indication as it suggests a market that continues to have huge downside momentum. To that end, we have also seen the S&P moving down and outside its 20 day, 50 day, 100 day and even 200 day trading bands. Again, this is a portrait of a market trending strongly to the downside, where there is a very high level of downside confirmation by momentum gauges. Typically, at more important market lows, we see prices falling on diminished downside momentum which leads to a condition of positive divergence and then an upside reversal. For now, that has not occurred and as a result, I believe that the medium to longer range trend for stocks will remain down for some time to come.

s and p

Above: S&P 500 Weekly with MACD Gauge

weekly S&P

Above: An ultra close up view of the weekly S&P, note that MACD has once again reversed lower and that with prices now having broken down in ‘clean' fashion, the 788 to 800 zone is now massive price resistance.

Five Week Moving Average of Bulls as a % of Bulls + Bears by Investors Intelligence

Above: Five Week Moving Average of Bulls as a % of Bulls + Bears by Investors Intelligence – not even close to the kind of ultra bearish negative pluralities seen at prior major lows. Major bottoms in equities are made up of selling capitulation and so far, that is NOT what we see on these charts.

The 10 day Moving Average of IBD Dollar Weighted Call to Put Premium Ratio

Above: The 10 day Moving Average of IBD Dollar Weighted Call to Put Premium Ratio – not even remotely close to the lower long term trading band where prior important bottoms have been seen. This is major apathy and an indication that the market is still quite vulnerable to further decline. 

In addition to the break down in prices, and the lack thus far of any material bounce, I am also highly disturbed by the absence of serious panic and/or fear. Over the weekend, I updated the long term chart for Investors Intelligence Sentiment survey and found that the 5 week average is still not down to anything like the kind of deep oversold, negative extremes which would normally be seen at major stock market bottoms. Ditto some of the options work, where the Investors Business Daily Dollar Weighted Call to Put Premium Ratio is still miles away from its lower band, the area where important lows have occurred. In addition, my own ‘in house' dollar weigthed Put to Call gauge for the stock market while elevated is nowhere near the upper trading band which would normally indicate a high level of fear. This, despite Monday's deep nearly 300 point Dow plunge. Precisely, when will the crowd become fearful? While no one can know the answer to that question, I do know that until we see a whole lot more fear and angst showing up in the sentiment data, I will continue to remain negative on the stock market and assume that the medium to longer range trend remains down.

GST Dollar Weighted Put to Call Ratio

Above: GST Dollar Weighted Put to Call Ratio (common stocks only) not anywhere close to the upper trading band which normally highlights excessive fear.

Finally, as I pointed out in last week's update, the point should not be lost in the concept that over the last few days, we have seen global equity markets breakdown to the downside with new bear market lows in London, Paris and Frankfurt. So far, Asian equity markets have been relatively stronger, with the Nikkei, Hang Seng, Kospi, and Taipei Weighted attempting to hold last year's low, yet in most cases, the margin is fairly paper thin. In our work, we keep one grand index which incorporates all of the largest world stock market indices into one unweighted Global Index. That gauge has now broken down to new lows, and still seems on track to move materially lower over the next few months. With a close of 2,573 last week, the GST World Index could easily retest its early 2003 lows at 2,380 in the weeks ahead implying another 7.50% downside, while some longer range Elliott targets project a potential more important low as far down as 2,200 which could be an additional 15% further downside still ahead. For now, while I believe that it is possible for stocks to enjoy a mild rally lasting a few days at virtually anytime, the overall technical posture of global equity markets still suggests that (short term bear market rallies notwithstanding), the trend at the moment is still strongly down, and thus far, while paddles have been applied, it is hard to discern any kind of steady pulse.


CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .

About Frank Barbera CMT