Thursday, May 29, 2014

Millennials' stock market phobia

“Coming of age during the financial crisis has made Millennials fearful of the stock market.  Just 27 percent of 18- to 29-year olds said they currently own stocks or shares in mutual funds, down from 33 percent in 2008.  Twenty-somethings with more than 50,000 in investible assets reported keeping more than half of their funds in cash.  Among investors aged 30 to 49, 67 percent own stocks, up from 58 percent in 2013.”  [The Week, May 30]

Tuesday, May 27, 2014

Russia and the U.S. retail economy

On the global market scene, Russia has been one of the major laggards this year.  The Market Vectors Russia ETF (RSX), a reflection of the country’s stock market, fell 30% from its October 2013 high.  RSX fell to its lowest level in more than four years only two months ago and seemed to be in danger of breaking below its 2009 long-term support. 

Bear in mind that the stock market – in any country – is the single best barometer of future business and economic conditions, as per the old Dow Theory saw.  Things looked pretty bleak for Russia earlier this spring, that is until the country caught a break from a major development in the commodities market.

Fortunately for Russia, the price of oil has been surging the last few weeks.  Russia’s economy is heavily influenced by the oil price due to the country’s reliance on oil and gas production and exports.  As goes the oil price, so goes the Russian economy, according to conventional wisdom.  It’s not surprising then to see Russia’s stock market rally in response to the recent oil price spike.

Russia’s gain, however, could become America’s loss.  As the price of oil rises, it makes the cost of all fuels from diesel to gasoline more expensive.  In turn, rising fuel costs eventually filter down into increased costs for all consumer goods.  Currently, however, the gas price hasn’t risen to unsustainable levels since the oil market rally hasn’t had time to ripple into other petroleum markets.  Consumers should therefore be safe for now.

The powers-that-be learned back in 1998 the folly of allowing oil prices to fall too low, for it nearly brought down Russia along with the rest of the global economy.  Since then we’ve seen a global subsidization of the oil price to artificially high levels, and most particularly in the price of gasoline.  Whenever things start to look bad for Russia, a rally in the energy markets always seems to come to her aid. 

A couple of useful barometers to watch in order to gauge the extent of fuel price pressures on the economy are the stocks of FedEx Corp. (FDX) and United Parcel Service (UPS).  Both stocks are holding up well and are as yet unfazed.  Rising fuel costs always weigh on these two key economic indicators, though, and if FDX and UPS start to flag this summer we’ll have a “heads up” that the fuel price increase could create problems for the retail economy.

Monday, May 26, 2014

Investors favor productivity over profits

“According to Morgan Stanley, companies that haven’t spent on new equipment have outperformed those that have spent for most of the recovery.  The situation could be set to change: For the last four months, companies with high levels of capital spending have outperformed those with low levels. 

“Savita Subramanian, head of equity and quantitative strategies at Bank of America, thinks this could mark a turning point.  Buying the stock of ‘companies with the largest share buybacks was the best performing strategy from 2012 through most of 2013, but is one of this year’s worst,’ she wrote in a May 19 research note.  This change in investor preferences could lay the groundwork for higher productivity growth.”  [Bloomberg Businessweek, May 25]

Friday, May 23, 2014

Strength in the Dow Transports

As mentioned in Monday’s report, the recent bottoming of the [short-term] cycle should temporarily take some of the recent selling pressure off the market, and so far it has done that.  The fact that this is a pre-holiday week has resulted in the type of low-volume, buoyant environment for equities that is typical in the days preceding Memorial Day.  

The Dow Jones Transportation Average (DJTA) is just below its all-time high and is reflecting a healthy trend for the transportation sector.  For that matter, the Dow Jones Industrial Average (DJIA) is less than 200 points below its all-time high (although it’s below the 15-day moving average)….

[Excerpted from the May 21 issue of Momentum Strategies Report]

Thursday, May 22, 2014

Another look at the 60-year cycle bottom (continued)

One of the questions most commonly asked by investors is why the economy has been so sluggish in recent years despite the Fed’s efforts at stimulating it? 

This question was recently asked of former Treasury Secretary Timothy Geithner by Time magazine.  His answer was that Americans are still “still living with the scars” of the credit crisis, implying that the reason for the slow pace of recovery is more psychological than anything.  His answer is unsatisfactory, however, since it obscures the deeper reason behind the slow growth era of the last few years.

A more academic attempt at answering this question was also made recently by economist Ed Yardeni.  Dr. Yardeni asserts that the ultra-easy money policies of central banks may actually be keeping a lid on inflation by boosting capacity.  He cites China’s borrowing binge of recent years, which “financed lots of excess capacity, as evidenced by its PPI, which has been falling for the past 26 months.”

Yardeni also noted that conditions are especially easy among advanced economies.  “Rather than stimulating demand and consumer price inflation,” he writes, “easy money has boosted asset prices.  It has also facilitated financial engineering, especially stock buybacks.”

The answer as to why demand has remain muted while inflation has remained in check these last few years can be easily summarized in terms of the long-term cycle of inflation and deflation.  The 60-year cycle, which bottoms in just a few short months, has been in its “hard down” phase for the last several years.  The down phase of the cycle acts as a major drag on inflationary pressure; more specifically, it actually creates deflationary undercurrents and sometimes even leads to periodic outbreaks of major deflationary pressure in the economy (as it did in 2008).  This cycle explains why, despite record amounts of money creation by the Fed since 2008, inflation hasn’t been a problem for the U.S. economy.

The term “financial engineering” is one we’ve heard a lot lately.  It involves companies repurchasing their own shares in order to reduce supply, thus increasing earnings-per-share.  This in turn boosts stock prices, thus perpetuating a self-reinforcing feedback loop.  Financial engineering has been spectacularly successful since 2009 mainly due to the influence of the deflationary cycle.  Because the 60-year cycle is in decline, it suppresses interest rates and thereby makes stock dividends attractive by comparison.  When a new long-term inflationary cycle begins in 2015, however, this technique will eventually become less effective.  When inflationary pressures become noticeable in the next few years, “financial engineering” will lose most, if not all, of its impact in boosting stock prices.

Another facet of the 60-year cycle is interest rates.  Interest rates have remained at or near multi-decade lows since 2009 with the deflationary cycle in its “hard down” phase.  This has also made it much easier to facilitate financial engineering.  One of the primary motives behind the Fed’s Quantitative Easing (QE) policies that began in November 2008 was to keep interest rates artificially low in order to decrease the cost of debt servicing and to help resuscitate the housing market.  The Fed has begun tapering the scale of its asset purchases to the tune of $10 billion/month with plans to completely end QE by the end of this year.  The Fed then plans to unwind its $4 trillion balance sheet and allow interest rates to steadily increase.  

Robert Campbell of The Campbell Real Estate Timing Letter believes this puts the Fed between the proverbial “rock and a hard place” since the Fed may be tempted to keep rates artificially low, yet doing so would create a potential catastrophe for pension plans and insurance companies which need higher rates.  

“Thus the Fed may have to let interest rates rise to prevent the pension catastrophe from becoming even worse,” he writes.  Indeed, rising interest rates are part and parcel of the inflationary aspect of the 60-year cycle.  We should eventually expect to see a gradual rising trend in coming years as the new inflationary cycle becomes established.

Wednesday, May 21, 2014

How bad will the 60-year cycle bottom be?

Question:  “How volatile or troublesome for markets do you see this descent into October's Kress cycle low?  Also, do you really think equities could kick on further from the heights they've already achieved?

Answer: In answer to your first question, I don’t see the coming final descent of the 60-year cycle into October to be extremely troublesome for the financial market.  The long-term Kress cycle theory promises at least one major crash – the type that occurs maybe once every 60-80 years – during the “hard down” phase of the 60-year cycle.  Mr. Kress defined the hard down phase as the final 8-12% of any cycle’s duration, which averages out to 10%.  Ten percent of 60 years is six years, which if we subtract from 2014 (when the cycle is due to bottom) brings us back to 2008.  That’s exactly when the credit crisis happened, which I believe was the once-in-a-lifetime crash that Mr. Kress predicted. 

History shows that sometimes market crashes occur somewhat ahead of scheduled cycle bottoms due to the influence of investor psychology.  If investor sentiment is too frothy and markets are over-extended, a crash can occur earlier than scheduled.  The stock market crashed in 1929-30 some five years ahead of the scheduled 40-year cycle bottom, but this was still within the allotted 12% “hard down” phase of the cycle.  While it’s still possible, indeed likely, that the bottoming of the current 60-year cycle this autumn will bring with it increasing volatility, the odds of a major crash occurring between now and then are extremely low. 

As to how much more upside potential the stock market has in 2015 and beyond after the 60-year cycle bottoms this year, it wouldn’t surprise if the rally from the 2009 low were only the half-way point of the bull market.  Following a major crash like the one we saw in 2008, a secular bull market that lasts around 8-10 years isn’t unusual.  The 60-year cycle bottom of the mid-1890s, the Axe-Houghton stock market index bottom advanced from a low of around 45 to a high of around 150 some 10 years later before the next major bear market occurred. 

Of course there will be periodic setbacks and “corrections” that occur over the course of the bull market and we may still witness such a setback this summer before the 60-year cycle bottoms.  But I would say the odds that the 60-year cycle will completely derail the bull market are slim.

Tuesday, May 20, 2014

Gold & Silver Stock Report performance

Below is the cumulative weekly performance graph of all trading recommendations made in the Gold & Silver Stock Report since 2011.  

Our strategy of buying according to the rules of our conservative trading discipline and then moving to cash when the trends reverse tends to minimize volatility within the portfolio.  It has also allowed us to outperform the XAU index during the last three years.  The fact that I don’t make short sale recommendations in the GSSR report is another reason for this relative out-performance since shorting tends to increase the volatility level within one’s portfolio.

Monday, May 19, 2014

Bank stocks in the balance

Before we finally emerge from the prolonged trading range environment of the last few weeks there are still a couple of major improvements needed.  One of them needs to be made in the bank stock group.  The PHLX Bank Index (BKX) made an attempt at confirming an immediate-term bottom earlier this week but failed. 

An immediate-term bottom requires a 2-day higher close above the rising (or flattening) 15-day moving average.  BKX confirmed an immediate-term downtrend in early April and has been down ever since.  Most recently, BKX pulled back 1.56% on Wednesday and is testing its 3-month low around the 67.00 level….

Experience teaches that the healthiest broad market rallies occur when the bank stocks are either leading or else participating on the upside.  A declining financial stock sector would qualify as a potentially dangerous divergence and would create somewhat of a headwind for the rest of the market.

[Excerpted from the 5/14/14 issue of Momentum Strategies Report]

Sunday, May 18, 2014

Is technical analysis losing effectiveness?

Question: “From a distance it seems that so many people are now aware of a lot of technical indicators that they’re becoming obsolete, e.g. seasonal trends, advance decline line, AAII polls.  Do you agree?”

Answer: I view technical indicators the way I would ANY indicator in life -- to be taken with a grain of salt.  The trick of properly using technical analysis is knowing when the indicators are likely to be valid and when they're not.  This takes years of practical experience and is just as much an intuition than it is a hard-and-fast rule.  To me, the most important aspect of financial market analysis are the individual stock charts.  I try to scan through at least 150-200 charts per day of mostly NYSE stocks and ETFs.  Doing this can give you a good "feel" of what's really happening beneath the surface of the market and is more valuable than relying on technical indicators, IMO.

Are the indicators losing significance due to so many people using them?  Not necessarily, although this may be true at times.  The A-D line has been around forever and investors have always known about it.  Sometimes it works, sometimes it doesn't.  It gives the best signals when it aligns with other technical and sentiment indicators and charts.  In other words, a weight-of-evidence approach works best when it comes to indicators.  

I would also point out a favorite quote which I once read in a book on the Middle Ages by historian Jonathan Riley-Smith.  The quote was in reference to historical models but it can easily be applied to analytical models in the financial market as well:  "Models invariably break down when the criteria for them are applied too strictly."  This is why technicians are sometimes frustrated in their reliance on indicators; they're reading them too literally and not giving enough weight to stock price momentum, which is the single most important factor in most cases.

Saturday, May 17, 2014

Another crisis in Greece? (Part 2)

In the previous blog posting we looked at the recent weakness in the Greek ETF (GREK) and speculated on its possible meaning for both the Greek and global economic outlooks.  A subscriber from Greece was kind enough to relay some additional insights:

You made a reference to the GREK ETF in last night’s MSR.  Since I am a Greek and actually leave in Athens-Greece, let me give a couple of extra bullet points as to what has happened in recent weeks that may have affected the local equity market:

“1. Banking stocks have been under pressure (especially National Bank of Greece - also trades in NY under the symbol NBG) due to a second round of bank recapitalization.  Banks needed extra capital after their loss provisions and % of NPLs (non-performing loans) after a 6th CONSECUTIVE year of recession. Recession officially started in mid/late-2008!!!  The 1st round of bank capital increases was last May.  Since March the major banks have raised via equity (dilution?) + bonds some 8.5 billionn euros. NBG’s stock has been down 50% since early 2014. In a very thin market when capital goes to BUY these recapitalized banks needs to sell other stocks in order to participate. Same as in IPOs in the US.

“2. Greece made its “appearance”/come back again to foreign capital markets in April 2014 after 4 years of absence. Its 10-year bond hit a 5.85% (yield -to-maturity) low in early May, after trading as low as 34-35% in 2012! It went back up to 6.85% or something last week.  That capital gains tax over foreign buyers of bonds will be repelled BEFORE even is instituted. Nervousness, however, may have affected stocks/bonds altogether.

“3. Greek holds tomorrow (May 18th) municipal elections and next Sunday (May 25th) there is a pan-European parliamentary election.  Greece has a coalition government and its majority is by a very thin margin. Parliament has 300 seats. The coalition has 152 of these 300.  Slim majority.  So if the opposition parties in the upcoming elections gain in popularity and get more votes they may start calling for general elections. Uncertainty?

“4. Finally, there is some rebalancing coming up in the MSCI Emerging Markets indices that affect a few stocks from the Athens Stock Exchange.  Since November 26th 2013 Greece is back in the EM MSCI index. From June 2001 until last November it was a “developed” market.

“All the above plus some technical damage on the charts may explain why the recent selling.”

Friday, May 16, 2014

Another crisis in Greece?

Although Russia is no longer an imminent threat at disturbing global financial market equipoise (see “No War in Year Four”), there is a potential threat on the horizon.  I’m referring to the world’s most notorious red-headed step-child, a.k.a. Greece. 

The Greek 20 ETF (GREK) is a proxy for Greece’s stock market.  Note the plunge to new quarterly lows as of the last few days in the following chart.  As you can see, GREK has been spiraling downward of late, which calls to mind the state of the Greek financial market during the 2010 crisis. 

 A cursory search of news headlines emanating from Greece reveals virtually nothing that would qualify as tinder for another round of global market turmoil.  The only possible exception is this Reuters wire story involving Greece’s denial that it has instituted a retroactive tax on foreign holders of Greek bonds.  The rumor apparently caused yields on Greek bonds to spike to a 2-year high.

A web site called the “Greece Reporter” also published an article on Thursday which highlighted the fact that Greece’s economy was still shrinking with GDP down 1.1% in Q1 2014.  The country’s unemployment rate is currently 27.4% according to the article.

It has been some time since we’ve seen Greece in the news; you’ll recall the country dominated news headlines a couple of years ago as the Greek financial crisis spread volatility throughout the global market.  Could it be that a revived Greek crisis (or mini crisis) is imminent?  The stock market is the ultimate barometer of future business conditions and the GREK chart suggests that something is amiss in the so-called “land of gods.”  Stay tuned.  

Thursday, May 15, 2014

No war in year four (so what’s next for gold)

Gold investors are wondering how much longer the metal will remain stuck in the mud as they await the next major “fear catalyst” that will launch a sustainable rally.  Gold futures have gone nowhere recently as traders assess the safe haven demand for the metal in the wake of recent economic reports from the U.S., China and Europe. 

Many investors wonder if perhaps volatile situation involving Russia and Ukraine will be the catalyst gold needs to launch a new bull market.  Adrian Ash, head of research at BullionVault, hit the nail on the head when he told MarketWatch: “Gold’s exposure to Ukraine looks asymmetric.  It’s not rising on the crisis, but might be vulnerable to a resolution.” 

Despite the efforts of mainstream media outlets to fan the flames of a Ukrainian showdown with Russia, however, the weight of evidence suggests the crisis has cooled considerably since last month.  See Time magazine’s latest cover below.

Even Time’s cover story by Michael Crowley and Simon Shuster admit that in the West, “there’s little appetite for harder-hitting measures” (i.e. economic sanctions) against Russia for its invasion of Ukraine.  Germany, for instance, is one of Russia’s main trading partners and according to the article, “Volkswagen, Adidas and Deutsche Bank are all opposed to broader sanctions.”  In other words, Big Money has prevailed against the war hawks in the U.S. who want to see another Cold War.  This is good news for Russia and the global economy, short-term at least, but it also represents one underpinning for gold’s appeal as a safe haven investment.

As we also looked at in a previous commentary, the Market Vectors Russia ETF (RSX), a proxy for Russia’s stock market, suggests that Russia won’t be a point of contention or a volatility factor in the immediate term.  As I wrote previously, “In contrast to the weakness displayed by the ETF in February and March, the RSX is on the mend and appears to be establishing an interim bottom.”  I also pointed out that if RSX manages to break out above its 10-week chart resistance at the 24.00 level it can only mean one thing: war has been forestalled for the foreseeable future.  While this would be good news for Ukraine, it’s not the news gold investors are looking for.

Another major factor which has underscored gold’s safe haven status in the past few months has been China.  Specifically, investors rotated into gold earlier this year when it looked like China’s economy was headed toward a recession.  Even now the economic data points to a soft Chinese domestic economy, with the China’s retail sales slipping to 11.9% in April compared with 12.2% in March.  Analysts have pointed out that gold has gained 7.5% in 2014 due to safe-haven demand in the West, partly thanks to China.  Yet even China’s stock market refuses to confirm the near-term weakness that analysts have forecast.  The China Large Cap ETF (FXI), a good proxy for China’s stock market, has established a short-term low at the 34.50 level and is still well above its March low of 32.50.  Unlike the economic statistics released by the government, FXI is forward-looking and seems to be reflecting a near-term scenario considerably less bearish than that of projected by the China bears.  This represents one less safe-haven support for the gold price.

Barring a resurgence of geopolitical and/or financial market volatility in the coming weeks, what could come to gold’s rescue and provide the catalyst for renewed demand?  Surprisingly, it might be nothing more than the simple yet sudden recognition among investors that gold is unloved and underappreciated.  In a note to its clients on Tuesday, UBS strategists Edel Tully and Joni Teves downgraded the bank’s one-month and three-month outlook for gold.  Yet they also suggested that diminished investor interest in the yellow metal would translate into gold putting in a short-term bottom.  The bank also expects gold to trade within a somewhat volatile trading range in the months ahead.

“Gold is not on the radar for many, and with broad expectations that prices will be range-bound this year, many investors are opting to stay out of this market,” said UBS.  “That is probably gold's biggest positive right now.”

It can’t be denied that investor interest in gold right now is at low ebb.  This means that gold will be sensitive to swift anything that might catalyze a short-covering rally or otherwise perk up value buying in a volatile market environment in the coming weeks.  Accordingly, a late spring or early summer rally can’t be ruled out for the yellow metal even without the sought-after “fear catalyst” which is necessary for a bigger, more sustainable uptrend. 

Tuesday, May 13, 2014

Momentum Strategies Report performance

I make it a point to record the performance of the Momentum Strategies Report on a weekly basis.  I believe this is important for providing subscribers (and potential subscribers) with an accurate representation of how the newsletter has performed in the recent past.  Instead of posting the performance in the form of percentage gains/losses (as most newsletter do), the cumulative results are presented in the form of a simple line graph.  The old saying “charts don’t lie” applies in this case.

Below is the performance graph of the last 16 months.  It shows the cumulative performance of the stock and ETF recommendations made in the “Trading Positions” section of the Momentum Strategies Report.

The above graph is an unvarnished reflection of how the recommendations made in MSR have performed since January 2013.  The trend is up, as you can see, yet the performance has admittedly lagged the broad market S&P somewhat.  This is typical of any technically-based trading strategy since it’s difficult to exactly match, or exceed, the performance of the broad market in a bull market due to the use of stop losses during market downturns.  In my experience it’s always best to err on the side of caution since you never know just how far down a market pullback will go before reversing.  The downside to this conservative approach is that the market tends to “whipsaw” a trading system that relies on a stop-loss mechanism in a bull market.

The upside to using a technical trading discipline is that your drawdown and relative volatility will be much lower than that of the broad market.  And in bear markets a technical trading system such as ours will invariably outperform the broad market, even without resorting to short sales.

Providing even more perspective on the long-term use of a conservative technical trading system, the following chart shows the long-term performance of the individual stock and ETF recommendations made in the MSR newsletter.  Keep in mind that we typically employ tight stop losses and only rarely recommend short sales or inverse (bearish) ETF trades.  The following graph therefore mainly represents more than seven years of long-cash positions.

One thing becomes quickly apparent upon a cursory view of the above graph, viz. the lack of volatility from 2009 to the present.  Back in 2007 and the years preceding it, I embraced a much more aggressive trading philosophy and used much looser stop losses when making trading recommendations.  This increased our upside (as in 2007) but also increased our downside during the volatile period immediately prior to the 2008 credit crisis.  This taught me the valuable lesson of embracing tighter standards when screening for potential stocks/ETFs and the use of a much more conservative stop loss system.  It also instilled in me the importance of minimizing the number of trading recommendations at any given time due to the “multiplier effect” during volatile periods (which is a double-edged sword).

In summary, the trading system employed in the MSR newsletter is one of the most conservative, yet consistently reliable systems you will find in any stock market newsletter when it comes to delivering long-term gains without exposure to extreme volatility.  It’s based on the principle of making market commitments only when the odds are decisively in your favor.  Otherwise, a cash position is warranted in the name of capital preservation – the first commandment of the financial markets.  

Never sell short a dull market

If there is a dominant theme in the stock market these past few weeks it has been the lack of commitment by investors.  According to the latest sentiment survey conducted by the American Association of Individual Investors (AAII), 28% of respondents were bullish and 28% were bearish while 43% were neutral.  According to Jeff Macke of, this is the highest level of neutrality in more than 10 years. 

Moreover, investors have been essentially neutral for the past 13 weeks according to the AAII poll.  You’d have to go back to 2012 to see a similar stretch of neutral readings. 

Unfortunately, prolonged neutral sentiment has no forecasting value.  And contrary to what the pundits are saying, an extended period of investor neutrality doesn’t guarantee that a decisive breakout, or breakdown, is imminent.  All that the neutral sentiment backdrop tells us is that investors have been driven to the point of indecision by the lack of directional movement in the stock market. 

There is an old Wall Street saying, however, that goes something along the lines of “Never sell short a dull market” in a bull market.  That is, if investors lose interest and volume and volatility shrink while the major uptrends remain intact, it’s probably a safe assumption that the path of least resistance still remains up.  In other words, it’s not usually safe to bet against a trading range market while the bull market persists.  Only when the key trend lines have been broken to the downside are we safe in assuming that the bears have taken control of the market.

[Excerpted from the 5/9/14 issue of Momentum Strategies Report]

Saturday, May 10, 2014

Gold and Russia's war

It was noted in the press that gold got a boost on Thursday from “geopolitical tensions as pro-Moscow separatists in eastern Ukraine ignored a call by Russian President Vladimir Putin to postpone a referendum on self-rule, a move that could lead to war.”  Increasing geopolitical tensions was cited in this report as one of the potential catalysts for an extended gold rally.  If it materializes it could indeed give a sizable boost to the gold price.  There’s a problem with this scenario, however, as the following graph shows.

The above chart shows the Market Vectors Russia ETF (RSX), a proxy for Russia’s stock market.  In contrast to the weakness displayed by the ETF in February and March, the RSX is on the mend and appears to be establishing an interim bottom.  RSX has in fact been trying to break out above its 10-week chart resistance at the 24.00 level.  If RSX manages to force a breakout above this pivotal level in the coming days it can only mean one thing: war has been forestalled, at least for the foreseeable future.  While this would be good news for Ukraine, this of course is not the news that gold is looking for.

[Excerpted from the 5/8 issue of Gold Strategies Review]

Wednesday, May 7, 2014

The Fed's contribution to the stalled housing boom

The Fed’s senior loan officer survey released Monday showed that banks are not making it easier for potential homebuyers. The survey of 74 domestic and 23 foreign banks operating in the US shows that banks are holding loan standards steady for prime mortgages and have raised them for nontraditional and subprime loans over the past three months. 

Fed officials have frequently stated that their ultra-easy monetary policy is aimed at keeping mortgage rates low to revive home sales. Their tapering talk last spring caused the 30-year mortgage rate to jump by about 100bps. It is still 82bps above the May 2, 2013 low. Meanwhile, the Fed is subjecting the banks to regular stress tests, which discourages them from making risky loans to would-be homeowners. 

In other words, the Fed is tapping on the mortgage-lending brakes and the monetary accelerator at the same time. This hasn’t stopped banks from making lots of business loans secured by inventories and other working capital.

[Dr. Ed Yardeni, May 7,

Tuesday, May 6, 2014

Clif Droke in Trader's World magazine!

Traders World, the leading magazine on Gann, Elliott Wave and technical analysis, has published an article by yours truly on the topic of moving averages.  In it I explain the basics of some of my trading techniques involving harmonic moving averages based on Kress cycle time frames.  Traders World issue #57 is now in circulation and you can view the article (on page 77) free by visiting the following link:

A stalled housing boom

“After a decade of boom-bust-boom, the U.S. housing market is going down-hill just when many economists thought it would be heading upward.  Sales of previously owned properties tumbled 7.5 percent in March from the previous year, to the slowest pace in 20 months, while purchases of new houses sank 14.5 percent from February.  And applications for mortgages to buy homes are indicating fading demand during what is typically the busiest season for deals….

“Housing’s woes are slowing the economic recovery.  Residential investment, including construction of single-family and multifamily homes, residential remodeling, and brokers’ fees, accounted for 3.1 percent of gross domestic product in the fourth quarter, less than half the peak contribution of 6.6 percent in 2006, according to an April 28 report by Capital Economics.  ‘The apparent crumbling in the housing recovery has, at least temporarily, removed a valuable support to GDP growth,’ the report said….

“The National Association of Realtors’ Housing Affordability Index, which compares household incomes with home prices and mortgage rates, fell 16 percent in the 12 months through February, the most recent month from which data are available….

“…The average rate for a 30-year fixed-rate mortgage was 4.33 percent in late April, according to Freddie Mac, up a full percentage point from a near-record low last May.  That raised the cost of a $200,000 mortgage 13 percent, sending monthly payments to $993 from $881….

“Nationwide, investors accounted for 17 percent of home purchases in March, the lowest share for that month since the National Association of Realtors began tracking the figure in 2008.  Meanwhile, the share of Americans who own their own homes was 64.8 percent in the first quarter, down from 65.2 percent in the previous three months, the Census Bureau said on April 28.  The rate is the lowest since the second quarter of 1995, when it was 64.7 percent.”  

[Bloomberg Businessweek, May 5-11]

Monday, May 5, 2014

A housing market slowdown

“Why is quarterly home price growth now falling at such a rapid pace?  According to Alex Villacorta, vice president of research at Clear Capital:

‘With waning investor demand [see chart below], higher rates of distressed sale activity mean that the housing market must withstand these distressed sales, which account for nearly one in four transactions.

‘Since the market fallout in 2006, home prices dramatically declined during sustained periods of rising distressed sales activity.  Over the last two years, however, rising distressed sales have been offset by investor demand, which is not guaranteed to be present in 2014.’

“Despite the big fall in investor demand that occurred in January 2014, please note that it is not unusual to see rising levels of distressed sales activity during the winter months.  However, as I explained in my January 2014 Timing Letter, Existing Home Sales – which is the best leading indicator of future housing market price trends – continues to signal a weakening housing market.”  

[Campbell Real Estate Timing LetterMarch 15, 2014,

Friday, May 2, 2014

The upcoming dawn of the 60-year cycle

On Apr. 30, the Fed announced a further reduction of monthly asset purchases by $10 billion to $45 billion, further reducing the scope of QE3.  The press lauded the reduction as a show of faith by the Fed in the U.S. economy despite a “dismal” reading on first quarter economic growth.  The Fed concluded its 2-day policy meeting with the prediction that the economy “will expand at a moderate pace and labor market conditions will continue to improve gradually.”

QE was beneficial for banks and large corporations but did nothing to help small businesses and the middle class.  Jobs and wage growth were stagnant for most of the last five years while the middle class did its best to muddle through under conditions that could only be described as contractionary.  QE was a boon for equity prices but actually hindered the middle class by slowing wage and lending growth.

Since the Fed began scaling back the size of its monthly asset purchases earlier this year, commercial lending has increased.  As economist David Malpass recently pointed out, “Growth was weak in 2009-13 but jumped to a 16% annual rate in the first quarter, when the taper started.”  The Fed plans to gradually diminish its monthly asset purchases until finally ending them in 2015, just as the new long-term inflation cycle will kick off.  The end of QE will coincide with the commencement of a new 60-year cycle.  Assuming the Fed sticks to its stated intention, there will be little counter-cyclical interference with the new long-term cycle (unlike the one that’s ending this year).  That means there will be more opportunity for the cycle to play out and extend its benefits throughout the broad economy, not just the financial sector. 

I’ve included the following graph which was originally printed in the late P.Q. Wall’s newsletter.  This graphic depicts the various “seasons” of the long-term 60-year cycle as it pertains to the phases of the economy.  It also shows the basic divisions and sub-divisions of the inflation/deflation cycle.  We’re currently approaching the end of “winter” and will soon be entering “spring.”

The following graph illustrates in greater detail the phases of the long-term cycle.  Again it is from one of P.Q. Wall’s old newsletters.  This graph is a good representation of the the 60-year cycle and its four 15-year phases.  P.Q.’s prediction that interest rates would bottom out in 2013, which he initially made back in the 1990s, was remarkably prescient.