by phil - September 26th, 2016 8:34 am
Last Wednesday, the Fed released the most divisive statement in many years with 3 Governors (Geoge, Mester and Rosengren), all of whom have expressed the opinion that the Fed needs to tighten now and stop dithering around. Sadly, other than Bullard, the hawks are vastly outnumbered this week and the last word goes to Grandma Dove, Yellen, who rides in at 5pm on Thursday to help dress those windows for the last day of the quarter.
If you think that makes it all seem like a gigantic, manipulated scam – you are catching on! Notice the only hawk allowed to speak during trading hours is Bullard and he speaks right ahead of a 7-year note auction – a time when the Fed WANTS to scare investors back to the bond market. There's a very strong correlation between days our Government needs to borrow money (bond auctions) and days when the market falls – making it look unattractive by comparison – even against 2% 10-year notes.
How else do you think a country can go over 100% of it's GDP into debt and still borrow money at rates that don't even keep up with inflation? There has to be FEAR somewhere, but you sure wouldn't know it from record-high stock indexes, would you? Keep in mind that being in debt 100% of your GDP is like you being 100% of your gross salary in debt, before taxes.
If you make $100,000 and lose $35,000 to taxes and have a $2,000 mortgage ($24,000) and $1,500 in monthly home expenses (taxes, insurance, utilities, groceries), that's $18,000 and maybe you have 2 cars for $1,000 month ($12,000) which leaves you with $11,000 in discretionary income and THAT is what you have to pay back your $110,000 of debt.
Then there's interest on the debt. If it's just 1%, like the US debt, then you are paying $1,100 in interest but that's still 10% of your disposable income. What happens if rates go up – what will you be sacrificing? Also, how's that saving for college and retirement going? No wonder 80% of American families have little or no retirement savings – this is the example for…
by phil - September 23rd, 2016 8:34 am
Yes, China again.
Don't blame me, blame Ambrose Pritchard, who decided today would be a good day to talk about China's continuing bad debt crisis, with non-performing loans now approaching 20% of all loans and that number would be much WORSE if it were not for the fact that overall loan growth jumped 25% this year, from $8Tn to over $10Tn. That made the $2.1Tn in bad loans shrink back from 25% of $8Tn to "just" 20% of $10Tn – see, problem solved!
“The longer debt grows, the greater the risk of asset quality and liquidity shocks to the banking system,” said Fitch. "Capital shortfalls are currently 11% to 20% of GDP, but this threatens to hit 33% in a worst case scenario by the end of 2018. Defaults in China could lead to mutual credit guarantees in the background pulling other firms into distress. A large increase in real defaults risks triggering a chain of bankruptcies that magnifies the potential for financial instability,” it said.
To put that in perspective, the losses we endured in the 2008/9 crisis added up to 8% of the US and Europe's GDP and we're still recovering from that! Overall public debt is now 55% of China's GDP and China's A+ debt rating may also be in danger. An attempt to reform the system last year led to an over 40% collapse in the Chinese market last summer and it's been hands off ever since and the banks and corporations have gone hog wild at the debt trough.
Overall credit in China is now 243% of their GDP, up 100% since 2008 so their 7% annual GDP growth over 7 years (49%) has been paid for by a 120% increase in debt. Once could extrapolate then, that had China not gone MASSIVELY into debt, their economy would be contracting faster than Japan's and do you know who went MASSIVELY into debt to stave off a recession 20 years ago? JAPAN!!!
by phil - September 22nd, 2016 8:14 am
Verklempt: so shocked and overwhelmed that we cannot speak.
That's the reaction Bill Gross and I had to the FOMC statement yesterday (and you can hear our LIVE reporting at the time in our Webinar Replay). CNBC says Steve Leasman was also verklempt as that Fed report was indeed shocking. Yes, we knew they might not raise rates (but I was sure enough to make it yesterday's headline that they wouldn't) but we didn't think they would LOWER their rate forecast by 30% over the next 3 years – that was STUNNING!
Note the red numbers highlighting the changes on the projected Federal Funds Rates – that was the shocker in yesterday's report and that was why I was wrong yesterday – because we were supposed to end the year at 0.9% average and that means we NEEDED to hike now because putting off the hike wouldn't give it time to get the average in line with the Fed's targets – it did not occur to Bill Gross or I that they would suddenly lower the targets.
This is not just putting off one raise, this is putting of 1/3 of all potential raises for the next 36 months and, before you grab your pompoms to celebrate infinite free money – think about the reason they are taking this action. Look at the top of that chart – long-term GDP projections are down 10%, from 2% to 1.8% – how is that a good thing? Inflation is 2% so the only "growth" in our economy is inflationary growth – that's pathetic!
Not as pathetic as Japan (yet) where the new crime against savers by the Central Banksters is being called "Yield Curve Control" where the BoJ will target 0% yield for the 10-year Japanese Government Bond, which had been negative for months. So it’s trying to push up the 10-year yield a smidgen. Shorter maturities would still sport a negative yield. This would steepen the yield curve. In effect, the BoJ will control the yield curve. By the end of next year, it might own 50% of all JGBs. As noted by Wolf Richter:
"Why even pretend there’s still a bond market? Maybe it’s just for
by phil - September 21st, 2016 8:31 am
Oh sorry, that's tomorrow's headline!
Silly me, sometimes I get ahead of myself. As I've been saying all week(s), the market is overbought and the Fed is boxed in and even the bat-shit crazy Bank of Japan didn't lower rates this morning and the only reason they were able to hold if is because they have been assured that our Fed will be raising rates at 2pm, effectively devaluing the Yen against the Dollar anyway.
Still, not everyone is as certain as I am which is why I called for a short on the Nikkei Futures (/NKD) in our Live Member Chat Room this morning (7:02), saying:
We're back at 2,140, of course, along with 18,125, 4,825 and 1,230 – exactly where we were yesterday so it's just a reset by the TradeBots ahead of the Fed but now it's a lot more dangerous to short those futures, though still fun if you are careful enough to keep VERY TIGHT STOPS above those lines. /NKD blasted to 16,800 and now back to 16,700 as the Dollar pulls back, still a good short there.
As you can see, the Nikkei has already dropped 65 points and, at $5 per point, per contract that's a gain of $325 per contract for our Members and the Egg McMuffins are paid for already this morning (stop is now 16,650 to lock in $250)! The other levels are the same ones we've been watching all week and we're still looking for the S&P in particular to give us 2,120, on the way to 2,035.
Don't forget though, I'm an outlier in my prediction and our confidence in a rate hike today was shaken by yet another downward adjustment to our GDP outlook by the Atlanta Fed yesterday – from 3.5% to 2.9%, which is a 20% downgrade in GDP outlook since the beginning of the month – that's a very scary trend!
by phil - September 20th, 2016 7:58 am
What a fun week it's been!
As you can see from our S&P chart, we've popped over our strong bounce line at 2,140 but, like a magnet (or the Godfather), the S&P keeps getting pulled back in though it seems just as much money can be made betting long at 2,140 as betting short – as long as you use very tight stops on the wrong side of the line.
So why, you may wonder, don't we bet long? Because we still have plenty of long positions in our portfolios, and we already have plenty of bets going that way and also because we think the risk/reward strongly favors the downside at 2,140. At 2,120, we may be inclined to play for a bullish bounce – as we did last Thursday Morning, when we prediceted the move back to 2,150 right in the morning post:
"2,127.50 was our weak bounce goal on the S&P 500 (SPY) and we finished the day yesterday at 2,125.77, so not quite and, unfortunately, today we must raise the bar, and our expectations, to the strong bounce line at 2,140 and we're not going to really be impressed until 2,150 is taken back but let's not get ahead of ourselves because, as noted in the title, we're looking down, not up."
A move from 2,125 to 2,150 on the S&P Futures (/ES) is good for a gain of $1,250 per contract but remember – I can only tell you what the markets are going to do and how to make money trading it – the rest is up to you… Today we told our Members that we liked SHORTING the S&P (/ES) Futures at 1,240 and the Russell (/TF) Futures at 1,235 and the Dow (/YM) Futures at 18,100 – we'll see how those do tomorrow but back to 2,120 would be good for another $1,000 per contract (tight stops above the lines, of course).
Meanwhile, of course, it's all about those rates at the Fed tomorrow:
by phil - September 19th, 2016 8:03 am
Rearranging deck chairs on the Titanic.
That's the image that springs to mind as the S&P breaks Real Estate out of the Financial sector after the close today in a move that BMO Capital says is not likely to have a significant effect on either the new sector or the S&P overall. REITs are, in fact, up 14% for the year but the ETF (VNQ) has pulled back sharply, from $90 back to $85 (5.5%) this month – a strong retrace of the 20% run-up as predicted by our 5% Rule™.
Notice how Industrials have fallen from 86% of the S&P in 1976 (pre-Reagan) to 9.7% on Friday but it was already down to 11% in 2001 – it took just 25 years after our Bicentennial to destroy 75% of those jobs in America. Health care became a monstrous 15% of our market (thanks Nixon), double what it is in any other developed nation. IT is a dominating 21% of the index these days now more so as the Financial sector is cut from 16% to 13% though Real Estate will still move in lock-step with Financials, so what's the point?
One effect we're going to see is the dividend yield of the Financial Sector is going to dwindle as all the high-yielding REITs are moving out of their neighborhood. We have the FOMC Rate Decision on Wednesday (2pm) and it's a coin toss whether or not they raise rates at this meeting but Treasuries haven't waited and have already been rising – taking a steep toll on dividend-paying stocks as people opt for the (supposedly) risk-free alternative:
In truth, Treasuries are far from risk-free. Even if you assume the country you are investing in will be able to pay you back, you still run the risk of the currency devaluing during your holding period – causing you to literally get paid back in paper that is worth less (worthless?). Another way bond-holders get killed is when rates begin to climb. That causes their low-rate paper to become unattractive and, should they try to unload it, they may have to do so at a steep discount.
by phil - September 16th, 2016 8:23 am
It's a crazy market.
On the whole, we've gone nowhere all week. We fell from 2,200 to 2,100 and a weak bounce from there is 2,120 and a strong bounce is 2,140 and we're at 2,129 on the S&P Futures (/ES) but what a wild ride it has been in between, especially after having such a sleepy summer at the top of the range.
Sadly, that range is from 1,850 to 2,220 (20%) with 2,035 being the 10% line and THAT is where we expect to correct to in this downturn and yes, it's a downturn even if we went up yesterday. Just like a day of snow doesn't mean Global Warming isn't happening, a one-day rally doesn't mean you're not in a bear market – that kind of logic is what destroyed many traders in 2008, when they kept "buying the dips" as stocks fell 5%, 10%, 20%, 40%, even 60% from their highs.
This is why we have our fabulous 5% Rule™, which prevents us from falling for false rallies. I drew you a chart yesterday saying we would fail at the strong bounce line on the S&P (2,140) and guess what, that's EXACTLY where we failed. In fact, the title of the post was: "Thursday: Failure at the Strong Bounce Lines Leads to 5% Correction" so pretty much our job was simply to wait for those strong bounce lines and then go short – not complicated.
The S&P Futures pay $50 per point so the drop from 2,140 to 2,130 has already paid $500 per contract – not bad for a day's work and 2,130 is now our stop line but, hopefully, we get a sharper move down on this wild options expiration day. Remember: I can only tell you what is going to happen in the market and how to make money trading it – the rest is up to you!
This morning, the Nasdaq (/NQ) makes an excellent short as it crosses below the 4,800 mark (with very tight stops above) and that's lined up with 2,130 on the S&P (/ES), 18,050 on the Dow (/YM) and 1,215 on the Russell (/TF) and our system…
by phil - September 15th, 2016 8:34 am
Are we there yet?
2,127.50 was our weak bounce goal on the S&P 500 (SPY) and we finished the day yesterday at 2,125.77, so not quite and, unfortunately, today we must raise the bar, and our expectations, to the strong bounce line at 2,140 and we're not going to really be impressed until 2,150 is taken back but let's not get ahead of ourselves because, as noted in the title, we're looking down, not up.
We believe we're at the early stage of what will ultimately be a 10% correction, back to the +5% line on our Big Chart at 1,942.50. The next significant milestone along the way for the S&P will be our 10% line, at 2,035, assuming we do fail support at 2,100. For the last two days, Apple (AAPL) has been propping up the markets as the index heavyweight has been responsible for essentially ALL of the market gains (see yesterday's Live Trading Webinar Replay for details).
This morning, the BOE has crimped the Dollar rally by leaving rates on hold (0.25%) but that move (or non-move) was, after all, expected and EU markets are flat in their afternoon so far. Of course unchanged still means a $435Bn QE program continues for the UK markets. In a country with a $2.6Tn GDP, that's right up there with our own Fed's $4Tn (so far). This has led John Mauldin to note:
“You shall not crucify mankind upon a cross of gold.”
– William Jennings Bryan, July 9, 1896
“You shall not crucify the retiree and saver on a cross of negative rates.”
– John Mauldin, September 14, 2016
by phil - September 14th, 2016 8:29 am
Finally an exciting market!
Yesterday, in our live Member Chat Room, at 1:59 pm, we used our fabulous 5% Rule™ to call the weak bounce line we expected on the S&P at 2,127.50. As it turns out, the S&P finished to day at 2,127.02, so back to the old drawing board to find out why our model is misbehaving, I suppose...
If you think calling market moves within 0.48 (0.025%) is useful for Futures trading – you're right, it really is! As one of our Members (Craigsa60) said yesterday:
Good day for me too on the futures. Much easier when the market moves pretty much one way all day and that is the direction you are trading. thanks again Phil. I may be getting the hang of this. Made more today because there were more times when I wasn't trading, which Phil has been telling us (me in particular) for quite some time.
At PSW, we don't tell you what to trade – we TEACH you HOW to trade – it's a subtle but huge difference. Yes, we make plenty of picks, but they are examples as we teach our Members our trading systems. We want our Members to become better traders and then they, in turn share their ideas and we all gain from the group knowledge – something our own country could benefit from by better educating people in general.
Today, in case you can't see the chart (and we have charts for all the indexes in our Live Chat Room) it's 2,142.50 or bust on the S&P as it NEEDS to take back that strong bounce line to show any real strength. If we get there and it fails, we can short at that line (2,140 would do) with tight stops above or, if 2,125 fails, we can short there too. We expect at least a head fake higher in the morning, in the very least.
Notice the word "short" keeps coming up and Craigs made his money on the short side as we were all shorting yesterday because we knew Monday's move was BS (see yesterday's post) and the call I made…
by phil - September 13th, 2016 8:13 am
Wheeee, what fun!
Clearly investors do not have a clue what's going on as we are in what we like to call a "Bugs Bunny Market," where he throws a switch and everyone stampedes in and out of the theater (5:00 on this video). That's what the Fed has been doing to investors but don't blame the Fed, blame the clueless investors who have no actual investing premise other than whatever they think the Fed will do. Obviously, you can't have real price discovery when there are dozens of major stocks trading at hundreds of times earnings – the room for correction is always a huge overhang.
We're well-hedged and could really care less, though we would like to see a nice correction so we can finally go back to our Watch List and turn it into a Buy List again at reasonable prices. I called yesterday a "watch and wait" day as we expected to see some bounces and, of course, they were more than we expected but, by 3pm, in our Live Member Chat Room, we had enough watching and I made this call:
I like /ES short at 2,150, Dow 18,250, Nas 4,750 and RUT 1,225 are our other marks with /NKD 16,700 and Dollar 95.06 needs to stay above 95, of course. Oil closed at $46.20.
As you can see, at 2,137.50 we're already up a quick $650 per contract this morning (and we expect lower still). Trading Futures is one of those fun things you can do with your sidelined CASH!!! when you are bored but we had to wait PATIENTLY for the right opportunity to go short again – almost all day yesterday, in fact. Keep in mind though, that Futures trading is tricky and requires a lot of practice – we'll be doing a Live Trading Webinar tomorrow at 1pm, EST, and we'll discuss some of our Futures trading techniques but remember:
You've got to be crazy, you gotta have a real need
You gotta sleep on your toes,