The Wall Street-Main Street Paradox

These days, many folks are feeling justifiably befuddled, as the contrast between Wall Street and Main Street is perhaps as striking a divergence as what was seen before the 2008 Credit Crisis bust. To be sure, the stock market continues to perform well, and at least on the surface the economic headlines appear to have reached a plateau. Yet below the surface the outlook for 2010 is taking on a grimmer and grimmer profile. Going back to December of 2008, I wrote a piece entitled “Tracking the “Official” Recession.”

I stated that the odds would be high that the current ‘great recession’ would take the shape of a “W”, implying a “Double Dip” contraction. Back then, I stated,

“In my view, a more accurate forecast might suggest that a “35 to 40” month economic contraction makes more sense, implying that the present period of great financial turmult may not end until early 2011. Yet, in contemplating these figures, a repeat of the 1980 to 1982 scenario in my view is starting to make the most sense. This is the so called “Double-Dip” recession outcome, where we may see an important economic “statistical low” in the early portion of 2009 (say April, May 2009), followed by a lengthy statistical rebound (perhaps 12 months – i.e. May 2010), followed in turn by a second, even more strongly declining contraction phase beginning in the latter half of 2010. It would not surprise me to see that second phase last a good 20 months in its own right implying that the final contraction bottom may not be seen before early 2012.”

Of course as it happened, the economic data began to turn up in March – April of this year, and has been on an understated bounce over the last few months. In today’s headlines, we learned that Consumer Confidence as tracked by the conference improved to a reading of 54.1 in August, up from a revised reading of 47.40 in July. Within the Consumer Confidence report, the Present Situation Index increased to a reading of 24.90 in August, up from 23.30 in July. At the same time, the Consumer Expectations Index rose to 73.50 in August, up from 63.40 in July. In the chart below, I show the steady increase in the Forward Expectation chart along with the 12 month Rate of Change in Forward Expectations (see lower clip for ROC). At present, I find that their remains a lot of upside momentum behind the current resurgence in the consumer outlook, which in my view implies that the current trend is likely to be maintained for another two to three months. In fact, in my view, the Forward Expectations component -- the leading component of the survey -- is likely to rise toward a value in the 88 to 96 range (see little dashed box) before the current advance is complete. Once Forward Expectations have reached a value in that zone, I believe things will be in the neighborhood from which point a renewed downside contraction may emerge.

Above: Consumer Confidence Forward Expectations (top clip) and Rate of Change on Expectations lower clip.

Elsewhere, the Case-Shiller Index for June showed that the prices for single family homes rose a non-seasonally adjusted 1.40%, the second increase after falling every month for the last three years. In addition, the Federal Housing Finance Agency reported that its index of home prices fell .7% in the second quarter, with prices down 6.10% from the prior year. Like the economy as a whole, housing seems to be trying to find a temporary plateau but has an overall forward looking outlook that is still quite bearish. Not only are home inventories as reported still at record levels, but in many markets banks are holding REO properties off the market in a huge shadow inventory that will likely continue to put downside pressure on housing for some time to come. In addition, I strongly believe that long term interest rates are near another important low, and that upside pressure on long term rates will depress housing in 2010. Thus, while we remain on track for a positive Q3 GDP report as “Cash for Clunkers” will likely have a substantial one off positive affect on sales, the odds remain very high that as 2009 draws to a close, the early going in 2010 will see the return of recession. As a result, investors need to remain very nimble and cannot take their eyes off the stock market charts. This is not an investors “Buy and Hold” market; it is a traders market that needs to be evaluated at least once a day.

As I see it, the overall trend for the equity market continues to remain positive with prices underpinned by a strong under current of positive momentum. Normally, this kind of momentum would take several weeks at least to dwindle down to the point where a larger, more powerful correction could take hold. As can be seen in the chart below, as the S&P has been moving steadily higher, the GST Advance-Decline Line for Operating Companies has been moving in 100% lockstep. That means that the underlying trend remains healthy.

Above: S&P 500 with GST Cumulative Advance-Decline Line (Operating Companies Only)

In addition to the positive action in the A/D Line, the McClellan Summation Index for the US equity market is also in very strongly positive territory. Last night the Summation Index ended at a reading of +7,348.30, and that is only a few points down from a recent peak at +7,626.78 seen on August 13th, 2009. Looking back at prior history when the Summation Index is over +4,000 it is usually a sign of strength, with readings above 7,000 denoting unusually strong climates. Notice that going back on the chart we saw a reading of +7730.19 back on June 17th, 2003. Some analysts would go so far as to claim that these kinds of readings always denote a bull market condition. On that point, I would defer and simply make the case that they almost always denote a market that is a reasonable distance in terms of time (i.e. number of weeks) from an important high. To this end, with the Summation Index at such lofty levels I am less concerned about the approaching seasonally negative September and October time periods. In fact I would actually argue that this year, these months have a good chance at being positive months with the equity market trend likely to begin deteriorating in November, and then potentially really deteriorating from December on. In my view 2010 will be another major bear market year, and I would not be the least bit surprised to see the equity markets wipe out the entirety of this year's advance (660 to 1150-1200(?)) and possibly even make new multi-year lows below 660 on the S&P.

Above: tight shot on the McClellan Summation Index

Above: Long term view of Summation Index with other high momentum values in 97-98.

Above: 20 day Oscillator of Advances and Decline.

But for now, the Return of the Bear will have to wait as the overall chart configuration for the stock market remains positive. Notice on the chart above that over the last few months the 20 day Oscillator of Advances less Declines has been making steadily higher highs, essentially confirming the underlying trend in the S&P. Now, I do believe that as the markets move into late September/October, the trend will begin to thin out and fewer sectors will participate, but I have not reached that point as this time. Another gauge which helps us keep an eye on the current psychology of the market is the Relative Strength Ratio of Consumer Discretionary to Consumer Staples. In my work, I convert this to a medium term trend oscillator which shows that market psychology is still positive as long as the oscillator is above zero. At the moment, the readings remain at reasonably healthy levels, which again suggests that the underlying uptrend probably has further to go in the weeks ahead. On a very short term basis there is support for the S&P at 1007 to 1010, and we could see a small 5 to 7 day correction down to those levels, but that would fall under the header of a minor reaction and should lead to another buyable low.

Above: Relative Strength Ratio of Consumer Discretionary to Consumer Staples, Oscillator is still in positive territory above zero.

Other gauges which continue to trend toward optimism are a swath of sentiment gauges, including the Put-to-Call Ratio, the VIX Index and the Gold to Goldman Ratio. Importantly, sentiment indicators tend to give false signals in the middle phases of a strong advance. In that regard my emphasis at the moment would be more on trend following and breadth-momentum gauges; until these really begin to fall off, the sentiment group is likely to be ‘too early’. For now, the Put Call Ratio is still not down to its lower band, and still not down to the low end of the range of the last few years. Similarly, VIX is trending down but will probably revisit last year's low readings in the 18 to 20 range before this advance has peaked. We also like to watch the Ratio of Physical Gold to Goldman Sachs (GS) as a crisis-optimism proxy. When the atmosphere is starting to turn hostile, Gold begins to out-perform Goldman, and when confidence is gaining the upper hand, money runs at Goldman Sachs and steps back a bit from Gold. In this occasion, that may be a bit tricky as we expect the Gold price to turn in a strong second half on the back of a weaker Dollar, but nevertheless, for now at least, Goldman Sachs is going up at a faster clip than gold, and so we glean a positive environmental signal from this Ratio which is confirming the direction of the VIX.

Above: The Put to Call Ratio

Above: upper – Gold to Goldman Ratio and lower – the VIX Index

Finally, investors should be anticipating some degree of further rotation in the stock market with Healthcare possibly emerging as a more solid performer in Q3 and Q4. In the chart below I show the Relative Strength of Healthcare versus Technology where we see that Healthcare is beginning to outperform. This ties in with a piece I did a few weeks back, when I featured Managed Care Stocks which have done quite nicely since I wrote about them, and which still look to be emerging from a major double bottom base.

Above: GST Healthcare Index versus Technology Stocks

Above: GST Managed Care Index

Where the Manager Care sector is concerned, my focus would be exclusively on the idea of buying pull backs and reactions on the order of 3% to 5% if and when they develop. Overall, volume in the sector continues to act very well, and with the recent developments in Washington, it is becoming more clear that, as I suspected, this sector will not be harmed that much, if at all, by any Obamacare legislation should such a plan even make it to fruition.

Above: Cumulative Up to Down Volume Healthcare Stocks.

Bottom Line: Investors putting money into the stock market at this relatively late stage of the rally need to understand that they must be nimble and must be watching their stocks at all times. While the rally likely continues to have a few more weeks of life and could press toward 1100-1200 as the year wears on, ultimately, we are likely dealing with a very large bear market rally that will be followed by a much more challenging market in 2010. While things on Wall Street are momentarily taking on a better spin (with easy Q4 comps directly ahead), on Mainstreet unemployment remains very high and is unlikely to recover in any meaningful way. Going forward, we note that as the stock market approaches the early phases of 2010, (especially the pre-announcement of Q1 EPS in March) analysts will start looking at very tough potential EPS comparisons, and as April 2010 approaches (and actual announcements begin), we will likely see a swath of conference calls showing a dramatic lack of top line sales growth. At that point life in the equity market will start becoming a whole lot less pleasant. At the moment, the sun is out, and most sectors are moving higher.

That’s all for now,
www.financialsense.com

Bharti topples Reliance Industries as top fund bet

MUMBAI: Leading mobile operator Bharti Airtel replaced Reliance Industries

as the most preferred stock of domestic fund managers in July,

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becoming the only company to topple the dominance of the country's most valuable firm since at least December 2006.

"Bharti, as a consumption play, appears to be far more attractive to funds than a commodity play," said Sanjay Sinha, chief executive of DBS Cholamandalam Asset Management. Bharti has a market value of about $33 billion, making it India's fourth-most valuable firm. Reliance is worth $66 billion, making it the country's largest firm by market cap.

As many as 273 funds collectively held 116 million shares of the cellular operator at July-end and 15 funds introduced the stock in their portfolios during the month, according to data from fund tracker ICRA Online. By comparison, 270 funds held stakes in Reliance Industries, controlled by billionaire Mukesh Ambani, with at least seven dumping the firm -- which posted a larger-than-expected drop in June quarter net profit and is locked in a legal battle with Reliance Natural Resources, run by estranged younger brother Anil Ambani, over a gas-sales pact.

Bharti unseated Reliance Industries even though its shares have fallen 3.8 percent since it announced in May that it had renewed merger talks with South African peer MTN, nearly a year after the companies' prior talks fell through.

Bharti more than 30 percent owned by Southeast Asia's top phone firm Singapore Telecommunications has consistently added about 2.8 million subscribers a month, leading growth in an increasingly competitive space where rivals such as Vodafone have expanded networks rapidly.

Firms such as ICICI Prudential Asset Management, IDFC Mutual Fund, ING Investment Management and Principal Pnb Asset Management added Bharti stock to their portfolios, while Canara Robeco and DSP BlackRock dumped Reliance Industries from at least one of their fund's portfolios. Bharti shares rose 2.4 percent in July, compared with an 8 percent rise in the broader market, while Reliance shares lost 3.3 percent.
(economictimes.indiatimes.com)

Inflation, Deflation, or What Have They Done to the Currency?

In recent weeks and months, there’s been much public debate in the financial press whether we’re going to hyper-inflate or suffer a deflationary collapse? I know this to be the case because I field many questions about this topic from readers around the world on a regular basis.

To better understand which of these two competing forces will ultimately win the day, let’s consider the following observable basics:

• In a hyper-inflation, the value of currency [in this case, fiat money] is driven toward zero as prices rise.
• In a deflationary collapse, the value of currency increases as prices collapse.

But above all, folks need to understand that inflation and deflation are BOTH monetary events which manifest themselves as a result of changes in the SUPPLY OF MONEY.

When we speak of MONEY SUPPLY, we might want to differentiate between the narrow money supply or Monetary Base [M0] and the broader measures of Money [M1, M2, and M3 – which the Fed no longer reports].

Definitions:

M0 - Notes and coins (currency) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). Remember, Governments and Central Banks exclusively set reserves and determine the amount of currency in circulation.

M1 - Includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Demonstrably, we can see that the broader measures of money are influenced by private commercial activity.

In this regard, we can say that broad monetary aggregates primarily track private activities, while the monetary base M0 is reflects the growth government / Central Bank activities.

Here’s what’s been happening to the Monetary Base according to the St. Louis Federal Reserve:

History tells us that hyperinflation is always and without exception caused by the government [acting in concert with a Central Bank] and never by consumers, unions or companies, which is apparently understood only by few people.

The effect of the one TRILLION increase in the monetary base depicted above, was recently analyzed by Mike Whitney in his article, Bernanke's Shell Game, where he explained,

…Former hedge fund manager Andy Kessler sums it up in a recent Wall Street Journal article, "The Bernanke Market". Here's a clip:

"By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market."

And here’s what this really means,

“It means the revered professor Bernanke figured out a way to circumvent Congress and dump more than a trillion dollars into the stock market by laundering the money through the big banks and other failing financial institutions. As Kessler suggests, Bernanke knew the liquidity would pop up in the equities market, thus, building the equity position of the banks so they wouldn't have to grovel to Congress for another TARP-like bailout. Bernanke's actions demonstrate his contempt for the democratic process. The Fed sees itself as a government-unto-itself.

Over at Zero Hedge, Tyler Durden did the math and figured that the recent 45 per cent surge in the S&P 500 had nothing to do with the fictional economic "recovery", but was just more of the Fed's hanky panky. Durden noticed that the money that's been sluicing into stocks hasn't (correspondingly) depleted the money markets. That's the clue that led him to the truth about Bernanke's 6 month stock rally.

Zero Hedge: "Most interesting is the correlation between Money Market totals and the listed stock value since the March lows: a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!”

Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S. banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer whose net equity was almost negative on March 31, could regain some semblance of confidence and would go ahead and max out his credit card. Alas, as one can see in the money multiplier and velocity of money metrics, U.S. consumers couldn't care less about leveraging themselves any more."

So, you see folks, all the talk we’ve heard of “green-shoots” and “recovery” are little more than high-stakes sleight of hand on the part of Mr. Bernanke’s Federal Reserve and his captive, agent-banks.

Dishonesty Begets More Dishonesty

The deceptive sleight-of-hand being practiced by the Federal Reserve has been increasing in recent weeks and months. Here’s why:

The following chart is excerpted from chapter 3 of an audio visual presentation in Chris Martenson's Crash Course.

Explanation: Fiat currencies are all lent into existence - but only in a manner that provides for re-payment of principal, not interest. Thus fiat systems require that the money supply grow at a minimum rate known as usury or interest, in order to pay back the earlier loans plus the interest.

In effect, fiat money or in the vernacular, the US dollar (but really all fiat currencies) is "THE BIGEST PONZI GAME" on the planet. As Martenson points out; the geometric growth curve eventually results in a parabolic "up" phase no matter how low the growth rate is the only determinant before this outcome results is - TIME.

The premeditated financial fraud and economic tom-foolery we've witnessed in recent years; rigging of the price of strategic commodities particularly gold, falsification of inflation data together with obscene amounts of interest rate derivatives has rendered the discipline normally enforced by usury ‘ineffective’. This perverse financial engineering lowered interest rates to un-natural levels, buying time, giving the false appearance that service of necessary parabolic fiat money [debt] growth was sustainable.

Usury Has Been Neutered

This neutering of usury which has enabled spiraling government debt growth has had its most deleterious impact in the very places one would logically expect: pensions and the fixed income nest eggs of savers. Nowhere is the harmful effect of monetary debasement more evident than here; where incomes are “anchored” to false, contrived inflation benchmarks while real costs [e.g. Healthcare, food etc.] are borne in the real world.

But the negative effects do not stop there.

The mis-pricing of capital through interest rate suppression accompanied by unchecked money creation has created a false sense of security regarding the affordability of finite, global natural resources. So you see folks, in a world where capital has zero costs, marginal business pursuits and outright speculation activities thrive creating a positive feedback loop reinforcing more unchecked money creation at zero cost [bubbles].

The pursuit of these unsustainable practices has now placed us squarely on the more advanced upper levels of the Martenson chart above:

These realities have led to further monetary debauchery on the part of the Federal Reserve as Chris Martenson revealed last week in an investigative article showing how the U.S. Fed actually bought [monetized] a large percentage of 7 year U.S. government bonds issued days earlier:

The Fed Buys Last Week's Treasury Notes

... Here's a recent example illustrating that the Fed's actions are more consistent with financial desperation than economic health.

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In concert with the claims I made in the prior Martenson Insider post, The Fed bought $7 billion in Treasuries today and even more yesterday.

...If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?

This $14 billion plus buying activity by the Fed represents fresh money created out of this air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called "POMOs") we can consider these additions of money as good as permanent themselves.

Looking at the maturity range we can see that these are all long-dated bonds with the one today specifically offering us a tantalizing clue as to how the shell game is being played.

Here's the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday). Please note the specific CUSIP number circled. Every bond in this auction carries this specific identifying number.

---

---

And now let's look at the detail for this most recent POMO:

Good grief! Just last week, when the auction results were announced it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand" and all the rest.

And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

A Shell Game Indeed

The upshot of the high-stakes shell game the U.S. Federal Reserve is playing has UNDERMINED foreign confidence in the U.S. Dollar. This is why, despite false claims to the contrary, foreigners are becoming unwilling participants at U.S. government bond auctions.

Remember folks, at least 70 percent of all U.S. currency is held outside the country. If [or when, perhaps?] foreigners decide to “throw in the towel,” these dollars will all come home to a hyper-inflationary homecoming.

Today’s Market

Overseas equity markets began the week on a positive note with Japan’s Nikkei Index gaining 112 points to 10,524. North American markets didn’t fare as well with the DOW off 32.10 to 9,338.00, the NASDAQ falling 8.01 to 1,992.24 and the S & P giving up 3.40 to 1,007.10. NYMEX crude oil futures gained .02 to end the day at 70.95 per barrel.

In the interest rate complex the benchmark 5 yr. government bond ended the day at 2.73% while the 10 yr. bond finished at 3.76%.

On foreign exchange markets the U.S. Dollar Index gained .35 to 79.24.

Precious metals were hit hard with COMEX gold futures falling 9.80 to 946.60 while COMEX silver futures fell .24 to 14.40. The XAU Index dropped 3.18 to 145.76 while the HUI Index gave up 9.08 to 357.19.

On tap for tomorrow, at 8:30 a.m. Preliminary Q2 Productivity data is due, expected 5.2% vs. prior 1.6%. Also at 8:30 a.m. Q2 Unit Labor Cost data is due, expected -2.2% vs. prior +3.0%. At 10:00 a.m. June Wholesale Inventory data is due, expected -0.9% vs. prior -0.8%.

Wishing you all a pleasant evening!

BY ROB KIRBY (financialsense.com)

Location beacon maker Kannad acquired for €10M

French maker of Personal Location Beacon (PLB) Kannad SAS was acquired yesterday by Orolia SA, a world leader in atomic clocks and synchronization systems. The transaction valued at €10 million was entirely paid in Orolia shares and is expected to be closed in September 2009. Kannad is one of the worldwide market leaders in personal location beacons and recorded pro-forma sales of 17.7 M€ in 2008.

Jean-Yves Courtois, Chairman and CEO of the Orolia Group, said “For many years, we have been providing our customers with systems to deliver and control the time and frequency information required by their vital applications, at any time and under any circumstances. In today’s world where traceability is critical and expansion of geolocation services is prolific, it appeared natural to strengthen our product portfolio with solutions that allow our customers to track in real time and in any environment the position of their key assets. Thus, we have decided to extend our “Timing” expertise to the global Positioning, Navigation, Timing (PNT) segment that is closely linked to Global Navigation Satellite Systems where Orolia is already a renowned player”.


Courtois also added, “Given the formative stage of markets for time and location applications and our focus on high-end, niche markets, we believe the ‘Search & Rescue’ sector is a particularly attractive area to advance this mission. The acquisition of Kannad, which has both a strong brand and business in this field, is for us a great opportunity to enter this market in a favorable position and expand new business as the PNT market structure solidifies”.

While Personal Location Beacons have been historically using wireless signal triangulation for determining the location of the distress message, the most recent generation of PLBs - such as the Kannad 406 XS-3 GPS - has integrated GPS technology to accurately pinpoint the person to be rescued. Moving forward GPS integration is likely to become a standard feature in location beacons.
The gpsbusinessnews.com