Stocks & Equities

While You Where Sleeping

  • Its a broadly mixed start to the day. Asian equities are down yet again, even in the face of a bigger-than-expected rate cut out of India
  • On the data front, the German ZEW investor index improved in April – both the current conditions and expectations components picked up nicely.

Another deja vu?

  • The ‘Sell in May and go away’ mantra worked so well in the past two years that it can’t be ignored

The rain in Spain is not contained

Even with the ECB buying more Spanish Bonds, the problems within Spain have obviously not been solved

One dismal U.S. macro backdrop

  • It’s so easy to get caught up in the high-frequency data flow that it is not difficult to lose sight of just how bad it is out there. 

But retail sales hang in

  • The consensus on March retail sales was for a 0.3% gain but instead we got +0.8% and the gains were fairly broad based
US retail_041612

April data bring on some showers

  • It’s merely a diffusion index, but the New York Fed Empire Survey did disappoint in a major way

Nothing loonie here

  • Despite the pullback in global investor risk appetitie and faltering commodity prices, the Canadian dollar has managed to remain at par against its strong ‘safe haven’ U.S. counterpart

Getting high on yield Conference

Many readers have heard me discuss the vitures of a S.I.R.P. strategy. We continue to believe in well thought out S.I.R.P. investments and my colleague Reno Giancola and I will be discussing investment strategies and investment ideas as a conference May 31st at the Design Exchange in support of Mount Sinai Hospital. 

Great Opportunity below:

I subscribed to a Free 7 Day Trial to David Rosenberg’s great Breakfast with Dave daily report so that you can piggyback on the trial. Just put in my username and password below and try it out! I have read it for years and really like the full report (the above “While You Were Sleeping” is just a minor part of the daily letter) it so see what you think. Only 3 more days on the trial but every report that’s ever been issued is available by putting in my email address and Password. Regards Robert Zurrer  email – or

Dear reader,

As one of David Rosenberg’s long-standing followers, we have set up a free no-commitment seven day trial with full access to all reports using the new platform. All you need to do is login using the details below:

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Does Another Cruel Summer Lie Ahead For Stocks?

By: Eric Parnell 

The stock market has made one thing abundantly clear in the early days of the second quarter: It still cannot stand on its own at current levels without the continued support of additional stimulus from the U.S. Federal Reserve. And with the latest Fed stimulus program set to end in June, it may be shaping up to be another cruel summer for stocks.

It all began on April 3 with the release of the latest Fed minutes from the March Open Market Committee meeting. Although nothing was included or discussed that we haven’t already heard from the Fed many times before over the last several years, the market decided that the key take away from the latest minutes was that no further quantitative easing would be coming from the Fed any time soon. Stocks (SPY) immediately recoiled on the news, sliding lower for the remainder of the holiday shortened trading week. Then came the disappointing employment numbers on Friday and the uneasy response by investors once the stock market reopened early this past week. All of the sudden, the additional Fed stimulus that so many had concluded was off the table merely one week earlier was all of the sudden back on once again.


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Be Careful

Via Richard Russell of Dow Theory Letters – Title: “Be Careful”  With This Stock Market

These stock and bond markets may not make us happy, but we might as well get used to them, because they’re all we’ve got!

I’ve had a lot of time while in bed to watch TV and particularly Bloomberg. And I note that 90% of the time the so-called experts try to predict the path of the stock market by the way the current news is going. If the news is getting better and unemployment is looking brighter, then the stock market “should” be rallying. If the European picture is darkening, then the market “should” be shaky to weak. Follow the fundamentals, not the market!

So far, the stock market isn’t giving off any definitive hints as to what it’s doing or which way the trend is heading. I study my PTI, and its last trend signal was bullish. But as you may have noticed from the recent point and figure chart, my PTI has not been climbing to new highs. Instead, it’s forming a column of descending metrics, although it has NOT yet issued a clear bear signal.

Lowry’s Selling Pressure Index is still above their Buying Power Index, a formation that always bears careful watching. Joe Granville’s on-balance-volume statistics remain bearish as does Joe, and I always take Granville’s work seriously. My astute friend, A. Gary Shilling, is bearish because he thinks US consumers have exhausted their buying power.

Actually, the reason I so frequently talk about Lowry’s and Granville is that they are about the only two who stick strictly to technical analysis of the stock market while putting the market first and ignoring all the news of the day and the much-talked about fundamentals.

I note that the futures in the Dow are almost always the opposite of the way the market has closed. If the market closes down, the futures are usually higher, and the opposite is true if the stock market closes higher. BUT, if the market closes higher and the futures are higher, it usually means that next day will be a positive day.

This is a grinding back-and-forth market, one that is better to watch than to play.

Large-metal-safety-sign-saftey-first-be-careful-1443-provided image

Minefields that can Blow-up Global Stock Markets in 2012

Nowadays, it seems as though the market is always teetering on the knife’s edge. Depending upon which way the wind is blowing on any given day, or what chatter is coming across the newswires, markets around the globe are moving at lightning fast speed. Sentiment can change instantly, with the release of unexpected economic data, market movements, or surprising actions of central bankers. The effect of high frequency trading (HFT) has turned the decades old profession of investing into a high stakes gambling operation, and more characteristic of commodity trading. Such erratic behavior on a daily basis makes it difficult, if not impossible, for analysts to formulate a long-term view, and for investors to maintain a long-term, “Buy and hold” position. “As soon as you think you’ve got the key to the stock market, they change the lock,” said long-time market guru, Joe Granville.



S&P 500: Range Contraction Indicator Suggests A Deeper Correction

On Tuesday the RCI (Range Contraction Indicator) closed at 1.125% for the cash S&P 500.

As mentioned in Monday’s article, when the RCI closes back above 1.1% (after first closing below 0.9%), it suggests continuing daily range expansion – which usually, but not always – is associated with strong bearish moves.

Again this is an indicator, not necessarily an entry signal. But if asked where should a stop be placed if one were to use it as an end-of-day short entry, my answer would be either just above the high of the day in which the signal was generated (today’s high of 1383.01); or for a more lenient stop, above the recent high (above the 1422.38 high).


As far as downside objectives, the 1286 to 1293 area figures prominently. From Tuesday’s close of 1358.59 down to 1293 (the first significant support point), this would be just under a 5% decline – still a very reasonable correction given the near exponential rally from the mid-December lows.

The October 2011 high was 1292.66, and a confluence of retracement levels arrive from 1286.41 to 1290.52:

1290.52 = 50% retracement of the Nov11 low to the recent high.

1289.59 = 38.2% retracement of the Oct11 low to the recent high.

1286.41 = 61.8% retracement of the Dec11 low to the recent high.

The only Fibonacci retracement level that I feel has more significance than a flip of a coin is the 50% level. But when a number of retracement levels as well as other technical points cluster around a particular area, then that reoccurrence and reinforcement becomes noteworthy.

The S&P correction can certainly segue into a uniformly bearish trend and trade lower than 1286, but for now this level is one of the most significant near-term objectives/support level.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

A Must Read Long Term View


“During the same three decades, the US altered its fiscal policy, first under Ronald Reagan and almost continuously since. (The Clinton administration was the exception.) Rising deficit financing has been facilitated by falling nominal interest rates. That combination leads to level, or even falling, aggregate debt service. You can owe more and more and have smaller and smaller monthly payments. That is the magic of falling interest rates. Until they hit the zero boundary.”

A note to readers. This 2000-word commentary is a longer-term view; think in terms of years, not months or days. The essay is not in conflict with the fully invested position currently held at Cumberland. The words reflect my personal thinking only. Some of my colleagues disagree. In my personal view, the future is uncertain (of course) and may be unattractive for the longer-term outlook. In my view, our American political system is failing us. In my view, we are joining the list of declining world powers. The framework to support that argument follows.

“The external menace ‘You’ll end up like Greece, if you do not do this and that’ and the internal opprobrium heaped on some categories of taxpayers are very powerful and dangerous instruments to deprive people of their own personal freedoms.” –Vincenzo Sciarretta

My friend Vincenzo is a journalist from Italy. He is a serious writer and researcher. He has covered the financial markets and economy of Italy for years. He and I co-authored a book on Europe during the optimistic period. If he and I were to write such a book now, it would probably be quite pessimistic.

Vince responded to my recent email series about the downward spiral underway in the euro zone. Readers may find those essays at Vince noted my reports from the meetings in Paris and my reference to the upcoming French elections, where the promise of the Socialist candidate is to raise the tax rate on the highest income level to 75%. I will end this commentary with a longer email from Vince, in which he quotes historian Will Durant and discusses the fall of the Roman Empire.

Now to write some thoughts that gnaw at me in the late of the night, when sleep is elusive.

Simply put: I’m worried.


When I get worried, I read and re-read in my library. I can honestly say that I have had my nose in a thousand of those books. The library holds many texts by giants. They wrote about history, economics, and finance. They took the strategic view. George Akerlof, Jared Diamond, Niall Ferguson, Carmen Reinhart & Ken Rogoff, Robert Shiller, and Nassim Taleb are among the modern writers. Milton Friedman, Martin Gilbert, Friedrich Hayek and his polar opposite John Maynard Keynes, Ludwig von Mises, R.R. Palmer, and Adam Smith are among the classics.

A favorite of mine is Paul Kennedy. Twenty-five years ago, this Yale historian concluded his monumental work The Rise and Fall of Great Powers with a profound observation:

“In the largest sense of all, therefore, the only answer to the question increasingly debated by the public of whether the United States can preserve its existing position is ‘no – for it simply has not been given to any one society to remain permanently ahead of all the others, because that would imply a freezing of the differential pattern of growth rates, technological advance, and military developments which has existed since time immemorial.”

Kennedy then argued that the United States has the ability to moderate or accelerate the pace of decline. Such is also the case for other great powers, many of which are in a state of decline from their centuries-old power peak. Among others in his treatise, Kennedy’s history lessons examine Spain, France, Rome, and the Austro-Hungarian Empire.

I think I just covered a lot of the euro-zone geography.

In 1987, Kennedy warned us, “The task facing American statesmen over the decades, therefore, is to recognize that broad trends are under way, and that there is a need to ‘manage’ affairs so that the relative erosion of the United States’ position takes place slowly and smoothly.” He added the additional warning that it not be “accelerated by policies which bring merely short-term advantage but longer-term disadvantage.”

Unfortunately, America’s leadership has not heeded such warnings.

For decades futurists have complained about the rising use of government debt financing by the United States. They predicted calamitous outcomes, which did not arrive as expected. Paul Volcker and Alan Greenspan applied monetary policy in ways that allowed inflation and, hence, interest rates to spend a quarter century in decline. The Volcker-Greenspan era opened with the highest interest rates since the Civil War. Building on this downward momentum, Ben Bernanke has taken the target short-term interest rate to near zero and held it there.

During the same three decades, the US altered its fiscal policy, first under Ronald Reagan and almost continuously since. (The Clinton administration was the exception.) Rising deficit financing has been facilitated by falling nominal interest rates. That combination leads to level, or even falling, aggregate debt service. You can owe more and more and have smaller and smaller monthly payments. That is the magic of falling interest rates. Until they hit the zero boundary.

What happens when the music stops and the chairs are full? Are we reaching that point in the United States? It appears we have done so in Europe, certainly in Greece, the eldest of the declining great powers. We are also getting there in Japan and the UK. All four confront similar financial straits: zero-bound interest rates coupled with expanding national government debt.

About 85% of the capital markets of the world trade by means of the dollar, yen, pound, and euro. The G-4 central banks have collectively expanded their holdings of government securities and loans from $3.5 trillion to $9 trillion in just four years. At the prevailing very low interest rates, the functioning of monetary policy and the role of fiscal policy merge. Is there any difference between a million-dollar suitcase of one hundred dollar bills and a million-dollar, zero-interest treasury bill? You need an armed guard to protect the first one. With the second one, you need to clear an electronic trade in a safe financial institution, not an unsupervised (no more Fed surveillance) Federal Reserve primary dealer like MF Global. Your earnings on either the cash or the T-bill are the same: you earn zero. You can use the treasury bill to secure a repo transaction at a near-zero interest rate. You can use the cash to conduct many types of black-market or gray-market trades. Is it any wonder that the hundred-dollar bill is so popular? Isn’t it understandable that roughly two-thirds of US currency circulates outside the United States?

Is this a healthy situation? How long can it persist? What happens next? When interest rates eventually rise, what will be the result of this blend of monetary/fiscal policy as its unwinding turns malignant?

Moreover, who then will be the politicians that inherit this mess? Who will occupy the central banker’s chair?

I worry because there is no rationally explained strategic-exit plan in the G4. Not in the US. Not in Japan. Not in the euro zone. Not in the United Kingdom.

I also worry because the direction of taxation is up, if certain politicians continue to have their way. I worry because US business tax rates are now the highest in the entire world. In addition, I worry because of the increasing power that national governments wield in the mature economies of the world.

Applied power eventually leads to serfdom.

Increasing taxation is a characteristic of a declining great power.

Governments are failing to heed Paul Kennedy’s warnings. They are worsening the longer-term outlook. The Western world’s leaders ignored Kennedy when he wrote “… accelerated by policies which bring merely short-term advantage but longer-term disadvantage.”

Zero-bound interest rates are a short-term advantage. We enjoy them. We profit from them. We expect them to continue for a while. They are like the oxygen administered to a very ill patient. If the patient dies, the oxygen has eased the pain in the terminal phase. If the patient lives, the lungs have been scarred and need many years of healing and repair. Today, the patient is receiving oxygen in the G4. Death is being delayed (Greece) or, perhaps, thwarted (elsewhere in the euro zone, Japan, US, and UK).

We do not know how this will play out. History only warns us that many of the likely outcomes may be unpleasant. The authors I cited have articulated their differing and diverse views. Their conclusions have tended to be in the form of warnings.

Paul Kennedy favors candor. In his second, exquisite work, Preparing for the Twenty-First Century, he wrote: “Many earlier attempts to peer into the future concluded either in a tone of unrestrained optimism, or in gloomy forebodings, or (as in Toynbee’s case) in appeals for spiritual revival. Perhaps this work should also finish on such a note. Yet the fact remains that simply because we do not know the future, it is impossible to say with certainty whether global trends will lead to terrible disasters or be diverted by astonishing advances in human adaption.”

Of course, we hope for the latter and worry about the former. History gives us little comfort.

For the time being we shall remain on the sanguine side with regard to this global experiment with increasing debt, zero-bound interest rates, and a monetary/fiscal policy compromise that obfuscates the difference between them.

As long as this persists, it means financial markets do well, stocks rise, risk assets regain favor, bonds with hedges yield results, and cash continues to earn zero return.

That is now. It may change tomorrow, next week, next month, next year or not for quite some time. There is no way to know.

For the downside from history we return to Vincenzo’s email to me:

“Dear David,

“I invite you to read the last few sentences of the below article from The Lessons of History, by Will and Ariel Durant. It is about how the destruction of the Roman Empire through the taxation channel made people ‘slaves,’ in other words how serfdom emerged. This is my number one fear for Italy, but I guess France is making the same mistakes, just starting from a lower debt level. You can also find an online version of the book, thanks to Google.

“Rome had its socialist interlude under Diocletian. Faced with increasing poverty and restlessness among the masses, and with the imminent danger of barbarian invasion, he issued in A.D. 3 an edictum de pretiis, which denounced monopolists for keeping goods from the market to raise prices, and set maximum prices and wages for all important articles and services. Extensive public works were undertaken to put the unemployed to work, and food was distributed gratis, or at reduced prices, to the poor. The government – which already owned most mines, quarries, and salt deposits – brought nearly all major industries and guilds under detailed control. ‘In every large town,’ we are told, ‘the state became a powerful employer, standing head and shoulders above the private industrialists, who were in any case crushed by taxation.’ When businessmen predicted ruin, Diocletian explained that the barbarians were at the gate, and that individual liberty had to be shelved until collective liberty could be made secure. The socialism of Diocletian was a war economy, made possible by fear of foreign attack. Other factors equal, internal liberty varies inversely with external danger.

“The task of controlling men in economic detail proved too much for Diocletian’s expanding, expensive, and corrupt bureaucracy. To support this officialdom – the army, the courts, public works, and the dole – taxation rose to such heights that people lost the incentive to work or earn, and an erosive contest began between lawyers finding devices to evade taxes and lawyers formulating laws to prevent evasion. Thousands of Romans, to escape the tax gatherer, fled over the frontiers to seek refuge among the barbarians. Seeking to check this elusive mobility and to facilitate regulation and taxation, the government issued decrees binding the peasant to his field and the worker to his shop until all their debts and taxes had been paid. In this and other ways medieval serfdom began.”

Thank you, Vincenzo, for this serious response. Thank you Paul Kennedy for superbly articulating history and issuing clear warnings. Thank you, dear reader, if you are still with me. I hope I have provoked some thought.

Now we will seek another night’s sleep and hope it is not elusive.

David R. Kotok, Chairman and Chief Investment Officer