Stocks & Equities

Are The Markets At A Logical Bottom?


As we mentioned Tuesday, the reaction to Wednesday’s Fed statement is important to the market’s intermediate-term direction. However, Apple’s (AAPL) strong earnings have provided investors with a reason to step up to the buyer’s plate. From Bloomberg:

    Apple Inc. (AAPL) profit almost doubled last quarter, reflecting robust demand for the iPhone in China and purchases of a new version of the iPad, allaying the growth concerns that sliced shares 12 percent in two weeks.

Since Europe continues to be the possible “fun sponge” for the bullish party, and Germany tends to pay the uncomfortable European clean-up tabs, the German DAX Index has served as a good proxy for the tolerance for risk assets. Germany has had a strong start to trading on Wednesday. Later in this article, we review the longer-term technical backdrop for the German stock market.

Picking market tops and bottoms is difficult at best. It is better to think in terms of a probabilistic bottom or top. One way to help discern if it is probable for a market to move higher is to look at long-, intermediate-, and short-term trendlines on both an absolute and relative basis.

When reviewing the charts below ask yourself, “Does this market seem to be at a logical point where a reversal could take place?” If the answer is “yes”, then we become more open to a possible buying opportunity. A few weeks ago we identified 1,363 as a possible point of inflection for stocks. The S&P 500 has been testing 1,363 for two weeks. On April 10, the S&P 500 closed at 1,358, which thus far has represented the lowest close during the current pullback. While we want to see some real conviction from buyers, the chart below seems to have a reasonable probability of producing a reversal to the upside.



It is passed time for a MAJOR disappointment!

Jack Crooks

 “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”

– Alan Greenspan

Are there no limits whatsoever to monetary policy?  It is beyond pathetic that a rising stock market seems the only substitute for real policy from our “best and brightest.”  Why doesn’t it matter to them that it isn’t working?  Are they that intellectually bankrupt and corrupt?  Is it odd that very smart people outside the government continue to bet on QE 3,4,5,6…?  Or is it the only bet?  What in the world is going on here?   

Orders for U.S. durable goods fell in March by the most in three years, indicating manufacturing will contribute less to growth this year.  

Bookings for goods meant to last at least three years dropped 4.2 percent, the biggest decrease since January 2009, after a revised 1.9 percent gain the prior month, data from the Commerce Department showed today in Washington. Economists forecast a 1.7 percent decline, according to the median estimate in a Bloomberg News survey.  

Now, would throwing more money into the banking system “help” this problem of slowing US growth momentum? 


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Stocks Cannot Levitate On Twist Alone

All eyes are on the Federal Reserve this week as they convene their latest Open Market Committee meeting on Tuesday and Wednesday to discuss monetary policy. A primary focus of investors is whether the Fed will hint about any future policy action.

Such news is important, as the stock market has proven keenly sensitive to the influences of monetary stimulus since the outbreak of the financial crisis several years ago. But while another round of policy support may help stabilize the stock market at current levels, Fed stimulus alone may no longer be enough to drive stocks to new highs. Moreover, it may now be insufficient to offset the forces of a major downside shock.

403065-13352422577635548-Eric-Parnell origin

A reflection on the movements of the stock market since October 2011 is informative in this regard. The U.S. stock market as measured by the S&P 500 Index (SPY) initially exploded higher at the launch of Operation Twist. Having touched a fresh cycle low at 1075, the stock market suddenly reversed and didn’t look back for the entire month. From the second day to the second to last day of October, the stock market advanced roughly +17%. But what is surprising is that since the end of October, the net impact of Operation Twist by itself has actually been fading lower from its peak.

The first sign of breakability associated with Operation Twist came on Halloween, as the market became spooked by the collapse of MF Global. By Thanksgiving, the U.S. stock market had bled nearly -10% and was only +5% above the early October lows. The market response to the MF Global bankruptcy was notable, for stocks prior that point had shown the resilience to continue rising during periods of Fed stimulus regardless of the risk. Such was not the case in November 2011.

Stocks thrashed back and forth into December until the week before Christmas. It was at this point on December 21 that the European Central Bank executed the first of its two planned Long-Term Refinancing Operations (LTRO) to support the at risk banking system across the continent.

It was upon the launch of LTRO that the stock market propelled itself into another euphoric melt up phase. This continued until the second planned LTRO on February 29. Along the way, the stock market advanced +14% in a virtually uninterrupted rally that included stocks rising on nearly 70% of trading days over this time period. This is well above the historical average of 52% and is exceptionally rare to occur over any sustained period of market history.


Rosenberg Roasts The Roundtable Of Groupthink

It appears that when it comes to mocking consensus groupthink emanating from lazy career ‘financiers’ who seek protection from their lack of imagination and original thought, ‘creation’ of negative alpha and general underperformance (not to mention reliance on rating agencies, only to jump at the first opportunity to demonize the clueless raters), in the sheer herds of other D-grade asset “managers” (for much more read Jeremy Grantham explaining this and much more here), David Rosenberg enjoys even more linguistic flexibility than even us. Case in point, his just released trashing of the latest Barron’s permabull groupthink effort titled “Outlook: Mostly Sunny.” And just as it so often happens, no sooner did those words hit the cover of that particular rag, that it started raining, generously providing material for the latest “Roasting with Rosie.”

From Gluskin Sheff:

Consensus Creates A Contrary Call

    When the experts and forecasts agree, something else is going to happen.”

    Bob Farrell’s investment rule #9.

Did the folks at Barron’s intentionally lob a ball right into my wheelhouse? The front cover says it all — Outlook: Mostly Sunny. Check it out. Any perma-bull out there right now should be trembling by the front cover effect. This is no different than the fabled Death of Equities in the 1979 Businessweek, the Economist front cover calling for oil prices to basically head towards zero circa 1998, and the front cover of Barron’s a decade ago saying That’s All, Folks when it came to interest rates supposedly bottoming out. Come to think of it, Barron’s ran with Dow 15,000 on its front cover back on February 13, 2012, and last we saw, at the nearby peak in early April, the blue-chip index closed 1,700 points below that threshold (and has been roughly flat since the date of that article).

What Barron’s is referring to here is the latest Big Money poll that it conducts semi-annually. The actual title of the article (on page 25) is Reason to Cheer. Reason to cheer? About what? Margins being squeezed? Profit growth practically evaporating? Earnings downgrades still significantly outpacing upgrades? The recovery so excruciatingly slow that senior members of the Fed are contemplating QE3? Insolvency of Spanish banks? Hard landing risks in China? The 2013 fiscal cliff? The fact that over 60% of the data in the past two months have surprised to the downside?

The results of the Big Money Poll were startling:

    55% of the portfolio managers are either bullish or very bullish. Only 14% are bearish or very bearish.
    Financials and technology are the favourites, with 31% citing both as being the top performers in the next six to 12 months.
    Favourite stock … Apple (surprised?).
    Utilities are seen as the worst performer — by 30% of those polled.
    With respect to Treasuries, 81% are bears, just 2% are bulls. How can yields rise in such a lopsided environment? I mean, who is there left to sell? This is a classic bullish contrary signpost.
    Bonds of all types are detested — 33% bearish on corporates while 14% are bullish; 35% are bearish on munis while only 12% are bullish.
    But … 41% are bulls on real estate; only 10% bears are left.
    For gold, 39% bears and 30% are bulls. That is great— the one asset class that has been in a secular bear market for 12 years is adored (equities), and the two that have actually made you money over this time span (the bond- bullion barbell) is to be avoided. Go figure!


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Facebook Snaps a $1-Billion Photo

By Alex Daley, Chief Technology Investment Strategist

“What made Instagram worth $1 billion to Facebook?”

When asked this question recently, I responded with an immediate, “Nothing.”

I’m not usually so terse or emphatic with my answers, as any longtime reader knows. But in this case, there really was nothing inherently valuable inside Instagram that made them worth the unbelievable sum Facebook agreed to pay. Yet they did it anyway. Clearly, there’s something missing from a traditional valuation analysis here.

That missing piece is what Instagram could have become in the hands of a competitor or even on its own, had Facebook not gone ahead with the marriage. Nearing its IPO, Facebook was willing to overpay in order to quash any potential risks that Instagram posed, both to the company’s reputation and its content stream.

Instagram by the Numbers

On the surface, Instagram might look like small potatoes. It has only one product: an application for smartphones that can take square, Polaroid-style throwback images, run them through a few cool filters to make them look snazzy, and share them with other users. Even though it has some sharing capability built into its own app, the overwhelming majority of photos are instead posted to Facebook (or Twitter or Posterous or other social network) with the app’s simple integration.

There is no magical computer science involved. The app – minus some intricacies that allowed it to scale to millions of users without buckling under its own weight – is simple enough that most any solid mobile developer could have thrown it together. This is not to dismiss the hard work the twelve-person company put into it – I am sure many late nights were spent on the finer details, squashing bugs, and the like – but it’s not exactly a fighter-jet simulator or climatology model. Facebook obviously didn’t want the company for its cutting-edge patents, code, or other intellectual property.

So maybe it had to do with the user base? True, the application is insanely popular, having been downloaded more than 30 million times according to the App Store statistics from Apple, and another 5 million on Android. (Of course, Apple and Google have it in their best interests to overcount those users, by including updates, reinstalls, upgraded phones, etc. But it is the best proxy we have, and we can reasonably assume Instagram still had tens of millions of users.) Plus, it was named “application of the year” by Apple for 2011, which was bound to further boost its appeal and draw in new users.

But Facebook already counts 850 million registered users, according to its most recent press releases. Even adding 30 million to that number would cause barely a ripple. And given that the most popular use of the application is to upload to your existing Facebook account, we doubt that it will bring many, if any, new users to Facebook. This was not about adding instant market share.

Nor did the two-year-old Instagram bring much in the way of revenue to the table. In fact, the company has no revenue stream at all; it was living off of $7 million in venture capital funds it managed to raise on the back of its early success, having garnered 1.75 million downloads just four months after its launch. (The product, by the way, was built on just $500,000 in seed funding pre-launch.)

No revenue, little money in the bank… you might think a company like that would come cheap. That instead, Facebook believed it justified a $1-billion pricetag tells us that Facebook values the company for something more than Instagram’s application, audience, or earnings.



Perspective: Stocks Commodities Currencies Credit Markets


The stock market is included in the orthodox calculation of Leading Indicators. Problem is that at the end of a great financial bubble, such as in 1929 and 1873, the recession started virtually with the collapse of speculation, which was also the case in 2007. This is one of the features of a bubble and its collapse. Stocks peaked in October 2007 and the recession started in that fateful December.

Essentially, both the stock market and the economy recovered when the panic ended in March 2009. We have thought that the relation would continue such that the first business expansion out of the crash would end with the end of the first bull market. It should be admitted that we had thought that the US expansion would end with the commodity-high of last April. Usually we leave the discussion about recoveries and recessions to the cult of economics, but sometimes it’s worth a try. After all, the NBER typically determines the start of the recession – one year after the actual start.

Naturally, we can’t help but wonder if the life that recently came into the economic numbers will turn down with the stock market – with little delay. Taking out 1340 on the S&P would set the downtrend. What would set the downtrend in GDP?

A couple of weeks ago central bankers were comfortable that stimulus and fixes had – well – fixed things. No more easing was required. Then, this week’s hit to the markets seems to have dislocated policymaker confidence such that Bernanke had to state that he would not raise administered rates.  Our view has been that it has been market forces that have lowered such rates. In troubled times conservative funds go to the most liquid items and they are short-dated instruments in the senior currency and gold. This drives the former down in yield and the latter up in price.

The swing in Fed opinion reminds of Tokyo at its extraordinary peak at the end of 1989. Speculation was radical and policymakers were trying to talk the action down – which is always impossible because such speculation will run to collapse. With the initial break in the Nikkei, policymakers became nervous and talked about lowering margin requirements. Shortly after the top of a bubble??? Japan’s subsequent contraction has been one for the history books.

Our “new financial era” recorded a number of cyclical speculative thrusts and cyclical bear markets until a classical bubble was accomplished in 2007.  Despite easing that exceeds the determined efforts by the Fed at the start of the post-1929 contraction, 

financial history remains on the typical post-bubble path. One could even say that central bankers have been extremely belligerent in attacking the normal forces of contraction.

However, sovereign debt markets are saying that it is not working well. An updated chart on the “Spanish Fandango” follows.


With the break in overall confidence, the long bond jumped almost 5 points in three trading days. Junk, high-yield bonds, and sovereign debt sold off.  The sub-prime which had rallied from 38 in October to 52.5 in February has slumped to 47.4. The chart has broken down and the target is the 38 of last October.  Municipals are close to ending their test of the highs in February.

This year’s seasonal reversal to widening in May could lead to very unsettled credit markets later in the year.

The long bond was oversold and the bounce has corrected this condition and the price is likely to drift down to test the low.

Action in lower-grade stuff has not been healthy, and an economist at an orthodox place (IMF) has discovered that there is not enough collateral behind all of the debt. In Victorian times this was called “over trading” and today its “leveraging”. No matter what the term, it is always followed by liquidation or in today’s terms “de-leveraging”. The next stage could inspire articles that it is impossible for the world’s economy to generate enough income to service the debt burden.

There will be plenty of opportunity for a “new” wave of young economists to point out the glaring blunders of the ancient and “barbarous relic” of interventionist economics.


Base metals and crude oil declined enough to prompt a rebound with the Fed turning on the speculation switch again. Neither were oversold enough to set an intermediate bottom. Natural gas got headlines in declining below $2.00, but it is not as oversold as at the 2.23 low in January. Also, late April often sets a seasonal high.

Agricultural prices suffered a hit last week, but not enough to break the chart out of the narrow trading range. Coffee clearly needs a jolt as it has given up most of the huge gain to April last year. It seems that the sector is being keep together by strong action in soybeans and soybean meal. These are becoming rather overbought at close to last year’s highs.

After mid-year, adverse credit spreads, a slowing global economy and a firming dollar could trash most commodities – again. The chart shows three “over-boughts” – at 474 in 2008, 370 last April and at 326 in February.


Bernanke renewed his vows to depreciate the dollar, which brought the DX back into its trading range. However, this is still within the pattern leading to a significant advance. 

Getting above overhead resistance at 81 could set the launch button. For day-traders May is a long time away, but for investors it is nearby and could record a reversal in credit spreads and forex markets.


Signs of the Times:

We ran “Boom Sayer” exclamations for four weeks and considering the nature of volatility it is reasonable to conclude that current excesses will eventually be followed by “Doom Sayers”.

But, let’s not be hasty – usually the next step from complacency is “Ooops!”.

And that might have begun with this week’s discovery that the “fix” on Euroland debt won’t last as long as even the shorter maturities become due.


This Year

“The biggest wave of state-and-local government debt refinancing in two decades is helping fuel the longest winning streak for municipal bonds since 2007.”

– Bloomberg, April 2

“Taxable municipal bonds are poised to extend their best rally in 18 years.”

 – Bloomberg, April 4

“Across the Eurozone, and beyond, hedge fund managers are now pointing to ‘significant’ pricing anomalies not seen since 2008.”

– Bloomberg, April 6

“JP Morgan trader of credit-derivative indexes [linked to the health of corporations] has amassed positions so large that he is driving price moves in the $10 trillion market.”

– Bloomberg, April 6

Of course, these preceded Tuesday’s setback, but their significance is that there is considerable speculation in credit markets. As we have been noting, favourable trends in corporate spreads ended in February. This could reverse to widening over the next four to six weeks.

As we have been noting, “Boom Sayer” exclamations from March and April last year were remarkably similar to this year’s list. The best of last year’s have been published and, essentially, they ended in April, which suggests a pattern.

Stock market action in both years set a momentum high in February with positive sentiment recorded in March and April – accompanied by bullish raves.

This week saw some “sudden” exclamations of dismay. Does it indicate a new trend?



Link to April 13 ‘Bob and Phil Show’ on