 PIVOTAL
EVENTS - AUGUST 13, 2009
Signs of the Times
Bob Hoye
Institutional Advisors
Aug 20, 2009
The following is part of
Pivotal Events that was published for our subscribers Thursday,
August 13, 2009.
SIGNS OF THE TIMES:
Last Year:
"Teen Retailers are
Showing Signs of Distress" –Wall
Street Journal, August 8, 2008
"European Luxury Car
Makers Feel Pain" –Wall
Street Journal, August 8, 2008
"Mortgage-Market Trouble
Reaches Big Unions"
"Students Face Hit
as Private Lending Dries Up" –Wall Street Journal, August 11,
2008
It seems there was some foreshadowing
of the classic fall crash.
* * *
This Year:
"Farmland prices, which
advanced for 21 years, couldn't escape the worst plunge in real
estate since the Great Depression." –Bloomberg, August 5, 2009
Oddly enough that decline in
farmland was the worst since the Great Depression of 1873 to
1895.
"Back in February,
no one really knew if the investment-banking business was going
to survive. The world has changed dramatically in the past 5
months, and now banks are hiring." –SIFMA, August 11, 2009
"New York Fed in Hiring
Spree"
"Aggressively hiring
traders as it seeks to manage its burgeoning securities holdings."
–FT.com,
August 11, 2009
One would have thought that
central planners would have done the hiring before the aggressive
buying. Must have been panicdotal buying.
***
STOCK MARKETS
In February we reviewed the
possibility of a post-crash revival out to around May, which
approximated the rebounds in the year following the crashes of
1929 and 1873. Ross noted that a retracement of between 25% and
40% was probable. A Few weeks ago this was refined to a Fibonacci
38%. On the S&P this was 1014. So far the closing high has
been 1010 on Friday.
As it turned out, there was
a good high in early June, followed by a tradable decline. This
became overdone as we published our July 9 edition, when we noted
that the decline had been rewarding and had likely run its course.
The next timing target was
for a high in August, some five months after the crash low. Typically
the fall crash low was set in November and the rebound ran for
some five months, when the contraction resumed. The initial crash
completed in early March. Also, Ross noted that the 1938 model
counted out to an important high in August.
Tuesday's S&P ChartWorks
reviewed recent weakening and provided a couple of oscillator
targets. The observation was that a slump could lead to an interesting
fall. Included was Ross’s version of the “Presidential
Model”, which calls for an important high in early August.
At the moment there is little
adversity in the yield curve and in credit spreads, but, the
DX seems to be working on a rally, with yesterday's decline related
to the miracles associated with FOMC announcements. That there
is debate whether the benchmark rate should be zero or 0.25%
mainly suggests that central bankers have a sense of humor. Of
course the key question remains – what does the Fed know
that the markets don't know? Very little.
Credit Spreads: The attached chart on the TED spread
dramatically shows the complacency that prevailed until May-June,
2007 when we expected the killer change in the credit markets
to start. By that fateful June, there had been enough change
to conclude that "the greatest train wreck in the history
of credit" had started.
On the spread from bills to
euro dollar rates, the catastrophe culminated last fall and has
narrowed with the revival in financial markets that we thought
could run into late spring. Using the five-month count from the
stock market low, running into August makes sense.
However, there is not much
"good" left in the TED action, and a rebound seems
inevitable.
Similarly, longer maturities
have enjoyed a remarkable decline in yield from, for junk, 42%
in early March to 17.06% on Tuesday. The spread, over treasuries,
narrowed from 3800 bps to 1255 bps on Monday. There has been
a miniscule increase in yield and widening since.
This shows up in the JNK chart,
which price action has faltered since Monday and is close to
giving the MACD "sell". This would be the first step
for our aggressive sell on corporate bonds. The next step will
be the MACD on the high-yield (CRE), which has a long enough
chart to show two previous patterns that concluded a big rally.
Investors have been advised to lighten up into the rally.
Reckless action in the carry
trade in spreads and the curve has reached Biblical proportions,
and the consequent deluge could be of Biblical dimensions as
well. Needless to say, but central bank employment of their shopworn
theories has been Biblically reckless as well.
###
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
Hoye Archives
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