The following is part of Pivotal Events that was published for our subscribers Thursday, October 30, 2008.
Glaringly Obvious Items
- The "Fall Crash Model" has been successful. We have been discussing the opportunities offered going into it and at its conclusion since June.
- Efforts to prevent liquidity concerns from turning into a disaster began in January. Despite interventions becoming massive, policy makers did not change the basic pattern of the fall crash.
- This year's action suggests "The Law of Expedient Genius": No matter how sudden, shocking, bloody, career-altering, expensive, or ruinous a market reversal is - within a week there is no one who didn't see it coming.
Signs Of The Times:
"As chart 1 shows, the Great Inflation of the late 1970s gave way to an age of low, steady inflation thanks in large part to the skill with which central banks learnt to steer policy."
- Article on central banking, The Economist, October 18, 2007
Actually, it has been another new financial era featuring inflating asset prices, which is considerably more dangerous than just plain old inflation of the Consumer Price Index, or even in the implicit price deflator. As for us, we remain content with the old definition of inflation as an "abnormal increase in the currency", or in recent, but belated times, an inordinate increase in credit. Referring to "inflation" as rising CPI is so - yesterday.
"The US economy is 'in a recession' and he would take flight from the dollar and buy other currencies."
- Interview with Jim Rogers, Telegraph, October 24, 2007
"U.S. Bank Stocks Look Unbeatable"
"Bank shares are so cheap - and dividends so high - that some of the world's biggest investors now say the combination is unbeatable."
- Bloomberg, October 30, 2007
"Russia's international reserves, the world's third largest, fell $149 billion last week as the central bank sold currencies to prop up the ruble."
"The speed of the fall is quite alarming."
- Bloomberg, October 21, 2008
"Global Currency Markets Dislocated Badly"
- Bloomberg, October 24, 2008
"Europe on the brink of currency meltdown"
- Telegraph, October 26, 2008
However sensational the press has been about the flight into the dollar, there is no need to worry about the stock market as on BNN on Monday a fund manager stated that it is "Not panic selling - it is forced selling by margin clerks."
We have been expecting dislocating conditions in the fall, with margin clerks trumping central bankers until the latter part of October.
Last Thursday's Pivot advised: "The cluster of strong signals in the currencies suggests that a significant reversal is imminent."
The high for the DX was 87.9 on Monday, October 27.
We wonder what the writer at The Economist is thinking about the ability of central bankers to "steer policy" these days. Now, the fall back for interventionists lately is that policy made today will be effective in a couple of years. Like so many relations we assume this must be commutative and conclude that today's crises must be a result of seriously considered policy measures implemented a couple of years ago.
That was a benighted "peddle to the metal" ambition to inflate credit. Why do that at the top of a boom? The only explanation is crowd behaviour.
Hasn't this been the ambition employed so aggressively and desperately over the past year? Yes, but history suggests that credit contractions are implacable and don't obey the dictates of carelessly fabricated theories of intervention. The crowd drives the markets.
Stock Market: Our "Roadmap" has been looking for at least a decline of around 48% on this bear market. Last week, we noted that at some 45% down for the senior indexes this target had been accomplished.
The other part was timing whereby forced liquidation could continue into the latter part of October, which was also reviewed last week. Additionally, the ChartWorks had registered a rare Downside Capitulation and on this last week's comment was: "Using a couple of counts this phase of forced selling could complete by next week. The initial rebound could be quick and signaled by the first day with a higher high."
That was accomplished on Monday and it seems that the move could be more than another "day-and-a-half" wonder. The correction in currencies has been likely to run for a few weeks. Lining up with this is the "Fall Crash" model, which has been looking for the first rebound to last for a couple of weeks and to test the lows in November.
No doubt besieged policy makers will claim that their massive efforts have ended the panic. The Fed spent two days debating a scheduled rate cut. Then seeing the markets starting a natural recovery moved to cut rates - thereby looking "in charge". Reminds of a 1930s movie with Jimmy Stewart playing the role of a young medical student in the 1860s. The doctor he is training under diagnoses bloodletting for the patient, which was the cure all of the day. Having to go somewhere else but wanting to watch the procedure, Stewart asks if it could be delayed until the next day. The doctor responds: "But, the patient might be better by tomorrow."
Market veterans as well as history know that panics end on their own dynamics and if they occur in the fall they have usually conformed to the pattern outlined above. The "Fall Crash" model and exquisite cartoon by David Brown is attached.
We are seeing a few studies that point out that if one had bought sound equities only a couple of years ago that one is still ahead. That dividend returns were better was also used at this time in 1929. Every few months Barron's would review the theory of investing in stocks for the "long pull" and this went on until the theoretical "widows and orphans" portfolio was no longer onside. Finally, the author of the series admitted that the account would have done better in a bank deposit.
That was close to the bottom, but it is worth reviewing more heroic measures to keep the public from selling. It is 79 years to the day when John D. Rockefeller Sr. came forward with his famous attempt to restore confidence with "My son and I have for some days been purchasing sound common stocks."
On October 16, this year, The New York Times ran an op-ed piece by Warren Buffett:
"Buy American. I Am."
"I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."
On October 30, 1929 the Dow closed at 258.47. The low was 40.56 in July, 1932.
Buffett's reason for buying now is "But most companies will be setting new profit records 5, 10 and 20 years from now."
In this regard Radio Corporation of America was the big winner in 1929 and with the boom had reported $3 a share in earnings. The allure of this continuing was based upon commercial radio, phonographs, recordings and "talking pictures". RCA's musical, Ziegfeld's "Rio Rita", was a big hit when released in September, 1929 and the stock reached 114.
With the crash, both the stock and earnings collapsed. By the mid 1950s, RCA had made it back to 55, but even the fabulous Elvis Presley contract couldn't boost the earnings to 3 dollars.
The theory of holding stocks for the long term is best replaced by competent trading during a post-bubble contraction.
Tales From The Crypt:
The 1873 bubble was in both financial and tangible assets and a severe contraction followed. As usual, the initial break prompted response that the economy was sound.
"The country itself was probably never more really prosperous than it is at present."
- Horace B. Claflin, September 18, 1873
"The country is too prosperous and wealthy to be seriously disturbed by the collapse of a few speculators or ephemeral banking institutions."
- New York Herald, September 18, 1873
The contraction ran from 1873 until 1895 and in 1884 senior economists began to call it "The Great Depression". At the height of the mania the Herald editorialized that nothing could go wrong because the US had a fiat currency and a brilliant secretary of the treasury.
Tuesday, October 14, 2008
The classic ballad "Autumn In New York" has some interesting lines:
"Dreamers with empty hands" and "[O]ften mingled with pain".
However, these could represent the almost immediate past and it could be timely to contemplate one of the brighter lines: "Why does it seem so inviting?"
Number one, market sentiment was about as bad as it gets. In so many words, most of the optimists have become pessimists.
Secondly, last Monday's ChartWorks outlined that if New York was down to Friday a Downside Capitulation would register. This was the case and the following update points out that the last such reading occurred in 1966 and prior to that there were three registrations in the 1929 to 1932 bear market.
One of the earliest fall financial disasters that is well-documented occurred in the money center in Northern Italy. Cipolla's "The Monetary Policy of Fourteenth-Century Florence (1962)" starts with the chapter "The Great Crash Of 1343-1346". The main problem was a business slowdown and too much public debt. These instruments, which had been not transferable were declared negotiable on October 25, 1345, and with doubts about interest payments the market immediately collapsed. During the travail the author notes that there were "wild fluctuations" in the relative values of gold and silver.
Prior to this, the debt was regarded as "a perfectly secure investment" that was yielding a return that was attractive to large and small investors. With the crash a contemporary chronicler, G. Villani, used the expression "mancamento della credenza", which translates as "want of credit". He also used the term "rimbalzo", which in today's terms meant "the multiplier effect", or a chain reaction contraction.
There were great market events through the 1500s and 1600s, and by the late 1600s there were enough participants, as well as a central bank with the powers of issue, to say that fully modern markets had arrived. The selling climaxes of the initial phase of subsequent great financial disasters occurred in September-October. The test of the low typically happened in November. One example eventually cleared in January.
|Nov. 10||Nov. 7-15||Jan. 1826||Nov.||Nov. 20|
This piece should have gone out on Friday, but the holiday week end interrupted the flow of info. The study is thorough and is a reference piece.
The lows have been likely to be tested in November.
Link to October 31, 2008 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1010