Chasing Rainbows and the Greatest Hits of 1930!
By Frank Barbera CMT. August 7, 2007
It has been a horrible two weeks on Wall Street since we last did our Tuesday column chronicling what now appears to be the ‘popping’ of the Great Credit Bubble. Oh sure, stock prices recovered from the edge of the abyss on Monday, and managed to add to those gains in Tuesday’s trade, but to what end?
Of course, if you are one of the die hard bulls of Wall Street, the rally of the last two days probably means that “Happy Days Are Here Again,” strike up the Al Jolsen recordings. Further, for those few of you left who still enjoy being in serious denial, we recommend the afternoon programming on Bubblevision between 2 and 3PM PST — you’ll love it, as these guys perpetually have their heads planted firmly in the sand. They never see anything or say anything negative. Heaven forbid, the facts should ever get in the way. In fact, every day, they talk about the US economy and how it’s the ‘greatest story never told,’ and how wonderful the economy really is, and how the sub-prime debacle would be contained.
Yep, its contained all right, contained in all sorts of strange portfolios. In their view, this rapacious form of capitalism known as “global outsourcing’ should entitle the stock market to really be north of 35,000, not lingering around near 13,000. Nowhere can you find more twisting and exaggeration of the truth, more expertly done with a straight face, then on the Bubble-Vision Economic show. Yes, these guys have the Mantra of 'Happy Days Are Always Here Again.' But guess what? That song, funny thing, it comes from a movie released in 1929 called “CHASING RAINBOWS” that debuted in October of 1929, just before the Great Crash and the start of the Great Depression. Perhaps that’s what the bulls are doing on Wall Street these days -- Chasing Rainbows and desperately humming 'Happy Days are Here Again.' Unfortunately, events of the last two weeks point to a far more sordid tale in the making and one we take no pleasure in recognizing.
Above: The DJIA beginning with the 1929 Crash. "Happy Days Are Here Again" was composed by Milton Ager (1893-1979) & Jack Yellen (1892-1991) in 1929, and introduced in October, just prior to the stock market crash which heralded the start of the Great Depression. It became a song that was extraordinarily popular in the first half of the twentieth century. Like "Ain't She Sweet" (1927), it became a Tin Pan Alley standard. "Happy Days Are Here Again" would also become the theme song for President Franklin Delano Roosevelt's 1932 inauguration - and was synonymous (with its upbeat tempo and cheerful lyrics) with the promised emergence from the Depression and Roosevelt's New Deal - and has remained the theme song for the Democratic Party ever since.
Yet, as this now blooming downturn of most likely epic proportions gets underway, it is important that we confront head on the many systemic issues which are undoubtedly already being set in motion. Bad debts will affect not only the Wall Street Brokers, but the Banks, the Home Builders, the Mortgage Industry -- it will be a very long list indeed. Of course, a big tip of the hat has to go to the Rating Agencies, who managed to sign off and bless these illiquid debts with a AAA Rating. Great work guys! Way to give lots of credence to the most opaque securities perhaps ever created, the Collateralized Debt Obligations. Fitch, Moody’s, S&P, all in the name of greed and quarterly earnings, big fee’s, for shame! Has no one heard of the term fiduciary responsibility? They were AAA rated in some cases and now they are worthless! Perhaps the hedge fund managers at Bear Stearns would enjoy afternoon tea with the CNBC Economics Crowd.
Of course, last week was an object lesson on how quickly things can turn sour. Accredited Home Lenders (LEND), American Home Mortgage (AHM), Fremont (FMT), Homebanc Corp (HMB), Hanover Capital (HCM), MGIC (MTG), Radian (RDN), Novastar NFI), Redwood Trust (RWT), and even good old WAMU (WM) and Downey (DSL)… What a wreck! Have you seen these charts? Space does not provide for a recount of all the charts, which in addition to the mortgage brokers, re-insurers and home builders, would include a number of US Bond Funds that have blown up badly in recent days, and just yesterday, Standard Pacific (SPF), which is also having trouble gaining access to credit. From the look of it, not only is Standard Pacific going down the proverbial toilet, but the US Credit Markets have embarked on what can only be described as a monumental correction, a change of course that will likely be an ongoing mess for quite some time to come. In our view, a contagion has been unleashed, which likely adds up to a seminal event in the history of financial markets wherein we may not see the ‘Happy Days’ for some time.
Above: the collapse of American Home Mortgage (AHM) last week.
Above: Impac Mortgage Company (IMH).
Above: Standard Pacific (SPF) is in the toilet.
Above: Reinsurer Radian (RDC) plummeted amid huge margin call induced losses last week.
Mind you, all of these credit problems are now playing out against the backdrop of an already anemically weak US Economy. Did anyone see last month’s Payroll numbers? A meager gain of +92,000, well below economist estimates for a gain of +120,000, and third consecutive declining figure. Yet, the headline numbers only give a hint of the real problem and dismal state of affairs. Of course, by now most of you are likely familiar with the BLS tricksters and their creative Birth-Death Payroll Model. Worthy of Joseph Goebbels and his propaganda ministry, the table below shows what BLS has reported in the way of Non-Farm Payroll Growth this year, and what contributions have been made by the Birth-Death Model (‘adjustments’). Note that each January, (see Table 2) the model goes back and revises downward by some factor the number of phantom jobs reported the prior year, so January numbers are always negative. What is remarkable about 2007 is that through the end of July, total Job Creation would be only 193,000, and if we look at just the last six months, February thru July, Job Creation is actually negative at —144,000. Thus far, in four of the last six months, without the Birth-Death Model ‘Adjustment’ Job Creation would have been negative four of six times. How do you think that would go down on Wall Street? Probably not well, but more importantly, what does this say about the ‘expansion’? You guessed it -- no expansion of any kind. Instead, this is far more indicative of the kind of negative payroll growth seen during a recession.
or Real Payrolls
|Six Month Tally of Job Creation:||-144|
|Seasonal Trends for BLS Business Birth Death ARIMA Model|
Above: the BLS Reported Non-Farm Payroll series (top clip) and the Private Sector tabulated Household Survey — the Household Survey is plunging headlong toward recession, while the government figures, propped up by the Birth-Death Model are rolling over at a more gentle rate of decline. Either way, the tend in both surveys ‘goosed’ or ‘un-goosed’ is to the downside. Recession Ahead.
Sticking with the ‘recession’ theme for a moment longer, it is well worth pointing out that a comparison of the Non-Farm Payroll series to its Private Sector companion, the Household Payroll Survey shows bears out our thought process, in that the Private Sector Household Employment Survey has been falling sharply for the last few months, clearly heading toward the zero line and recession. Will the Government mandated Payroll Survey catch up? Who knows, but for now, the trend in both appears to be strongly down suggesting that the contraction in the Housing Market is already well along in its negative spill over onto Main Street, something Wall Street has passionately denied. More proof? OK, last thought on the economy compares Temporary Employment trends with the BLS Non-Farm Payrolls. Historically, changes in Temporary Employment lead the BLS Data, and that appears to be what is happening right now, as Temp Hiring is moving down at a very rapid rate.
Above: Non-Farm Payrolls 6 Month Average (thin line) and Temporary Employment 6 Month Average (thick line). Temporary Employment tends to lead. At the moment, we see downside acceleration; Again, Recession Ahead.
Thus, in the larger macro-view, we continue to see ample signs of a major economic reversal in the making. As is normal, the global equity markets are now discounting the forthcoming slow down by turning down ahead of time. For the balance of the last two months, we have stayed on theme in these updates suggesting that a major topping process was unfolding before our very eyes. It is now quite clear that we were generally quite correct in our views, as virtually all markets have experienced a major trend reversal in the last few weeks. Among the highlights we have illustrated were the major tops in brokerage stocks, where we featured Bear Stearns and Lehman Brothers in these reports as far back as June 5th — a week BEFORE the initial story on Bear Stearns ever hit the newspaper with Bear at $149.60 and Lehman at $75. As of last night, Bear was trading at $114 while Lehman closed at $59. We featured the Broker-Dealer Group again in our July 24th update, “Bearish Divergences Abound” just as the Broker-Dealer Index, the XBD, was breaking down from a Head and Shoulder Top.
The chart below shows the violent sell off which then followed sending the index to a short term low yesterday, just under $210, down nearly 16% from our last article. This column also took the time to repeatedly highlight the negative divergences which were ultra pronounced and in place on the S&P 500, just BEFORE the market broke sharply too the downside, taking out critical support at the 1490 level. While we don’t mind taking a little credit for our work, the larger point about the effectiveness of technical analysis should not be lost on readers. Where else does one obtain advanced clues for a possible change in trend other then by studying the charts. While we would be the first to admit that Technical Analysis is definitely more of an art then a science, in our mind, there is no question as to how helpful it can be at important market turns.
Of course, not every theme we have studied has worked out, at least to this point in time. Yet, as we see it, there is tremendous value in following up and understanding where things stand in those areas which have to this point resisted the decline. Of the “Top Ten Signals that Global Stock Markets have Topped,” only three signals have yet to fully fall into place. In Brazil, the Bovespa is down approximately 5,000 points from its July 19th peak, or 8.6%. An extremely volatile market, the 10 day moving average is only now just about to cross below the 50 day average putting the icing on the proverbial cake. In our original work, we thought that the upside momentum then evident in the Bovespa would lead to a final blow off top peak in the low 58,000 zone, with the actual high coming in just over 58,000 at 58,292.88. Since then, the index has broken its accelerated rising trendlines and is still on course for a trip back down to the mid-March lows near 43,300. In our view, before the end of the year, we would not be the least bit surprised to see this index down over 30% from its July highs, trading below the 40,000 benchmark. In addition to the Bovespa, both the South Korean KOSPI and the Bombay Sensex Index are only just recently breaking their moving averages, but with both indices now far enough off the peaks to suggest that exhaustion moves have run their course and that final highs are in place.
Above: The Bovespa Index Brazil from our July 3rd report, targeting the 58,000 level followed by a sharp break.
Below: The Bovespa Index today which peaked at a reading of 58,292 on July 19th, and broke the accelerated rising trendline on July 24th at 55,790. The Bovespa (down 8% from the high) is now in our view, just embarking upon a major decline having completed its blow off advance up and outside its rising parallel trend channel.
That basically leaves the Shanghai Market as the sole hold out among Global Markets. Ironic, in that the historical analogy between the US Market and Great Britain of the 1920’s seems to be holding up perfectly nearly 80 years later. Back in the late 1920’s, the US was the up and coming industrial production giant, while Great Britain was the established economic power. As it turned out, the European Stock Markets peaked in 1928 and began extended declines into early 1929. At the same time, the US Stock Market was able to shrug off the declines in other markets and continued to make new all time highs going into August of 1929. Then came the Crash, where the US Market collapsed and caught up to the European and UK Markets which by then had long since been in bear market territory down more than 30% off there highs.
Flash forward to 2007, and we see roughly the same thing happening all over again, this time with the US in the role of Great Britain as the developed economic power, and China as the rising manufacturing star. At the very last pages of this report, we update what will in all likelihood be the final version of the Global Top Out Parade for this cycle, documenting the high dates for each of the major global indices, and a wide number of important sectors. What is painfully clear is that China now stands alone with its market, the Shanghai Composite, on a “Solo Walk” to new highs. Perhaps for a historical sense this is the most fitting end, as the Shanghai market has been the speculative bubble leader over the last few years. That said, we see no way that this market is able to sustain itself with the inevitable crash in Chinese stocks still the order of the day.
We say this because, it has been our experience that parabolic structures nearly always shake out in violent fashion and there are few things we have seen in the last decade or two, short of the Internet Stocks in 2000 that are more parabolic than the Chinese Stock Market. As it happens, we already see the handwriting on the world. Let’s step back a moment to early June and our report entitled “Will the Real Slim Shady — Please Stand Up!” Back then, we pointed to the Deep Cyclical sector of the US Stock Market as the bulwark of market leadership, the Copper Stocks, the Steel Stocks, the Base Metal stocks, names like, Posco (PKX), Commercial Metals (CMC), Hanson plc (HAN), Martin Marietta Materials (MLM), US Steel (X), Southern Peru Copper (PCU), Rio Dolce (RIO), Cleveland Cliffs (CLF), Foster Wheeler (FLWT), Reliance Steel (RS), BHP Minerals (BHP), and RTZ (RTP). As can be seen over the next few pages, many of these deep cyclical stocks have already rolled over and broken long term trendlines that have defined the bull market advance. In those cases, where serious downside action has not yet taken place, the stocks have stalled, lost upside momentum, and are now well along in a topping process. The high level of pain that normally follows the completion of exhausted parabolic moves has not yet really begun in earnest, as before the current down cycle is complete, most of these issues will likely be down 30% or more from there cycle highs.
Above: Cleveland Cliffs (CLF), rolls over after exhaustion move.
Above: Commercial Metals (CMC) rolls over after exhaustion move.
Above: US Steel rolls over after exhaustion move.
Above: Martin Marietta Materials (MLM) rolls over after exhaustion move.
Above: Close up daily view of Brazilian Steel and Iron Major — Companhia Siderurgica Nacioncal SA (SID) completing small but powerful Head and Shoulder Reversal Top… below $55, watch out!
Above: the Weekly Chart for SID showing the vertical advance of the last few years, another bubble about to POP?
Above: Posco’s unreal advance climaxed with an Island Reversal formation, and shown below, the massive final blow off move up and outside the daily parallel channel. The stock has come down to initial support at the 50 day average following the Island Reversal Top. From here any move below $130 should usher in a bout of sustained heavy selling. The end has been seen, and the BUST is likely very near.
Above: TeckCominco — leading Base Metals producer vertical along with RTZ and BHP.
Below: BHP Minerals — rolling over with a top in place… trend violation dead ahead.
In our view, the fact that a substantial portion of the US Cyclical stocks have now rolled over, is an ominous sign for share prices in Shanghai. Over the last few years, it has been the perceived engine of endless Chinese demand that has driven the Deep Cyclicals ever higher in their parabolic upward spiral. In the next page, we show the close linkage of the daily trends for big name leaders such as BHP and RTZ with the China 25. With these major market leaders now rolling over, and having sustained serious technical damage, odds are high that the highly speculative Shanghai market will not be far behind. While some Bulls may feel that the worst of the recent selling is over, the higher probability outcome suggests that the recent bouts of selling are simply marking the start of a much larger decline, with most of the world’s major indices now well off there 2007 highs.
Above: BHP Minerals (a deep cyclical stock — natural resource producer) and the CHINA 25 ETF — Notice the parabolic move in tandem.
Above: the advance in Rio Tinto Zinc RTZ (symbol: RTP) has also paralleled the rise in the China 25.
Above: the Shanghai Market in 2007 aligned against the DJIA in 1929, we could be very late in the game for the Chinese stock market.
We end this week's article with a look at what is very likely the final iteration of the Top Out Parade for this cycle the only remaining question being when the Shanghai market begins to decline in earnest. In our mind, the parallels to the Chinese stock market of 2007 with the US stock market of 1929 are striking with the odds building that the bulk of the downside selling pressures are still ahead of us. Yes, 'Happy Days' may be here again, but this time, it looks like the 'Happy Days' are here for Short Sellers.
The Top Out Parade
02/02/07 Philly Housing Sector Index (HGX)
02/08/07 Dow Jones REIT Index
02/21/07 Dow Jones Bank Index (all other Bank Indices)
02/23/07 Physical Comex Silver
04/20/07 Physical Comex Gold
04/25/07 Amex Biotech Index
05/04/07 Amex Pharmaceutical Index
05/04/07 Physical NYMEX Copper
05/07/07 Physical NYMEX Platinum
05/08/08 Dow Jones Corp. Bond Index
05/11/07 Nuveen Municipal Closed-End Bond Index
05/15/07 S&P Insurance Index
05/21/07 Dow Jones Utility Index
05/22/07 Dow Jones Healthcare Index
05/23/07 Dow Jones Home Construction Index (lower high)
05/31/07 Dow Jones Steel Index
06/01/07 Dow Jones Financial Index
06/01/07 Paris CAC-40 Index
06/01/07 Amex Broker-Dealer Index
06/01/07 S&P Retail Index
06/04/07 Dow Jones Coal Index
06/04/07 Dow Jones Wireless Telecomm Index
06/04/07 Dow Jones Consumer Services Index
06/04/07 Value Line Arithmetic Index
06/15/07 London FTSE 100
06/15/07 Dow Jones AIG Commodity Index
07/05/07 Mexico — IPC Index
07/09/07 Tokyo Nikkei 225 Index
07/13/07 Russell 2000
07/13/07 Amex Oil and Gas Index
07/16/07 German DAX Index
07/17/07 Philly Semiconductor Index
07/18/07 Dow Jones Railroad Index
07/19/07 Dow Jones Transportation Index
07/19/07 S&P 500
07/19/07 Dow Jones Industrials
07/19/07 San Paulo Bovespa Index
07/19/07 S&P Small Cap 600 Index
07/19/07 NASDAQ Composite
07/20/07 Australia All Ordinaries
07/20/07 Philly Gold and Silver Index
07/24/07 Bombay Sensex Index
07/24/07 Hang Seng Index
07/24/07 Singapore Strait Times Index
07/25/07 South Korea KOSPI Index
???? China — Shanghai Composite Index
The S&P closed Tuesday at 1476.71 up 9.04, the DJIA up 25.60 at 13,494.38 with NASDAQ ending higher at 2561.03, up 13.70. The 10 Year Bond finished at 4.74%.
That’s all for now,
© 2007 Frank Barbera