By Frank Barbera CMT. October 2, 2007
What a strange world we live in. For those who live their lives blissfully unaware of the machinations of the financial markets, the ‘ups and downs’ of the various markets must seem like one big mass of confusion. One day, things are negative and getting worse, the next, things are just fine and the stock market is hitting all time highs. Perhaps at no time, has the contrast between the action in the markets and the trend for Main Street been as divergent as what we have seen in the summer of 2007. Consider the Credit Crisis, where over $500 billion in value has been removed from the Commercial Paper Market, where thousands of Home Owners face major mortgage resets, where untold quantities of CDO paper remain un-priced and cloaked from view ‘off balance sheet’, and where the news in Housing business practically couldn't get any worse. A casual glance at the headlines of just the last two weeks paints a pretty telling view of where the underlying economic trend is really going.
Yet in the world of equities, stock prices as measured by the Dow Jones Industrial Average yesterday closed at a new all time high ? Ask yourself, from July until now, have things gotten better, or have they gotten materially worse? Is the stock market justified in residing at new all time highs, as indicator after economic indicator points the way to a recession ahead ? On the surface it appears to be sheer madness, but markets being discounting mechanisms have put forth this rally as a monument to their confidence in the Fed. A strange world indeed, where even as stock prices in Dollar terms reach for new all time highs, in non-dollar terms the DJIA resides 33% below its all time high seen in June 5th, 2001.
Isn't this propaganda? As a nation, are Americans really any wealthier today then we were a few years ago when the Dollar had greater value? What are these stock indices supposed to measure if not wealth? Looking at the vast majority of currency charts for the DJIA in foreign currencies, the US is becoming less wealthy over time, as the amount of money it takes other countries to buy one share of the DJIA continues to shrink. For American's, we live in the great miasma of ‘Bubble Vision’ and Fed Speak, where like pavlovian dogs we are trained to react to new highs in the major averages? --- Here's a new high, get excited! --- Never mind the man behind the curtain, ---The Wizard of Ben, -- who is pulling the levers to make the value of our money decrease. At what point is a worthless dollar a bad thing? If having very cheap paper money is the key to economic growth, why not devalue the whole pile in one shot ? The answer is that, as folks in Brazil, Argentina, China, Hungary and Zimbabwe and many others have all found out in recent decades, cheap money is only a quick ticket to national bankruptcy, a poverty stricken nation, and a dying economy. Rejoice because the DJIA hit a new all time high yesterday? Mirror, Mirror on the wall, --which markets are the fairest of them all? --- When we look in the mirror of our markets priced in terms of other people's money, -- it is a sad picture, a picture of a debt-laden economy producing the classic symptom of depreciating monetary values. Mirror, Mirror on the wall, shall we rejoice? A look at the charts shows there is nothing nothing, to rejoice about.
Above: the DJIA price in Euro's and Lower clip, the number of Euros needed to buy One Dollar.
Above: the DJIA in British Pounds
Above: the DJIA in Aussie Dollars, new all time highs yippee? Ah, No not by a long shot!
Above: the DJIA in Canadian Dollars, we aren't even going up, we are going down, and down a lot�..
Above: the DJIA in Japanese Yen - here an activist Central Bank aiming at maintaining an export advantage has cheapened its money at an even faster rate, but even now, versus the Yen, there is no ‘new high’.
Yet oddly enough, happy times prevail, as sentiment in the stock market is back to euphoric levels with a hefty 55.60% Bulls versus only 25.60% Bears in the latest Investors Intelligence Survey. -- Who cares about the value of the Dollar! -- certainly not our esteemed Fed Chairmen. --- Oh, No --- rather then holding rates steady, or raising them to protect the value of the Dollar, we have more interest rate cuts on the way! Let's transfer wealth from those who save, and those who don't leverage, to those who speculate, and those who take unwise risks and need a state sponsored bailout. The Inflation Tax, the cruelest tax of all, is in the process of being unleashed, and with a trite smile, courtesy of Uncle Ben.
Above: the 5 Week Moving Average of Bulls versus Bears at Investors Intelligence
In our view, the perverse nature of the markets, with sentiment now quite optimistic against the backdrop of a clearly weakening economy suggests the markets should be vulnerable. Perhaps the S&P and the DJIA and the NASDAQ are in the act of recording a final and very major Double Top. Perhaps other markets, as in the Asian markets, which are over-extended and moving in parabolic fashion will also roll over and yield to the prospect of a slowing global economy which is the inexorable consequence of a slow down in the United States. Perhaps not. If markets continue to ignore a deteriorating fundamental climate, then perhaps they are telling is that broad scale money printing will lead to a debasement of all forms of paper money, in the fullness of time. In the event, the only place to be will be commodities, where the supply of material is constrained by nature, a force greater then even the Federal Reserve. For now, we see a number of sentiment gauges shooting up across the range and telling us that the crowd is feeling good, the crowd is feeling confident, and we cannot help but feel, such confidence, seems badly misplaced.
Above: the S&P 500 and the Investors Business Daily 10 day Moving Average of Call to Put Premium Ratio, back above 1.00 at the very high end of the sentiment spectrum, especially by the standard of recent years.
Above: Rydex Short Term Data is also once again moving back to very high levels of optimism as the Crowd is placing confidence in the Fed, something that did not work between 2000 and 2002. We'll see. If excess sentiment is a sign of a more important market peak, we should see signs of a more substantive downturn fairly soon.
Above: Rydex Data plotted as a Sentiment Oscillator for NASDAQ, again, confidence is roaring ahead, rapidly approaching levels that have marked former peaks.
Above: Dollar Volume Weighted Call-to-Put Premium Oscillator for S&P 500, off the charts showing huge levels of Optimism
Above: Another view - 10 Day Dollar Call Volume S&P 500 thick black line, versus 10 day Dollar Put Volume thin line. -- Big Spread, lots of directional bets looking for even higher prices ahead.
Above: the GST Sentiment Composite which incorporates all Four Sentiment Polls, the AAII, MarketVane, Investors Intelligence and Consensus Inc. At present, this gauge is failing to move back to the extreme levels of optimism that were seen in July, and with that, the bearish divergence could be a sign of a more important market peak.
What ever happened to the trend of the Currency as a measure of confidence? -- If this measure is still REAL, then confidence is faltering, and faltering rapidly. From our view, things today are worse off then they were only a few weeks ago, and the primary trend of the economy is turning down. The stock market in this light, appears disconnected and vulnerable to the kind of disappoints a real world recession will bring. At the close today, the DJIA closed down 43.33 index points at 14,044.22, the S&P 500 lower by -.41, at 1546.63, and the NASDAQ higher by +6.04 at 2747.03. The 10 Year Bond Yield ended lower by .03 basis points to close at 4.53%, while nearby December Gold dipped $17.30.oz to close at $736.80.
That's all for now,
© 2007 Frank Barbera