WHO
SAYS BEN ISN'T THE GREENSPAN TYPE?
by Richard T.
Williams, CFA, CMT
Summit Analytic
Partners
September 8, 2007
|
Closing Prices |
Support |
Resistance |
Yield % |
|||
| Nasdaq | 2569.76 |
2550 |
2650 | S&P 500 EPS yield | 6.45% | |
| S&P 500 | 1458.14 |
1385 |
1495 | 30 Yr. Bond yield | 4.69% | |
| Dow Jones Indus | 13160.02 |
13,080 |
14,060 | Greenspan index rich by 28% | 128.5% | |
| Crude Oil | 75.77 |
68.50 |
79.00 | ST yield | 3.92% | |
| Gold (spot) | 713.10 |
652 |
713 | Dollar Index | 80.01 |
Who says that Helicopter Ben is different than Greenspan? The evidence points to similar tactics and therefore similar policy: the Fed seems to be acting much the same way as before, just talking differently but not acting that way. The policy of supporting the economy and the market has been in place since 1987 when Greenspan took over as the Fed Chairman and rescued the market after the �87 crash. The significance of a policy of rescuing investors when inflation is advancing at an increasingly threatening pace isn�t a prudent one from most perspectives that come to mind in the same breath as the Fed�s charter from Congress. Fighting inflation is its #1 goal with optimizing employment an ancillary purpose. Saving investors seems to have become the de facto purpose of the Fed in spite of its charter. That suggests to us that the Fed�s independence is likely to come into question should the economy take a serious hit along with the market from the broad excesses caused by Greenspan�s policies and now furthered by Bernanke�s actions. It has been argued that the Fed has little choice but to accommodate the whims of Congress or face its wrath. We would posit that a semi-independent Fed may be worse than none at all in the long run. Inflation threatens the underpinnings of the economy just when it most needs to find stability and to correct the imbalances that come from too much prosperity.
Money Supply (MZM) Model Chart
Source: Bloomberg Charts and Summit Analytic Partners Technical Research
The Fed is making up for lost time � pumping up the economy and the market just like G�span used to do !
The spread of bankruptcies is growing rapidly with mortgage defaults running close to 16% compared to under 4% last year and 11% last quarter as reported by the media. The fact that upwards of 20% of sub-prime borrowers are either in default or are delinquent points to the looming impact of the mortgage reset cycle we have been referring to for several years now: the fat has not yet hit the fire but will soon as the current round of resets percolate through the system causing perhaps 50% of ARMs holders to face sharply higher payments at a time when refinancing away the problem is increasingly less likely due to credit tightness across the lending institutions. The result will probably be that another wave of problems will hit the market and the headlines with increasing numbers of hedge funds blowing up, not to mention banks and brokers, as mortgage defaults further bite into home prices and consumer spending is forced into a period of relative austerity. To us the notion that business investment can offset even to a slight degree significant downside to consumer spending is like whistling past a graveyard: that dog just doesn�t hunt! Businesses have proven to be very attuned to headline news and consumer demand and won�t change focus simply to help the economy avoid a recession when it costs them now precious cash.
Global Liquidity Forecast
Source: Summit Analytic Partners Research and Bloomberg charts
The news is not all bad � a bottom may be indicated after further downside action as the market assimilates more bad news
We have talked about the downgrade risk to the fixed income marketplace as CDOs become the subject of much greater scrutiny by regulators, investors and ratings agencies alike. The problem is that so few CDOs received downgrades going into the sub-prime crisis that now ratings agencies are under the gun to step up and accurately report the state of the mortgage derivative market. Their crisis is that with so many CDOs out there that are rated AAA, downgrades to more realistic junk bond levels would probably precipitate a tidal wave of selling by professional money managers required to own only investment grade debt. The fallout would depress prices of CDOs to extreme levels, setting off several rounds of hedge fund and bank/broker blow ups as 3Q reporting brings pressure to bear on managers to fess up and market positions to market rather than to model or to cost. The reaction to another wave of blowups and defaults will itself motivate further downside correction to the market as earnings forecasts come under review in light of the now bearish jobs revisions.
NYSE A/D Line Oscillator
Source: Summit Analytic Partners Research
The Oscillator shows that stocks are now extremely overbought � a surprising and bearish indication looking forward
Several years ago we started a study of jobs and the impact of trend changes on the economy and the market. The conclusions were that once jobs topped out as they did in 11/05, about half way down the slide to the nadir which has yet to be seen in the current cycle, the actual recession begins. Once jobs turn negative for several months the �official� recession is likely to be named, just in time for a recovery to start developing. About the time that the actual recession is ending, the NBER data suggests that it has just begun. Then around the time that the recovery is underway and jobs turn positive for several months, the NBER recession ends. It is confusing and not terribly helpful to investors in our experience. The key point, however, is that our jobs model has provided what looks like a good signal ahead of prior recessions and recoveries and is now telling us that the next recession is upon us. That the market has not turned bear as it normally does somewhere between 4-8 months ahead of the face may be blamed on the data that was revised so dramatically taking the Street�s economists from a consensus view of sanguine conditions to one of surprisingly negative results overnight. We have been saying since the Gulf War-II that jobs growth has been sub-par and that possibly as many as 5 million jobs have not been created that history indicates should have occurred. This recovery has not even kept pace with new entrants over the last 2+ years much less actually grown the employment roles or increased disposable income.
Jobs Index Chart
Source: Bloomberg Charts and Summit Analytic Partners Technical Research
Jobs tend to correlate closely with the SPX � When jobs turn negative the market historically corrects
The implications of jobs growth turning negative could be manifold to investors. The reality of the big revisions that came out today point to an extended period of what now looks increasingly like misperceptions by mainstream economists and strategists. The snapback reaction risks being overly negative as formerly sanguine players now face an outlook that is materially worse than what was perceived to be the case only hours ago. We expect some of the reminders that the market is only 5% off new highs to start sounding a lot more cautious about the fact that the market is 102% off the �02 lows. With the outlook for sales and earnings now clouded, �07 and especially �08 estimates will be at risk of downward revisions which will do nothing for valuations as investors feel the chill of fear with each revelation of just how bad the excesses have been over the last 16 years since the �91 recession low.
The Fed as always remains the wildcard in the mix, but this time could behave like a wounded bear: with sharp reactions that could ultimately serve to worsen the situation even as they act to stem the crisis from spreading. Should the Fed continue to act in a way that supports the market and the economy at the expense of LT prosperity, allowing inflation to accelerate further and adding to the almost unprecedented levels of public debt, then we believe that the problems facing investors and the nation will only worsen and be prolonged further than necessary. The public pressure for action is likely to be overwhelming and would make even a fully independent Fed think twice about allowing the markets to self correct however beneficial in the long term. The risk of such action to investors is to heighten volatility and create wild swings in prices as the market moves to discount the shift in sentiment and outlook by investors. In the extreme case the Fed could conceivably juice the market so much that new highs could be scored, but at a cost over the long haul that would be startling to behold for us.
New sell signals are being registered on Supply/Demand models from hourly to daily, with sharp deterioration in momentum readings. The Weekly model is deteriorating as well but not yet caught up to the shorter timeframes. The A/D Oscillators show the market internals already peaking after a lackluster recovery from August selloffs. The implications being that the bulls have pretty much had their way on the field and now control of the ball shifts to the bears. Momentum indicators like Wilder RSI illustrate a broad deterioration of market strength into the recent bounce highs. The weakness presages a reversal and further selloffs in the coming weeks as bad news filters through valuations. It appears fairly clear to us based on the available data and more importantly the trends of the data that the economy is falling into recession and that the market will have to discount a sharply reduced outlook. But the wildcard remains in the hands of the Fed and that means almost anything can happen from here.
The market pattern suggests to us that a wave-2 retracement has completed and now a wave-3 decline is starting. The bounce came in an ABC corrective formation with time projections holding at C (up) measuring .618 of A (up). Wave-2 (up) retraced about .618 of the lost ground making for a tight formation. The minimum projections for a wave-3 (down) are SPX 1382 and 1312, but could easily extend to 1200 or beyond. Early October brings pre-announcement season which could be critical to investors� outlooks for earnings into year-end and seasonal 4Q strength from budget flush and Xmas spending. Any weakness there would exacerbate the downside potential of the market and of the economy. With back-to-school spending still in question given large price discounting, the situation is anything but clear. For now we will focus on near term support and price confirmation of sell signals. The LT trend support at 1385 may prove to be an important rallying point for bulls or confirmation for the bears.
| SPX Hourly Price Chart |
 |
| Source: Bloomberg Charts |
SPX has weaker RSI at the recent price high � signals weakness ahead in what could be a wave-3 decline
| SPX Daily Price Chart |
 |
| Source: Bloomberg Charts |
SPX hit trend resistance at a .618 retracement � key bullish support comes in at 1385
| SPX Weekly Price Chart |
 |
| Source: Bloomberg Charts |
The bull market may have completed in mid-July � and a bear market could well unfold from here
| Hourly SPX Supply/Demand Chart |
 |
|
Source: Summit Analytic Partners Research |
Hourly S/D is on a new Sell signal � Confirmation comes below 1450
| 60-Minute Volume-adjusted Price Chart for S&P500 |
 |
| Source: Summit Analytic Partners Research |
VAP is rolling over quickly � RSI never bounced back at all
| 1-year Supply/Demand Chart for Nasdaq |
 |
| Source: Summit Analytic Partners Research |
S/D Daily is fully extended on a �post crash� buy signal � The rally was very weak and so downside potential is high
| 1-year Volume-adjusted Price Chart for Nasdaq |
 |
| Source: Summit Analytic Partners Research |
VAP is bottoming � Momentum made a higher low signaling buying power coming into SPX fa�
| 5-year Supply/Demand Chart for Nasdaq |
 |
| Source: Summit Analytic Partners Research |
S/D is still on a Buy signal following the crash signal � but price confirmation is late in coming, if at all�
| 5-year Volume-adjusted Price Chart for Nasdaq |
 |
| Source: Summit Analytic Partners Research |
VAP made a lower low � Momentum never turned back up suggesting mounting weakness ahead
| Philly Fed Survey of Business Activity |
 |
| Source: Summit Analytic Partners Research |
Claims are also signaling a recession onset in the near future
| ISM Inventory of Homes for Sale |
 |
| Source: Bloomberg.com |
Inventories are sharply higher � this is before the current Mtg resets have become known!
| PCE Core Inflation Index |
 |
| Source: Summit Analytic Partners Research |
Inflation on this measure looks almost tame � But the dollar and gold suggest otherwise !
| US Dollar Index Chart |
 |
| Source: Bloomberg.com and Summit Analytic Partners Research |
The dollar has broken down from a bullish wedge � now 80 support is in jeopardy
Certifications and Disclosures
© 2007 Richard T. Williams, CFA, CMT
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Contact Information
Richard T. Williams, CFA, CMT
Senior Software Analyst
Summit Analytic Partners
Jersey City, NJ
Email
