Specter of Global Debt…

Guest Post by EWI

Inside Look: The Specter of Global Debt Default is Once Again Rearing its Head

Editor’s note: The following article was republished here with permission from the co-editors of the September issue of The Elliott Wave Financial Forecast, a publication of Robert Prechter’s Elliott Wave International, the world’s largest financial forecasting firm. From Sept. 25 to Oct. 1, EWI is throwing open the doors to all of its investor services 100% free. Click here to join EWI’s free Investor Open House now.

A key milestone in the prelude to the stock market’s 2007 peak came in the week of July 16, 2007, when Bear Stearns announced that two of its subprime mortgage funds had lost nearly all of their value.

The firm liquidated the funds two weeks later and by August a “worldwide” credit crunch was on, as subprime mortgage-backed bonds were “discovered” in the portfolios of banks and hedge funds from Paris to China.

The Dow Jones Composite Index topped that week and started a 54% decline, but the Dow Industrials and S&P 500 made a slightly higher high in October 2007 before tumbling into their biggest declines since the Great Depression.

By March 2008, Bear Stearns, an 85-year stalwart of Wall Street, was bankrupt and forced to sell itself to JP Morgan Chase.

In recent weeks, the specter of global debt default is once again rearing its head.

On August 1, Argentina defaulted on its sovereign debt, which occurred on the heels of bond defaults in South African and Portuguese banks. Meanwhile, Chinese property companies are starting to fail in the same way that subprime funds imploded in mid-2007.

We think these scattered pockets of default are a prelude to the upcoming debacle. The next, more virulent phase of the credit crisis will focus on government, bank and real estate loans the world over.

A change in social mood is behind the shift, and it will soon affect the stock market.

To continue reading Hochberg and Kendall’s 10-page issue of The Elliott Wave Financial Forecast, click here to join EWI’s free Investors Open House now.


This article was syndicated by Elliott Wave International and was originally published under the headline Inside Look: The Specter of Global Debt Default is Once Again Rearing its Head. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

GSR & US Dollar

So our thesis has been that a concurrent rise of USD and the Gold-Silver ratio (GSR) would not be a good thing for markets.  Stick it in the blender and mix with several other indicators (we have not even mentioned weak junk bonds and junk to quality credit spreads, at least not publicly) and you have ‘so far, so good’ on a coming bear case.

To review, a rising GSR means that speculative liquidity is coming out of the markets, as in risk ‘OFF’.  The rise in USD is a fundamental consideration that would hit manufacturing first.  Here again, I tell you that the biiwii guy, a former manufacturing person, was the first to project coming US manufacturing strength for NFTRH subscribers.  Just to counter a few wise guys who would finger point and yell ‘perma bear!’  Today’s firm bulls were all hiding under rocks as Congress did the Fiscal Cliff Kabuki Dance at the time.

To put things in non-technical terms, I think some shit’s happenin’ out there folks.  We’ll see.

gsr.uup

NFTRH+; Goodbye Intel

For me, more longs have been not working than working lately.  That is another sign of the market’s deterioration.  So most longs are now sold and that includes Intel, which may lose support today if the current market negativity keeps up.  Taking the profit on the half a position I did not sell previously.  I still very much like Intel’s story, just not its stock for now; just not much of any stock right now.  The market’s sponsorship indicators are giving a warning.  If they reverse, I’ll reverse.

intc

India Rising

In a big picture (monthly charts) look at currencies a month ago, we noted that USD was turning former resistance into support after a minor breakout.  We noted the Euro breaking down from its bearish Rising Wedge and the bearish state of the commodity currencies (Canada and Aussie) and the bearish Japanese Yen (negatively mirroring Japan’s stock market).  At the end of the segment we noted that “The Rupee sure is volatile for a currency; volatile and bullish.”

Here is the updated chart of the currency that has been so well tended by the exception to the Central Bankers’ rule, Raghuram Rajan, the chief of the RBI.  Indeed, Mr. Volcker, err Mr. Rajan has received much love from Biiwii and NFTRH over the last year or so because he did what he thought was right in the battle against inflation, not what was politically expedient.  Rupee holders owe him a debt of gratitude.

rup

Ref:  The economist who predicted the financial crisis just sounded another alarm  – it would be wise to listen this time

Combined with Narendra Modi’s pro-business, pro-investment orientation India now seems poised as a leader going forward.  We track the Bombay Sensex (flying around way up in blue sky territory) in a casual way each week in NFTRH, but upon the next global market correction India may be a place to park new funds.

For further views on the subject, Wisdom Tree discusses it’s views of India and how it manages its India Earnings Index, which is an area I will be interested in upon any new buying opportunities.

The thing about India is that it tended to its currency first and then its asset markets.  In other words, the Indian RBI Chief and Prime Minister each have their agendas in play and it is all because Rajan refused to follow the CB herd and instead, did the right thing.  I just like the India story, if that is not overly evident by now.

Small Caps vs. Large Caps

Remaining on the subject of the Russell 2000 and the small caps, here is an interesting view of the RUT iShares IWM vs. the SPY.  True to their always bullish stance (what else are they going to say, ‘risk is high, sell your stocks’?) of the mainstream financial services industry, the spin lately has been ‘move out of small caps and into the relative strength of large caps’.  What do they care as long as you hold stocks (i.e. risk… ‘ON’)?

Well, small caps under performed into the end of the secular bull market in 2000 and at the cyclical peak in 2007.  IWM-SPY in fact, has declined right to the line it was at when the S&P 500 maxed out in 2007.

iwm.spy

Please, this is not a bear call.  Tune out everyone imploring you to be either bearish or bullish, while doing so on some form of auto-pilot or chronic robo bias.  But this is a call that simply states that among several other market leadership/sponsorship indicators that have degraded recently, IWM-SPY is doing exactly what it did leading into the crash of 2008.

I used IWM-SPY for its perfect alignment to 2007.  Note that the actual Russell to S&P 500 ratio is not quite there… yet.

RUT2k Updated

Yesterday’s post wondered whether the Russell 2000 was going to hold and rip the shorts’ heads off or break down.  Well, they sure don’t make it easy do they?  It made a false breakdown and got back above the line.

So if the market has another upward thrust in it I wouldn’t put it past the RUT to gain some relative momentum.  The silly potential target we have had on the R2k for over a year now is around 1350*.  That is the running mate of the silly target on the S&P 500 of 2192 (looking much less silly now).  A question frothed up bulls need to consider is will there be a correction first?  I think there will because the market’s internals are starting to suck wind.  But we will see…

* [edit] Short of an all out stock mania I don’t think this target will get registered any time soon… or even not so soon.

rut

Hulbert HGNSI and Gold

First off, I want to say that the plan explained by Steve Hochberg in the video associated with the previous post (free sign up required) meshes well with how I see gold currently.  The 1000 +/- level is very doable, folks.  Not a given, but quite doable.  That would close out investors’ fear from 2008 by having made a completed cycle on the rebound in greed.

In the short-term, gold was probably ready to bounce even before the war stuff hit the news yesterday.  Sentiment had become just deplorable, with gold bulls puking left and right.  The geopolitical thing is a negative, as it always is but the Hulbert HGNSI is quite a positive, as the gold timer community (ha ha ha…) plummets well into net short territory.

hgnsi

So, geopolitical aside (and I always take that seriously as a negative for gold because it gets the worst of the gold “community” back to pumping) gold can see some decent rally activity off of sentiment and the improved Commitments of Traders structure.  But I think more downside may follow over the next few months.  Then?  Cyclical bull.

Meanwhile, I am using gold as a macro tool; probably the best macro tool I have when comparing it to other assets that are positively correlated to economies.  Gold is just a tool around here after all; a tool for market evaluation and a tool for monetary value.  It’s not an idol.  When the ones who obsess about gold with wildly glaring eyes are back on the pump, take caution.

Separately, also at MarketWatch we see that the word is getting out that these ‘golden’ and ‘death’ crosses that inexperienced TA’s often get hysterical about are indeed opposite to the hype.  The supposedly bullish golden ones are more bearish than the death ones.  Too funny, and sadly all too true.

What I like about market management is that there is no shortage of bullshit out there to decode and debunk, but casual observers tend to take it seriously.

Hedge Funds Surpass 2007 Leverage

Guest Post by EWI

[biiwii edit]  check out Hochberg’s EW analysis of gold (video), which is very similar to our plan using the link below (assuming you care to sign up)…

Editor’s note: The following article was republished here with permission from the co-editors of the September issue of The Elliott Wave Financial Forecast, a publication of Robert Prechter’s Elliott Wave International, the world’s largest financial forecasting firm. From Sept. 25 to Oct. 1, EWI is throwing open the doors to all of its investor services 100% free. Click here to join EWI’s free Investor Open House now.

Hedge funds are further out on the same limb they occupied in 2007, right before the collapse shown on this chart of the HFRX Global Hedge Fund Index.

According to Eurekahedge, a global hedge fund monitoring service, hedge funds’ gross assets hit 170% of capital in January, which surpasses the previous peak of 168% in 2007.

Leverage at many of the largest hedge funds is far higher.

For instance, in April, the New York Post noted that Citadel Investment Group, one of the 25 biggest US hedge funds, had implied leverage of about 8.8 times its total investment capital. The Post also noted that Citadel’s “leverage last came under scrutiny in 2008, when it had to unwind a leverage of 8.2 times as the financial crisis unfolded.”

The Elliott Wave Financial Forecast asserted in April that hedge funds will be even more of a focal point for losses in the next wave down. The chart of the HFRX Index shows that global hedge fund performance has been essentially flat since 2011. The A-B-C rally from 2009 has now retraced 63% (5/8) of the decline from 2007-2008, so an even more precipitous downtrend seems near for hedge funds.

The U.S. Senate’s Permanent Subcommittee on Investigations confirms the imminence of a reversal.

In July, Congress opened a major probe into the inner workings of the hedge fund industry. A report from one set of hearings is titled “Abuse of Structured Products: Misusing Basket Options to Avoid Taxes and Leverage Limits.” The subcommittee recommended that regulators “take steps to examine complex financial arrangements.”

It never fails. When a mania ends, the instruments of the uptrend are often subject to recrimination and “reform.”

In the early 1930s, there was the Pecora Commission, which led to the Glass-Steagall Banking Act of 1933. This is a bigger peak, so the politicians will extract more than just their average pound of flesh.

To continue reading Hochberg and Kendall’s 10-page issue of The Elliott Wave Financial Forecast, click here to join EWI’s free Investors Open House now.


This article was syndicated by Elliott Wave International and was originally published under the headline Hedge Funds Surpass 2007 Leverage; New Era of ‘Permanent Investigations’ Confirms Imminent Reversal. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.