I’m No Chart Whiz, But About That Whole Reflation Thing…

By Heisenberg

Ok, so this comes with the usual caveat about me not being the chart wizard that some other folks are, but this is starting to look like a sh*t show from where I’m sitting in terms of the reflation narrative….

Since the Fed:


Long bond (30Y yield dropped below 3% on initial report of London terror attack):


USDJPY (dollar fell for a sixth day; USD/JPY dropped to 110.73):


Brent (-32c to end session at $50.64, below 200-day MA; price touched $49.71; first trades below $50 since November):


Small caps (the damage to this popular Trump trade was of course done yesterday):


Or, in cartoon form…


What’s next for the Dollar, Gold & Stocks?

By Axel Merk

Two rate hikes since last year have weakened the dollar. Why is that, and what’s ahead for the dollar, currencies & gold? And while we are at it, we’ll chime in on what may be in store for the stock market…

The chart above shows the S&P 500, the price of gold and the U.S. dollar index since the beginning of 2016. The year 2016 started with a rout in the equity markets which was soon forgotten, allowing the multi-year bull market to continue. After last November’s election we have had the onset of what some refer to as the Trump rally. Volatility in the stock market has come down to what may be historic lows. Of late, many trading days appear to start on a down note, although late day rallies (possibly due to retail money flowing into index funds) are quite common.

Where do stocks go from here? Of late, we have heard outspoken money manager Jeff Gundlach suggests that bear markets only happen if the economy turns down; and that his indicators suggest that there’s no recession in sight. We agree that bear markets are more commonly associated with recessions, but with due respect to Mr. Gundlach, the October 1987 crash is a notable exception. The 1987 crash was an environment that suffered mostly from valuations that had gotten too high; an environment where nothing could possibly go wrong: the concept of “portfolio insurance” was en vogue at the time. Without going into detail of how portfolio insurance worked, let it be said that it relied on market liquidity. The market took a serious nosedive when the linkage between the S&P futures markets and their underlying stocks broke down.

I mention these as I see many parallels to 1987, including what I would call an outsized reliance on market liquidity ensuring that this bull market continues its rise without being disrupted by a flash crash or some a type of crash awaiting to get a label. Mind you, it’s extraordinarily difficult to get the timing right on a crash; that doesn’t mean one shouldn’t prepare for the risk.

If I don’t like stocks, what about bonds. While short-term rates have been moving higher, longer-term rates have been trading in a narrow trading range for quite some time, frustrating both bulls and bears. Bonds are often said to perform well when stock prices plunge, but don’t count on it: first, even the historic correlation is not stable. But more importantly, when we talk with investors, many of them have been reaching for yield. We see sophisticated investors, including institutional investors, provide direct lending services to a variety of groups. What they all have in common is that yields are higher than what you would get in a traditional bond investment. While the pitches for those investments are compelling, it doesn’t change the fact that high yield investments, in our analysis, tend to be more correlated with risk assets, i.e. with equities, especially in an equity bear market. Differently said: don’t call yourself diversified if your portfolio consists of stocks and high yielding junk bonds. I gather that readers investing in such bonds think it doesn’t affect them; let me try to caution them that some master-limited partnership investments in the oil sector didn’t work out so well, either.

I have argued for some time that the main competitor to the price of gold is cash that pays a high real rate of return. That is, if investors get compensated for holding cash, they may not have the need for a brick that has no income and costs a bit to hold.

Continue reading What’s next for the Dollar, Gold & Stocks?

The American Dream: An Endangered Ethos

By Danielle DiMartino Booth

Few words are slipperier than ‘ethos’ to grasp

Even the best translation of the word – essence – is hard to get your arms around. Perhaps that is why so many of us were blissfully unaware until recently that the very essence of the American Dream was slipping through our fingers. Though the phrase, which captures the very, yes essence, of the American thirst for adventure, dates back to the hopes and spirit that emboldened prospectors to ‘Go West,’ those who first engaged in California Dreaming, it was James Truslow Adams’ popularization of the term that cemented the ideal into our collective psyche.

“But there has been also the American Dream, that dream of a land in which life should be richer and fuller for every man, with opportunity for each according to his ability or achievement. It is a difficult dream for the European upper classes to interpret adequately, and too many of us ourselves have grown weary and mistrustful of it. It is not a dream of motor cars and high wages merely, but a dream of social order and in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.”

It is sweeter still, in the annals of our proud U.S. history that these words were written in 1931, during the thick of the most ravaging economic devastation this country has ever known. And still hope defeated despair, reigning supreme, inviting the lowliest of street urchins to achieve greatness in this country of endless possibilities. Were that only still the case today.

The housing crisis has long stopped commanding headlines. According to ATTOM Data Solutions, the new parent company of RealtyTrac, default notices, scheduled auctions and bank repossessions slid to 933,045 last year, the lowest tally since the 717,522 reported in 2006. Is the final chapter written? Not if you live in judicial foreclosure states such as New York, New Jersey and Florida where ‘legacy’ foreclosures take years to clear. At the end of last year, 55 percent of mortgages in active foreclosure were originated between 2004 and 2008. Factor in what’s still in the pipeline and one in ten circa 2006 homeowners will have lost their homes before it is all said and done.

That helps explain one part of the chart below which was generously shared with me by one Dr. Gates. Longtime readers of these missives will recognize the nom de plume of my inside-industry economic sleuth. His first take on this sad visual, was that, “The heart of the American Dream has stopped beating.” Did that stop your heart as it did my own?

As you can see, after a steady 40-year build, owner-occupied housing has stagnated and sits at the lowest level since 2004. This has sent the homeownership rate crashing to 63.4 percent, the lowest since 1967. It would be nice to think that things were looking up for would-be homeowners. But it’s difficult to be overly optimistic when the local newspaper reports that house flipping in the Dallas-Ft. Worth area rose 21 percent in 2016, seven times the national rate.

In all, 193,000 properties nationwide were flipped for a quick inside-12-months profit last year, a 3.1 increase to a nine-year high. Moreover, the median age of a flipped home rose to a two-decade high of 37 years, about double the median age of homes flipped before the crisis hit. That translated into a median gross profit of $69,624 on a median selling price of $189,900 in 2016, a neat 49.2 percent margin, the highest on record. Awesome!

That is, unless we’re still talking about the American Dream. But then maybe homeownership isn’t all it’s cracked up to be.

At least you can still hang a shingle in this country. Right?

You may note that the decline in self-employed is appreciably more dramatic than the fade among the ranks of owner-occupied homes.

You see, it took more than even the cruelest recession to wipe out two decades of ingenuity, to decimate a trend, to shift a culture. Think of the financial crisis as merely the initial catalyst, the first nail in the coffin.

Then came access to capital, which was dealt a once in a century body blow. Seemingly overnight, credit cards and home equity lines of credit disappeared as a source of operating income. Arguably these two growth governors spread the lack of wealth evenly across the country. But it was the heartland that suffered the most as the number of community banks in the six years ending 2013 sank by 14 percent. Federal Reserve data found that this shrinkage resulted in a 40 percent decline in the number of people with access to community banks. (No, Dr. Bernanke, zero interest rates do not benefit the little guy. They just make it cheaper to borrow for those who have never and never will lose their entree to the credit markets.)

Note that neither ‘Dodd’ nor ‘Frank’ were mentioned in that last paragraph. The awful Act did indeed further impinge access to credit, but let’s say that falls under a different heading, the most insidious of the plagues unleashed on small businesses.

To that end, it’s the last nail in the coffin, the one that’s left behind the most difficult stain to eradicate, as we are beginning to find out the hard way as the GOP tears itself asunder on the public stage. Of course, we speak of the imposition of a regulatory burden that knows no precedent. It’s all but inconceivable to fathom an additional $100 billion in annual regulatory costs but that’s the reality, the legacy of the last administration.

More than anything else, even the Federal Reserve’s assigning of the have’s and have not’s among us, this suffocation of the ability to succeed that raised the hackles of middle-income Americans, bitter that they’ve lost the right to what once was every American’s birthright. The hope is that the nascent rebound off 2014 lows in self-employment continues as red tape is rightly slashed back to where it belongs, that is countries where capitalism doesn’t exist, that the 40-year low in new business formation is squarely in the rearview mirror. The prayer is that recession is not around the corner, an unwelcome development that would undo what little progress has been made.

“My hope is for our current President to turn this tide. Lord knows the last President didn’t do anything to get us back on track, and neither did the Fed,” Dr. Gates observed. “At least we still have baseball, hot dogs and apple pie.”

It goes without saying, ‘tis the season for all three of those National Treasures. Thank you, Dr. Gates.

As for yours truly…shall we dispense with the niceties for just a moment? Like it or not, part of what’s happened in housing is a natural Darwinian outgrowth of the ridiculous zero interest rate policy that’s set profit-seeking scavengers on one another. What we’re witnessing is a mere reflection of a world in which rational investments have been whittled down to nothing.

Still, might we at least raise an eyebrow to the schadenfreude that’s infected the housing market? Should we truly take pride in crowding out those who would rather own than rent a home in the name of hard-to-come-by profits in a low rate world? And what good have we done, allowing our feckless politicians to snuff out a proud history of entrepreneurship that put our country on the map? Will the one percent be capable of lifting all boats, or even care to do so, in order to reestablish our national pride?

It was later in life that James Truslow Adams placed a punctuation mark on his written legacy with the following:

“The American dream, that has lured tens of millions of all nations to our shores in the past century has not been a dream of merely material plenty, though that has doubtlessly counted heavily. It has been much more than that. It has been a dream of being able to grow to fullest development as man and woman, unhampered by the barriers which had slowly been erected in the older civilizations, unrepressed by social orders which had developed for the benefit of classes rather than for the simple human being of any and every class.”

No more elegant words were ever written to ensure our ethos would never be endangered. And yet it is at risk of extinction today. It is high time we stand up for what is rightly ours and take back the American Dream for one and for all.

How Falsehoods Become Facts

By Steve Saville

All is certainly not well with the global economy, but you can’t properly make that point using a nonsensical statistic

The more an invalid piece of information is quoted as if it were true, the closer it will come to being widely viewed as correct. Here are four examples that spring to mind:

1) The claim that there is a severe shortage of physical gold in Comex inventories, making a Comex default likely. This claim seemingly originated at ZeroHedge.com and was ‘supported’ by a chart showing the ratio of Open Interest to Registered Gold. Even though it was never true, the Comex gold shortage story started by Zero Hedge got picked up by numerous gold-focused sites/newsletters and quickly became accepted as fact within a significant portion of the “gold community”. I debunked the story multiple times at the TSI blog, including in the May-2016 post linked HERE.

2) The claim that the “science is settled” on the matter of Anthropogenic Global Warming. This claim is ridiculous, because:

a) Many scientists dispute the theory that the most recent warming period was primarily the result of human activity.

b) The models that were constructed over the past three decades to show what would happen to the climate under different CO2 emission outcomes haven’t worked.

c) The science is NEVER settled. Instead, it is constantly evolving as new information becomes available.

Despite being ridiculous, the “science is settled” claim has been quoted so often that many people now believe it to be a fact.

3) The claim that the Russian government colluded with the Trump team and conducted operations during the 2016 US Presidential campaign to hurt Clinton, including the hacking of DNC (Democratic National Committee) emails and the leaking of these emails to WikiLeaks. I don’t know for sure that this claim is false, but it is currently not supported by any evidence (WikiLeaks has stated that the emails did not come from Russian hacking). Despite being unsubstantiated by hard evidence and quite possibly being a completely fictitious story, the supposed Russian involvement in Trump’s election victory has now been mentioned so many times that it is widely viewed as confirmed.

4) Oxfam’s statement that the eight richest men in the world, between them, have the same amount of wealth as the bottom 50% of the population combined. This statement has been cited in countless articles and is generally considered to be evidence that all is not well with the global economy, but it is claptrap. As pointed out in Felix Salmon’s article at fusion.net:

…if you use Oxfam’s methodology, my niece, with 50 cents in pocket money, has more wealth than the bottom 40% of the world’s population combined. As do I, and as do you, most likely, assuming your net worth is positive. You don’t need to find eight super-wealthy billionaires to arrive at a shocking wealth statistic; you can take just about anybody.

All is certainly not well with the global economy, but you can’t properly make that point using a nonsensical statistic.

In conclusion, the more that a false statement or misleading number is quoted, the closer it will come to being generally perceived as factual. If it gets quoted enough its validity will no longer even be questioned.

I wonder if there is a lot less fact-checking and healthy scepticism these days, or if it just seems that way.


By Jeffrey Snider of Alhambra

It would have been better in 2011 for central banks to sit that one out, to let a second crash develop even if it was equal in size and duration to the first one

It is more than interesting that Herbert Hoover has become the modern ideal of the liquidationist. In these very trying times, one is either that or a Keynesian, Hoover’s supposed opposite, an interventionist who believes there is no good in any recession or deflation at any time. To “prove” the superior foundations of the latter, the ideological associates of that position will always invoke the Great Depression. In what is the economic equivalent of Godwin’s Law, in some ways just a corollary since it was the Great Depression that made the Nazi extreme possible, to advocate free market liquidation is to be pressed into the corner of wanting another Great Depression.

It is, of course, a true non sequitur, for most who are committed to free markets can be so without ever having the slightest desire for calamity. It has been in the decades since the 1930’s a common tactic to associate free markets with such dangerous messiness and the role of government the virtuous economic janitor forced to clean up from the chaos. The panic in 2008 gives us a great test to some of those theories, especially as intervention was the rule almost from the start (August 2007 rather than February 2007, but still close enough to the initial rupture).

The fact that the Fed interceded at every turn but also on every count humiliatingly failed demonstrates one fact of false interventionist lore – that without the skill and courage, as Mr. Bernanke himself has called it, the Great “Recession” would have become a second Great Depression. In other words, without QE in this specific case there would have been no stopping the destructive capacity of the panic; it would have gone on and on and on until there was nothing left to the global economy.

That was always an irrational assumption, as even the messiest of free markets undergoing the messiest of liquidations reach on their own an end. No economy will ever liquidate down to zero. The idea that a crash will just keep on going until the enlightened central banker stops it is more politics than economics. In the case of 2008, it was truly absurd because nothing any central banker did led to any positive effects whatsoever. If the Panic of 2008 stopped, it was because it was always going to stop.

The case of the Great Depression was a singular, unique one; though there are enormous similarities of general outline between the 1910’s to 1930’s and the 1990’s to the so far 2010’s, in truth there are a great many differences especially monetarily. In the former period the public payment system was greatly endangered by its close and often direct connection to asset markets; in the latest period, the public’s money was never in such peril, as it was only interbank money where panic was realized. The worst of this age was never what happened up front in late 2008, it has been instead the lack of growth following it.

Even though the 2007-09 liquidation stopped largely on its own, intervention has continued almost constantly anyway. Largely based on the credit central bankers had initially given themselves, they kept at it year after year after year even though after several years it was more than enough time to realize “something” wasn’t working. As of last year, even central bankers have quietly surrendered, leaving them to finally admit that something was their “stimulus” – though they have yet to truly consider why.

The problem is primarily global economic potential, on that point even the interventionists have finally agreed. The Great “Recession” in other words was never actually a recession, it was instead a giant and permanent rupture in global economic function. Orthodox economists have no idea why even if they now recognize it for that condition. This is the so-called “supply side” where “stimulus” is exclusively intended for aggregate demand; if the supply side is so impaired then it is no wonder demand side stimulus failed to stimulate.

But how could the supply side become so shrunken? There is no mechanism in their literature that could explain it, which is why economists and policymakers have turned to the ludicrous almost exclusively. They will never willingly re-evaluate the assumptions that underpinned their interventionist stance. Including:

“All the stakeholders emphasized today that we have to avoid delays,” EU Economic Affairs Commissioner Pierre Moscovici told a news conference after the meeting. “That would be very harmful. That would impair the confidence of investors and consumers. That would be detrimental to economic recovery.”

I have to confess that when I read this paragraph I actually laughed. It was an inappropriate one, and so more about again the ridiculousness of it the ideas expressed literally rather than the plight which was being described related to it. The article which contains that passage is one published initially yesterday relating apparently a new crisis in Greece, the fifth or sixth depending upon your definitions; which is to say the same crisis of Greece that has been ongoing for now seven years without interruption no matter the intervention.

Continue reading Again?

“Where the Wild Flowers Are”: Equity Funds See Largest Inflow in 13 Weeks Before Fed

By Heisenberg

There’s been no shortage of discussion this year about flows into US equities.

Over the past several weeks, more than a few commentators have suggested that the flood of Johnny–come–lately retail money into stocks may be proof that they do in fact “ring bells at the top.”

Of course these flows have been catalyzed and perpetuated by the “Trump trade” meme. Headlines advertising the “Trump rally” and Dow 20,000 have been plastered across every newspaper in the country, fueling retail demand and ensuring that as is almost always the case, “mom and pop” are buying when multiples are stretched and are thus almost sure to be underwater in the medium- to near-term as the market finally corrects.

Well, for those interested, below find a few charts from Deutsche Bank which, to borrow from Maurice Sendak, show you “where the wild flows are”…

Via Deutsche Bank

As shown below, US equity funds accumulated $55 billion of inflows over the past twelve months ( $100 billion since November alone)…


Last week, DM equity funds (+) with US & Japan (+) vs. Europe (-): DM equity funds rose to their highest level in the past 13 weeks (+0.2%, MFs: -0.1%, ETFs: +0.7%) as significant ETF inflows outweighed MF redemptions…



So as noted, those weekly flows were before the Fed.

It’ll be interesting to see what the lagged numbers look like this week.

Gold & Silver: Technical vs. Fundamental

By Keith Weiner of Monetary Metals

Every week we talk about the supply and demand fundamentals. We were surprised to see an article about us this week. The writer thought that our technical analysis cannot see what’s going on in the market. We don’t want to fight with people, we prefer to focus on ideas. So let’s compare and contrast ordinary technical analysis with what Monetary Metals does.

Technical analysis, in all of its forms, uses the past price movements to predict the future price movements. In some cases (e.g. momentum analysis) it calculates an intermediate signal from the price signal (momentum is the first derivative of price). But no matter the style, one analyzes price history to guess the next price move.

This is necessarily probabilistic. There is no way to know that a particular price move will follow the chart pattern you see on the screen. There is no certainty. And when it does work, it is often because of self-fulfilling expectations. Since all traders have access to the same charts, and the same chart-reading theories, they can buy or sell en masse when the chart signals them to do so.

We are not here to argue for or against technical analysis. We simply want to say that it’s not what we are doing. Not at all.

Our analysis is based on different ideas. The key idea is that there is a connection between the spot and futures market. That connection is arbitrage. Think of each market as a platform that moves up and down on its own vertical track. The two tracks are close together. And the platforms are connected to each other by a spring. Suppose platform A is a bit above platform B. If you push up on A, then the spring stretches a bit more and will pull B up, though perhaps not as much. The same happens if you push down on B.

Conversely, if you push down on A, then it will compress the spring and platform B will tend to go down, though not as much.

A and B are the futures and spot markets for gold (the same analogy applies to silver). Arbitrage works just like a spring. If the price in the futures market is greater than the price in the spot market, then there is a profit to carry gold—to buy metal in the spot market and sell a futures contract. If the price of spot is higher, then the profit is to be made by decarrying—to sell metal and buy a future.

There are two keys to understanding this. One, when leveraged speculators push up the price of gold futures contracts, then that increases the basis spread. A greater basis is a greater incentive to the arbitrageur to take the trade. Two, when the arbitrageur buys spot and sells a future, the very act of putting on this trade compresses the spread.

If someone were to come along and sell enough futures contracts to push down the price of gold by $50 or $150 or whatever amount is alleged, then this selling would be on futures only. It would push the price of futures below the price of spot, a condition called backwardation.

Backwardation just has not happened at the times when the stories of the big “smash downs” have claimed. Monetary Metals has published intraday basis charts during these events many times.

The above does not describe technical analysis. It describes physics—how the market functions at a mechanical level.

There are other ways to check this. If there was a large naked short position in a contract that was headed into expiry, how would the basis behave? The arbitrage theory predicts the opposite basis move. We will leave the answer out as an exercise for the interested reader, as thinking this through is really good work to understand the dynamics of the gold and silver markets (and you can Google our past articles, where we discuss it).

This check can be observed every month, as either gold or silver has a contract expiring (right now it’s gold, as the April contract is close to First Notice Day).

This week, the prices of the metals both rose. The price of gold is almost back to where it was the prior week, but that of silver is not.

Below, we will show the only true picture of the gold and silver supply and demand. But first, the price and ratio charts.

The Prices of Gold and Silver

Continue reading Gold & Silver: Technical vs. Fundamental

Another Missed Opportunity

By Doug Noland

Credit Bubble Bulletin: Another Missed Opportunity

March 16 – Financial Times (Robin Wigglesworth, Joe Rennison and Nicole Bullock): “When Romeo impatiently hankered after Juliet, the sage friar Lawrence dispensed some valuable advice: ‘Wisely and slow; they stumble that run fast.’ It is a dictum the Federal Reserve clearly intends to live by, despite the improving economic outlook. There have been rising murmurs in financial markets that after years of the Fed being too optimistic on the economy, inflation and interest rates, it is now behind the curve. But on Wednesday the US central bank sent a clear message to markets that it is not in a hurry to tighten monetary policy.”

Yes, markets had begun fretting a bit that a sense of urgency might be taking hold within the Federal Reserve. But the FOMC’s two-day meeting came and went, and chair Yellen conveyed business as usual. Policy would remain accommodative for “some time.” The focus remains resolutely on a gradualist approach, with Yellen stating that three hikes a year would be consistent with gradualism. And three baby-step hikes a year would place short rates at 3.0% in early 2020 (the Fed’s “dot plot” sees 3% likely in 2019). It’s not obvious 3% short rates three years from now will provide much restraint on anything. As such, the Fed is off to a rocky start in its attempt to administer rate normalization and a resulting tightening of financial conditions.

Yellen also suggested that the committee would not be bothered by inflation overshooting the Fed’s 2.0% target: “…The Fed is not inclined to overreact to the possibility that inflation could drift slightly — and in the Fed’s view temporarily — above 2% in the coming months.” There would also be no reassessment of economic prospects based on President Trump’s agenda of tax cuts, infrastructure spending and deregulation. “We have plenty of time to see what happens.” Moreover, the Yellen Fed did not signal that it is any closer to articulating a strategy for reducing its enormous balance sheet.

Bloomberg had the most apt headlines: “Yellen Calms Fears Fed’s Policy Trigger Finger Is Getting Itchy;” “Yellen Faces New Conundrum as Conditions Defy Hike;” “The Market Is Acting Like the Fed Cut Rates.”

Ten-year Treasury yields dropped 11 bps on FOMC Wednesday to 2.49%, the “largest one-day drop since June.” Even two-year yields declined a meaningful eight bps to 1.30%. The dollar index fell 1.0%, with gold surging almost $22. The GSCI commodities index rose more than 1%. EM advanced, with emerging equities (EEM) jumping 2.6% to the high since July, 2015.

I think back to the last successful Fed tightening cycle. Well, I actually don’t recall one. Instead it’s been serial loose financial conditions and resulting recurring booms and busts. And, once again, the Fed seeks to gradually raise rates without upsetting the markets. Yellen: “I think if you compare it with any previous tightening cycle, I remember when rates were raised at every meeting, starting in mid-2004. And I think people thought that was a gradual pace, measured pace. And we’re certainly not envisioning something like that.” Heaven forbid…

In her press conference, Yellen again addressed the “neutral rate” – “The neutral level of the federal funds rate, namely the level of the federal funds rate, that we keep the economy operating on an even keel. That is a rate where we neither are pressing on the brake nor pushing down on the accelerator. That level of interest rates is quite low.”

Yellen may not believe the Fed is “pushing down on the accelerator,” yet the truck is racing down the mountain.

March 14 – Bloomberg (Claire Boston): “Companies are issuing bonds in the U.S. at the fastest pace ever… Investment-grade firms are on track to complete the busiest first quarter for debt sales since at least 1999. Firms… have pushed new issues to more than $360 billion so far in 2017, closing in on the previous record of $381 billion from 2009… That puts bond sales 14% ahead of last year’s record pace… High-yield bond offerings have also roared back after a plunge in commodity prices muted new issues last year. Junk-rated firms have sold more than $72 billion in 2017 through Monday, compared with $41.7 billion in the first quarter of 2016.”

March 16 – Bloomberg (Sid Verma and Julie Verhage): “Financial markets are telling Janet Yellen there’s more work to be done — or else. While the Federal Reserve chair raised interest rates by 25 bps as expected Wednesday, the outlook was less hawkish than market participants foresaw, with projections for the medium-term tightening cycle largely unchanged… ‘Our financial conditions index eased by an estimated 14 bps on the day — about 2.3 standard deviations and the equivalent of almost one full cut in the funds rate — and is now considerably easier than in early December, despite two funds rate hikes in the meantime,’ Goldman Chief Economist Jan Hatzius and team wrote…”

Continue reading Another Missed Opportunity

DJI Oscillator Positive Index

By Tom McClellan

DJI Oscillator Positive Index

DJI Oscillator Positive Index
March 17, 2017

The DJIA itself might be hanging around all-time highs, but its components are telling a different story.  When a higher index high is made on declining participation, that’s a problem.

The indicator in this week’s chart is one I thought up about 20 years ago, one of a set of indicators that look at the 30 Dow stocks to see what they are doing.  This is a type of “diffusion index”, which describes an indicator that looks at the behaviors of each member of a group in order to generalize about the group.  All market breadth indicators are diffusion indices, for example.

In this case, the indicator is looking at the Price Oscillator for each of the 30 Dow stocks to see if they are above or below zero.  When we refer to our Price Oscillators, what we mean is an indicator calculated as the difference between the 10% Trend and 5% Trend (19-day and 39-day exponential moving averages, as some people call them) of closing prices.  This is the same math as we use for the McClellan A-D Oscillator, which uses the daily A-D difference as its raw data.  The Price Oscillator uses closing prices.  This is similar to the math involved in Gerald Appel’s MACD, which typically uses 12-day and 26-day EMAs.  Interestingly, Appel came up with that idea in 1969, the same year that my parents developed the math for the McClellan Oscillator (and independently from Appel).

Here is a Price Oscillator for General Electric, for example:

GE Price Oscillator

The DJI Oscillator Positive Index seems to follow the underlying trend of the market quite well.  That’s a nice property, especially since it is less noisy than the DJIA itself.  It is all the more valuable when it shows a change in that trend by crossing its own 15-day moving average.

That is the condition we have right now, with a slight down move for this indicator taking it below the 15MA.  It says the presumptive trend for the market right now is downward.

For the bigger picture, this indicator can also give useful messages about high and low extremes.  Here is a longer term chart:

DJI Oscillator Positive Index

When it gets to a true extreme, and especially when it shows a nice divergence relative to the DJIA, that can be a powerful message.  We do not have that sort of message now, just a more ordinary type of downturn that begs for a minor pullback, but not a major bear market.

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Chart In Focus Archive

“Pump” & Dump?

By Heisenberg

If there’s anything I’ve been consistent on over the past several months, it’s been the idea that Wall Street and investors probably shouldn’t throw good money after bad when it comes to US shale.

US operators have demonstrated an unwavering propensity to outspend, forcing them to rely on capital markets to plug funding gaps. Fortunately (for them), the central bank-inspired hunt for yield has meant that both debt and equity markets are relatively forgiving. And so, otherwise insolvent production weathered the two year downturn in prices and lived to pump another day.

When the OPEC (non) cuts drove prices up some four months ago, these operators came out of hibernation and it’s been off to the races in terms of US production and ramped up capex plans ever since. As a reminder, here’s a bit of color out last month from Wells Fargo:

Street Missing The History Lesson. With the activity ramp fully underway and the attention now on volumes growth, we wanted to revisit the topic of E&P outspend. We Model Outspend Much Greater Than Consensus. Operators seem to have short memories when it comes to capital discipline which is why it’s no surprise to us that we’re already starting to see signs of a meaningful ramp in spending emerge.

Poor capital discipline has consequences as enterprise values are expanded through either net debt or equity increases. In all cases, existing common stockholders’ share of total EV is diluted, all else equal. Therefore, production and cash flow forecasts are less impactful than headline figures suggest after making an adjustment for associated dilution.

Right. “In all cases, existing common stockholders’ share of total EV is diluted,” but don’t tell that to all the gullible folks who contributed to a blockbuster January in terms of equity raises by US producers. Via Bloomberg:

Wall Street is throwing the most money at U.S. energy companies since at least 2000 amid growing confidence that the industry is emerging from the worst downturn in a generation.

Energy firms raised $6.64 billion in 13 equity offerings in January, drawn in by a rich combination of oil prices consistently above $50 a barrel and a rush to drill that’s doubled the rigs in use in the U.S. and Canada since May. The biggest change from last year: oilfield servicers that provide the rigs, fracking equipment and sand used by drillers.


Included in that $6.64 billion was the $508.4 million raised on January 20 by Keane Group, a Houston-based provider of fracking services, in what was the first IPO of the year in the US. Here’s what I said back in early February about that:

Continue reading “Pump” & Dump?