Posts filed under “Think Tank”

Stock markets: retreat in store?

Stock markets: retreat in store?

It seems as if the spring rally has probably exhausted itself. And it is about time given the extent and rapidity of the move. The MSCI World Index increased by 45.2% from its March lows until the early June high and the MSCI Emerging Markets Index by a staggering 68.9%. Both these indices have only had one down-week since the advance commenced in early March.

Leading markets such as Russia (+137.0%), India (+89.5%), China (+54.7%) and Brazil (+50.4%) significantly outperformed laggards such as the Dow Jones Industrial Index (+27.5%) and the S&P 500 Index (+39.9%), although all markets recorded very respectable returns. The major US indices have gained for 12 out of the past 14 weeks.

Click here or on the table for a larger image.


Source: Plexus Asset Management (based on data from I-Net Bridge)

Focusing on the US, the S&P 500 Index (911) has backed off resistance at its January high (935) and is less than five points away from breaking down through the key 200-day moving average (906) – broken to the upside only two weeks ago.

Importantly, short-term oscillators such as the rate-of-change (momentum) indicator is on a knife’s edge of giving a selling signal, i.e. crossing through the zero line in the bottom section of the chart below. Also note the negative divergence between the Index and the ROC line – typically be a warning sign that a near-term trend change will take place.



The venerable Richard Russell of Dow Theory Letters fame said: “In order for a counter-trend rally in a bear market to be sustained, it requires steady or rising buying power plus short covering. Lowry’s Buying Power Index has been declining steadily since May 8. At yesterday’s market close, this Index (demand) was only 24 points higher than it was at the March 9 lows. Furthermore, volume is drying up.

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Category: Think Tank

Technical noise/Fighting the last war

With triple witch expiration Friday, where the open interest in the 900 strike in the SPX is huge and within just a few points of the 200 day moving average, the Russell rebalancing next Friday and only a few weeks before quarter end, there will be a lot of crosscurrents that will impact market activity…Read More

Category: MacroNotes

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from…Read More

Category: Bailouts, Think Tank

Obama’s Regulatory Proposals — Smarter or Just More?

Good Evening: U.S. stocks finished mixed Wednesday after a morning dip and afternoon rally both failed. Some less than cheery news from FedEx and some bank downgrades set the tone for the early weakness, while a successful test of the 200 day moving average by the S&P 500 helped prices rebound in the afternoon. And…Read More

Category: Markets, Think Tank

That’s a lot of money

Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.


Household debt is “down” to 130% of disposable income. “Down” is a relative term. It was 134% recently. But it was half the current level as recently as the mid-1980′s. Total debt in the U.S. (all debt including the government) stands at about 360% of Gross Domestic Product. It was 155% in 1980. Another way to slice the debt overview is to look at non-financial debt (take the banks’ debt, etc. out) and that is 240% of GDP. The Euro zone is also at about that level and Japan is at something like 450% of GDP. But that economy has been down for a long time, so I take no comfort we are better off than that.

Let’s look at household debt for a moment. Disposable personal income is close enough to $11 trillion that we can use that as a number. If household debt were to retreat to, say, 100% of income, it would be a retrenchment of a good bit over $3 trillion. That would be one big bite out of consumer expenditures. I have no idea where this debt to income will or should go. Things tend to revert to the norm over time, and if we were in the 70% range in the 1980′s, I don’t think returning to 100% is a crazy view. If the savings rate were to return to its 70-year average of 9%, that would chip in almost $1 trillion a year. Savings might not go to pay off debt, but, from a total balance sheet overview, we could balance one against the other. If all else stayed equal (which of course it won’t), it would take several years to get back to 100%. Not a joyful prospect for a booming economy led by the consumer, but I don’t think any of us believe the consumer is going to be a driving force in any recovery.

What might be a driving force would be inventory restocking. I mentioned yesterday that Industrial Production was down again, which means there is no inventory build at all, and inventory liquidation instead. If final demand started to pick up, there would be a need to increase production quickly.

New York City has balanced its budget with the aid of Federal stimulus dollars. But the smoke and mirrors employed also revealed a rise in the sales tax and a reduction in the work force. How does the use of stimulus dollars in this sense stimulate? Taxes are up and employment down. I don’t get it. Only about $50 billion or so of the total stimulus package of $787 billion has been spent, and there is a lot of enthusiasm that, when the rest gets spent, the economy will prosper. But if it non-stimulates like this, we are in for a reassessment.

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Category: Credit, Currency, Think Tank

Draft of Financial Regulation Proposal

A recent draft of the plan to reshape financial regulation sent to members of Congress (via NYT) > click for PDF via NYT

Category: Bailouts, Politics, Regulation, Think Tank

Bank CDS/What’s going on?

The giveback of the June gains over the past few days in the S&P’s has been matched by the corporate credit markets where the CDS on the HY and IG index are back to the levels of late May. The action in the bank sector specifically is most interesting. On May 7th the results of…Read More

Category: MacroNotes

Gasoline Prices

The higher than expected build in gasoline prices in today’s weekly DOE data is sending front month gasoline futures down 2.5%. This may result, in the next few days, in the very first decline in retail gasoline prices at the pump since April 28th, as measured by the daily AAA national unleaded gasoline price survey….Read More

Category: MacroNotes

Morning stuff

The May CPI rose .1% headline, .2% less than expected but the core gain of .1% was right in line with forecasts. Headline CPI y/o/y fell 1.3%, the most since April 1950 and was .4% greater than expected. The core rate rose 1.8% y/o/y. In the CPI, food prices make up a larger portion than…Read More

Category: MacroNotes

Governor Kevin Warsh: Defining Deviancy

Defining Deviancy
Governor Kevin Warsh
At the Institute of International Bankers Annual Meeting, New York, New York
June 16, 2009

In a seminal essay delivered about 16 years ago, Senator Daniel Patrick Moynihan offered a striking view of the degradation of standards in society.1 He observed that deviancy–measured as increases in crime, broken homes, and mental illness–reached levels unimagined by earlier generations. As a means of coping with the onslaught, society often sought to define the problem away. The definition of customary behavior was expanded. Actions once considered deviant from acceptable standards became, almost immaculately, within bounds.2

Society moves on, as it were. Well-meaning efforts are periodically made to treat its failings. But if these efforts prove less than successful, citizens and policymakers alike tend to grow increasingly accustomed to the unfortunate statistics. Every bit the reformer throughout his decades of public service, Moynihan seemed reluctantly resigned to society’s construct: “In this sense, the agencies of control often seem to define their job as that of keeping deviance within bounds rather than that of obliterating it altogether.”3

Given the financial crisis, deep contraction in the real economy, and extraordinary fiscal and monetary responses, I cannot help but wonder what constitutes deviance in economic terms in 2009 and beyond. What level of real economic output and unemployment is expected and, more important, accepted? And what level of volatility constitutes the “new normal”?4 As I will discuss, we must be wary of macroeconomic policies that–in the name of stability– may have the effect of lowering trend growth and employment rates.

In Moynihan’s framework, will we in the official sector be accepting of periods of significant financial and economic distress, however infrequent? That is, will deviancy be defined down with the understanding that a rare crisis is the price for dynamic, robust economic growth? Or will the official sector say, “Never again–not on our watch,” and become less tolerant of deviations in economic and financial conditions? Under the mantle of reforming capitalism, will policymakers instead define deviancy up, and seek to guarantee stability in our economic affairs?

I suspect that, for a time, policymakers will be more attracted to this latter path. Stability is a fine goal, but it is not a final one. Long after panic conditions have ended, stability threatens to displace economic growth as the primary macroeconomic policy objective. But we must recognize that the singular pursuit of stability, however well intentioned, may end up making our economy less productive, less adaptive, and less self-correcting–and in so doing, less able to deliver on its alluring promise. This fate, however, does not have to be ours. The U.S. economy is capable, in my judgment, of delivering more.

The Growth Experiment5
This most recent boom and bust is not, as they say, our country’s first rodeo, but it may turn out to be the most consequential since World War II. And, here, I am not just talking about the near-term peak-to-trough changes in growth and employment levels, which are likely to prove significant.

Policymakers are revealing new policy preferences and prescriptions–fiscal policy, trade policy, regulatory policy, and monetary policy, chiefly among them. Long after the official recession ends, the choices being made may significantly alter the contour of the U.S. economy. The harder question that remains is whether these changes will prove beneficial.

From the mid-1980s through 2007, U.S. real gross domestic product (GDP) growth averaged more than 3 percent per year, and was less volatile than in previous decades. The average unemployment rate was less than 5-3/4 percent, a full percentage point less than in the previous 15 years. Most notable was the realized acceleration in labor productivity in the mid-1990s.

The bipartisan, pro-growth policies that predominated during this period contributed meaningfully to these gains. Tax and spending decisions generally sought to expand the economic pie. Trade policies were aimed at opening new markets to U.S. products and services, and removing barriers domestically. Regulatory policies permitted failure, and relied in equal parts on capital requirements, regulatory standards, and, no less important, market discipline. As a result, businesses were well positioned to adopt new efficiency-enhancing technologies and processes to excel in the pro-growth environment. These policies helped drive significant productivity gains, and remarkable U.S. and global prosperity.6

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Category: Federal Reserve, Think Tank