Is the rally over?

One thing I like to watch in finance is the trend of opinion. There are a few ways to look at it, from the general sentiment indicators (are money managers bullish or bearish?) all the way down to the individual opinions of those with good track records. There's also the socionomic angle, such as why is Bob Prechter showing up now?

In January, Marc Faber said the S&P 500 could drop 20% after a spring rebound. (He expects Bernanke to print money at that point and halt the decline.)

Tim Knight has posted his latest Big Picture review.

A new short sale rule has ominous implications, not because of the policy itself, but because the government always mistimes its policies, such as passing recession fighting programs once the recession is over. (This time we have a depression and they, like Hoover and Roosevelt, do not know how to fight a depression.)

Economically, things are not looking good. The deadline for applying for extended federal unemployment benefits ends today.

And it turns out that 40% of the banking system and 3000 community banks are exposed to the coming commercial real estate crisis. Many warned about the risks of the housing and subprime markets, but most people do not believe something is a crisis until it is unfolding before their eyes. Therefore, despite the years of warnings, this will not affect the market until liftoff. Even if the market tumbles in April or May, commercial real estate will not yet be a concern—though the slide could trigger liftoff since it could damage the developers' ability to raise capital.

If we see a true deflationary crash, expect gold to tumble along with the markets. Prechter's admonition to load up on cash is appropriate. Also, the U.S. dollar is likely to rally against everything except the Japanese yen. At the end of the slide, the yen may be strong enough to put the Japanese economy at the center of international concern.

I've jumped the gun on the end of this rally so many times, however, that I'm waiting for a clear sign of a break. The previous year of market action suggests a bounce and climb to a new 52-week high and the S&P 500 Index is right at its 50-day moving average. The line is about as flat as it can get, suggesting the next move will bend the 50-day average in its direction. A break higher would be bullish, with the previous high of 1150 as the target for now. A break lower would be bearish, but the S&P 500 would need to drop more than 6% before it reached its 200-day moving average of 1033.


February Performance


Feb %


S&P 500 TR






上海 Shanghai




Entertain. Trends



Green Dragon



Best of Funds



Pharma & Dogs



China Fund



Software Security



Yield to Me



Catch a Falling Knife



Will shorts begin to pay off, finally?


Crash Comparison Update 2010/02/23

Consumer confidence is a lagging indicator, but...

Consumer confidence lags at the turns, but this decline is reveals that the efforts of the government and central bank only managed to inflate expectations.

Just yesterday, I wrote about Obama's low poll ratings and how the stock market would converge with those numbers. Here's another poll, consumer confidence, showing a negative social mood. Today's "surprise" drop isn't a great surprise to many observers though. ZeroHedge has been covering the divergence with the ABC Consumer Confidence survey for months.

An explanation for the drop in consumer confidence is also found in the number of Americans saying they are underemployed.
Those who were underemployed reported spending 36% less than those who were employed, $48 per day versus $75 per day.
Also important to watch is the insider selling at Google and other corporations.If the rise in stocks is responsible for some non-trivial amount of confidence, a decline in stocks would do a number on President approval, consumer confidence, etc.

Solar stocks flirt with major support

FSLR is dragging the funds lower, but is it the leader or laggard? The Chinese solar firms don't look as bad yet.


Closing the Social Security Deficit; Socionomics explains Obama's ratings

Social Security is already running deficits due to reduced payroll taxes. The government needs to find a way to plug this hole, but if they open up a public debate about the deficit in Social Security right now, it's likely to add massive fuel to the widespread anger over government spending. Instead:
Protect the Social Security Trust Funds. The President’s Proposal provides that, if necessary, funds will be transferred to the Social Security Trust Funds to ensure that they are held harmless by the Proposal.
Why does the spending for health benefits kick in two years after the bill and tax increases pass? It's to plug the massive financial hole in the U.S. budget that could create a "Greek-lite" scenario for U.S. Treasuries. The government assumes that in two year's time, the economy will pick up and the revenue raised from the taxes can be directed for healthcare.

Elsewhere, President Obama has reached a new low in his approval ratings. Healthcare is hurting the President, but I believe it is the social mood that is most responsible. Right now, the bailouts, stimulus programs (cash-4-clunkers, first time homebuyer credit) and Federal Reserve efforts have managed to inflate the stock market. Presidential approval ratings are not inflated, and I expect the stock market to converge with the ratings, rather than the other way around.


First Solar (FSLR) Falling Wedge

Or maybe a symmetrical triangle.I lean bearish here for one simple reason. The solar industry has been support by heavy government subsidies in Europe, Asia and North America. Sovereign debt crises in Europe and the U.S. (the states have massive deficits and public pension shortfalls) means there will be no money for these types of subsidies for the next few years. As Barron's points out in Don't Get Burned by First Solar:
Among risks is the possibility Germany will make further cuts to a solar subsidy that has helped make the country the dominant market for solar power. About 75% of First Solar sales in 2008 were to German customers. As more consumers and businesses install solar panels, the so-called feed-in tariff is becoming increasingly costly for the government and German businesses.
Germany may need that cash for a bailout of Greece.

Descending Triangle in CMED

China Medical Technologies (CMED)
This is a bearish pattern and breaking of the support line, with a close below $12.50, would signal a breakdown. Very bearish compared to China ETFs. CMED tracked FXI and HAO higher until June 2009, since then CMED is down more than 40%, while FXI is up less than 10% and HAO is up more than 20%.


Dollar Up, Gold down...

Gold has moved lower as the dollar moved higher, but the move has not been 1 to 1. Here again is the ratio of SPDR Gold Shares (GLD) to PowerShares DB U.S. Dollar Bearish Fund (UDN). The rising ratio indicates that foreign currency is losing versus the dollar more than gold is losing versus the dollar. That losing currency is, of course, the euro.

Gold is moving lower after market close thanks to IMF gold sales.


Reverse H&S on SPY?

Despite my bearishness, the market can still move higher if it formed a reverse head and shoulders from October 2008 to July 2009:

Another look at the euro

I've just finished up Technical Analysis Explained by Martin Pring. One system mentioned in the book is a 10-week moving average, plus 6-week and 12-week rate of change. Below is the CurrencyShares Euro (FXE) with those indicators, plus a relative strength reading on top, along with the buy and sell signals. Clearly still bearish at the moment.


RMB Going Up 5%?

Goldman’s O’Neill Says ‘Something Brewing’ in China on Currency
Goldman Sachs Group Inc. Chief Economist Jim O’Neill said China may be poised to let its currency strengthen as much as 5 percent to slow the world’s fastest growing major economy.

“I have a strong opinion that they’re close to moving the exchange rate,” O’Neill said in a telephone interview from London after China’s central bank told lenders on Feb. 12 to set aside larger reserves. “Something’s brewing. It could happen anytime.”
WisdomTree Dreyfus Chinese Yuan (CYB) tracks the yuan with forward contracts.

Socionomics Alert! Rethinking China

Robert Samuelson says We've Misjudged China:
Most American-Chinese disputes reflect China's unwillingness to endanger domestic goals for international ends. It won't commit to binding greenhouse gas cuts because these could reduce economic growth and (again) jobs. On Iran, it values its oil investments more than it fears Iranian nukes. Likewise, it worries that unrest in North Korea could send refugees spilling across the border. Because Taiwan is regarded as part of China, U.S. arms sales there become domestic interference. And censorship is needed to maintain one-party control.
For international ends...or American ends?
It would be a tragedy if these two superpowers began regarding each other as adversaries. But that's the drift. Heirs to a 2,000-year cultural tradition -- and citizens of the world's largest country -- the Chinese have an innate sense of superiority, Jacques writes. Americans, too, have a sense of superiority, thinking that our values -- the belief in freedom, individualism and democracy -- reflect universal aspirations.

Greater conflicts and a collision of national egos seem inevitable. No longer should we sit passively while China's trade and currency policies jeopardize jobs here and elsewhere. Political differences between the countries are increasingly hard to ignore. But given China's growing power -- and the world economy's fragile state -- a showdown may do no one any good. Miscalculation is leading us down dark alleys.
Which country is trying to impose its value system on the world?

Social mood is declining and instead of viewing a rising China as a positive change, it is now viewed as a negative change. China is becoming the focal point of American problems and the implications are not positive.


Is Spain finished too?

Spanish intelligence probing debt "attacks"-report
"The (CNI's) Economic Intelligence division...is investigating whether investors' attacks and the aggressiveness of some Anglo-Saxon media are driven by market forces and challenges facing the Spanish economy, or whether there is something more behind this campaign," El Pais said.

Officials at the CNI were not available for comment.

The report comes days after Public Works Minister Jose Blanco protested "somewhat murky manoeuvres" were behind financial market pressure on Spain.

"None of what is happening in the world, including the editorials of foreign newspapers, is coincidental or innocent," Blanco said.
Unless there's an Al-Qaeda plot to retake Andalusia that includes financial warfare, Spain is in trouble for the same reasons as every other indebted state.

Where is the euro going?

Strong support is at the $1.25 level, or $125 per share for CurrencyShares Euro (FXE).

Greece is finished

The Greek political leadership knows it and they're lashing out, since it's the only thing left to do, Greece turns on EU critics.
Greece on Friday unleashed a fierce attack on its European Union partners, accusing them of creating a “psychology of looming collapse” a day after they pledged support for the country’s crisis-hit government.

George Papandreou, Greek prime minister, said that, in the eurozone’s first big test, Greece had become “a laboratory animal in the battle between Europe and the markets”.

In a televised address to his cabinet, he criticised EU members for sending “mixed messages about our country . . . that have created a psychology of looming collapse which could be self-fulfilling”.
It's not self-fulfilling because of psychology, it's self-fulfilling because every individual/business/country has a debt limit. However, if you believe in psychology alone, then the words from the Greek Prime Minister shows that even the Greek political leadership knows they are finished.

Germans say euro zone may have to expel Greece: poll
The Emnid poll for Bild am Sonntag newspaper showed 53 percent of Germans asked said the European Union should, if necessary, expel Greece from the euro zone.
Auf wiedersehen!
Greece Remains a Political Time Bomb
David Goldman says of Greece:
Although Greece is an EC member, its finances and political system have the character of a banana republic. EC membership, though, enabled Greece to borrow far more money than any banana republic, such that the country’s debt-to-GDP ratio is about triple that of Argentina just before the latter’s bankruptcy in 2000. And because Greece is an EC member, the size and adumbrations of a bankruptcy would be much, much larger than that of any Latin American country.
He also relays an email sent to him:
According to the President of the National Bank of Greece, 30% of the budget of the last administration was unaccounted for—yes, just disappeared into the coffers of their families and well-wishers, and I would guess the other 70% was never audited.


Merkel nixes bailout

Angela Merkel dashes Greek hopes of rescue bid, or as I might put it, Merkel delivers fiscal sanity to Europe:
"Germany is stepping totally on the brakes on financial assistance," said a senior EU diplomat. "On legal grounds, on constitutional grounds and on principle." Another senior diplomat said of the Germans: "They're not waving their chequebooks."
The split meant 16 finance ministers could not agree a common position before the summit. "Germany cannot justify its taxpayers having to finance the lovely lives of the Greeks," said a senior diplomat.

Rather than bailing out Athens, Berlin is insisting on rigorous policing of the Greek austerity programme by a triple force from the commission, the ECB and the International Monetary Fund, an exercise never attempted in the eurozone.
Euro took a nice hit in Europe today, CurrencyShares Euro (FXE) will at least open at a new low today. The ProShares UltraShort Euro (EUO) should have another decent performance.

Also, here's a great line from Frankfurter Allgemeine, to show that Merkel's position has domestic political support:
Die Gewerkschaften rufen zum Generalstreik, und die Griechen gehen auf die Straße, um gegen die Verschiebung des Renteneintrittsalters von 61 auf 63 Jahre zu protestieren. Sollen die Deutschen künftig nicht mehr bis 67, sondern bis 69 arbeiten, damit die Griechen den Vorruhestand genießen können?
The Greek unions are protesting an increase in the retirement age from 61 to 63, should the Germans have their retirement age increase from 67 to 69 to pay for the Greek's early retirement?


Euro at a crossroads

CurrencyShares Euro Trust (FXE) is about to see its 50-day moving average cross below the 200-day moving average. Bearish!

These countries fall like dominoes...

Vietnam as Asia's first domino
The disconnect between central command and peripheral resistance was made apparent last year when many export-oriented industries refused to cash in their export receipts at the official exchange rate for the dong against the US dollar. As of October, there was a 9% spread between the official and black market rates, and that gap drove the government's decision in November to devalue the dong by 5% by expanding its permissible trading band. Even with that depreciation, financial analysts monitoring the situation say there is still a 5% spread between the official and black market rates.

One factor driving the distortion is the government's interest rate subsidies, which were implemented last year as part of the stimulus package to encourage more local lending. The policy effectively reduced lending rates from 10% to 6.5% and drove huge new lending worth around $24 billion, or nearly 23% of GDP. According to Standard & Poor's, a credit rating agency, Vietnam's year-on-year loan growth was up 37%.

Financial analysts say that because there was virtually no underlying demand for working capital among state-owned enterprises (SOEs) and export-oriented private companies that received the bulk of the new credits, much of the money was recycled into the local stock market. The footloose liquidity contributed to making Vietnam's stock market one of the world's best performers during the first half of 2009; it then fell dramatically in the second half.

It's unclear to financial and sovereign analysts how much of last year's US$24 billion in new lending was lost to stock market speculation. Kim Eng Tan, a sovereign and public finance analyst at Standard & Poor's, expressed his preliminary concerns about last year's 37% loan growth rate. He said that the balance sheets of major Vietnamese banks were in "reasonable shape" at the end of 2008, but that "we'll need to see what has changed after the new surge in lending".
Market Vectors Vietnam (VNM) would suffer from troubled in Vietnam. SPDR Gold Shares (GLD) may do relatively well if investors buy gold in response to currency crises, but in the short-run, PowerShares DB U.S. Dollar Index Bullish Fund (UUP) may see larger gains.


UUP Near Term Price Target of $24.10

I'm slowly working my way through technical analysis study. Head and shoulders patterns are easier to spot than most, and I think I see another one here in UUP. If my reading is correct, then UUP should breakout to about the $24.10 level, which would match the percentage move from the neckline to the top of the head.

Defensive & Short ETFs

I have these funds in my "Best of Funds" portfolio on Marketocracy. Holdings skew defensive, rather than short.

ProShares UltraShort MSCI Brazil (BZQ)
ProShares UltraShort China 25 (FXP)
ProShares UltraShort Euro (EUO)
ProShares UltraShort MSCI Europe (EPV)
PowerShares DB U.S. Dollar Bullish (UUP)
iShares Barclays Short Treasury Bond (SHV) - this is short-term Treasuries, not an inverse ETF.

I also have a large cash position, some precious metals, and inverse ETFs on the major U.S. indexes.

The portfolio is underperforming the market by about 2% today, but YTD through yesterday, it was up more than 3% compared to -5% returns for the S&P 500 and Dow.

As I wrote last month, I think there has been a sentiment shift in the market and I expect "Best of Funds" to do much better this year.


Watch out for GIPSIs

The acronym PIGS (Portugal, Italy, Greece & Spain) is old, ever since Ireland joined the group to make it PIIGS. Now they are saying to watch out for the GIPSIs!


China's local governments may have debt problems

Banks made loans fast and furiously last year. Now they're trying to figure out where the money went, exactly. Scary View from China's Financing Platforms
Some 8,221 fund-raising platforms were operating at provincial, regional, county and municipal government levels as of June, according to CBRC. The bulk -- 4,907 -- were in counties.

These platforms were awarded a combined 8.8 trillion yuan in bank credit, while their outstanding loans grew to more than 5.56 trillion yuan – an amount nearly equal to the central government's debt.

Liabilities exceeded total fiscal revenues in 13 provinces. In some cases, liabilities were twice revenues.

And these figures may underplay the activity; some critics have questioned the quality of data used to describe the recent work of local fund-raising platforms.
"The scary thing is that the central government is not even clear on how many local fund-raising platforms there are, how big the risks are, and whether risks might be systematic," a high-level financial industry executive said.

Even central bank officials admit a lack of clear data. "All this needs to be researched," said a central bank researcher. "We've only begun to compile local numbers."
The loans went flying out the door to local governments and many of them were newly created platforms that didn't have experience in managing capital. No doubt there was some fraud and waste, but the main thing is that, like the U.S. government stimulus, a lot of the money was malinvested.

To service debt, local governments have been relying on cash flow from projects and land auctions. They also anticipate funds based on high-speed economic growth – expectations that some call too optimistic, and perhaps even dangerous given financial realities.

The central bank's Financial Office estimated that the local government debt service rate will exceed 15 percent by 2012. That means a downturn in land auction revenues or the real estate industry could trigger local debt crises.

In much of the world, the ratio of outstanding loans to fiscal year disposable income for a local government is 100 percent. But audits show debt for some Chinese local governments exceeds fiscal-year income up to five times, and that overall debt is increasing faster than financial resources.

"More than 70 percent of local financing platform projects are unprofitable," a source at a large commercial bank said.
There's a lot of focus on China, understandably. But this is a story all across the world. Local governments in the U.S. will be in the same situation vis-a-vis pensions and spending if the economy turns down. The world's central bankers fired all their bullets and if there's another wave, it will be epic.

Vietnam ETF Completed H&S

I noticed this pattern forming last fall, unless I'm reading it wrong it looks to be a textbook example of a head-and-shoulders pattern. Interestingly, Vietnam did well this week, though it needs to at least get above it's 50-day to become interesting.

Oil & China, FXI:DBO Price Ratio

Here's an interesting one. It shows that the ratio between iShares FTSE/Xinhua China 25 (FXI) and PowerShares DB Oil (DBO) has been pretty consistent since the start of 2009. It suggests that these two funds are responding to the same underlying factor(s).

Euro,Yen, S&P 500

The CurrencyShares Japanese Yen (FXY) CurrencyShares Euro (FXE) ratio has broken out for the first time since August 2008. Yikes.

Second chart shows that in terms of the euro, the 2010 move in the S&P 500 looks to be sideways, but the last chart shows the SPDR S&P 500 (SPY) by itself.

Gold versus S&P 500, Euro, Dollar Index

Gold has fallen about as much as the U.S. dollar strengthened, as the ratio of SPDR Gold Shares to PowerShares DB U.S. Dollar Bearish (UDN)has been consistent. GLD is up slightly versus CurrencyShares Euro (FXE). The first chart has the SPY versus GLD. In terms of gold, U.S. stocks have pretty much gone nowhere since April.

Crash Comparison 2010/02/05


Greece is yesterday's news, Spain is tomorrow's

Spanish mortgage leader declares real estate industry is bankrupt
According to Santos Gonzalez Sanchez, president of the Spanish Mortgage Association who speaks on behalf of the country’s mortgage lenders, there is so much debt in the industry that finance for property development has effectively dried up.

‘The real estate sector is bankrupt,’ he said, pointing out that Spanish developers had a combined debt of €324 billion in the third quarter of 2009, the equivalent of around 30% of Spanish GDP, according to figures from the Bank of Spain. The interest bill alone is around €15 billion a year.

More than 50% of the debt was used to buy land for which there is now no market. ‘Whilst those plots of land are not properly valued, the financial system can’t start afresh and won’t be able to finance new homes,’ Gonzalez told the Spanish press.
Santander Faces Scrutiny After BBVA Property ‘Shock’
BBVA fell the most in 10 months on Jan. 27 after fourth- quarter profit was almost wiped out as it made writedowns in the U.S. and reassessed its Spanish property holdings. Bad loans as a proportion of lending in Spain and Portugal leapt to 5.1 percent in December from 2.6 percent a year earlier, as the bank reclassified 1.82 billion euros of property and consumer loans as doubtful in the fourth quarter. Santander Chief Executive Officer Alfredo Saenz said in October he expects a default rate of 3.3 percent on Spanish loans by year-end.
Investors will compare Santander’s provisioning to BBVA’s when it reports earnings tomorrow, said Andrea Williams, who helps manage about 1.2 billion pounds ($1.91 billion) at Royal London Asset Management in London and described the plunge in profit at BBVA as a “shock.”

Five Things: Spanish Real Estate and the No Good, Horrible, Very Bad Bank Solution
Still, few Americans realize Spain is larger than the state of California. Most, if they think of the country at all, think of it as little more than a subsidiary of the Club Med franchise, basically just a resort, or a small section in the back of their local wine store. But it has the ninth or tenth largest economy in the world, so when the head of the country's mortgage industry declares the entire real estate industry bankrupt, it's "worrying," as the local news there puts it.

After all, real estate is nothing if not a religion, and when the chief pope-in-charge of doling out mortgage loans declares the very backbone of that religion bankrupt, students of history know that bloodshed is likely close at hand.

On Tuesday, while the world was nervously eyeing Greek and Swiss bankers for any furtive movements, Santos Gonzalez Sanchez, president of the Spanish Mortgage Association, the man who speaks on behalf of the country’s mortgage lenders, essentially had a nervous breakdown in public, declaring the country's entire real estate industry bankrupt. Which is true, but beside the point. This is the man who heads up the whole gig. It would be similar to the pastor at your local church painting the sanctuary red and sacrificing a bull... just for fun.

My gut tells me that the problems in Spain are just starting to come to light and this still has a ways to go before it's finished.