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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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    Is Economic Reality Overcoming Central Bank Manipulations?

    Part 1 of Weekly Review/Preview: A Strategy Guide For All Markets For the Coming Week

    Markets didn't move much over the past week, so technically speaking there were no major market movers. However if we look beyond a superficial look at the weekly moves of major indexes, currencies, or commodities, the apparent quiet belies a potentially far more significant development.

    In the overall scheme of things, last week was another chapter in ongoing story of the past 18 months - of markets being caught in the middle of a tug-of-war between the bullish central banks' market manipulation via stimulus versus the bearish reality of slowing global growth.

    For most of the past year, central bank liquidity has won out and pushed most risk assets higher.

    Downbeat Q3 Earnings The Top Market Mover

    Over the past three weeks however, the reality of the global slowdown has forced its way back into market consciousness because it is now showing up in Q3 earnings reports. As the chart below shows, the bellwether S&P 500 has been pulling back since the start of Q3 2012 earnings season.

    (click to enlarge)


    Source: MetaQuotes Software Corp,,

    04 OCT 27 2344

    Why? After three weeks, Q3 2012 earnings season has been characterized by:

    1. More companies missing already lowered "bottom line" earnings estimates
    2. Even more companies missing "top line" sales revenue estimates. This is a greater concern because most firms have already exhausted their cost cutting options. To grow earnings going forward, they need to actually improve sales and bring in more gross revenue with that already trimmed-to-the-bone cost structure.
    3. More companies are lowering guidance for the future.

    Still, to keep things in perspective, the bellwether S&P 500's roughly 50 point pullback from the 1460 area since the start of earnings season has been mild, and is only down about 3.5% from its mid-September high.

    Actually the dour earnings picture is worse than it looks, because it's based on forecasts that have recently been revised lower in order to raise the percentages of earnings reports beating expectations.

    Were the headline numbers less manipulated, markets would likely being showing a more pronounced negative reaction.

    See here for details.

    Other Market Drivers

    Other lesser market drivers included:

    • Hopes for more BoJ stimulus have lifted Japan and to some extent Asian markets because that stimulus helps the region (at least in the short term by adding liquidity) and helps exporters by weakening the JPY, thus lifting the USD and USD index and thus aiding Japan and other Asian exporters.
    • The usual EU worries on Spain and Greece. The EU has complied with Washington's request for quiet until after the US elections, though on Tuesday Germany's Finance minister warned that "Europe's debt crisis seems to have entered a calm phase, but that's only an illusion…the worst has yet to come." That's disconcerting, considering that the past three years have been nearly fatal for the EU as whole and sent much of the GIIPS into deep recession or outright depression.
    • A few bits of random data had short term influence, like China's beating forecasts for the HSBC flash manufacturing report, showing less contraction than expected.
    Lessons, Ramifications

    By far the biggest question coming out of the past week is, essentially, are central bank stimulus actions losing their effectiveness, or will markets resume their march higher once the unpleasant reminder of this earnings season recedes from the collective memory? In particular:

    1. Will the past three weeks' unpleasant reminder will soon be forgotten and the combined weight of central banks stimulus/money printing can continue to drive risk assets higher or prevent a material pullback?
    1. Or are the effects of unlimited liquidity and low rates that have forced cash into risk assets now starting to reach their limit?
    1. Are investors losing confidence in the credo of "don't fight the Fed?" If so, we could see the kind pullback from near-decade highs that the global slowdown and EU contagion risk suggest should happen if markets were moving with the risks posed by the deteriorating global economic situation.

    Typically earnings season loses its influence after its third week, which has now passed, because the overall tone has been set. So we should have our answer to the above question in a week or two.

    Bond Markets Flashing Warning

    Note that while the price action in most markets was relatively quiet, there was at least one notable, potentially significant exception. As shown in the chart below, Barclays (via, see here for details) notes that the spread between high yield (and thus higher risk) bonds and investment grade bonds is at its highest in three years.

    (click to enlarge)


    02 oct 27 2322

    In other words, riskier bonds are pricing in far more pain than investment grade bonds.

    The potentially significant implication is that market risk is higher than generally acknowledged by markets in general, as credit markets have bid up the price of investment grade bonds due to hordes of investors willing to pay a premium for safety in a market they see as riskier than generally believed.

    In my new book, The Sensible Guide To Forex, I discuss the basics of how to use inter-market analysis to improve your performance. I note that bond markets tend to anticipate events better than equity markets. Hence the old saying "credit anticipates, and equity confirms," (again, hat tip to for the reminder) so it pays to watch bond markets closely.

    Beware The Most Common Investor Mistake & How To Avoid It

    We continue to repeat the warning, because no one else is doing it.

    The one thing that is clear at this time is that the major central banks are, if anything, stepping up their money printing campaigns. While the Fed has gotten the most attention for its QE 3, in fact since 2008, the ECB and BoJ have applied stimulus (as a percentage of GDP) far more aggressively. See here for details.

    This past week the BoJ became the latest major central bank to increase its stimulus plans, and more is expected from it in the coming months. The EU hasn't even begun unlimited GIIPS bond purchasing under its new OMT program because Spain has yet to provided the needed request for this aid and agree to the conditions that come with it. Japan is expected to introduce yet more stimuli. China and the UK are also more likely than not to do the same.

    Agree or disagree with this approach as proper public policy, it's terrible for those trying to preserve and grow wealth for future needs.

    Everyone needs to diversify out of the USD, EUR, JPY, and other overprinted currencies, and into more responsibly managed currencies or assets denominated in them. The only question is which methods of doing so best suit your needs?

    Most guides to forex trading advocate methods that are considered too risky and demanding for mainstream investors, and take time to master. Most guides on foreign investing fail to consider the currency, which can turn a winner into a loser and vice versa.

    To find an entire book on a variety of ways to do this, some of them never before covered in any book, readThe Sensible Guide To Forex: Safer, Smarter Ways To Survive and Prosper From The Start (Wiley 2012).

    Visit the book's page, or the book's companion site, for further details.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 27 10:40 PM | Link | Comment!

    he following is Part 2 of our weekly review and preview strategy guide for traders and investors of all major asset classes

    See Part 1 for prior week market movers and their lessons for the coming week

    1. Reaction To Q3 Earnings: Will Reality of Global Slowdown Again Overcome Central Bank Manipulations?

    As we noted in OCTOBER 21-6 MARKET MOVERS & LESSONS: BEWARE DECEPTIVE QUIET & BOND MARKET SIGNALS, for most of the prior year, markets have rallied impressively due mostly to central banks stimulus and the expectation of more to come. "Over the past three weeks however, the reality of the global slowdown has forced its way back into market consciousness because it is now showing up in Q3 earnings reports."

    We've just completed the third week of earnings season, after which it typically loses its influence on markets because the tone is already set and is theoretically already priced in.

    If however, earnings and revenues reported continue to miss forecasts at higher rates than seen in years, and markets continue to retreat on that news, we may have a the start of a change in perceptions that drives markets lower. If markets continue to sell off on bad earnings news, that would likely mean that that investors no longer believe that central bank stimulus and money printing alone can continue to drive asset prices higher while the global slowdown hits corporate performance in earnings and revenues.

    The coming week or two should clarify whether unlimited monetary easing has reached the end of its effectiveness.

    We also note in the above post that in fact the earnings picture is even gloomier than it appears when one considers that the higher rate of missed forecasts is coming despite these forecasts having been repeatedly lowered, and there are signs that Q4 earnings season could be even worse. See here for details. also notes here that there are signs we'll see further downward revisions for Q4 earnings season.

    Finally, although earnings season is past its third week, there are still some marquee names that might influence market sentiment. See any good earnings calendar for details.

    2. US Monthly Jobs & Related Reports For September

    Monthly US NFP, unemployment, and related reports that hint at the Friday result together form what is, taken together, potentially the most market moving group of reports for the month. Pay particular attention to the ADP version of the NFP report (Thursday), because its preparation process has been revised to more accurately predict the actual official BLS report that's released on Friday. This purported greater accuracy could make any surprises from the ADP version more influential. The consensus for the ADP version is for ~140k new jobs, so variation of over 10% either way could be market moving.

    Given that this is the last jobs report before the US presidential elections on November 6th, it takes on added significance, because if it's positive it raises the odds of an Obama re-election, and if negative, makes a Romney victory more likely. Granted, interpreting which result is more market friendly is not simple. Generally, Republicans like Romney are believed more market friendly, though some fear he'll pull away the stimulus punch-bowl faster. While that's better for the US in the long run because it reduces debt and the deficit, in the short run that would hurt risk assets.

    3. Watch The Spread Between High Yield And Investment Grade Bonds

    We also noted in the concluding section (Lessons, Ramifications) of the above mentioned article that

    bond markets are flashing a warning that equity and other risk asset markets have not priced in enough risk of pullback and so remain too high (still near 2007 highs in the case of stocks).

    Pay attention to the spread between high-yield and investment grade bonds, which per Barclays (via are now at three year highs. In other words, bond buyers are paying more than they have since late 2009 for safety.

    4. Technical Indicators Overall Bearish-May Be Self-Fulfilling

    As I mention repeatedly in The Sensible Guide To Forex, even most of those who aren't true believers in technical analysis will readily concede its importance, simply because so most investors do use it and hence negative indicators on price charts can create their own self-fulfilling prophecy.

    Here are just a few technical indicators to consider.

    Bearish Weekly S&P 500 Chart

    First, consider the chart below.

    (click to enlarge)


    Source: MetaQuotes Software Corp,,

    04 OCT 27 2344

    1. We've an established 3 week downtrend confirmed by a series of lower highs and lower lows

    2. The bellwether index has dropped below and out of its Double Bollinger Band Buy Zone (bounded by the upper orange and green Bollinger Bands). This suggests a critical loss of upward momentum. See here for details.

    3. The weekly chart shows that the index may be forming a bearish Head and Shoulders pattern.

    4. The index is still holding above 1400, a mere 160 points below decade-plus highs around 1560, even though global growth and earnings are falling apart and virtually unlimited stimulus is already priced in. That means we've very limited room to climb before hitting 12 year old resistance (that's strong) with little fundamental 'fuel' to power past that level.

    In sum, while markets could remain within their trading ranges, the longer term bias is to the downside.

    Deteriorating Growth Rate of Core Capital Goods Orders

    A number of prominent analysts have noted this. See here for details on their findings. The short answer: not good.

    5. EU: Maybe Some Market Moving Noise But Little Risk Until After US Elections

    Greece will vote this week to approve measures that the Trioka demands in exchange for more loans that Greece cannot repay. Not worry, the motions will likely be passed. Why not? Greece has little to risk given that the EU has forgiven past failures to comply in order to avoid contagion risk from a Greek default.

    Yes, markets may get spooked by the usual German talk about getting tough with Greece or Spain, but there's little need to take it seriously until after the US Presidential elections of November 6th. Germany has in the past backed down anyway on fear of contagion from a Greek default. That fear, along with Washington's request for quiet, should mean the EU remains a lesser market mover this week.

    However we completely agree with German Finance Minister's warning that "the worst is yet to come." Why not? Nothing has been solved, and the temporary solutions being used to buy time involve yet more debt and money printing, making the ultimate defaults and their collateral damage that much bigger.

    The current consensus is that Europe continues to "muddle through" for the coming years. That's a glorified way of saying "we don't know what will happen," the EU's primary survival tools have been buying time via:

    1. Additional lending to those who can't repay their current debt load, using cash created out of thin air
    2. Meetings that typically do little besides arrive at plans to make future plans, or actually do make plans involving temporary unsustainable solutions that are variations on #1 above.

    Obviously that's not a sustainable solution, though the timing of the point at which confidence in the EUR and EU collapses remains impossible.

    6. Other Calendar Events

    Beyond the above mentioned events, here are a few others that might be market moving. See any good economic calendar for further details.


    Japan: Bank of Japan monthly rate statement and press conference- suddenly significant because the BoJ just announced new stimulus and probably needs yet more, so the press conference might yield clues about when that might be coming. That in turn would move the USDJPY and USD index.

    EU: ECB President Draghi speaks, Italian 10 year bond auction

    US: CB consumer confidence

    7. US Election Related News

    As noted above, it's not clear which candidate is really perceived by markets as more pro-market, even though Romney is obviously the more sympathetic of the two to the market participants and others who are net tax payers rather than net consumers of government cash. Those who prefer the short term benefits of QE 3, currency debasement, and minimal progress on deficit reduction are likely to see Obama as more likely to continue that along the "extend and pretend" path.

    So while the latest polls may influence markets, it's not completely clear how, though we still suspect Romney is seen as the more pro-market, at least in the US. I recognize there are those who disagree and that I may catch some firm disagreement in reader comments. That's fine with me.

    Longtime followers of mine know I try hard to keep these articles objective.

    From the perspective of those for whom it's a priority that the US dollar retaining its purchasing power and reserve currency status over the long term, the evidence suggests Romney would be the better candidate, though it's not clear that either candidate will have that much freedom to do what he'd prefer. For the sake of brevity, I'll leave it at that, though I'm curious to hear what readers think on this point.

    Whoever wins, we expect the long term debasement of the USD, EUR, JPY, and other currencies subject to similar central bank policies, to continue. For those lacking a clear plan for how to protect their assets and diversify out of these currencies and assets denominated in them, strongly consider reading The Sensible Guide to Forex (Wiley, 2012)



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 27 10:37 PM | Link | Comment!

    What Last Week Tells Us About This Week

    Last week, the biggest market movers were bullish sentiment about Spain, both rising hopes for a bailout and its avoiding a credit downgrade from Moody's, and overall bearish earnings reports that confirmed the global slowdown.

    As we discuss below, the very fact that these were the prime market drivers is very significant.

    One-Minute Weekly Summary

    First, here's how the week broke down.


    Markets were overall higher on good data from China and the US, as well as on optimism about a coming Spain bailout and more stimulus from China. A Citigroup earnings beat and solid US retail sales also helped European and US stocks.


    Asia, Europe, and US markets were all higher, primarily due to German comments expressing support for a "precautionary credit line" for Spain that wouldn't carry the full stigma of a bailout, and thus be acceptable to Spain. Earnings beats from JNJ and GS also helped.


    Markets were overall higher (despite weaker earnings from JNJ and Intel), mostly due to Spain avoiding a credit downgrade to junk from Moody's and strong US housing starts.


    Markets were mixed as bullish news (China GDP meets forecasts, successful Spain bond auction, solid UK retail sales) balanced key earnings misses in Europe (Nestle) and the US (Google).


    Disappointment on the EU summit and earnings sent markets lower, wiping out much of their gains for the week and leaving them only modestly higher.

    LESSONS & SIGNIFICANCE: Overall Bearish Implications

    As noted above, last week, the biggest market movers were bullish sentiment regarding Spain, and overall bearish earnings reports. Miscellaneous data points (like China meeting its reduced GDP forecasts and solid US retail sales) and EU crisis utterances had some short term effects, but news related to Spain and earnings were clearly the big market movers.

    The fact that these were the top market movers suggests some dangers ahead for the coming weeks.

    Here are the key lessons to keep in mind for the coming week.

    1. Rising Risks Of Disappointment On Spain Bailout Delays Risk Pullback, Perhaps New Crisis

    For weeks now, markets have risen on hopes that soon insolvency risk for Spain would disappear for the near future because once Spain's regional elections were over on (October 21st), Spain would cooperate with the EU and make the needed aid request for the ECB's OMT unlimited Spain bond buying program to start.

    That hope could well be unrealistic.

    The regional elections of October 21st in the Basque country and Galicia do signal an end to Madrid's domestic political concerns. In less than 4 weeks there's another important regional election in Catalonia. Remember that mere weeks ago we were hearing secession threats from Catalonia, as it resents subsidizing Spain's poorer regions. So Rajoy may well not yet be ready to cooperate with the Catalonian elections coming up.

    Meanwhile, time is working against Spain.

    There are simply too many things that can yet go wrong and ignite another bout of EU anxiety about the ultimate solvency of Spain and the EU as both sides play yet another dangerous game of brinksmanship to please their voters back home. Consider:

    • Losses in these elections for PM Rajoy's People's Party could make it harder for Spain to muster the needed political will cut public spending, even if things don't get worse for Spain.
    • Unfortunately, odds favor further deterioration:
    • Spain economic data continues to be awful. For example, It's banks continue to bleed deposits and their bad loan rates are rising [chart???].
    • Yet another Spanish autonomous region, the Balearic Islands, announced plans on Friday to request aid of 355 million euros from the Spanish Government's Liquidity Fund for the Autonomous Communities, raising the risks that the regional bailout fund may soon be overwhelmed before. It's likely that Spain's regional finances will worsen, so Spain my suddenly find itself needing a bailout without enough time needed to arrange it.
    • Other Events Could Stop Or Delay Bailout & Ignite New Fears, Crisis

    Spain may be too important to fail, but there are so many moving parts to this bailout that the chances of failure grow as time goes on. A fatal delay that ignites new Spain solvency worries could come from

    Increased German demands due to upcoming German elections, trouble with Greece, a rating agency's action, or other unforeseen domestic or foreign issue could suddenly make the bailout look uncertain, or at least too unlikely to happen in time before Spain's solvency is again in doubt. That would once again send Spain's borrowing costs soaring and reignite worries about the stability of the Euro-zone and the Euro. As we've seen before, that worry could then send other GIIPS bond yields soaring and suddenly the EZ is again in flames.

    2. Poor Earnings Suggest Reconnection To Underlying Economic Fundamentals, Futility of Central Bank Actions

    Since the Spring of 2012, we've had an odd disconnect between risk asset prices and global economic fundamentals. Most risk assets have maintained an uptrend while global economic data has deteriorated. Earnings season thus far has been as disappointing as expected. The justification for this was that more central bank easing would yet again inflate asset prices.

    For example, per a recent Reuters report:

    "Based on results from 116 companies and estimates for the rest, earnings for S&P 500 companies are expected to decline 1.8 percent from a year ago - the first such decline in three years…So far for the fourth quarter, there have been 17 negative outlooks from companies, no positive outlooks and one in line. That compares with 11 negative outlooks, two positive outlooks and two in line at a comparable period for third quarter guidance."

    See here for details.

    If next week's results continue in the same direction, markets will need to consider whether we've reached the end of stimulus based rallies that have brought them near pre-crisis highs without the underlying fundamentals to support these prices.

    This leads to the following conclusions.

    3. Upside Potential For Risk Assets Very Limited

    In sum, if markets are moving on hopes for Spain, and they're pulling back on bad earnings, we have a problem.

    In addition to the above, consider:

    a. Chances Of Pre- "Fiscal Cliff" Selling

    Added to the above concerns is whether US investors may start to sell in order to book capital gains at the low 15% rate in order to avoid likely higher rates that could well be coming as part of the fiscal cliff negotiations.

    b. Technical Barriers Firm In Absence of Bullish News

    Friday's action was the most interesting of the week, as a world-wide market pullback wiped out major chunks of the week's gains for most major stock indexes, leaving them with minor gains at best over the prior week's pullback.

    There was no definitive explanation for the Friday profit taking, leaving us to suspect technical resistance, in the absence of news to justify further gains, was the real culprit.

    For example, looking at the weekly chart of the S&P 500, the 1450 zone has held firm for the past 6 weeks.

    As usual, the S&P 500 is an accurate barometer of risk appetite. Other bellwethers of risk appetite, like the DAX, the EURUSD, Brent crude oil, etc, all show similar stalling at resistance for the past 6 weeks.

    So another big lesson is that despite all the stimulus coming or anticipated, markets still need some meaningfully good news to move higher.

    So What To Do?

    We maintain our current position. We don't start selling risk assets while the overall up trends remain intact, and we're not establishing new longs at this time.

    We reiterate our weekly warning that all of the most likely scenarios we see coming involve a vast expansion of the supply of dollars, euros, yen, and also of other currencies as nations seek to protect their exports' competitiveness with cheaper currency.

    That means we all need to start diversifying into the more responsibly managed currencies or into assets denominated in them. For details on the best collection of the safer, simpler, less demanding ways to do this than generally found in guides to forex markets or to investing in foreign assets, just type "The Sensible Guide To Forex" into your search bar.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Oct 20 11:15 PM | Link | Comment!
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