Let's not get hysterical. Ok. No hysteria.
We have all watched this market climb relentlessly against all odds. Even as macroeconomic growth has sputtered, as America has limped unevenly toward recovery, as China has panicked to cover-up a massive debt-bubble and an imploding housing market, as Europe has sank deeper and deeper into a dual economy of haves and have-not nations.
Even as American and International companies have continued to perform poorly in the actual marketplace (think of CAT, IBM, Philips), no longer able to sell their products to a contracting world marketplace, stock prices levitate near 52 week highs, resisting all attempts at correction. This is, of course, because of Fed intervention -- Fed BAILOUTS for Wall Street -- providing tiny interest loans that allow companies to buy up their own shares and thereby reduce the float of shares to cover up a loss of real earning/revenue momentum. I have demonstrated all this in earlier posts, but I will recap it here.
Generally speaking, when a company is losing earnings/revenue growth, it can either tell the truth or they can take on more debt (IBM, for instance, has taken on 49% more debt from 2009-20014 in order to cover up 8 consecutive quarters of weaker growth) to cover this up, by reducing the number of shares being traded.
MSFT had revenues of $17 billion in 2012 and 8,330,000,000 outstanding shares. If we divide the earnings by the number of shares we get Earnings Per Share (which is different than simply earnings, of course -- and this difference allows a lot of manipulation, as we will show).
$17,000,000,000 divided by 8,330,000,000 equals $2.04 EPS.
$16,000,000,000 divided by 8,330,000,000 equals $1.92 EPS -- a loss of 6% on a loss of $1 billion in revenues.
$16,000,000,000 divided by 7,330,000,000 equals $2.189 EPS -- a gain of 26% on $1 billion loss in revenues and a (with increased debt) reduction of shares from 8.3 billion to 7.3 billion.
I won't keep harping on this. But the Fed is provided WELFARE FOR THE RICH -- in trillions of dollars -- on a continuing basis -- with all its QE projects and with ZIRP, more debt for the rich in all countries, courtesy of the US taxpayer. When the country eventually wakes up, we will need to find a way to get this money returned to us.
Today I want to look at where the market seems to be at this moment. I have been bearish intellectually and emotionally since 2001 -- but not technically. Clearly, when one has indicators that scream BULL one cannot ignore them. I have never seen a market as bullish as this one. Every little dip is quickly overwhelmed with excess liquidity.
Of course the Fed is also actively manipulating markets, selling gold futures, short-selling gold ETFs, hammering the VIX, buying S&P futures contract on the first sign of a correction. Should we talk about the morality of this? Even the legality of this? The FED is tilting the playing field in favor of one side of the market over the other side. I think the Supreme Court might find this illegal, and might limit the capacity of the FED to fix markets. But who is going to sue the FED? The FED might even argue that it is its job to FIX markets during times of stress. It is a lame argument to those of us who feel the FED's job, duty, is to balance extreme markets by raising interest rates when there is panic buying (as there has been for years now) and to lower interest rates when there is panic saving). Notice panic selling in the market is not the same as panic saving. By panic saving I mean historic markets in which interest rates are so high that no one will go near equities markets because...well, there is no need of the risk. Panic saving does not occur ever in low-interest rate environments.
Anyway, back to our theme. I keep a database (one of many) with only inverse etfs, issues that become positive as shorts on the markets. I look at this database every day in terms of one of my better indicators, which measures intermediate-to-long-term-trend, which I will show in the charts below.
For many months now, none of the shorts have been positive -- that is, they are all in the 'long position'. Then YCS, short the Japanese Yen, and JGBS, Short Japanese Government Bonds went positive -- in the 'short' position. Then VIX flicked over, right before it jumped up.
During the most recent Small Cap correction, this indicator went positive. And it has gone positive again.
Let's look at charts.
TWM is a Small Cap Short ETF. Look at two things: 1) the blue line in the top pane. This is the indicator I have been discussing: "M2F ALT Trend Look-Back Plus" (I apologize for the name). When this indicator goes positive, there will almost always be a move up. How long this move lasts is not possible to know. 2) the brown line overlaying the price module, second pane down. "CGTS Old #1". This indicator does not so much mimic the price moves, but tends to predict them. This indicator is now in a steep climb.
This is a warning shot across the bow for those holding small cap stocks.
Ok, so this is a warning shot for small caps. Our datase has 39 inverse etfs, and only 4 are positive -- in the 'short position'. That seems pretty insignificant.
What else is short? Oil. The double-short OIL ETF, DTO, is also short. Is a collapsing oil price, if it occurs, bearish for stocks? Not necessarily.
I mentioned the VIX. The VIX is a measure of volatility through put options versus call option ratio. A climbing VIX has historically indicated a bearishness for stocks. Of course, the FED now knows how to manipulate markets by manipulating such indicators, so many historical indicators no longer work as they once did. The GDP is also manipulable, in much the same way that company buy-backs manipulate the truth about honest earnings growth of companies, debt-spending manipulates the truth about honest economic growth. The FED does not seem to appreciate that they can manipulate the indicators without affecting the underlying reality. They can bend the yield curve artificially, but the economy does not respond to the manipulation of this indictor, which is not the CAUSE of the economic damage, but the efffect of the economic weakness.
Looking primarily at the brown line overlaying the second pane price pattern, the VIX is in a bullish pattern in terms of CGTS OLD #1. What does this mean? Time will tell. It depends largely on the future habits and utterances of a seemingly kindly old woman in the FED Chair (behind the curtain in Wonderland) who claims she cares about the poor and the unemployed but whose actions scream her allegiance to the rich and powerful. If she raises rates, all hell could break loose. All hell could break loose anyway. All hell is breaking loose in Eastern Europe, the Middle East, Western Africa...and the reaction of the rich and famous, the beautiful people, has been a self-interested yawn.
The VIX in 2011 did show a similar CGTS Old #1 uptrend, which was followed by a dancing idiot VIX for a few months. Was that one of those places when QE (Welfare for the Rich Corporations) was in PAUSE?
I won't suggest that we are entering troubled waters AGAIN. My belief that the markets are fair is no longer intact. My belief now is that the selfish rich fix the markets for their own benefit, and allow 'disciples' and admirers to tag along for the ride.
It is a dangerous game the central banks play; historically, this type of unfair manipulation of the poor by the rich has led to violent political reactions ("get out the gallows team!"), which will wipe the stupid grin off the faces of Paulson, Greenspan, Bernanke, Yellen types quickly.
In the meantime, this is just a warning of a shot across the bow.
Michael J. Clark, CGTS
27 July 2014