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John Furlan
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John Furlan has been familiar with financial markets for many of the past thirty years. Please contact him at jf09sa@gmail.com.
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  • Significant New Evidence of Major Negative Global Shift 1 comment
    Feb 6, 2010 12:17 PM
    Highly-regarded market trend-follower Carl Swenlin's timing model switched to neutral on Thurs, see his Feb 5 "Chart Spotlight."  This is significant for two reasons. 

    First, all the way back on Mar 17, very shortly after the Mar 6-9 2009 market low, Swenlin's model generated a new short-term buy signal, which was upgraded to medium-term week of April 9, and to long-term week of Aug 14I.e. Swenlin has been in sync with the huge market rally since the Mar 2009 lows.

    Second, it's very important that Swenlin's technical market timing switch also goes along with other significant fundamental negative shifts this past week, that I mention just below


    Both Key Technical and Fundamental Indicators Shifted Last Week

    Here's some fundamental key shifts I noted this week. 

    Feb 5 on my Instablog I posted "ECRI's First Negative Tone Change in Past Year is Significant," when ECRI's assessment of its Weekly Leading Index of the U.S. economy turned more negative (WLI itself is still just now flattening), also for the first time since the March 2009 market lows, as ECRI said:

    "The continued easing in WLI growth indicates that U.S. economic growth will start decelerating in the coming months." [all my bold emphases in the quotes in this article are added]

    I would also add this significant warning from the JP Morgan Global PMI for Jan, published on the ISM web site on Feb 3, from my Feb 4 article on "Global PMI" :

    "it is worrying to see that the manufacturing and inventory led rebound has yet to fully filter through to services, leaving growth heavily dependent on the industrial sector."

    And for yet another piece of the same global economic puzzle, see my Feb 3 article, "Korea Indicators Hit 'Peak Growth': An Economic Bellwether." 

    The pieces of evidence are adding up.  The global negative shift that I first focused on in my Jan 23 article (Jan 21 Instablog) "Emerging Markets Leading Global Markets Down, as They Did Going Up," is starting to become more clear. 

    Major market concerns this past week about PIIGS debt and continued very high U.S. unemployment is a manifestation of a deeper underlying shift in the global economy, with the weakest links exposed first, both in terms of countries and most vulnerable segments of populations, as usual.

     
    This Convergence of Fundamental and Technical Indicators is NOT a Coincidence

    The fact that Swenlin's technical timing model turned neutral and ECRI's fundamental assessment of the U.S. growth turned more cautious within a day of each other is NOT a coincidence
    .

    I saw a similar convergence of both technical and fundamental evidence at the market bottom in March 2009, looking at the same things I'm discussing in this article (I only started posting on Seeking Alpha in July 2009, but I've been closely following financial markets for a long time).

    The HUGE difference being that in March 2009, it was an extreme culmination of a devastating bear market, while the changes I'm highlighting in this article are much more likely the beginning of the end of the huge post-Mar 2009 rally.  This topping process will most likely continue to take awhile to play itself, though when it finally accelerates down, the speed can be shocking

    I wrote "'Easy Money' Is Over," back on Sept 28 2009, when market breadth topped. It wasn't until four months later, these things take time to develop, after a very typical low-volume year-end rally, that I posted on my Instablog on Jan 21, published as an article Jan 23, "Emerging Markets Leading Global Markets Down, as They Did Going Up." 

    It seems to me that's what been happening in global market since then, with Obama's reaction to the Mass election and then the Greek debt drama greatly speeding things up from what I initially expected back on election night Jan 19, when I posted an Instablog titled, "2010 a Year of Trading, First Key Decision Point Imminent.."

    SPX coincidentally topped the same day I wrote that, Jan 19 at 1150 and then falling over -9% to its intraday low Feb 5.  High beta securities fell much more globally.  EEM, the emerging markets etf, fell nearly -17% from its Jan 11 intraday high to its Feb 5 intraday low.  EWZ, the very popular Brazil etf, fell over -18% during the exact same period.

    Again, I want to strongly re-emphasize that global market tops take time, though when markets finally accelerate down, the speed can be shocking.  That's perhaps why there have been so many premature calls for this market to crash, by trying to get in front of that rapid decline.

    It's very difficult looking for the evidence and signs of a market top, I try to use all the help I can get from experienced market analysts, and then you also have to be very lucky.  In the past I have focused a great deal on avoiding the really killer bear markets.

    Here's an example of a top I looked for.  I downgraded China's Shanghai Index on July 31, 2009, in only my third article on Seeking Alpha, just days before it peaked on Aug 4 at 3471 close, it's now down -15%, to 2929.  I was watching China very closely because it was leading the global economy and markets up, having bottomed in late 2008 well before the U.S. in March 2009, due to China's rapid implementation of a huge stiumulus program that actually seemed to work. 

    Thus I was watching to see that China's incredibly huge bank loan growth in the first half of 2009 had just peaked at that time, driving its markets sharply lower.  When that decline almost immediately happened, it did so much faster than I anticipated, it almost always does

    Btw, just a quick houskeeping detail before moving on, since markets have become much more dynamic since my Jan 19 instablog at the SPX top, I've posted nearly 90 Instablogs, most of them in real-time during the trading day with charts, as I wrestled, along with everyone else, with trying to figure out what the market is actually doing (as opposed to what our biases would like us to believe we see it doing).

    This is the first time I have done heavy Instablogging on Seeking Alpha, I probably won't keep it up, at least not at that very frenetic pace.  I would still encourage you to visit my Instablog if are interested in following my market views on a timely basis as they change.


    Swenlin: "Bull Markets Typically Do Not End This Cleanly"

    I will further analyze recent major global changes in the sections below, but first, Swenlin makes the same point as I just did in the previous section about market tops.  Again in his Feb 5 "Chart Spotlight," "Changed to Neutral Posture," he wrote: 

    "The mechanical model has moved us to a neutral market posture. I worry about whipsaw when neutral signals generate coming off market highs, but the weekly PMO and the cycle context make me think that the correction has a way to go."

    I want to emphasize Swenlin's "worry" about being whipsawed, he also says:

    "Now our hope is that there will be enough continuing decline to cover what may turn out to be a whipsaw signal. No guarantees in that regard, but bull markets typically do not end this cleanly.  The market sold off deeply on Friday, but in the end it rallied and closed up by a small amount. This looks like the beginning of a bounce of at least short-term duration."

    The phrase I emphasized in bold is very critical, "bull markets typically do not end this cleanly," leaving aside here the important issue, which of course will only be known in retrospect, of whether the huge post-Mar 2009 increase is a bull market or bear market rally, Swenlin initially thought it was the former but shifted his view, with the market, to the latter, as a disciplined trend-follower will do.


    The Key Fundamental Reasons Why a Market Top Is Taking Time

    The reasons why the market's huge post March 2009 increase probably will not die easily are, as I wrote in my Feb 5 Instablog "Major Negative Market Shift", slightly expanded here:

    "Nevertheless the accelerating speed of the decline was still somewhat surprising, especially for Wall Street strategists, whose main bullish arguments are:

    * Fed super-easy money, Wall Street's usually most reliable trump card;
    * undeniably strongly increasing corporate profits, from a very low base, which are highly gamed by Wall Street to be "better than expected" (NYSE:BTE), a ridiculous charade and farce that should have been ended once-and-for-all with the dot.com collapse, and which just started to unravel a bit with negative market reactions to BTE fourth-quarter earnings reports;
    * and perhaps not overly extended valuations, which depend on what future earnings turn out to be.


    Some bullish market watchers were expecting a sharp decline later in the year around Sep-Oct (for among other reasons, the second year of the four-year election cycle that also end in 0 tend to be quite poor). One issue for bulls is if the market decline should go much further, then how much unexpended ammo does the Fed and Treasury still have?"

    However one chooses to characterize the huge market rally in 2009 and market decline in 2010, I have felt that 2010 is going to be a difficult year, compared with 2009.  In 2009, there was just one decision, go long in March, though many investors, perhaps even a majority, fought that decision for a long time.

    I think 2010 is going to be much more trading oriented, at best, with a lot of wild cards, including political.  That's why on Jan 24, shortly after the Jan 19 Mass. election, I published an article titled, "Market Risk Increases, From 'Year of Trading' to "Year of Populist Backlash."


    The Key Corporate "Missing Link" Between Unemployed Humans and Wall Street Speculators

    Here I want to include a section on unemployment from my Feb 5 Instablog, "Major Negative Market Shift as Structural Issues Impact Cyclical," there is also other useful stuff on the structural vs cyclical distinction that I suggest you might want to check out there.

    "The U.S. economic recovery is not going to be sustainable based on carrier capex (Cisco report) for the insatiable bandwidth demands of smartphone users (Apple report). Nor is the rest of the world going to continue to finance U.S. consumers playing with their iPhones all day. That is just not politically feasible any more in China and in other U.S. creditors.
     
    The U.S. financial/consumer fantasy world ended during the financial crisis when the “Wizard of Oz” curtain was torn away, finally, regarding the supposedly world-class U.S. financial markets. That fantasy world is not coming back.  That's what the markets are finally starting to come to grips with this Thurs morning.

    How to create jobs in America is the big issue.  Government doesn't have the financial and other resources to do so.  Big corporate America does, with its strong cash flows and balance sheets (profits margins are above historical average). 

    But as long as big corporate America feels Wall Street will punish their stock prices, hence CEO stock options, by increasing operating expenses by hiring, and as long as banks won't lend to small businesses, job growth is going to be slow.  I.e. a financial system definitively proven to be dysfunctional during the Wall Street crisis is now greatly hampering employment growth.

    I increasingly believe that corporate America will only slowly deploy its cash flows in new large expansion programs unless the tight link with Wall Street, via CEO options, is modified.  Through that link Wall Street has strong influence over a relatively healthy big corporate sector, with its entrepreneurial, technical and other resources needed for business expansion.


    That Wall Street "shareholder value" solution to the so-called "agency" problem of corporate governance doesn't seem to work, have you noticed that ever since it became popular about thirty years ago (after Michael Jensen's 1976 article), the life of the average American employee/consumer hasn't been the same."
     

    What the Greek Debt Drama Really Means about Global Austerity

    Now let's turn from American unemployment to the other big story that dominated financial news and market fears this week. 

    The huge market concerns about Greek debt this week are actually with part of that "populist" backlash noted in my
    Jan 24 article title.  I.e., it's not just about Greece, or the next small European country.

    The bigger issue, for which Greece is a stalking horse, is how are governments going to try to impose austerity on debt-burdened economies in the advanced industrial countries, including the U.S.

    All of whose debt was greatly increased by the collapse in tax revenues brought about by the sharp global economic decline CAUSED by the Wall Street Crisis (which is what it should be called), and the huge fiscal cost of the Wall Street bailout and stimulus programs that were rapidly shoved in place to try to deal with the economic impact of the Wall Street Crisis
    .

    This is a completely NEW and historical change.  Previously national austerity programs were routinely rammed down the throats of what were then called the developing world, now emerging markets.

    E.g. Latin America throughout the 1980s and Asia in 1997-98, in what Asians still refer to as the "IMF Crisis," because typically it was the IMF that would be the front man for Wall Street and the U.S. Treasury's "Washington Consensus," in that episode Summers was the hatchet man on the ground for Goldman's Rubin, both then running U.S. Treasury, with Geithner tagging along in Treasury behind Summers from 1998-2001 (Rubin left Treasury in 1999 for Citigroup, his work there completed after having strongly helped end Glass-Steagall for Citi's big merger, he was also the point man on massive Mexican austerity in 1994).

    Emerging market leaders got so fed up with having to deal with the strong domestic political backlash to Wall Street's repeatedly extremely harsh treatment, essentially massive national austerity to save hot-money global speculative debt, that they vowed "never again" after the 1997-98 Asian crisis, and started massively building up their foreign exchange reserves, led by China's now huge reserve arsenal, in good part so that they would never be dictated to again by Wall Street, the U.S. Treasury Dept, and the IMF.


    Crucial to Focus on Fact that Wall Street Crisis Created the Growing Surge in Public Debt

    Now the shoe is on the other foot, and it is the advanced industrial economies, led by the weakest ones on the southern and eastern periphery of the EU core, that are about to go through Wall Street's austerity wringer. 

    Should it come to that, massive austerity is not going to be pretty, and it's not going to be easy.  Especially when the process fully hits the U.S., right now it's mainly being felt in sharp cutbacks at the state and local government levels.

    Very ironically, in the U.S. the push for massive austerity seems is being led by Wall Street "greedy" speculators, but also joined by very sincere fiscal conservatives, and understandably very angry "populists." 

    This is very ironic because the biggest cause of the explosion of government deficits that are of great, legitimate concern of the second two groups is the direct, immediate, causal economic impact, in terms of both collapsing tax revenues and government "stimulus" and "safey nets," of Wall Street's Crisis. 

    The political task in trying to make austerity politically viable in the U.S. will be to try to deflect the anger of the second two groups from Wall Street mainly onto Washington, which of course also deserves huge blame, and on to extremely cash-strapped state and local governments, and perhaps also against China.  So far Wall Street is succeeding in doing so, with a few fig-leaf concessions.



    Three Decades of Massive Growth in Financial Sector Debt Being Shifted onto Public Sector

    Below is the second time I'm showing the following three charts, because they so clearly illustrate the key issue that has to be resolved, i.e. the huge increase in debt over the past few decades, which so far has been propped up by Wall Street/Washington policies, mainly from the Fed Board and New York Fed, shifting some of the monstrous financial sector debt onto the public sector (see the third chart).

    It was that huge multi-decade increase in financial sector debt, and to a lesser extent household debt, that was the cause of the Wall Street Crisis, which was very simply extreme leverage on very risky assets financed with very short-term debt.  The charts go back to 1870 and 1929, so please look at them long enough to let the key trends sink in.

    Especially note the much larger increase of financial sector debt as a percent of GDP than government debt as a percent, and also in which of the last three decades the latter also increased and decreased, both are not what most people believe, especially fiscal conservatives and "populists."
     
    LEFT CLICK ON CHARTS TO ENLARGE.



    Source:Hoisington “Quarterly Review and Outlook Fourth Quarter 2009.”



    Source:  Morgan Stanley.



    Source:  Morgan Stanley.


    Disclosure: No positions in stocks, etfs mentioned.
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  • lower98th
    , contributor
    Comments (1420) | Send Message
     
    Excellent charts on debt, and where the rotation of impacts are showing up economically and politically.
    6 Feb 2010, 04:18 PM Reply Like
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