Prechter: Sell in May, and Go Away until 2016

May 30, 2009

I was once of the school that Elliot wavers were some niche group of Armageddonists, driven by Tarot readings and other esoteric science like the general perception that surrounds Scientology.  I can’t say I’ve left that camp entirely, but my ears are open, and listening to what is coming out of the Elliot Wave stream of thought.

In a post I penned Signs of a Bounce from March 5th, just before the market turned violently upwards, one of the long time bears calling for the reversal was Robert Prechter.  I have not had the time I would like to read as much as I was a few months back, so in trying to catch up I Googled Robert to see where his views lay today.  The article below was quite disturbing, but resonates with my gut instincts and the instincts of others who think this rally is overdone.  I don’t know if Elliot Wave black magic is worth following like some cultists do, but I think this warning is at least worth reading.

Stocks still face deflationary collapse: Prechter

NEW YORK (Reuters) – Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.

Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that’s akin to the Great Depression, he said.

The U.S. S&P 500 stock index’s .SPX rebound by nearly 40 percent since it sagged to a 12-year closing low of 676 points on March 9 is not sustainable, Prechter said in an interview with Reuters.

“It’s not the start of a new bull market,” said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. “Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932,” he told Reuters in a wide ranging interview. “It’s a very rare event,” he added.

“I think the next leg down will be at least as severe if not more severe than what we just experienced. So you want to stay on the side of safety,” he said.

As in his 2002 book “Conquer the Crash,” which warned of the dangers of a U.S. debt bubble and deflationary depression, Prechter continues to advocate safer cash proxies such as Treasury bills.


Riskier assets such as commodities, corporate bonds, and stocks which are currently anticipating that the severe global economic downturn may be bottoming, are likely to have short lived intense rallies, but within an inexorable long-term decline that may last another seven years, he said.

As banks continue to accumulate losses and corporate earnings fall, “the difficulties will probably last through about 2016,” he said. “There will be plenty of rallies along the way.”

Oil may rally further from current levels just below $60 per barrel but the upside will be capped at about $80 per barrel as the commodity is locked in a long-term bear market, he said.

In July, U.S. crude oil hit a record peak above $147 per barrel and was just above $57 per barrel around noon on Thursday.

“Deflation is coming, it’s going to lead to a depression. We’re not at the bottom yet,” Prechter said. “I think we are going to have bouts of deflation separated by recoveries.”

Prechter also painted a bleak picture for commodities like silver and is largely unenthusiastic about gold, believing the precious metal made a major peak when it rose above $1,000 last year.

While gold may have already topped at above $1,000 an ounce in March 2008, Treasury bond prices are likely to fall in a long term bear market, with huge government debt issuance being the main catalyst.

The benchmark U.S. 10-year Treasury note yield, which moves inversely to its price, hit a five-decade low of 2.04 percent in mid-December.

“People got very enamored with bonds and very enamored with gold and I don’t like to be invested in markets that are over subscribed,” Prechter said.

“The Treasury (Department) has taken on so much bad debt” at a time tax receipts are falling, that “there will be a slow, but very steady change in the way people will view the U.S. government,” said Prechter. As a result, investors in Treasury notes and bonds will ultimately demand higher yields, he said.

The U.S. central bank will not be able to control the government bond market and prevent yields from rising, regardless of how much money the Fed uses to buy Treasuries, he added.

Next year, U.S. corporate bond prices will probably fall below their extreme price lows of December during the market panic of 2008 when investors fled riskier assets, he said.

“Corporates in terms of price have the big wave down coming. This has been a prequel,” Prechter said.

“Many corporations who (now) say we can borrow more money and take more risks: those are the ones who will get in trouble,” he said. “Many municipalities will default,” he added.

Stocks still face deflationary collapse: Prechter
John Parry, Haitham Haddadin and Ellis Mnyandu, Reuters, May 14, 2009 6:50pm BST


Today’s 5-Year Treasury Note Auction: Where are the Headlines?

May 27, 2009

Someone pointed out the day’s massive rally in the TBT which is the ProShares UltraShort 20+ Year Treasury ETF.  The ETF moves up 2:1 when the daily percent change of the 20-year Treasury moves down, and vice versa.

My immediate reaction was admittedly muted, as ETF’s are riddled with technical anomalies, and I’ve learned to ignore most of the noise that one-day moves create.  But I thought I would just double check what actually occurred today in the treasury market, which is when I noticed that the 5-year treasury auction effectively failed.

May 27, 2009 5-Year Treasury Auction Results

May 27, 2009 5-Year Treasury Auction Results

May 27, 2009 5-Year Treasury Auction Results & Historical Averages

May 27, 2009 5-Year Treasury Auction Results & Historical Averages

Today the government sold another $35 billion in 5-year t-notes, the second auction of such size.  Effectively, the cost for the US Treasury to borrow 5-year paper jumped from 1.94 in April to 2.31 in May.  This is no small move, and is strongly indicative of waning support for the greenback.  This auction could very well now become the tipping point for more long-dated treasury auction stress.  The 1, 3 and 6 month auctions as well as the 2-year on Tuesday seemed to clear without any significant changes.  This would indicate that inflation is becoming a concern, or at least that fear of US credit risk is rising for maturities of five years or more.  Tomorrow’s 7-year note auction that closes at 1pm will offer confirmation of today’s effective “failure” in the 5-year.  If the 7-year prices significantly wider, and this trend continues, this will have a ripple of consequences that will bleed into all credit and spread product markets.

The inability of the US to cheaply and effectively finance the largest taxpayer bailout in modern history would stop the green-shoots dead in their tracks.  As the US’s cost of financing increases, so will the costs for all other borrowers.  Imagine the consequences as this trickles back into housing, municipal and corporate credit markets as all rates begin to rise, constricting the delicate “growth” we’ve been hearing about.

One thing is for sure, today’s auction was a sign that demand for the US dollar may not be endless, and that furthermore, the Obama Administration may have underestimated the speed and efficacy of the detriment an all-you-can-eat fiscal policy can cause.  Buyers of this debt were 44% sovereign, according to Marketwatch, up from a recent average of 36%.  Furthermore, this price drop is including any net purchases by the Federal Reserve in its attempt to keep rates low, which is essentially an artificial price inflator.  If nothing else changes, future auctions will have to be smaller, which will stifle the speed with which the administration can inject added liquidity and shore up price stability through this deflationary period.  It would be predicament for policy makers to potentially have rising interest rates and further price deflation at this point in time.  If that happens, all those folks who bought guns may see appreciation on their investments.

The 5-year treasury auction ended at 1pm today.  The chart below is the intra-day chart for the TBT.  Notice the price action on this ultrashort treasury ETF from 1pm on.  Speaks for itself.

 ProShares UltraShort 20+ Year Treasury (ETF) (Public, NYSE:TBT) 5.27.09

ProShares UltraShort 20+ Year Treasury (ETF) (Public, NYSE:TBT) 5.27.09

Not all gloom and doom though.  The equity markets have found ways to continue to accentuate the positive as Dr. John would say.  While I view this anecdotal tidbit as wholly negative, maybe the green-shooter-uppers will find a way to a new high in equities anyway.

Bloomberg, Google, Marketwatch

Fed Spin of the Day

May 13, 2009

This headline takes the cake for the most asinine headline I’ve seen today and is eerily reminiscent of Bush era GOP misdirection.

Fed Views Jump in Yields as Sign of Better Outlook (Update1)

Yeah I get the misguided logic on this one and see the Greenshooters jumping on the bandwagon here, but please try convincing a CEO of a debt hungry corporation to view the fact that his cost of debt capital is rising as a positive sign of things to come.

The harbinger of the near fail in the 30-year treasury auction last week and a steadily rising 10-year yield is certainly an indication that there are better opportunities out there than owning US Treasury Debt.  However I think it is a leap of faith to assume that this is a positive sign.  All equations have two sides, and all arguments have three.  In this equation the money fleeing treasuries could be flowing towards risk assets because they are once again in fashion, or they could be fleeing treasuries because treasuries are riskier than recent yields have offered compensation for (a.k.a. they have been overvalued).  The argument on the matter includes both sides of this equation and then of course the truth, which only takes its clothes off in hindsight.

Fed Views Jump in Yields as Sign of Better Outlook (Update1)

Scott Lanman and Steve Matthews, Bloomberg, May 13, 2009

Will you still need me, will you still feed me, when I’m 64?

May 12, 2009

According to this article today from Bloomberg, those of us born in 1973 will turn 64 the year social security is set to run out.

May 12 (Bloomberg) — The financial health of Social Security and Medicare, the two main safety nets for American retirees and the elderly, is declining as the recession cuts payroll-tax contributions just as the baby-boom generation begins to retire.

The Social Security trust fund will run out of assets in 2037, four years sooner than previously forecast, the trustees said today. Spending on Medicare, the health insurance plan for the elderly, will reach a legal limit by 2014, the same year predicted in 2008, the trustees’ report said.

The deteriorating position of the two funds puts pressure on Congress and President Barack Obama to come up with ways to cut costs and boost revenue for both. Obama yesterday said fixing the nation’s health-care system is an “imperative for America’s economic future.”

“After we have passed health-care reform that puts our nation on a path to lower growth in health-care costs and expanded affordable coverage, this president will work to build a bipartisan consensus to ensure the long-term solvency of Social Security,” Treasury Secretary Timothy Geithner said today in a statement.

The trustees’ annual report also estimated that Medicare’s hospital fund will be exhausted by 2017, two years earlier than predicted a year ago.

Funding Medicare

The report issued today is the third consecutive one in which Medicare’s trustees have pulled the so-called trigger, a law mandating that the president introduce legislation the following year to protect the program’s financing. President George W. Bush last year proposed that wealthier seniors pay higher premiums for Medicare’s prescription-drug benefit, which Democrats in Congress dismissed as insufficient.

Spending on Social Security is expected to exceed revenues in 2016, one year earlier than last year’s forecast, the report said. The trust fund will need an additional $5.3 trillion over the next 75 years to meet all scheduled benefits, the trustees said. The retirement-assistance program can continue to pay full benefits for about 30 years, the report said.

The government retirement system faces a cash shortfall because the number of retirees eligible for benefits will almost double to 79.5 million in 2045 from 40.5 million this year.

Bush Failed

Bush and then-Treasury Secretary John Snow campaigned across the nation for partial privatization of Social Security in 2005, shelving the idea after encountering widespread opposition from Congress and the public.

Obama “explicitly rejects the notion that Social Security is untouchable politically and instead believes there is opportunity for a new consensus on Social Security reform,” Geithner said in his statement.

The administration yesterday raised its estimate of the budget deficit this year to a record $1.84 trillion, up 5 percent from the February estimate, and to $1.26 trillion next year, up 7.4 percent. Next year’s budget will end up at $3.59 trillion, the White House said, compared with the $3.55 trillion it estimated previously.

“The Social Security and Medicare trustees’ report confirms what we already knew: Our nation cannot afford to continue this reckless borrowing and spending spree,” House Republican Leader John Boehner said in a statement. Obama’s policies “are putting our kids and grandkids deeper in that hole, and deeper in debt to China and the Middle East.”

U.S. Recession

Since the recession started in December 2007, the world’s largest economy has lost 5.7 million jobs, the most of any economic downturn since the Great Depression. The country’s jobless rate of 8.9 percent in April was the highest since September 1983.

“The leading cause for any change in the lifespan of the Social Security or Medicaid trust funds is change in our economy, in a recession,” White House Spokesman Robert Gibbs said today before the reports were released.

The best way to address the problem is to “create jobs to get our economy moving again, to lay the foundation for long- term economic growth, and through that economic growth we’ll see a stronger position for both Medicare and Social Security,” Gibbs said.

Medicare, Social Security Funds Worsen in Recession (Update2)
lison Fitzgerald, Bloomberg, May 12, 2009

Capital positions at major European banks (Reuters)

May 8, 2009

May 7 (Reuters) – Several top U.S. banks are expected to be told on Thursday
they need to raise billions of dollars in capital, following “stress tests” on
19 American banks. [ID:nN07333426] Europe would risk being mired in political
wrangling if it tried to set up a uniform stress test, as some politicians have
suggested. [ID:nL5475615]
Following is a summary of the capital position of major European banks:

HSBC (HSBA.L) (As of Dec. 31, 2008):
— Tier 1 capital…………………..$95,336 million
— Tier 1 ratio………………………..8.3 percent
— Total capital ratio…………………11.4 percent
— Risk-weighted assets…………..$1,147,974 million
— Capital Raising: Investors approved a record 12.9 billion pound ($18.4
billion) rights issue in March.
May 6, 2008 –  763.38 pence
May 6, 2009 –  539.00 pence
— Economic forecasts: UK GDP 2009: -3.6 percent

SANTANDER (SAN.MC) (As of Dec. 31, 2008):
— Core capital………………..40,030 million euros
— Tier II capital ratio……………….13.5 percent
— Tier I ratio (before deductions)………8.9 percent
— Risk-weighted assets………..546,088 million euros
— Capital Raising: Made a 7.2 billion euro ($9.38 billion) rights issue in
Nov. 2008. In Feb. 2009 Chairman Emilio Botin ruled out further capital
May 6, 2008 – 13.11 euro
May 6, 2009 –  7.11 euro
— Economic Forecasts – Spain GDP 2009: -3.0 percent

BBVA (BBVA.MC) (As of 31 March 2009):
— Core capital………………..18,604 million euros
— Tier II…………………………….3.8 percent
— Tier I……………………………..7.7 percent
— Risk-weighted assets………..292,626 million euros
— Capital Raising: Said in January 2009 it will adopt a more prudent
dividend policy to strengthen solvency ratios, averting the need for a capital
It would pay out 30 percent of earnings to shareholders in 2009, compared
with 37 percent in 2008, generating an additional 80 basis points of core
May 6, 2008 – 15.00 euro
May 6, 2009 –  8.54 euro
— Economic Forecasts – Spain GDP 2009: -3.0 percent

UBS (UBSN.VX) (As of 31 March 2009):
— Core capital………….29,240 million Swiss francs
— Total ratio ……………………….14.7 percent
— Tier 1 ratio……………………….10.5 percent
— Risk-weighted assets..2,277,665 million Swiss francs
— Capital Raising: Sold 13 billion Swiss francs of mandatory convertible
notes to the government of Singapore and an undisclosed Middle East investor in
December 2007. In June 2008 it completed a 15.97 billion Swiss franc ($14.06
billion) rights offering. In October 2008 it raised another 6 billion francs
from the sale of mandatory convertible notes to the Swiss government as part of
a state rescue. The bank said in March 2009 it will buy back up to 1 billion
euros ($1.30 billion) of bonds to boost balance sheet.
May 6, 2008 – 32.89 Swiss francs
May 6, 2009 – 16.09 Swiss francs
–Economic Forecasts – Switzerland GDP 2009: -3.0 percent

INTESA (ISP.MI) (As of 31 Dec. 2008):
— Tier 1 capital………………37,619 million euros
— Tier 1 ratio……………………….15.1 percent
— Risk weighted assets………..249,674 million euros
— Capital Raising: Intesa said in December 2008 it will boost its Core Tier
1 capital ratio by about 6 basis points via the sale of its 30 percent stake in
Cassa di Risparmio di Fano (Carifano). In January 2009 executive board chairman
Enrico Salza said Intesa had enough capital.
May 6, 2008 –  4.78 euro
May 6, 2009 –  2.53 euro
— Economic Forecasts – Italy GDP 2009: -3.7 percent

UNICREDIT (CRDI.MI) (As at 30 Sept. 2008):
— Tier 1 ratio……………………….6.46 percent
— Capital raising: Announced plans in October 2008 to boost capital by 6.6
billion euros. It won approval from shareholders for its 3 billion euro ($3.81
billion) capital increase in November. In March UniCredit said it will ask for
up to 4 billion euros ($5.22 billion) from Austria, Italy and other investors as
a key capital ratio fell short.
May 6, 2008 –  4.92 euro
May 6, 2009 –  2.05 euro
— Economic Forecasts – Italy GDP 2009: -3.7 percent
BNP PARIBAS (BNPP.PA) (As of 31 Dec. 2008):
— Tier 1 capital……………………41.7 bln euros
— Tier 1 ratio………………………..7.8 percent
— Capital Raising: Shareholders backed in March 2009 a plan to issue 5.1
billion euros ($6.84 billion) worth of preference shares to the French state.
May 6, 2008 – 70.19 euro
May 6, 2009 – 45.29 euro
— Economic Forecasts – France GDP 2009: -2.8 percent
CREDIT SUISSE (CSGN.VX) (As of Dec. 31 2008)
— Tier 1 capital………….34.2 billion Swiss francs
— Tier 1 capital ratio………………..13.3 percent
— Risk-weighted assets……257.5 billion Swiss francs
— Capital Raising: Said in October 2009 it had increased its Tier 1 capital
by about 10 billion francs from several major investors.
May 6, 2008 – 56.85 Swiss francs
May 6, 2009 – 43.50  Swiss francs
–Economic Forecasts – Switzerland GDP 2009: -3.0 percent

BARCLAYS (BARC.L) (As of 31 December 2008):
— Tier 1 capital………………..37 billion pounds
— Tier 1 capital ratio…………………9.7 percent
— Risk weighted assets…………433.3 billion pounds
— Capital Raising: Won shareholder approval in November for a 7 billion
pound ($10.4 billion) fundraising, including up to 5.3 billion pounds by two big
Middle East investors. Barclays opted to raise funds privately rather than take
part in the government bailout. In April it offered to exchange 3.4 billion
pounds ($5 billion) of Upper Tier 2 sterling-denominated notes into dated Lower
Tier 2 bonds to help boost balance sheet.
May 6, 2008 – 461.37 pence
May 6, 2009 – 288.00 pence
— Economic Forecast – UK GDP 2009: -3.6 percent

DEUTSCHE BANK (DBKGn.DE) (As of 31 Dec. 2008):
— Tier 1 capital………………..31.1 billion euros
— Tier 1 capital ratio………………..10.1 percent
— Capital Raising: Has said it has raised 7 billion euros ($9.1 billion) on
capital markets so far this year and plans to increase that figure to a total of
16 billion euros by year-end.
May 6, 2008 –  77.89 euro
May 6, 2009 –  40.29 euro
–Economic Forecast – German GDP 2009: -4.4 percent
Source: Reuters/Company reports; GDP forecasts from Reuters Poll,
Switzerland/Spain from IMF)
(Writing by Jijo Jacob and Carl Bagh, Bangalore Editorial Reference Unit;
Editing by David Cutler and Sharon Lindores)
($1=1.136 Swiss Franc)

© Thomson Reuters 2009 All rights reserved

FACTBOX-Capital positions at major European banks
Jijo Jacob and Carl Bagh, May 7, 2009, Reuters

Geitner on Charlie Rose Last Night

May 8, 2009

My favorite part was when he was about to list the three biggest problems with the system when the network or cable carrier “accidentally” had a broadcast glitch.

Vodpod videos no longer available.

more about “Charlie Rose – An hour with Timothy …“, posted with vodpod

Inflation Trade: Game On?

May 8, 2009

This rally looks like its got some legs.  While I suppose a short term mild sell-off or sideways move as speculators unload financials (equity) in the weeks ahead in advance of further equity dilution is likely, the stability being pronounced by Bernake and Geitner  will certainly attract buyers whoever they are.  That said today’s M2 data came in wildly higher (+41.6B) than last week’s negative (-4.4B).  I suppose one could infer that the trillions being spent by the government is translating into nickels into the economy.  Nonetheless, earlybirds have been short credit, short the dollar, and long risk assets.  Today’s 30-year treasury auction disappointment only helps to bolster that fact that the market is beginning to shun duration risk in favor of this beta rally.  Inflation traders come one, come all.

Money Supply (M2) Weekly Data

Money Supply (M2) Weekly Data

YOY money supply growth is finally rising, sharply.

M2 (Money Supply) YOY Growth

M2 (Money Supply) YOY Growth

Will be important to keep an eye on the velocity of money.  Remember that GDP = Velocity*Money Supply.  While velocity has been decreasing, Uncle Ben has been printing greenbacks to flood us with supply (quantitative easing).  If velocity does not pick up (we don’t spend more), poor Ben will probably have to clear-cut South American Rainforests to make enough paper for the amount of money he’ll have to print.

Velocity of M2 (Velocity of Money)

Velocity of M2 (Velocity of Money)

These are certainly interesting times.

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