11/14/14…is ‘government the problem’ – or an ineffiecent solution?

Quote of the Day from the Friars Club Encyclopedia of Jokes: “Life is a sexually transmitted disease.” – Guy Bellamy

 

Bloomberg Quote of the Day: “There is another life that I might have had, but I am having this one.” – Kazuo Ishiguro – arigato!

Bloomberg Top Stories: (running late so no headlines today)

Thursday’s Market Summary

Sometimes markets make for strange bedfellows and yesterday was one of them. The two worst performers were the Russell 2000 -0.9% and Dow Utilities -0.8%, while the rest ranged from Dow Transports -0.2% (only other negative), to The NDQ 100 +0.4% (1.4:1 advancing). Some big losers including JGWentworth (the broker on your side?) JGW, -11.6% – guess clients didn’t know that as they had a huge earnings miss. Volume rose but on a mixed day not a good thing, A’D’s and Breadth were solidly negative; new 52 week highs down sharply while new lows rose; and lastly, the VIX rose sharply closing bearish again at 13.79 +.77 with a high of 14.31! Particularly noteworthy with options expiry next Friday!

Total NYSE Volume higher for a second day at 3.46B shares vs 3.25B vs 2.93B vs 3.24B vs 3.45B. Average volume since 9/30 is about 3.7B shares but now falling, or about 700M more than the 12-month average. Shares traded on the NYSE floor – affectionately referred to by TB as REAL volume about even at 708M shares vs 718M vs 614M (lowest since 9/15),vs 717M vs 752M – still trending lower. For comparison purposes, for the prior 12 months it is a historically weak 712M shares…but since 10/1: 836B shares (and falling) – including that HUGE 1.22B share day – highest since 9/19, followed by two more 1B plus days leading to options expiry!. The lowest was 10/6’s 696M share session. April 30 – September 30 we had just SEVEN 800M shares…since 10/1: 16, and FIVE 900M+ days.

A/D’s were negative – a rarity in the last six sessions: NYSE: -1.8x vs +1.2x vs +1.1x vs +1.3x vs +1.6x; Nasdaq -2x vs +1.6x vs -1.1x vs +1.6x vs -1.1xx. Breadth was similar: NYSE -2x vs 1:1 vs +1.1x vs +1.1x vs +1.9x; Nasdaq -1.2x vs +1.6x vs +1.1x vs +1.4x vs +1.1x. New 52 Week Highs slipped again to 249 vs 276 vs 339 vs 368 vs 313 vs 328 vs 390 – their range for the year is 39-612!!! New Lows rose again to 146 vs 113 vs 100 vs 85 vs 114 vs 145. The 2014 range is 24-1043!!! S&P VIX jumped and is again in bear territory at 13.09 +.77 with a session high of 14.31! Next Friday is another options expiry…heed! This is its 13th sub-15 close since peaking on 10/15. Heading back toward those bearish extremes that had a high of 31.06 (highest since 11/28/11!!!)? you decide. The average of the past 12 months is 13.97, with a low of 10.28!…high close of 26.25 on 10/15/14!

U.S. bond market oscillated then closed higher. The recent 12 month low yields (10’s 2.09%; 30’s 2.87%; and long TIP 0.83%), 10’s closed at 2.35% +5/16; 30’s 3.07% +1/2; and the long TIP 1.00%! +3/8. Overnight weaker: 10’s 2.36% -1/8; 30’s 3.08% -1/4; and long TIP 1.01% -3/8. Where to from here? Dunno…  

Libor update: 0.233% 3 mos.; 0.326% 6 mos., both steady and just above new record lows! The Fed Funds rate has averaged 0.09% and is steady at 0.08-0.10%. T-Bills still acting screwy: 0.04%, one-month, 0.01% 3 mos???, 0.14% +.04 one year???

Foreign bond yields lower across the board (Benchmark is 10yr): Germany 0.79% -1; UK 2.16% -2; France 1.15% -2; Italy 2.35% -4; Spain 2.11% -2; Portugal 3.18% -1; Greece 7.91% -4. 10/16’s close was 8.54%! – cycle low: 5.42%; Crisis high: 12.57%. Japan: 0.47% -2.

Gold closed slightly higher at $1161.50 +$2.40: note that this was the 4th straight ‘lower high and a somewhat ‘wedge’ is forming. This since Friday’s surprise rally to $1176.70 culminating in a positive key reversal (session low was $1130.40, a new recent low!). The recent intraday high of $1255.60, highest since 9/10/14, was rejected. The last 12 sessions have had prints below $1200 first time since 12/31/13 Last close above $1300 was on 8/15. 7/17’s session high was $1346.60, highest since March 19th!!! Res is at $1200 (psychological), then the 40 day at $1208, the 50 day $1214, then the 200 day at $1279, all declining. The 12-month high is $1392.60 on 3/17, highest high since 9/4/13. $1130.40. 11/7’s low was $1130.40! Overnight, it’s 5th straight ‘lower high’ and back below $1150 at $1147.50 -$14.00, low $1147.30 – WEAK! Silver also in a wedge with 5 straight ‘lower highs’ taking it to the low-15’s and near 11/5’s low of $15.12, more than a five year low.

Crude was slammed to close at $74.21 -$2.97 and worse setting a new recent low of $74.07, lowest since 9/20/10!!! 10/25’s high was $84.83. There have now been 33!!! handles since peaking at $107.73 on June 13th, highest since 9/19/13. The record high of $147.27 was on 9/30/08, the low since on 12/30/11 is $74.95: $93.60 is the midpoint!!! Recent rally high and close are $110.70 and $110.53 respectively. RES at the 40 day ($84.45), then the 50 day ($86.17), and lastly the 200 day (97.36), all continuing to plunge and accelerating to the downside. So much for $74.95, the 10/4/11 low on a spike down…and we are now looking at $70! The recent range is now $74.07-$112.24 since 3/1/12. Overnight it is little changed at $74.51 +.30 BUT with a low of $73.25 – its 34th handle and lowest since 9/17/10!!!

European equities higher, ex-UK; Asia too, ex-Korea: UK -0.1% vs -0.1% vs -0.4% vs +0.2% vs +0.5%; France +0.4% vs -0.4% vs -1.1% vs +0.7% vs +0.3%; Germany +0.1% vs -0.2% vs -1.3% vs +0.4% vs +0.3%; Japan +0.6% vs +1.1%! vs +0.5% vs +2.1%!!! vs -0.6%; Hang Seng +0.3% vs +0.3% vs +0.8% vs +0.3% vs +0.8%; Korea -0.8% vs -0.3% vs +0.2% vs +0.2% vs +1%!; India +0.4% vs -0.2% vs +0.4% vs +0.1% vs flat. U.S. equity futures slightly higher: DOW +18 (range 60); SPX +2 (6!); NDQ +4 (9!).

 

Some random thoughts:

it wasn’t all Reagan’s fault (“In this present crisis, government is not the solution to our problem; government is the problem.”), he had help…lots of it. How many of you recall William (Bill) Simon, Treasury Secretary appointed by Nixon in his second term (and confirmed again by Ford after the near impeachment), a man as unlike the Fed chairs, William McChesney Martin, Arthur Burns, and Paul Volcker, as possible in knowledge of financial markets. It should not be surprising that this non-intellectual, Salomon Brothers bond trader (hey wasn’t Robert Rubin too? …same occupation different firm (GS), had nothing but contempt for regulation (also note that Salomon was later fined for rigging bids in U.S. treasury auctions).

That attitude was not only to influence Ronald Reagan but may have been responsible for the above quote. Simon said, in his book A Time for Truth, which was to be a blueprint for the Reagan administration (and the UK’s Margaret Thatcher) in testimony before a House subcommittee in April 1976, “(w)hen we se this monstrous growth of government, we must realize that it is not a matter of narrow economic issues… What is at stat is the fundamental freedom n on of the last, and greatest, democracies in the world.” Then…”Just look at what has happened in other countries today, whether it be Italy, or the United Kingdom or Argentina or Uruguay or Ceylon. Look at what has happened there when the so-called “humanitarians” try to create ‘Great Societies” by taxing and promising and spending.” Using the nominal amount of cash and deposits in the economy it was certain that ‘the government was printing money hand over fist to help finance its expenditures’. (he obviously didn’t know the difference between the monetary base and the money supply). ‘From 1956 to 1965’, he pointed out the money supply expanded at an average of 2.3 percent.’ But between 1966 and 1975, as the government engaged in runaway spending (true)…the average annual money growth rate rose to 5.8 percent.”

Both Simon and Milton Friedman agreed that the government should “keep it hands off the economy, to let the free market do its work.” (thanks to Kwasi Kwarteng’s book War and Gold, for the above. Reagan believed heartily in Simon’s ‘theories’.

This brings us to how they were wrong and how that thinking led to the financial crisis. Prior to the Friedman era, the economics profession had little use for investment theory. In fact, ‘Finance’ sprung off of this as one could not even write a thesis or dissertation on the subject.

Interestingly, Accounting, Economics, and Finance (thru the efficient market hypothesis), rely on one human trait: rationality. That is, the consensus view of what rationality is. For example,

– a person would not pay more for something than it is worth, thus the ‘market’ value is the correct value (that of course does not apply to frauds who trade among themselves as they did with the S&L’s to inflate their way out of being insolvent.

– since the market price is the value of a stock there is no need of securities analysis (strong form of the efficient market hypothesis)…but if so, why do Wall Street firms and advisors throw away hundreds of millions a year to have analysts? Just asking…

– the intrinsic value of a security is the market value (meaning the price a willing buyer and seller would agree on for a security…or home, or building. If this were true there would not have been an S&L crisis IF they were truly arms-length transactions.

– a corporation would never do anything that was negative to its long-term survival…if you believe this you don’t read the papers…or realize that the ‘long-term’ is the CEO’s expected tenure, with the blessing of his/her board, while the only long-term holders of stocks are those not in the know.

Thus, it was/is easy to get an accounting firm to give a ‘clean’ opinion on a company even when the numbers have been played with…not only the S&L’s but Enron and others (by the way, why hasn’t Sarbane-Oxley been used to prosecute CEO’s? Because they can always hide behind the auditors opinion. BUT we have whistleblowers who have risked or destroyed their careers and the SEC and Justice Department have ignored them. Worse, regulators like former CFTC head, Brooksley Born, are ridiculed…in her case by Robert Rubin, Larry Summers, and to her dismay by Fed Chairman Alan Greenspan. If her request to regulate derivatives had been approved instead of ‘derided’ (sic), there most likely would not have been a financial crisis…and if the 11,000 real estate appraisers who sent a letter to Congress telling how they were being coerced into providing inflated values for property, the housing crisis wouldn’t have happened…but who should they listen to? Experts or lobbyists for the financial services industry. Uh….

The ‘efficient markets hypothesis’ has been adopted by the industry and drummed into all those young, impressionable CFA (Chartered Financial Analysts). On Monday, some examples of political power being used to override the public good.

Enjoy your weekend!

TB

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