Asia generally bounced overnight following the US equity bounce end of session but in many Asian markets the move was very weak. Given the oversold levels the Asian bounce looks to have more to run. Technically id point to the analysis here: http://www.stocktiming.com/Shanghai_Daily_Stock_Market_Updates/shanghai-index-update-monday.htm
These sorts of analysis are, as always, probabilities. Government and central bank actions can suspend and extent economic cycles beyond all recognition. Its worth always remembering this point.
US equities. We had all sorts of extremes of oversold, volume, volatility conditions in US equities. The probability is for the bounce here and now to sustain a little but i want to cover the past a little here.
The top was formed in a strangely thin manner, as i’ve said before. Battles were lacking. Why? We can only provide conjecture why this was. Imo it seems most probable that this was about leverage. We have near zero interest rates. We have the exchanges confirming that leverage in all markets had risen to high levels again. They confirmed that paper leveraged trading had massively overtaken the cash instrument trading. These sorts of phenomena makes for a lack of price ‘battles’. It makes for huge volatility and herd conditions. This helps to explain the price action, imo. The patterns were sound.
The purely visual signal was clear but the price action was not, until the move started that is. But even when it started it was not fast. It was an orderly exist with every few seconds stock being sold. At no point was the order book overwhelmed. For every seller there needs to be a buyer simply at a lower rather than higher price. Just as many participants own stock today as yesterday. It is rather that the profile of owner is in the process of changing from leveraged to un-leveraged, most likely.
What is note worthy here is that prices fell close to their dec 2009 levels for dow components within a 2 week move. The nas100 is better but sp500 similar to the dow.
Given the 2 week move and general weakening of the data does this suggest something more ominous as Faber suggests in his latest interview. My view is unchanged here. Without much more money printing we have and will have no sustained recovery in nominal prices. Nothing has changed from march 2009. The nos have improved due to each monetary unit being worth less and so asset prices rise but as leverage in the system never declines any let up in the money creation leads to sharp spikes down ward, and almost equally violent upward moves, note.
Welcome to the world of bubble economics; free money creates this giant casino. In such a world riff with interventions and geopolitical risks you have a choice to either enter the ‘ring’ with the leveraged herd and attempt to participate in twists and turns (with the upside and downside consequences this entails) or use cash to ‘stock pick’, accumulate on ‘sold off’ levels on the basis nominal prices can only, over time, move in one direction. The consequences of this not occurring is a complete systemic collapse.
To maintain your sanity as a capital holder, imo, you have to see this big picture for what it is. That now, more than ever before in fact, short term price swings do not represent the ‘value’ contained in assets due to zero interest rates and the immense leverage this creates. As an example, oil can fall today to 10 usds a barrel. Does or should this mean that the Saudi and Russian state’s balance sheets indicate bankruptcy? Clearly the answer would be no here. It merely shows that paper leveraged trading of assets represents 95% of all financial transactions. So therefore that no short term demand and supply picture on the trading floors reflects clearly the ‘real’ supply demand balance for the underlying asset. Given the explosion in leverage this ‘dislocation’ is more pronounced today that it has ever been. In an auction based pricing system stuffed with leverage prices can and may fall to near zero producing extremes of value and over valuation. I realize we probably all understand these issues but at this juncture it certainly worth restating these sorts of issues.
Fixed Income or rather the US T-bonds.
Prior spikes have been created by the announcement of QE programs by the FED. This time around the spike was created by the market sell off.. Treasuries are approaching breaking out of their all time low yields on the basis of weakness. It is hard for Ben to justify more money printing as a method of lowering yields. Yields are already approaching all time lows at a time when QE programs have been curtailed. How do we rationalize this? It seems that the banks and corporates and consumers are sitting on cash. All are paranoid of risk assets and prefer to sit on negative yielding treasuries than risk losing capital. This is the only conclusion possible. The risk reward at these levels for holding US Tbonds is unimaginably bad. Technically triple tops are rare and given the third spike up is driven by market fear issues rather than government manipulation it looks the best attempt for treasuries to reach new highs and potentially breakout. This is not a trade i chose to take. The risk reward, as above, is a disaster.
(As an aside on metrics of earnings of stock prices vs treasuries and fed funds rates stocks are at historically low valuations. Conversely private investor participation in developed stock markets is at historic lows. This is true New York to Tokyo).
OIL –
The oil price has collapsed from 114 to to 75.5 but world demand is where she was and refinery rates remain at all time highs.. go figure? I wanted to add around 88 but price did not show any hint of an entry. I like oil trading but i must say this is extreme stuff here. The only instrument im adding here on oil are option calls. I strongly believe in the peak oil paradigm as strongly as i believed in the gold paradigm in 2008/2009. I will be entering option calls on oil but i cannot enter futures on oil for the obvious margin issues oil presents. Anyone that tells you where the oil price will be in the next month or so is dreaming. It is impossible to tell you this.. We can say she is very deeply oversold and is due a bounce beyond that impossible as the technicals have been destroyed by the recent move. The longer term fundamentals are unquestionably for much higher oil prices. The energy complex fundamental story remains as she was. Nothing has changed in spite of some issues like the coal miners losing more than 50% of their value in the last few weeks. To repeat the above these short term prices are driven by leverage issues not by fundamental value issues.
Part II to follow.. inc fx, precious metals and some specific stock issues.
Rich
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