Recently Market Rally Got A Little Help From The Fed, The Real Correction Is Still Coming

by streettalklive
In last week’s update, I discussed the short-term oversold condition that existed at that time. To wit:

“As you will notice, the reflexive rally, and subsequent failure, have tracked the original predictions very closely up to the point. With the market once again very oversold on a short-term basis, it is likely that the markets could manage a weak rally attempt over the next few days.“

The chart below is updated through yesterday’s close.

As you can see, the markets did retest the late August lows, and when combined with the very oversold conditions, led to a frantic “short covering” rally back to previous resistance. It is worth noting that the recent market action is very similar to that of the August decline and initial rebound as well.
Of course, the question that must be answered is whether we have seen the end of the current correction or is this just another “reflexive rally” that will fail?
The 2016 Recession And Market Reversion
To answer that question it is important to examine some statistical tendencies as well as potential artificial influences.
In January of 2014, I penned an article entitle “The Coming Market Meltup and 2016 Recession.” That article discussed several historical statistical precedents for such, at that time, an outrageous piece of analysis. To wit:

“However, looking ahead to 2015 is where things get interesting. The decennial pattern is certainly suggesting that we take advantage of any major correction in 2014 to do some buying ahead of 2015. As shown in the chart above, there is a very high probability (83%) that the 5th year of the decade will be positive with an average historical return of 21.47%.
The return of the positive years is also quite amazing with 10 out of the 15 positive 5th years (66%) rising 20% or more. However, 2015 will also likely mark the peak of the cyclical bull market as economic tailwinds fade and the reality of an excessively stretched valuation and price metrics become a major issue.
As you will notice, returns in the 6th and 7th years (2016-17) become substantially worse with a potential of negative return years rising. The chart below shows the win/loss ratio of each year of the decennial cycle.”

“The statistical data suggests that the next economic recession will likely begin in 2016 with the negative market shock occurring late that year, or in 2017.”

It is important to remember one simple phrase that is too often forgotten by the “bullish crowd:”

“Past Performance Is No Guarantee Of Future Results.”

There are plenty of reasons that that the market could lapse into a far bigger correction sooner than the historical evidence would otherwise suggest. Such an event would not be the first time that an “anomaly” in the data has occurred.
However, with a Presidential election forthcoming there is sufficient reason to believe that “all guns will be brought to bear” to forestall the onset of an economic recession and major market correction. This reason I say this is because since individuals “vote their pocketbook.”
A recession/market correction would ensure a Republican victory. With Democrats currently in charge, it would not be surprising to see the Federal Reserve pushed into action with some form of monetary interventions, or negative interest rates, if the current market correction worsens. 
It is worth noting that contractions/expansions in the Fed’s balance sheet has had a very high correlation with subsequent market action as liquidity is pushed into the financial system. As shown in the chart below, the Federal Reserve has already once again began to quietly expand their balance sheet following the recent downturn. Not surprisingly, the market has responded in kind with the recent push higher. My suspicion is that if such minor interventions fail to stabilize the market, a more aggressive posture could be taken.

As I stated back in 2014:

“The inherent problem with the analysis is that it assumes everything remains status quo. The reality is that some unexpected exogenous shock is likely to come along that causes a more severe reversion as current extensions become more extreme.”

Of course, since then, China has become a severe drag on the global economy which is now filtering rapidly into the domestic economy. Given the weakness in the recent economic data from manufacturing to employment and production, Q3 GDP will very likely be well below 1% growth.
This means two things.

1) The Federal Reserve WILL NOT raise interest rates this year. 
2) If the data continues to worsen, expect the Federal Reserve to become more “accommodative” for a period of time.

Such actions will likely, as stated, continue to “float” the markets for a while which will provide the time necessary to pass the election in 2016. This will also align with historical full market cycle as shown in the chart below.

Current Rally Will Likely Fail

While the “seasonally strong” period of the year could foster a further rally in the market, it is highly likely that it will ultimately fail. As shown, since the turn of the century there have only been two previous times when the market traded in oversold territory combined with all three major “sell” signals triggered. Both of these periods marked a much more severe bear market cycle.

Given the late stage of the current market cycle, the issue of rising global economic weakness and deflationary pressures and deteriorating earnings, many of the “bullish”arguments have been broken.
You Can Trade It, Just Don’t Buy It
However, there is still enough bullish sentiment, and “hope” of a continued “bull market” to keep investors chasing returns until they finally become exhausted. Therefore, for individuals with a very disciplined “buy/sell” approach, the “seasonally strong period” will likely provide a tradeable opportunity through the end of this year.
However, this is not a “buy for the long-term” opportunity. The markets remain grossly overvalued, overbought and extremely deviated from its long-term mean. As John Hussman wrote last week:

“If there is a single pertinent lesson from history at present, it is that once obscenely overvalued, overvalued, overbullish market conditions are followed by deterioration in market internals (what we used to call “trend uniformity”), the equity market becomes vulnerable to vertical air-pockets, panics and crashes that don’t limit themselves simply because short-term conditions appear ‘oversold.’
While the concept of mean-inversion seems strange – almost preposterous – it actually aligns very well with what we know about so-called “secular” market phases.“

What most investors do not realize currently is they could go to “cash” today and in five years will likely be better off. However, since making such a suggestion is strictly “taboo” because one might “miss some upside,” it becomes extremely important for measures to be put into place to protect investment capital from the coming downturn.

(In other words, if you didn’t like the recent 10% correction, you are not going to like what comes next.)

However, the importance of cash should not be dismissed. As I wrote in April of this year:

“The chart below shows the inflation adjusted return of $100 invested in the S&P 500 (using data provided by Dr. Robert Shiller). The chart also shows Dr. Shiller’s CAPE ratio. However, I have capped the CAPE ratio at 23x earnings which has historically been the peak of secular bull markets in the past. Lastly, I calculated a simple cash/stock switching model which buys stocks at a CAPE ratio of 6x or less and moves to cash at a ratio of 23x.
I have adjusted the value of holding cash for the annual inflation rate which is why during the sharp rise in inflation in the 1970’s there is a downward slope in the value of cash. However, while the value of cash is adjusted for purchasing power in terms of acquiring goods or services in the future, the impact of inflation on cash as an asset with respect to reinvestment may be different since asset prices are negatively impacted by spiking inflation. In such an event, cash gains purchasing power parity in the future if assets prices fall more than inflation rises.

While no individual could effectively manage money this way, the importance of ‘cash’ as an asset class is revealed. While the cash did lose relative purchasing power, due to inflation, the benefits of having capital to invest at low valuations produced substantial outperformance over waiting for previously destroyed investment capital to recover.
While we can debate over methodologies, allocations, etc., the point here is that ‘time frames’ are crucial in the discussion of cash as an asset class. If an individual is ‘literally’ burying cash in their backyard, then the discussion of loss of purchasing power is appropriate. However, if the holding of cash is a ‘tactical’ holding to avoid short-term destruction of capital, then the protection afforded outweighs the loss of purchasing power in the distant future.
Of course, since Wall Street does not make fees on investors holding cash, maybe there is another reason they are so adamant that you remain invested all the time.

Bye bye Bugatti? VW emissions scandal forces cash away from non-core projects

The Bugatti Vision Gran Turismo arrived just days before the VW emissions crisis struckNewspress

As the Volkswagen emissions scandal continues to rumble on, it could be set to claim another scalp: Bugatti. Braced to pay almost £5bn towards recalling and fixing millions of cars − and much more in fines and compensation − VW is planning to halt investment in non-core projects, including the iconic supercar brand.
These include a next-generation VW Phaeton, the brand's luxury saloon car, and a replacement for the Bugatti Veyron, which was expected to draw inspiration from the Vision Gran Turismo, shown off just days before the emissions crisis broke. New VW boss Matthias Muller told German media on 6 October that any projects that aren't "absolutely vital" will be cancelled.
Addressing workers at VW's headquarters in Wolfsburg, Muller said: "We will review all planned investments, and what isn't absolutely vital will be cancelled or delayed. I will be completely clear − this won't be painless."

A crisis about a loss of confidence in VW

The former head of Porsche went on: "In addition to the huge financial loss, this crisis is primarily a crisis about a loss of confidence. It affects the core of our company and our identity, our cars, and the essence of the brand: solidity, reliability and credibility."
It is understood that investment in mainstream VW models, like the Golf and Polo, will continue, but Autocar believes development of non-core vehicles, like the Phaeton and new Veyron replacement could be halted. Given Bugatti is a single-car company and the fact that the Veyron is no longer in production and the four-seater Galibier never made it to production there are doubts as to whether the brand will survive at all.

VW could put Bugatti up for sale, but any potential buyer − or VW, if it keeps it for when the scandal headache subsides − would be urged to proceed with caution. Bugatti was reported by The Economist to have lost an average of £3m on every one of the 450 Veyrons it sold. Clearly, no such project would get the green light in VW's current position of financial turmoil.
Muller said VW engineers are close to working out a solution to the defeat device installed in cars fitted with the EA189 diesel engine. The device could tell when the car's emissions were being tested and altered how the engine worked to produce lower emissions. On the open road some VWs were found to produce up to 40 times more nitrogen oxide (NOx) than is legal in the US.
VW says some cars will only require a software update, whereas others will need hardware modifications. The first recalls will take place in January and are due to be completed by the end of 2016. VW has set up a website to help owners find out if their car is affected and how to get it fixed.
Muller continued: "The technical solutions to the problems are in sight. By contrast, the business and financial consequences are not yet foreseeable."

BREAKING Questions About Leak at Federal Reserve Escalate to Insider-Trading Probe

It sure looks to me like "they" want to get Federal Reserve chair Janey Yellen.

WSJ is now reporting:

A high-profile investigation into a leak of sensitive information from the Federal Reserve in 2012 has escalated to an insider-trading probe led by a key market surveillance agency and federal prosecutors in Manhattan, according to people familiar with the matter.

The firm at the center of the probe, Medley Global Advisors put out a report, in advance of a Federal Reserve statement, with such specifics that were included in the statement that a reeks of a tip off from inside the Fed.

Here'e where things get interesting. Yellen has admitted that she met with Medley some time before the leak. Bloomberg reported in May:

Yellen also said that in June 2012 she met with an analyst from Medley Global Advisors, which published a report on deliberations of a September 2012 closed-door meeting of the Federal Open Market Committee, one day before minutes of the meeting were made public.

The Fed chair said she met with Medley analyst Regina Schleiger on June 11, 2012, “to hear her perspectives on international developments.”

In addition, the Fed chief noted that she could not have known about the September events reported in the Medley letter and added that she “did not convey any confidential information.”

Medley, an investment  advisory firm, is not co-operating with the investigation. It claims it is a news organization.

However, WSJ notes:

Traditional media firms are largely immune from insider-trading prosecution because even if they acquire private information, they publish it to a broad section of the public. But the government has no clear definition of what constitutes a media organization, in part because it is wary of being accused of infringing on the First Amendment.

Medley’s website refers to recipients of its research notes as “clients,” not readers or subscribers. It says the firm serves “the world’s top hedge funds, institutional investors, and asset managers” by delivering “unbiased intelligence on macroeconomic and political events by cultivating relationships with senior policy makers around the globe.”

  -RW

6 Out Of 6 Fed Surveys Say US Is In Recession… Credit Crashes Most In 4 Years… For The First Time During This Business Cycle, The US Hasn’t Added A Single Manufacturing Job This Year

For the first time since 2009, all six major Fed regional activity surveys are in contraction territory. So, time to hike rates?

Charts: Bloomberg

http://www.zerohedge.com/news/2015-09-30/6-out-6-fed-surveys-say-us-recession

Biotech Bloodbath Sends Stocks To Longest Losing Streak Since Lehman; Credit Crashes Most In 4 Years

For 2015… you get nothing!!

 

The quarter’s carnage:

• Russell 2000 down 12.7% – worst qtr since Q3 2011
• Dow down 8% – worst qtr since Q3 2011
• Nasdaq down 7.9% – worst qtr since Q3 2011
• S&P down 7.4% – worst qtr since Q3 2011

Not pretty:

http://www.zerohedge.com/news/2015-09-30/biotech-bloodbath-sends-stocks-longest-losing-streak-lehman-credit-crashes-most-4-ye

For The First Time During This Business Cycle, The US Hasn’t Added A Single Manufacturing Job This Year

While the headline ADP print earlier today was modestly better than expected, at +200K, one of its components posted a surprising tumble: with 14,600 manufacturing jobs lost in August, this was the worst month for the US manufacturing sector since January 2010.


Where this data becomes more disturbing, and where it can be seen in full context, is when clustering the monthlies into full year buckets. It is here that the full impact of what is now clearly at least a manufacturing, if not yet service, recession can be witnessed.
As the chart below shows, according to ADP, for the first time this decade, the US hasn’t created a single manufacturing job for the entire year. In fact, it has lost some 6,600 jobs.
http://www.zerohedge.com/news/2015-09-30/first-time-during-business-cycle-us-hasnt-added-single-manufacturing-job-year
Brazilian Nightmare Worsens On Bad Budget Data, Record Low Confidence, Horrific Government Approval Ratings
http://www.zerohedge.com/news/2015-09-30/brazilian-nightmare-worsens-bad-budget-data-record-low-confidence-horrific-governmen

China Stock Regulator Imposes Record Fines After Rout

China Stock Regulator Imposes Record Fines After Rout

China’s securities regulator has handed out at least 2.37 billion yuan ($370 million) in penalties this month, five times the total for all of 2014, as the government clamps down after a stock rout. Bloomberg’s David Ingles reports on “First Up.” (Source: Bloomberg)

In the hole: Report finds states hiding $1.3 trillion in debt

 
Much is made of the federal government’s debt, but what about debt at the state level? It may not have reached such eye-poppingly high figures, but it’s still a matter of concern. In its sixth annual Financial State of the States report, the nonpartisan accounting group Truth in Accounting (TIA) took a full account of government assets and liabilities. It found that even though many states claim to have balanced budgets, state governments have in fact accumulated a combined debt of $1.3 trillion.
“As a CPA looking at government finances, I found they were not being truthful and transparent about their financial condition,” Sheila Weinberg, founder of TIA, told Watchdog.org. “For years, citizens have been told that their home state budgets have been balanced. If that were true, state debt would be zero and Taxpayer Burden would simply not exist.”
She argues the generally accepted accounting standards the government uses are flawed for two reasons. First, she suggests that Government Accounting Standards Board that controls how the standards are set is not as independent as it sounds. Second, she notes that the government always has the power to tax, which reduces the incentive for sound fiscal policy – because if and when it comes up against a wall, it can always tax its way out.
Watchdog reporters covered the report and looked at the ramifications for their states. Here’s a state-by-state snapshot of what they found:

Seeing red in the Green Mountain State

Vermont’s $3.2 billion in debt may not seem huge compared to many of its counterparts, but with its relatively small population, Vermont’s budget shortfall works out to $14,300 for every taxpayer.
“The most common budget trick involves excluding pension benefits from annual budgets, according to the report,” wrote Watchdog reporter Bruce Parker. “Financial officers keep those liabilities off their balance sheets because the expenses don’t have to be paid until state employees retire. By ignoring expenses incurred in the present but paid in the future, states can claim to be balancing their budgets. In reality, the costs are being shifted to future taxpayers.”
These accounting tricks mean states like Vermont are in for a rude awakening next year. Weinberg said 2015 will be the last year they are used nationally, as standards have changed. Next year, states will have to add their pension liabilities to their balance sheets, and in 2017, retiree health care liabilities will also be added to state balance sheets.

A fuzzy picture

In Mississippi, Watchdog reporter Steve Wilson found that his state’s taxpayers weren’t getting the entire picture of Mississippi’s financial health. The law requires the state legislature to send the governor a balanced budget, so in order to eke out more spending, the proposed budget uses certain accounting principles to show only $139 million of the pension fund’s liability.
In reality, however, the Public Employees’ Retirement System of Mississippi, the state’s defined benefit pension plan for most state, county and municipal employees, has $4.6 billion in liabilities.

More trouble in the Northeast

Ranking just below Vermont and well below Mississippi in debt-per-taxpayer is Pennsylvania. The state neglected to list $53 billion on its balance sheets, ranking third among the 10 Northeast states in hidden debt. In total, the Keystone State’s debt works out to $15,600 per taxpayer, the 11th highest in the nation.
Watchdog reporter Andrew Staub explains how spending can get out of control but still remain largely hidden: “Much of that debt can be traced to retirement benefits, which represent more than 50 percent of state bills. The unfunded liabilities have accumulated, as the state promised billions of dollars in benefits to retirees without adequately funding them, according to Truth in Accounting.”

The New York exodus

New York State was another hefty spender with $77 billion in unfunded liabilities for an average of $20,700 per taxpayer – second highest in the Northeast. Watchdog Arena writer Nicholas Fondacaro noted that each taxpayer’s share could grow even larger if New York’s exodus of workers continues.

Not so sunny in Sacramento

When California Governor Jerry Brown released his spending proposal last June, the Los Angeles Times wrote that California’s budget was “flush with cash.” The state claimed it had cut spending by $6.6 billion from 2013 to 2014, but due to obfuscating by the aforementioned accounting methods, TIA found that California’s hidden debt actually amounts to $111 billion.

From bad to worst

At the bottom of the pack is New Jersey, which TIA ranks as the worst spender with $160 billion in debt, or $52,300 per taxpayer. Upon further investigation by New Jersey Watchdog, however, reporter Mark Lagerkvist noted that the report actually understates the debt, and the proper figure is actually $10 billion higher. The discrepancy stemmed from a new valuation in State Treasury records that found New Jersey’s responsibility for unfunded retiree and employee health benefits has increased to $65 billion.
Local governments in New Jersey have troubles of their own. “The $170 billion hole does not include the debts of New Jersey’s local government units, which face a collective shortfall of $50 billion for pensions and health benefits,” wrote Lagerkvist. “Nor does it encompass the bond debts and other liabilities of the state’s 21 counties, 565 municipalities and 610 school districts.”

Not all doom and gloom

Though the overall picture is bleak, the debt situation isn’t quite as troubling in some states. Nebraska’s financials, for example, are actually in decent shape. The state has $5 billion in liquid assets and $3 billion in bills, for a “surplus” of $2 billion — or $2,800 per taxpayer. Even though Nebraska’s pension funds are mostly funded, the report found that it still hides some debt, but it’s in a much more manageable position than any of the aforementioned states.

Is there any hope?

Even though 49 out of 50 states have balanced budget requirements (Vermont being the exception), TIA identifies 39 states that have dug “financial holes” for themselves, while only a handful currently run true budget surpluses. The first step in reforms of any kind is transparency, which TIA and Watchdog.org have focused on providing in our coverage of state debt. Government has proven more responsive to the electorate and much more capable of reform at the state level, so there’s still an opportunity for many of these states to turn their financial situations around.
This entry was posted on Tuesday, September 29th, 2015 at 3:52 pm and is filed under Blog.

Why Global Deflation is Another Banker Lie

 

Published on Sep 25, 2015

Today, I will discuss how easily bankers spread propaganda and lies that are embraced as truth by the masses. If we were simply to use common sense and observation in our own daily lives, we would easily reject a lot of the banker lies that are being spread today to serve the banking agenda. In this video, I will discuss one of the most commonly accepted banker lies of global deflation.