Living Inside a Broken Clock: Thursday, Dec. 31, 2009.

by gmak

Happy New Year, or other Pagan festival of your choice!

Here is the game being played by Treasury, the FED, FCBs, and the political uberclass. It can only end in tears.

Japan has huffed and puffed and inflated debt to GDP to a possible 200%, to no avail. Take warning those who believe that the FED can reflate a multi-trillion dollar hole in the balloon. Here is one take on Japan’s latest efforts as they try once again to push through the burning forest.

Here is what, for now, is the definitive over-kill of charting inflation – using PPI and CPI-related measures – and well worth a look-see. IMHO, this is only one part of the story since inflation is ALL money divided by ALL goods, services, and ASSETS. However, we are seeing some upward price pressure.

If credit is still contracting, then that extra money being spent at the producer and consumer level is coming from somewhere else – perhaps savings (and Asset prices). Here is an example of how the credit contraction is showing up. Those credit card write-offs are “money” that has now disappeared from the system.

This is in spite of the massive expansion of the FED’s B/S. Notice in the chart how the expansion is under pressure. That attempt at credit creation is NOT making its way into the hands of the private sector and households. Remember that the MBS expansion – which is what has been driving the FED’s B/S expansion lately – is running out, and expires in March. A crisis is needed for this to continue.

Wages and benefits are also under pressure, which begs the question ask to where the money for growing PPI and CPI is coming from.  A reduction in benefits affects total income and disposable income. Either money is shifted from one area to another (i.e. from TV to medical benefits) or savings are increased (to replace declining pensions), or the reduction in benefits results in a decline in expenditures in that area which reduces the income for those working in that area, and the vicious cycle continues.

Will the world save the US? Northern Trust has everything you care to know about global economic growth. In a nutshell, they say that it will be staggering (no doubt under debt levels) upward slowly. They do mention the credit contraction but don’t really address how this impacts the growth story. Continuing weak unemployment, credit contraction, are supposed to be offset by growth elsewhere in the world. How many pyramids can China build?

What seems to be driving current growth, and the stellar Chicago PMI index result could be inventory re-building. The theory is that inventory rebuilding to long run norms means jobs for those where the inventories are being rebuilt. Those jobs mean more disposable income = more spending = more jobs in those sectors where the spending occurs to keep inventory levels going. The fly in the ointment is if the consumer does not spend but saves instead, or pays down debt. This blog saves me from having to cut and paste a whole bunch of charts. Remember, the inventory rebuild is only temporary GDP growth unless extra disposable income is created and actually spent on consumption – not on credit contraction. For the record, I find the GDP projections laughable, especially given the superficial treatment using seasonally-adjusted numbers.

The PMI numbers are not what they seem and are (as usual) fudged with seasonal adjustments. I think that it’s best to look at non-SA YoY changes, not MoM or QoQ seasonally adjusted.

And it looks like the consumer is not buying into the “good times are here again” spin in the media. It seems the consumer is pulling their collective head back into the shell.

And tax revenues are showing this, to the consternation of local and state governments everywhere.

Here is a small break for amusement. We all need a bit of a chuckle about now.


 I read the news today, oh boy! Unemployment hits its lowest level since July 2009. Now I’m looking for the details. the blogosphere is like owning your own personal research team. The world is mixed with Asia mainly green but Europe mainly red. Doctor Copper (with a PhD in finance) is rallying. All the signs are there for economic growth. Don’t be fooled.

Right to the meat. ES continues its shallow rally off the bottom from yesterday. PIvots:

  • R2: 1128.75 = Possible if anyone wants to play reindeer games.
  • R1: 1125.50 = Seems to be overhead resistance at this time, but TD thinks that ES = 1126 is going to happen (the blue line and blue picket fence).  Being overbought on a 5 min chart does not seem to matter.  Current floor is virtual (no TA) and at around 1122.50. ES will remain range bound and likely get turned back up on any dip by  the TD dashed red line at 1121.50.  This is the line in the sand for going long with stop, or to indicate time to go short if there is any dip.
  • Neutral: 1119 =  in the middle of support going back a number of days. Volumes have been low, but this is where the buying seems to come in.
  • S1: 1116 = Support from 24 Dec.
  • S2: 1109.75 = Doesn’t seem to have any importance today. The low from yesterday was 1113. Note it well.


USD is putting on a move down. INteresting given how TNX and the 10 year yield are ramping up 10 bps – which is a lot. Those FCBs who bought in auction are probably regretting it now as they are getting hit on the value of their Tbills but gaining a bit on the cost to buy USD to settle today.

CAD, EUR, and GBP are stronger. JPY is weaker. There’s a riddle for you as the risk trade is on but not in the USA.

Apparently, today is a normal trading day – so be careful of the reindeer games.

Here is a little mood music as we see the end of this bittersweet year. As the elites are saying: “We only meant well. It’s for the best.”  As gmak says: “The road to hell is paved with good intentions.” Tick. Tock. Tick. Tock.

Living Inside a Broken Clock: Wednesday, Dec. 30, 2009

by gmak

Household ownership of equities as a percentage of total assets is falling, even with the drop in housing prices. However, it is not yet at the cyclical low. Either all other assets will go up in price (notice that I don’t say value), or equities will fall in price. At the same time, bond ownership as a percentage of total assets is at a cyclical high – with rates at their generational lowest.  If interest rates rise, then housing prices and bond prices will fall, which means that equity prices could fall even more- IF the %equity cycle is going to play out as in previous generations. You can see all sorts of other sectors analysed as well here:

Here is an historic data set of certain asset ownership back to 1952 if you like to crunch your own numbers.

Where is all the money coming from to support the price growth in assets? Every dollar of cash ($929 billion = ) is supporting 57 dollars of debt or credit. ( $53,000 billion =  – see Line 1 “Total Credit Market Debt owed by”).  That is substantial leverage and suggests why the USD is so weak. The point is that the debt is in fact dollar creation and the reason that prices have been rising over the last century or so. Here is a better analysis than I have time for.

Meanwhile, the amount of debt is contracting. Market Ticker has a nicely compiled chart of all the data in one place. The number of data points of contraction is relatively small – but there nonetheless.

In spite of massive B/S expansion by the FED – which should lead to total money expansion (cash and debt) – debt has leveled off or is falling. The math is fairly simple:

Individual Asset Prices = total money (includes cash and debt) divided by total assets.

If all this money (and debt) shrinks, then some or all of the asset prices need to fall as well. (if you have 200 shells and 100 coconuts, then each coconut is priced at two shells. If 100 shells are “destroyed” then each coconut is priced at 1 shell. The value of the coconut has not changed, but its price has.  Here is an old primer written on this topic several years ago:  )

If the %equity cycle is valid, then equities are where the price adjustment should happen. Yet it appears that major IBs are still expecting households to up their ownership in equities. (From the first link: “we’ve seen research from some of the highest bonus paying investment banks on the Street suggesting that before this cyclical bull has run its course, the public will essentially have no choice but to up equity allocations meaningfully. ” )  They are still looking for distribution. The question now is who will be holding the hot potato when the debt implodes into a singularity like Vulcan in the most recent Star Trek re-tooling. Tick… Tock…Tick… Tock…

On the other hand, you could bet that the FED will be able to create enough debt to stop this contraction and that the historic %equity cycle will not overshoot the long run mean for the first time ever. That approach worked very well for many in gold, and many who went long this past year.


The next high is in. Overseas equity is showing red. SPX has come up to the most recent trend line at a time when Volume and trader willingness are both weak.

THe weekly SPX chart is much more meaningful, IMHO, for indicating where the more likely paths lie. As I’ve mentioned, the TD SELL setup bar count is at 8 of 9 – meaning that next week should see the completion. To be valid in the count, this week needs to close above 1105.98 and next week needs to close above 1106.41. IF this happens then there is likely to be a 1 – 4 bar reflex retrace. The depth of this retrace will determine if it is a trend changer or merely consolidation before the next wave up. The dashed yellow trend line is at 1122.62 for today, for those who want to play along at home.

As you can see in the chart, the TD wave count is either yellow 4 of 5 (down sequence) or blue 3 of 5 (up sequence). TD wave counts are sequential and NOT nested like EW.  If it is a down sequence (which began in September 2007 BTW) then the next wave will need to go below 869 – using TD methodology. If you look closely on the chart, this is around the 23.6% FIB at 878ish, and there is a dashed red line which is a TD risk level. Some TA, eh?  Otherwise, blue wave 4 (up sequence) is next – which is a down wave but usually shallow or sideways.

TD also thinks that the current blue 3 of 5 is due for a retrace and this is shown by the blue line marked 1135.10 – which is a retrace level. Further, TD Pressure is in a Low risk SELL mode (since the TD Pressure went back below the red signal line at the bottom of the chart), with a STOP up around 1146. If SPX gets back above 1146 then the trend is still up (of course, that is true for 1135 as well.)

I know this sounds like I’m saying that the market will either go up or down – but that’s always the case. The numbers are to provide road markers for the trip – that’s all.

ES was quite flat overnight until Europe opened. BAM at 4:30AM EST. Support is now being provided by the high from Dec 21, 2009 at 1113ish. This is also a TD risk level. It looks like ES is retracing back there on the daily chart. IMHO it could be the “break the ceiling”; retrace; “take off again” type of play – but the volumes are weak going into year end and I hesitate to stake my cash on this. ES pivots:

  • R2: 1131.50 = would be a new high. Not likely on the volumes we’ve seen
  • R1: 1126.75 = Where ES peaked yesterday before the NY open. Also the site of a number of TD retrace / resistance indicators. On the 5 minute chart, ES is putting in wave 2 of 5 down and S1 is the new ceiling.
  • Neutral: 1123.50 = Looks like resistance from yesterday going into lockup. ES never recovered after that and sold down to S1 when Japan opened
  • S1: 1118.75 = current ceiling. acted as support until Europe opened. Sellers came in around 4:30AM EST.
  • S2: Sort of acted as a floor – but more support came from 1113.50 which was the high from Dec 21.

If you want to play short, then 1118.75 is where to put it on with a stop above 1121 (TD risk and retrace level).  1115 or 1113 look like possible targets.

If you want to play long, you might want to wait to see if ES retests 1115 or 1113 again into the open.


USD is stronger. CAD has been pounded.  JPY, EUR, and GBP are all mildly weaker. DXY is struggling to get back up and running into resistance at the pivot at 78.065. As the chart shows, we need time to see if this is a wave 3 of 5 up sequence (the blue numbers) or wave C of ABC yellow – which is all part of the down sequence. Which it is depends on whether or not DXY peaked on Dec 22nd. The 78.298 pivot is critical and needs to be breached for a new high. Again, it’s difficult to read these entrails going into Year end. Suffice to say that the USD is running into resistance overhead – but that the USD /SPX correlation has been weak as of late.

The EUR does look wounded and is being very well behaved in terms of pivots (meaning that the price seems to be responding to pivot levels cleanly).  EUR made an attempt to break out yesterday but was unsuccessful. Current floor at 1.4304 is where there has been previous support. The thing about FX is that the market is so large and the leverage so great that it is hard to “wear through” a level. It takes a change of sentiment on the part of one or more players – followed by some stop running.


Enjoy the day!

Sprott to Trot

MD/CD here and at your service (ha!)…

I’m decompressing a bit more this week than previously planned. But, my PDA is working well out in the California desert and should my market life begin flashing before sand-filled eyes, I wont miss much.


If you haven’t seen it, check out today’s comments from hedge fund manager Eric Sprott here. I’m not going to agree that the price of gold plows to ever-heights (it may, it may not), but I do agree the market is likely about 10 years into a long, drawn-out bear market and his point about Fed programs ending in March and the impact of either doing nothing more, or of printing ever more…makes for some interesting catalysts in the not-so-distant future.

Please take a look at this, discuss and tell me what I need to know. I’ll be back later to see what I’ve learned 😉

    Zero Indicator

    Darth Mole Alerts

  1. poll

    • How many discretionary trades to you place per month?

      view results

      Loading ... Loading ...

  2. NinjaTrader

    search warrant

  3. recent misdeeds

    1. Happy Thanksgiving
    2. Great Call Flawed Execution
    3. Time For A Little Hedge
    4. Soylent Green And Orange
    5. Misses Mean Reversion 2015 Runner Ups
    6. The Mad Momo Ratio
    7. Europe Will Never Be The Same Again
    8. E-Mini Session Wrap Up Video
    9. Support Zones
    10. Short Term Inflection Point