By Bob Hoye, Institutional Advisors | 10 September 2010
Three Years Ago:
In retrospect, it would have been best to have avoided the product as well as the high fees.
The record high for the S&P was 1565 on October 9, 2007.
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The initial rebound out of the late 2007 hit topped in May 2008.
The rebound high on the S&P was 1427 on May 19, 2008.
The rest, as the saying goes, is history.
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When reviewing market history it is appropriate to use actual quotations from either the exciting times or from moments of dismay. Of the above excited or complacent ones, the quote as investors returned from the carefree summer of 2007 seems rather timely. Particularly with this week's eruption of enthusiasm.
Over the summer, there have been more than a few of these, as well as the equivalent down-days. One measure of stock market violence is the 90 Percent Day when 90% of the trading volume is in the day's direction. Devised and determined by Lowry's, we can call them extreme days. The count is now at 28 days out of the last 88 trading days have been 90% days (up or down).
This is remarkable, and it is worth reviewing previous occurrences. We searched the net for comments from September 2007 and the last such outbreak happened with 8 extreme days in the month of August 2007. At the time, Lowry's called it "the greatest rash of extreme volatility in at least 60 years".
Now it is back!
There have often been times when there has been someone or some agency that can "move" the stock market. In the 1929 mania there were buying "pools" formed to promote individual stocks. Michael Meehan, the specialist in RCA stock thought the price was too low and formed the "Radio Pool". A position was accumulated and in due course the rumour was floated that RCA stock was going to be "taken in hand". These were the magic words that would rally the stock. Understandably, the "pools" were also designed to get the participants out.
In the late 1970s, market guru, Joe Granville, had a couple of calls that moved the market. More recently, interventionist economists have boasted that government action prevented the 2008 crash from "going on forever". This crowd seems not to understand that markets always clear— on their own.
This is now a popular notion about an agency "moving the market". But, for all the fury of the financial panic it was just the initial post-bubble crash. The establishment has yet to be fully tested by the prolonged contraction that follows every great financial mania.
Great white sharks come to mind, and there could be worse. A recent article on killer whales was impressive. We have all seen film footage of them coming right up a steep gravel beach to grab seals. The article pointed out that "Orcas", as they are called in correct circles, also have little trouble in taking out any size of a whale. [[But sperm whales have teeth.: normxxx]]
The article concluded with a question about what happens when killer whales encounter a great white shark. The expert smiled and replied "lunchtime". Market forces seem close to having policymakers "for lunch"— again.
The accomplishments of policymakers are always celebrated during a soaring bull market. In the late 1980s the Nikkei had the world admiring the wonders of MITI, which was the acronym for Japan's industrial policymakers. That reached a peak as the Nikkei reached 40,000. Over time, the esteem faded such that our Tokyo colleagues advise that the time for heroes is well over, with "ordinary" people in high places in government or corporations.
Perhaps a long deflation of expectations will get most folks in the West to shift their regard from big business and big government back to the individual. In the meantime, September has started with a "bang" as noted by today's Financial Post:
The great rebound in corporate bonds can be considered as a mini-bubble. For example, the yield for junk declined from 41% in March 2009 to 10.9% in April of this year. That was an outstanding rally to a very overbought condition, based upon the improbable notion that government spending your money will restore real growth and prosperity.
Clearly an unsustainable trend that got hit by the expected reversal in May. Last week this sector was deteriorating, but we thought corporates could find a relief rally this week and this is working out. In couple of weeks these could resume declining in price as spreads widen.
The August 25th ChartWorks, "Bye Bye Bonds" gave the technical "goodbye" to long treasuries. The action in the ten-year registered an Upside Exhaustion which indicates compulsive buying. Usually an important top follows and this seems to be the case.
For the long bond, the high was 136.8 and the initial drop was to 133.6, from where it bounced to 136.4 on Tuesday. This filled in one gap on the chart and our initial target has been the gap at 132. Subsequent stock market firming has brought the price down to 134.3 earlier today.
The gap at 132 could be filled on this stock rally. Beyond this there is a possibility of another liquidity crisis such that if it becomes severe— problems in corporates could induce weakness in treasuries. In which case, the target of 125 becomes feasible.
What's next? As the wag on TV observed the other day "That is the 64,000 Renminbi Question"? Indeed— This is based upon a popular 1950s TV show with a prize of $64,000 to the winner on a set of difficult questions. This in turn was based upon a 1940s radio show whereby the winner got $64. Radio audiences in Canada and the US avidly followed the show— to the point that the phrase "The 64 dollar question" became widely used in the vernacular.
That this amount of money would command international audiences shows how much currency has been depreciated since. In late July the decline in the Dollar Index registered a Downside Capitulation that when the Sequential Buy pattern completed provided the "buy" on the DX. The low was 80 and the bounce was to 83.6.
The low needed to be tested and this seems to developing at the right time to help orthodox investments. The test could run into next week and there could be support at 81.5. The next leg up for the dollar could reach resistance at the 84.5 level. This last could be associated with the renewal of some liquidity concerns.
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