What Thursday’s Unfilled Gap & Poor Close Might Mean

The late-day selloff may have felt bearish on Thursday. One very simple study I ran last night suggested otherwise...

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The number of instances was a little bit low. These results are strongly suggestive of upside over the next few days, though. The profit factor (gross gains / gross losses) over the first 3 days is especially impressive. Also compelling is the fact that every instance saw at least 1 close above the trigger day close within the next day or two.

„I`d Be A Bit Careful About China“

“The Chinese government is one of the few governments in the world that knows its GDP numbers three years in advance. I’d be a bit careful about China.” Marc Faber, CNBC

Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world. Dr. Doom also trades currencies and commodity futures like Gold and Oil.


The latest Newsweek cover says it all:

Rosie turns grudgingly bullish?
In addition, perennial economic bear David Rosenberg allowed in his latest missive that the economy might be turning around [emphasis mine]:

[T]here is no doubt that after the sharpest downturn in housing, production and employment since the 1930s, that the laws of gravity themselves prevent the economy from any further deterioration. Nothing is going to zero, and there is always the chance that housing sales edge back up towards their demographic levels, auto sales recover to their replacement demand levels (plus GM getting back into the leasing game), and inventories get rebuilt in line with spending levels. The government has its hands in 40% of the economy and when public sector officials can influence how banks can value their assets, how mortgage servicers should be doing their business, who shall fail in the financial industry and who shall not; and when we have a central bank that is not just the lender but the market of last resort, even for RVs, and a government willing to run up its deficit to levels that would have made FDR blush, then perhaps we can end up seeing a recovery occur sooner than we had thought.

You can almost hear the agony in his voice as he penned those last few words.

On top of that, Mark Hulbert reported about a week ago that newsletter market timers were getting too bullish.

As the S&P 500 rally tests the magic 1,000 level, it’s worthwhile to think about these sentiment data points.

Telling Big Earnings Lies is Easy

FN: The full article is mind boggling.

Wall Street Analysts Keep Telling Big Earnings Lie: David Pauly: "At a time when the financial industry’s credibility is at an all-time low, you would think Wall Street’s finest would break their necks providing transparency.

Not so. Stock analysts continue to promote corporate earnings lies, insisting that net income isn’t really what investors need to know.

Instead, their earnings estimates ignore often huge expenditures that can’t help but affect a company’s health.

In analystspeak, Intel Corp. wasn’t hit with a $1.45 billion fine from the European Union in the second quarter for anticompetitive practices.

After setting aside funds to cover the fine, which Intel is appealing, the semiconductor-maker had a quarterly loss of $398 million, or 7 cents a share. Disregarding the fine altogether, analysts maintain the company earned 18 cents a share, beating their average estimate of 8 cents.

As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn’t cost its shareholders $293 million.

Google, according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options."

Consistently Strong Last Hour

The last hour rally has been common lately. The last hour is often viewed as the “smart money” hour, when institutions place many of their trades. Some indicators track either just last-hour movement or 1st hour and last hour. While the market has consolidated the SPY has moved up in the last hour for 4 days in a row now. I looked at other situations like this.

Strong moves in the last hour are often interpretted as bullish. My rather simple test here shows no evidence of that going forward over the next week. I intend to explore the last hour concept in greater detail in the future.

„I am 100% Sure That The US Will Go Into Hyperinflation“

“I am 100 per cent sure the US will go into hyperinflation. Buy a US$100 bond and frame it to teach your children about inflation by watching the US bond value diminish to almost nothing over the next 20 years." Marc Faber

Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world. Dr. Doom also trades currencies and commodity futures like Gold and Oil.

Savings Rate Could Stay High

Mark Thoma shows us a historical chart of the personal savings rate since 1960 and asks how much of the recent increase (from an average of about 0.5% from 2005 through 2007 to a peak of almost 7% in May of this year) is permanent? One must, of course, take the May figure with a grain of salt: the savings rate rose in May largely because tax withholding was reduced; unless that attempt at a stimulus is completely ineffective, we should expect the savings rate to decline as people start taking advantage of the new disposable income. But even before May the savings rate this year was running consistently above 4%, which is a dramatic change from a few years ago. Let’s use the April figure – 5.6% – as a guesstimate of what the “true” savings rate is right now and ask how much of that will be permanent.

Not much, thinks Brad DeLong:
I would guess that only a small part of the rise in the savings rate is permanent. Financial distress was and is much greater than in past post-WWII recessions, and financial distress is associated with transitory rises in the savings rate.

I’m inclined to disagree. Undoubtedly the savings rate will fall somewhat as the degree of financial distress declines, but I think there’s a good case to be made that much of the increase is permanent.

For one thing, from the point of view of households, “financial distress” may be extremely slow to lift. If the Japanese experience is any guide, it is a very slow process to get a severely distressed banking system to start lending normally again, and it’s not clear that things are going to be any easier for the US. Meanwhile, most forecasts expect the unemployment rate to remain quite high for several years. It could take 3 years, or 5 years, or 10 years, or 20 years before the financial distress lifts.

Granted, even 20 years is not forever, and 3 years is certainly not forever, but it’s long enough to stop thinking about household behavior as being continuous over time. We can reasonably surmise that, even without so much financial distress, the savings rate would have trended upward over time. Presumably households would gradually have come to recognize that they weren’t saving enough. (Can zero be anywhere near enough?) And as baby boomers’ children settle into their own careers, they would cease to be a drag on their parents’ savings, and at the same time those parents would have to start worrying seriously about retirement. The financial distress messed up this scenario (or maybe just speeded it up), but the underlying trend should still be going on “beneath the surface.” By the time the distress lifts, there will be other reasons for the savings rate to be higher than it was in 2006.

That argument is rather speculative, I admit, but there are more solid reasons to expect the savings rate to remain high. While the current, comparatively high savings rate may reflect the effects of financial distress, the low savings rates of the 2005-2007 period did not merely represent the absence of financial distress. What is the opposite of financial distress? Financial ease? The degree of financial ease during that period (which was the culmination of a process that had been building on and off for a couple of decades) was well beyond normal, and well beyond what we can expect in the coming years, even if recent sources of distress are resolved fairly quickly. Consumption was supported (and aggregate saving accordingly reduced) by a fountain of credit that will not re-emerge with such force unless people in Washington and on Wall Street make some big mistakes.

The ready availability of credit to consumers was in large part the result of lax regulation, careless investing, and the assumption that home prices would never decline significantly on a nationwide basis. With respect to regulation, the pendulum is clearly swinging in the other direction now. Careless investors have learned their lesson for a generation. And housing prices have disproven the earlier assumption.

After the collapse of housing prices, not only will lenders be more cautious: borrowers also won’t have as much collateral. It will be quite a while before typical homeowners have as much equity as they did in 2006.

Moreover, the meltdown may have shaken confidence in the concept of securitization to the point where it will take a decade or more to restore even healthy securitization markets (if they can be restored at all), let alone the severely intoxicated ones that we were seeing in 2006. It won’t be easy for households to borrow money for consumption in the coming years. The ones that had negative savings rates will be much less common, while the ones that had positive savings rates will still be there. I expect we’ll be seeing savings rates noticeably higher than zero for years to come.

UPDATE: With today's revisions, the increase in the savings rate is much less dramatic, from an average of 1.8% during 2005-2007 to 5.2% in the second quarter of 2009. (Revised monthly data are not yet available.) My guess is that the rate going forward will be higher than the 3.5% average of 2002-2004 but probably not as high as the second quarter, when the lower tax withholding begins to appear in the denominator.

DISCLOSURE: Through my investment and management role in a Treasury directional pooled investment vehicle and through my role as Chief Economist at Atlantic Asset Management, which generally manages fixed income portfolios for its clients, I have direct or indirect interests in various fixed income instruments, which may be impacted by the issues discussed herein. The views expressed herein are entirely my own opinions and may not represent the views of Atlantic Asset Management.
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