Investing in Macro Tipping Points

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AN UNUSAL WARNING

None of the International stock markets that we cover have followed the U.S. stock market to new highs for 2014 over the past several weeks, with the exception of Japan's Tokyo Nikkei Index NIKK , which has rallied recently in response to its massive yen monetary devaluation plan. Japan's gains are purely monetary debasement driven. Every other international stock market we cover remains in a downtrend in 2014. This is a fascinating Bearish divergence for the United States stock market. The following international stock markets are below their 2014 highs this weekend, some very far below:

• Canada's TSX,
• London's FTSE,
• Germany's DAX,
• Israel's TA100,
• the Dow Jones Euro Stoxx 50,
• Emerging Markets MSEMF Index,
• the Hong Kong Hang Seng HSI Index,
• France's CAC 40 Index,
• China's Shanghai SSEC Index, and
• Australia's S&P ASX 200 Index.

As of this weekend, the Daily Full stochastics for every one of these International stock markets are either

• Overbought or
• On a sell signal,

... with the exception of the MSEMF, supportive of the next leg of their large degree declining trends. 

Every single international stock market we cover has Elliot wave labelings and price patterns that tell us they have all completed major tops and are now in the infancy of disastrous declining major waves that could last years. You can see those charts in this weekend's international report at www.technicalindicatorindex.com

What this means is world stock markets are falling, and the next leg of their declines is either underway or close to starting. Think about this. Global markets are in trouble.

Do we honestly think the U.S. stock market and economy can hold up with international stock markets declining in concert? This is a grave situation.

The consensus of all knowledge internationally of all market participants about the expected future state of world economic prospects is that economic devastation is coming. The specific causal factors of that economic devastation is hard to identify. Technical Analysis does not identify causal factors. But TA does measure the collective wisdom of every investor worldwide and what they see coming for the future of stocks, and at this time we are being told by the markets that the collective wisdom of every investor worldwide sees from their own vantage point a series and collection of negative events that suggests to them individually that stocks will fall in the future and will fall quite a bit.

Perhaps their collective wisdom sees barriers to economic growth from

• war,
• pestilence,
• terrorism,
• political strife,
• environmental crises,
• a derivatives implosion,
• banking crises,
• power grid blackouts,
• natural disasters,
• the demise of capitalism,
• other issues unsupportive of future higher stock prices.

Global markets in combination reflect the opinions of every investor, the sum of their bets that the future will be brighter or worse. The verdict: Global Market participants do not believe governments will be able to stop whatever is coming. They believe stocks are headed much lower. A major Bear Market is starting.

This is the technical analysis picture for international stock markets this weekend. I wish it was a brighter picture, but the markets are speaking loud and clear, "Prepare."

Best regards,

Bob McHugh, Ph.D.

www.technicalindicatorindex.com

PATTERNS - The Long Term Elliot Wave Count

The Fibonacci Ratio Progression from 1932 to 2014 Our highest Fibonacci-derived target for a daily closing high for wave V in the Dow, as presented on pages 18-20 and Figure 9 of the July issue of The Elliott Wave Theorist , is “17,282 + or – 2%.” Let’s refine this projection.

• The rise of wave I from 41.22 in 1932 to 194.40 in 1937 is 4.71616x, or (5/3) 3 (which is 4.6296) + 1.870%.
• The rise of wave III from 92.92 in 1942 to 995.15 in 1966 is 10.70975x, or (8/5) 5 (which is 10.48576) + 2.136%.

We did not need “ or minus ” within our original expression, as in both cases the Dow went beyond the Fibonacci ratio multiple. It should have read only “+2%.” The average overshoot is 2.003%.

A compatible goal for the end of wave V from 577.60 in 1974 would be a multiple of (13/8) 7 , which is 29.9208, yielding a target of 17,282.25, plus 1.870%-2.136%, which is 2.003% + or – 0.133%, indicating a high at 17,605.43- 17,651.40 , or 17,628.41 + or – 23 points

We should consider the possibility that the difference in overshoot for each wave is also undergoing a progression, in which case the target is slightly higher. In arithmetic terms, the overshoot of wave III is 0.266% additional to that of wave I, and if wave V’s overshoot is 0.266% additional to wave III’s, it would be 2.402%, projecting 17,697.37 . In percentage terms, the overshoot of wave III is 14.2246% more than that of wave I, and if wave V’s overshoot is 14.2246% more than wave III’s, it would be 2.4398%, projecting 17,703.90 . If the Dow’s closing high is within four points of 17,701 , then, the progression will be precise.

The calculated ideal target range of 17,605-17,704 covers less than 100 Dow points. It can also be expressed as 17,655 + or – 50 points . Figure 6 displays these observations. The Dow entered this range at today’s close.

Like the other targets provided in the July-August issue, this is a single projection. There is just some leeway as to where it might be met.

Supercycle Peaks are Occurring at Fibonacci Numbers

The calculation yielding 17,704 is especially interesting given that 17,711 is a Fibonacci number. The three previous Supercycle-degree tops of the past 250 years also occurred near Fibonacci numbers. The Fibonacci sequence goes like this, with the Supercycle-degree peaks noted in bold :

1, 1, 2, 3, 5, 8, 13, 21 , 34, 55, 89, 144, 233, 377 , 610, 987 , 1597, 2584, 4181, [ 6765 ], 10946, 17711 .

The wave peaks are as follows:

• 21 : Supercycle (I) at 24.44 in 1835
• 377 : Supercycle (III) at 381.17 in 1929
• 987 : Supercycle peak in inflation-adjusted Dow (DJIA/PPI) in
• 1966; Dow at 995.15
• 17711 : Supercycle (V) in 2014?

The peaks of 1929 and 1966 average less than 1% from their associated Fibonacci numbers. The differences are 1.1% and 0.8%, respectively. A 1.1% leeway from 17,711 is 195 Dow points, bracketing 17,516-17,906 . The Dow entered this range on November 6.

At 16% away, the peak of Supercycle (I) is the furthest from its associated number. It nevertheless seems qualified for part of the progression because the Foundation for the Study of Cycles derived its Dow-equivalent numbers from skimpy data for the first hundred years on this chart. Any actual DJIA could have been 16% different from the interpolated number. The success of the two peaks for which data are precise suggests that the earlier peak may have been so as well. If the upcoming turn does not coincide with a Fibonacci number, the proposed progression will prove spurious. If it does coincide with a Fibonacci number, then we may feel even safer in assuming that the 1835 high did so as well.

The low in 2009 at 6547, denoted in brackets, occurred 3% away from a Fibonacci number, 6765 . That low is either Primary 4 or Supercycle a . The reason this is worth noting is that it fits the spacing of the other turning-point numbers: 21 is 6 steps past the sequence’s starting number, 1; 377 is 6 steps past 21 ; and 17111 is 6 steps past 987 . Likewise, 6765 is 6 steps past 377 . Moreover, there are 2 steps between 377 and 987 , and 2 steps between 6765 and 17711 .

All these observations are illustrated in Figure 7.

The Supercycle lows have not adhered to Fibonacci numbers. Although the low of wave (II) in 1842 is 5.43, which is 9% away from the Fibonacci number 5 , the low of wave (IV) in 1932 is 41.22, nowhere near a Fibonacci number

The Inflation-Adjusted Dow Clears the Way for a Wave 5 Label in 2014

The Dow/PPI ratio adjusts the Dow for inflation. It measures not how many dollars the Dow will buy but how many goods . We use the Producer Price Index (PPI) as the divisor because it is not nearly as easily manipulated as the Consumer Price Index (CPI).

In the past, corrective-wave rallies that made new nominal highs (for example the Dow in 1973) did not make new highs in inflation-adjusted terms. This divergence seems to be a trait of intra-correction waves, i.e. “B” and “D” waves, as opposed to fifth waves.

One of my long-time arguments in favor of labeling the orthodox end of wave (V) in 2000 has been that the inflation-adjusted DJIA, as represented by the Dow/PPI ratio, peaked on 1/14/2000 at 86.91, and despite new nominal highs in 2007 and 2013 the market fell short of new inflation-adjusted highs. But a new high in the Dow/PPI this month has eliminated this objection to labeling the current rally as wave 5.

The new high in the inflation-adjusted Dow is not proof that wave 5 is the correct count. The Dow/ gold ratio (pricing the Dow in real money) is nowhere near a new high. Still, sentiment toward stocks is ebullient enough that investors have driven the Dow’s purchasing power to a higher level today than they did in 2000. That’s quite a feat, one more likely in a fifth wave than in a B wave.

Figure 8 shows that wave 5 in the Dow/ PPI can be counted as five nearly completed waves. The impulse form does not have to be terminating, but for the first time since the 2009 low it can be. This acceptably terminating form is compatible with the fact that the nominal Dow is in the range of our last price target.

STUDIES - Revisiting the Macro Bias

2014 MACRO CALL

2007 COMPARISON

STUDIES - Fed Balance Sheet Correlation Returns

STUDIES - USD Breaks 30, 12 and 8 Year Trend Resistance

ACTUALLY OVER 12 YEARS

MORE IMPORTANTLY OVER 30 YEARS

US CARRY TRADE SHOCK: Globally the US Dollar carry trade is believed to be north of $3 trillion (the emerging market component alone is $2.7 trillion). Now, a carry trade only works when the currency you are borrowing in remains weak. As soon as it begins to strengthen, your profits not only evaporate but you can end up deep in the red (remember you’ve borrowed $100 for every $1 you have in capital). And the US Dollar rally has become a BIG problem for a financial system awash in borrowed Dollars. If the $3 trillion carry trade begins to unwind we could very well see a spike similar to that which occurred leading up to 2008

DRIVER$ - US$ Carry Trade In Troubles

The following analysis is marked up / annodated from: Is the US Dollar About to Trigger a 2008 Collapse? 11-10-14  Phoenix Capital Research via ZH

The financial world focuses far too much on stocks. The stock market, despite being at record highs (meaning record market capitalizations) remains one of the smallest, and least sophisticated markets on the planet.

Consider that stocks, even at current lofty levels, have a global market capitalization of slightly over $60 trillion. In contrast, the global bond market is well over $100 trillion. And the global currency market trades OVER $5.3 trillion per day.

• It is currencies, not stocks, where the most significant moves occur.
• The currency markets are the largest, most liquid markets in the world.
• They are always first to move when things change. 
• Stocks are the DUMB money compared to currencies.

With that in mind. I want to draw your attention to something that is happening in the US Dollar. We’ve been following the greenback closely since it began a sharp rally last summer. But now things havereally begun to heat up. As you can see, the US Dollar has broken out of a massive wedge pattern that has been forming over the last eight years.

ACTUALLY OVER 12 YEARS

MORE IMPORTANTLY OVER 30 YEARS

Why does this matter?

US$ CARRY TRADE UNWINDING

Because, globally, the world is awash in borrowed money… most of it in US Dollars.

When the Fed cut interest rates to zero in 2008 and flooded the financial system with liquidity, it funded an unprecedented amount of debt borrowed in US Dollars.

Everyone around the world, from traders to hedge funds to financial institutions and even global banks could borrow US Dollars at 0.25%... and invest in emerging markets, emerging market currencies with higher yields, infrastructure projects, corporate takeovers, etc.

In simple terms, the US Dollar became one of, if not the largest carry trade in the world. Globally the US Dollar carry trade is believed to be north of $3 trillion (the emerging market component alone is $2.7 trillion).

Now, a carry trade only works when the currency you are borrowing in remains weak. As soon as it begins to strengthen, your profits not only evaporate but you can end up deep in the red (remember you’ve borrowed $100 for every $1 you have in capital).

And the US Dollar rally has become a BIG problem for a financial system awash in borrowed Dollars. If the $3 trillion carry trade begins to unwind we could very well see a spike similar to that which occurred leading up to 2008:

Here’s the recent action:

Is the US Dollar about to send us into another 2008 collapse?

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BUYBACKS - The largest source of overall US equity demand in recent years

The Biggest "Source Of Equity Demand In Recent Years", According To Goldman Sachs

Spoiler alert: it's not the Fed, even though the portfolio rebalancing channel courtesy of a $4.5 trillion Fed balance sheet certainly assured that the artificially inflated bubble in stocks, as a result of the Fed's own purchases of bonds, is unlike anything seen before (and to all those debating whether the bubble is in bonds or stocks, here is the answer: it is in both).

The answer, according to Goldman's David Kostin is the following: "From a strategic perspective, buybacks have been the largest source of overall US equity demand in recent years."

In other words, not only has the Fed made a mockery of fundamentals, the resulting ZIRP tsunami means that corporations can issue nearly-unlimited debt to yield chasing "advisors" managing other people's money, and use it to buyback vast amounts of stock, which brings us to the latest aberation of the New Abnormal: the "Pull the S&P up by the Bootstaps" market, in which the only relevant question is which company can buyback the most of its own stock.

Some further observations on the only thing that matters for equity demand in a world in which the Fed is, for the time being, sidelined:

Since the start of 4Q, a sector-neutral basket of 50 stocks with the highest buyback yields has outpaced the S&P 500.

And sure enough, with the market once again rewarding stock buybacks...

... companies will focus exclusively on stock repurchases in lieu of actual growth-promoting capital allocation such as CapEx (as predicted in April 2012):

We forecast S&P 500 cash spent on repurchases will rise by 18% in 2015 following a 26% jump in 2014.

Putting this number in the context of the recent "fire and brimstone" announcement by the BOJ:

We estimate the incremental demand for US equities from the combined re-allocation of Japan pension assets will total $70 billion. For context, we forecast share buybacks by S&P 500 firms will total $707 billion in 2015, or 10x as much as the overall Japan pension fund re-balancing.

In other words, what the BOJ does to the market will be a tiny fraction of the impact the latest and greatest cost-indescriminate buyer - corporations buying back their own stock - will impart on equities.

And here is what happens to CapEx as a result:

... capex growth will decelerate by 200 bp to 6% as global growth concerns and a 25% plunge in crude oil prices since June have brought investment plans under review. The Energy sector accounts for roughly onethird of aggregate S&P 500 capex.

We have said it for years, and finally even Goldman admits it: the days of Capex growth are over:

There is more bad news: because while stock buybacks mean even more artificial growth for risk assets, the collapse in CapEx, especially among energy companies, means that GDP in 2015 is about to drop off a ledge, polar vortex 2.0 notwithstanding.

Behold: 0% (or negative) growth in Real Private Fixed Investment Oil & Gas Structures & Machinery, a direct - and quite substantial - input factor into the GDP calculation.

But who needs growth when the Chief Executives of America's largest corporations are about to trickle down their record, stock-buybacks driven bonuses for yet another year.

EARNINGS - Revenue Softness Worries Stock Investors

EARNINGS - Analytsts Taking Down Earnings Estimates for Q4 2014

Does this look like the earnings picture painted by a thousand talking heads on financial news networks?

As Goldman reports,

The positive 3Q earnings surprise is in stark contrast to negative revisions to consensus 4Q 2014 and 2015 earnings forecasts.

Consensus 2015 EPS estimates for the Energy sector fell 3% in the last week alone.

Forecasts for most other sectors are also falling but the magnitude of revision is smaller.

So apart from that - yeah, earnings look great!!

FLOWS - Liquidity, Credit and Debt

From Despair to Euphoria (and Back?) 11-01-14 Richard Duncan

When I wrote my last blog, “Very Scary”, on October 14th, the stock market was very shaky. Bloomberg reported that $744 billion had been wiped off equity values just since October 8th. Things became very much scarier the next day. When the markets opened on October 15th, panic set in. The Dow fell as much as 470 points, and bond yields collapsed. The yield on the 10-year US government bond fell from above 2.2% to 1.86% nearly as soon as the market opened. CNBC’s savvy bond market watcher, Rick Santelli, said he had never seen anything like it. The Fed had long signaled that it would end the third round of Quantitative Easing in October and the markets were terrified by the thought of what would happen to stocks when the Fed stopped pumping money into the financial markets.

The following morning (October 16th) stocks were moving down sharply again. The NASDAQ was down more than 10% from its September high, while the S&P was off 9.8% from its peak. Then, in the blink of an eye, everything changed. In a live TV interview, St Louis Fed President James Bullard recommended extending QE. The Dow jumped 120 points so quickly that it looked like a computer error must have occurred. The following day, the chief economist of the Bank of England revealed that the first interest rate hike in the UK was likely to be delayed relative to earlier expectations. On October 20th, the European Central Bank announced it had begun buying covered bonds to boost the Eurozone’s economy. And on October 28th, Sweden’s central bank cut its policy interest rate to zero percent for the first time in history.

By this point, stocks had recovered most of their losses from earlier in the month. On October 29th, the Fed put on a brave face and announced that it had decided to end QE 3, as scheduled. But, then, two days later, the Bank of Japan stunned the financial world by announcing that it would increase its Quantitative Easing program from Yen 60 - 70 trillion a year to Yen 80 trillion a year, an amount equivalent to US$727 billion.

Within the space of two weeks, market sentiment flipped from despair to euphoria. By the end of trading on October 31st, both the Dow and the S&P had hit new record highs. The Yen fell to its lowest level against the dollar in nearly seven years, while the Nikkei index jumped to its highest level since November 2007. The strong dollar pushed oil down 9% during October and gold fell to its lowest level since 2010. What a couple of weeks!

So, what next? As you know, I believe central banks (primarily the Fed) have been driving economic growth by printing money and pushing up asset prices, thereby creating a wealth effect. Stocks came very close to crashing mid-month on the thought that QE was about to end. But, James Bullard restored calm by strongly implying that the Fed was prepared to step back in with more QE if necessary. Then all the other central banks chipped in, one way or the other (the BOJ most dramatically), to send a strong signal that they would not allow the global bubble to deflate.

But, here’s the thing. Without more – in fact, without much more – fiat money creation by the Fed (a.k.a. QE 4), the global bubble is going to deflate, or, at least, that’s how it looks to me.

The following chart was taken from my latest Macro Watch video, which was called “Analyzing The Five Largest Central Banks”. It shows the annual percent increase in Global Liquidity projected out to the end of 2016.

It shows that, without more Quantitative Easing from the Fed, global liquidity will expand by only

• 6% during 2016, compared with
• 20% in 2012,
• 30% in 2009 (at the peak of the policy response to the crisis), and
• 15% in 2004 and 2005 (the years leading up to the crisis).

This chart was made before the BOJ announced the expansion of its QE program, but even incorporating that, the growth in global liquidity will still be less than 7% in 2016. That will not be enough to keep the global economic bubble inflated. Only another very large round of Quantitative Easing by the Fed will achieve that. It will be fascinating to watch how much longer stock prices will continue to levitate without additional policy intervention to keep them afloat.

Not for long is my guess.