A Quick Overview
Below we briefly review updates of two charts we have employed in our recent market updates. The first one is a quick glance at several major indexes: the NDX, the SPX, the Russell 2000 and the DJIA. There have been multiple divergences between these indexes at their recent peaks, but there is also a divergence visible now that a rebound has begun – which is a direct result of the recent underperformance of momentum stocks. Note that we have taken this chart snapshot during the trading day, so it doesn't incorporate Wednesday's close yet.
The market has begun to bounce from a natural support level: lateral support in the NDX (as well as the Nasdaq Composite and the RUT) that has served as a support and resistance level on several previous occasions.
As you will see further below, although momentum and growth names are outperforming 'safe' stocks in Wednesday's trading, the trend toward safety is not undermined yet by this short term counter-trend move. There have been several short term pullbacks in the XLU-QQQ ratio since this new trend emerged in November, but the trend has continued all the same. On Tuesday, the ratio actually reached a new high for the move and is probably overdue for a pullback.
The Rydex sentiment measures we are keeping an eye on show practically no change since our last update. The only measure that is not firmly in cloud-cuckoo land just yet are total assets in bull and sector funds. However, relative to assets in money market funds and bear funds, they are near the peak levels recorded in early 2000. Bear fund assets and money market fund assets are at 17 year lows.
A Shrinking Meat Supply
As Agweb informs us, fears shrinking meat supplies have sent both the prices for cattle and hogs into the stratosphere recently:
“Cattle futures rose to a record as ranchers struggle to boost the U.S. herd from a 63-year low, and hogs climbed to a 34-month high after a virus that kills piglets spread, spurring concerns that meat supplies will shrink.
Beef output in the U.S., the world’s top producer, will fall 5.3 percent this year to 24.35 billion pounds, the lowest since 1994, the Department of Agriculture has forecast. At the start of this year, the cattle herd fell to 87.7 million head, the lowest since 1951, following drought and high feed costs. Porcine epidemic virus has killed more than 4 million pigs, according to an industry group.
This month, the USDA lowered its 2014 forecast for red-meat production and boosted the outlook for cattle and hog costs. Higher meat prices will raise expenses for retailers, while grocery shoppers will pay as much as 3.5 percent more for meat this year, compared with a 1.2 percent increase in 2013, the government projects.
"Total beef production is going to be down, and that’s one of the few commodities that we’re projected to see the supplies tighten this next year," Don Roose, the president of U.S. Commodities Inc. in West Des Moines, Iowa, said in a telephone interview. "In hogs and the cattle, the supplies are expected to continue to stay tight all the way into the spring. Funds are piling into the long side."
There can be no doubt of course that concerns about tighter supplies have strongly supported the recent rally in prices. And yet, this is certainly not the first time that parts of the food industry were plagued with supply concerns. Events like those described above, such as droughts and illnesses befalling herds happen quite frequently. So we are left to wonder whether prices would have also attained the truly dizzying heights recently recorded in the absence of money printing by the central bank. We would suggest the answer to this question is clearly no.
Below we show both the daily active futures charts of lean hogs, live cattle and feeder cattle, as well as 25 year long term charts of their respective prices immediately below the daily charts. As can be seen, prices have never been this high and the recent advances have been huge in the historical context. Luckily for the government, food prices are excluded from the 'core' inflation measure, so the undoubtedly higher grocery bills of consumers won't rudely intrude on the fiction that money printing has no effect on prices.
Moreover, even headline CPI is unlikely to reflect these moves in prices, due to the substitution trick: instead of comparing apples to apples (or in this case, beef to beef), the government simply assumes that consumers will buy less of what has increased in price and therefore will reduce its weight in the basket of goods in favor of goods the prices of which have risen less. It is a very neat way of pulling the wool over everyone's eyes. There may for example be a smaller weighting given to beef, replaced by a higher weighting for chicken. Should chicken prices and other meat prices also rise, consumers will one day presumably be assumed to be eating cat food.
US Monetary Backdrop
Last week we discussed the fact that China's money supply growth has slowed precipitously and also looked briefly at some long term euro area data. As we have mentioned on previous occasions, the annualized growth rate of US money TMS-2 has declined noticeably, but remains brisk in a longer term historical context. Between late 2008 and late 2012, the growth rate briefly dipped below 10% only once, as it was kept high not only via 'QE1' and 'QE2', but also the phenomenon of funds fleeing from euro-dollar markets into depository institutions in the US (in order to ensure financing of the dollar liabilities of European banks, these funds were partly replaced by the now permanent currency swap arrangements between central banks). The situation regarding euro-dollar deposits changed when the sovereign debt crisis abated; moreover, a blanket deposit guarantee for large scale deposits granted by the FDIC in the wake of the 2008 crisis expired, further reducing the advantage of holding such deposits in the US banking system.
Lastly, while 'QE3' has been both open-ended and has involved the largest monthly amounts of debt monetization yet in absolute terms (with the sole exception of the massive alphabet soup programs initially launched in late 2008), there are basis effects to consider: when 'QE2' was launched in November of 2010, the total extant money supply was still a lot lower than it was when 'QE3' began in late 2012. In addition, bank lending growth has steadily declined since early 2012, so there was little impulse from inflationary lending on the part of commercial banks (very recently, growth in bank lending has picked up a bit).
Note that 'Operation Twist' did not directly influence the money supply, as it merely amounted to an altering of the maturity structure of the Fed's securities portfolio.
The most recent data show that the true broad US money supply has by now expanded to almost $10 trillion, with the year-on-year growth rate ticking up again slightly in January, but still remaining below the y/y growth rate recorded a quarter ago and a year ago. In short, the downtrend in the rate of growth in evidence since the end of 'QE2' has not really been interrupted. That may change if commercial banks increase their lending at a faster pace than the Fed reduces its securities purchases. While bank lending growth has indeed picked up since the 'taper' announcement, it is too early to come to conclusions about it, as it is a fairly recent phenomenon that may yet be reversed.
Money Supply and Lending Growth Decline Sharply
Both the growth rate of China's narrow M1 money supply and the broader M2 measure have recently declined to levels not seen in many years. Here is a recent chart showing both:
Annualized growth in China's narrow money measure M1 (currency and sight deposits) has collapsed to just 1.5%, a level not seen in at least the past 15 years (and probably a good while longer). M2, which includes savings deposits, corporate time deposits, deposits in trusts and a few other smaller items grew at 13.2% year-on-year, but even that is one of the lowest growth rates of the past decade – click to enlarge.
We're not 100% sure if China's M1 is a good proxy for money TMS, as there is a paucity of readily available monetary data from the PBoC (its web site is basically useless, at least it was when we last looked) and we don't know whether savings deposits are available on demand in China or not, but it is a fairly good bet that it actually is at the very least a good proxy for TMS-1.
Economic and Political Quagmires
We want to briefly take another look at the situation in four of the emerging market countries that have recently been the focus of considerable market upheaval. The countries concerned are Turkey, Venezuela, Argentina and South Africa. There are considerable differences between these countries. The only thing that unites them is a worrisome trend in their trade and/or current account balances and the recent massive swoon in their currencies as foreign investors have exited their markets (this in turn has pressured the prices of securities). There is currently an economic and political crisis in three of the four countries, with South Africa the sole exception.
However, even South Africa is feeling the heat from the fact that it has a large current account deficit and the ongoing exodus of foreign investors from emerging markets. However, the country is actually used to experiencing vast fluctuations in foreign investment flows in short time periods and has the potential to relatively quickly turn its balance of payments position around. Of the four countries in question, it seems to us to be the most flexible one in this respect.
A Few Worrisome Signs for the Jobs Market
It is well known by now that the two most recent payroll report misses were due to the bad weather that economists and economic forecasters apparently failed to notice. They presumably never go outside, possess no thermometers and don't watch the weather channel, or any other news programs for that matter – this is the best explanation we have for this particular forecasting failure at the moment.
Forecasting with the help of a ruler pressed to a chart (i.e., by simply extrapolating the most recent trend) apparently isn't working so well when global warming makes the weather extremely cold.
Anyway, employment is usually a lagging economic indicator. This is so because employers can never be sure whether incipient signs of economic weakness are merely a short term blip or the sign of worse things to come. One doesn't simply fire people on every little blip in sales. And yet, there are recently a few signs – subtle as they may still be – that the US labor market is deteriorating. A friend pointed us to this recent post by Lee Adler, who is an avid follower of unadjusted, raw economic data and has long stressed that there is an uncanny inverse correlation between US unemployment claims and the stock market. He writes:
“The headline number for initial jobless claims came in at 339,000, which was close to Wall Street economists’ consensus guess of 335,000. On the surface it looked like a non event, with the stock market seemingly viewing it as such, but the actual data shows a more troubling picture.
The DOL reported that “The advance number of actual initial claims under state programs, unadjusted, totaled 358,914 in the week ending February 8, an increase of 3,727 from the previous week. There were 361,417 initial claims in the comparable week in 2013.”
The current number was down 2,500 or 0.7% year over year. This was a sharp deceleration from the prior week’s annual rate of decline of 8.6%, and it’s near the top of the range of weekly annual percentage changes of the past 15 months. Furthermore, the week to week increase of 3,727 was atypical for this week of February. Last year that week had a drop of 27,000. The average change for this week over the previous 10 years was a drop of 6,600. Instead of dropping this week, as is the norm, claims rose. By any measure this was not a good performance.”
Another Warning Sign for Stocks
Both Tom McClellan and Jim Stack recently pointed out that the Coppock curve – a very long term momentum oscillator – has turned down (here are the links to Jim Stack's and Tom McClellan's articles on the topic). It should be pointed out that the Coppock curve is generally better at catching market bottoms than tops, as the stock market tends to make spike lows and rounded tops. As an indicator catching major lows, the Coppock curve has an excellent track record. However, it has been recognized that it does in fact also warn of major peaks, only this requires two downturns in the curve in succession, over a period of about one to two years. As can be seen on McClellan's chart below, a second peak has just been put in. As he points out, the curve could still reverse course if the DJIA rises sufficiently (namely to currently 16,238 points), which would invalidate the signal. Whipsaws do occasionally happen.
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Small Moves on Monday, But Charts Still Ominous
The moves in the EM currencies the market is currently most focused on have actually been fairly small on Monday – however, when looking at the charts, one cannot help thinking that they are merely consolidating ahead of the next major move. For instance, the Argentine peso and the South African Rand have built triangles in recent days, which more often than not tend to be continuation formations. The Turkish lira has also failed to find any new fans and has formed a symmetrical triangle as well on the daily chart (a somewhat steeper sloped one).
Of course there is no guarantee that these triangles will actually turn out to be continuation formations. It is just something that has a fairly high probability per experience.
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Charts We Have Recently Pondered
We come across a large number of charts every day, and below we show a few stock market related ones that we have found especially interesting. First a chart that was recently published by John Hussman. It shows the total value of US equities and bonds divided by GDP. Although one might object that GDP is a somewhat arbitrary choice for the purpose of this comparison, the chart nevertheless is testament to the economy's increasing 'financialization', which in turn is a direct consequence of decades of massive monetary inflation. Inflation spreads from its point of origin throughout the economy, but there are 'inner circles' that profit from it, as they are the earliest receivers of newly created money. Their profit comes to the detriment of later receivers, who find the purchasing power of their incomes diminished.
In the innermost circles we naturally find the government and the banking cartel, hence the 'financialization' effect. The financial sector becomes ever bigger, and represents an ever larger share of corporate profits. His happens notwithstanding interruptions like the 2008 crisis, as the largest financial firms as a rule are always bailed out when things go seriously wrong. That is what the banking cartel was set up for after all!
Other articles that might be of interest for you:
- The Taming of Deluded 'Conspiracy Theorists'
- Meat Prices Go Hog-Wild
- The Facts about the Fed’s Dangerous Credit Bubble
- A Brilliant Look at US Monetary History
- Turkey Energy Advisory
- Are Nation States Beginning to Splinter?
- Growing Unrest in the Eastern Ukraine
- The Germans Just Love Russia
- Insiders Become Extremely Pessimistic
- Walt's Law