Cashin Comments
FAIR VALUE= -185 BUY PROG = -85 SELL PROG = -285
CASHIN’S COMMENTS
TUESDAY, MAY 12, 2009
[AN ENCORE PRESENTATION]
On this day (-2) in 1857, one of those cases of employers not listening to employees took a rather nasty turn. The employer was Her Majesty's Imperial Government in India as the Brits liked to call themselves at the time. The unheeded employees were the sepoy rifleman, serving in Her Majesty's Army in "Inja." (The Brits didn't want to be bothered calling the native troops by their customary regional titles like Bengali; Pakistani, Kashmiri, etc. so they called all Indian troops "sepoy.")
Anyway, on this day in 1857, the management decided to issue the troops some new "state of the art" cartridges for the Khyber Rifles. Some in the army thought India was a confluence of too many conflicting cultures to try to rush into any new project or venture. They feared the European mind was not properly sensitive to how such a complex society might react. But the top brass shrugged off the cautious types and ordered the cartridges dispensed immediately.
One of the new things about the new cartridges was that each one was greased. The Hindu troops thought it was cattle grease, which they could not handle for religious reasons. The Muslim troops thought the grease was pig fat, which they could not handle for religious reasons. Management resorted to a time-tested ploy - punishment - and slapped nearly half of the Third Bengal Lancers who were stationed at the garrison at Mecrut into jail.
When they offered the other half of the Lancers the opportunity to use the new cartridges or be jailed, the employees resorted to an age-old labor ploy and killed all the Brits they could find. They then began to march on Delhi to oust all the Europeans who didn't understand them or respect their culture. It cost the Brits lots of money and men to put the insurrection down. It took a year, many lives, and forced the Brits to take control of the government. The incident poisoned relationships on the sub-continent for over a century.
Imagine a disastrous outbreak of civil unrest exacerbated by governmental confusion about customs, culture and religion.
It wasn’t greased cartridges that greased the skids for the markets yesterday.
A Reminder Of Lingering Problems Provide Excuses For Overbought Pullback – A caution from HSBC provided an opportunity for the rally to back off from its overbought condition. They saw the recent improvement in the mortgage market as "a blip." The chairman said, "Whether we are at, or somewhere near, the bottom, we don't know and will not know for some months."
Since U.S. bankers had been talking glowingly of "green shoots" and successful stress tests, the caution jostled the banking sector. As you may have noticed, the banking sector had provided a lot of leadership in the massive March rally. The HSBC warning rained on that parade.
Stocks opened sharply lower. The S&P fell to 908, stopping just above the napkin support level at 900/905. Stocks then rebounded somewhat with the S&P getting back to 917 which had been part of the broken support at 917/921. For the balance of the day stocks zig-zagged back and forth to try to break above the new ceiling at 917. As the final hour approached, they managed to get Nasdaq into plus territory. Traders thought an afternoon "levitation" was being put together.
There would be no late rally on Monday, however. As the bulls tried to regroup, Meredith Whitney was interviewed on CNBC. She suggested that some of the bank earnings in the first quarter may have been manufactured. That new blow to the banking sector seemed to kill the rally attempt and stocks closed on their lows.
A Half Hour With The Wizard – We had the distinct honor and pleasure to do a thirty minute UBS conference call (Brown Bag Lunch) with Mohamed El-Erian. In the exchange Mohamed expanded on his theme of the "New Normal." (His new essay on that topic will be posted on the Pimco website later today.)
There were many insights and terrific analogies and we hope to get to most of them in coming days. Here's part of the summary point I heard from him toward the close of the session:
Certain things unfortunately are in our future that will define the new normal.
Muted growth rates. We are going back to lower growth rates. It will take a long time to work out the excesses.
Governments find it necessary to enter and intervene in private sector. Historically that makes it very difficult to exit because when a government exits, it stops supporting a financial activity. (That brings pressure from affected constituents.)
The financial system across the board is going to be de risked, de levered and slimmed down which means there is going to be less credit available.
Cashin's Comments Page 2
Tuesday, May 12, 2009
We are going to accelerate the hand off of growth to countries whose interest right now are aligned with ours but later on may not be which speaks to how quickly inflation may come back into the system.
Bottom line is that what we’re involved in goes well beyond a cyclical flesh wound. It is secular in nature and will play out over a number of years. Clients have to recognize this. It's not only about returns but they need to think about how to protect principal and what sort of investment vehicle one uses in this environment.
We think we should all pay careful attention to point # 4. We'll try to transcribe more of the conference call to cite in coming Comments. There were terrific insights.
The Case Against The Rally – Last week I cited some of the work of Dennis Slothower, who had one of the three best performing market letters last year according to Mark Hulbert. My citation produced a lot of interest and comments from readers of these Comments. Yesterday, Mr. Slothower listed ten reasons why he's not ready to buy into the rally yet. Here's what he wrote:
The majority of the major market indexes are not trending above their 200-day moving averages. Bear market rallies are notorious for rallying to their 200-day moving averages and then topping out.
None of the indexes are above their monthly middle Bollinger Band lines. Bear markets trend below the monthly middle Bollinger Band line and bull markets ride above it. This market is still trending in the lower part of the Bollinger Band channel for all the indexes, including the Nasdaq 100!
The 50-day moving average is discounted and trading below the 200-day moving average. In sustainable bull markets, the 50-day moving average will trend above the 200-day moving average. In bear markets, the 50-day moving average will trend below the 200-day moving average for the S&P 500 index.
The S&P 500 is still trending below its 10-month simple moving average on a closing basis. In a study by the Journal of Wealth Management this tool would have kept you out of all the bear markets since 1900 including the Great Depression and you would have caught all the bull markets. We are still below this threshold.
We still have a left translation verses a right translation. A left translation has a pattern of lower lows and lower highs from on intermediate term cycle low to the next. The majority of the indexes have not taken out their January highs and we still don’t know where the next intermediate-term down leg will settle.
Cycles point to a peak in May, with a down leg to about July 17th or so. This traditional cycle peaks this week. My proprietary indicator, the Fidelity Select Family Stochastic Oscillator, is at %K 96 and %D 95. Weekly stochastics are cresting. Daily stochastics are now negative.
The slope of growth in the money supply is dropping like a rock. M2 has been falling steadily and last week fell from 2.4 to .7 – that less than 1% folks. Volume on this rally has been subpar. In a bull market volume rises on rallies and declines on bad days, but what we are seeing is volume rises on bad days and falls on advancing days.
The P/E ratios for the S&P 500 companies are off the charts! The P/E ratio for the Nasdaq 100 is 65.51 times earnings.
Sentiment readings are way too bullish now with the NYSE Bullish Percent Index showing 75% bulls.
Corporate insiders are aggressively selling into this rally, not buying on the dips.
Cocktail Napkin Charting – Given yesterday's action, the napkins suggest support is 900/905 with a default at 888/892. Resistance is 917/921 with a backup at 927/932. Technicals are flashing warning signs at the rally. Many upside targets on the charts have been reached according to John Murphy.
Consensus – This week may be critical. Will the rush of the banks to "monetize the moment" create a logjam of new supply? The trade deficit and budget deficit are key items. Remain wary and stay nimble.
Trivia Corner
Answer - Generous Gene began with a sock of seven potatoes.
Today's Question - "Go Fish" - Dick and Billy are on the road with an evening to kill. They decide to play a card game but since they’re close with a buck, they play for $1 per game. At the end of the evening, Billy had won three games and Dick had won $3. How many games did they play??
Labels: Frank Delaney
posted by Frank A Delaney IV @ 11:03 AM
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