Wednesday, January 18, 2012
Following on from my overall summary chart of 110 years of the Dow Jones Industrial Average (DJIA) published here last week, further detailed analysis serves to demonstrate that volatility has been reliably consistent for the past 110 years, and now is no different. Leading on from last week's DJIA summary, I discovered on the 10base LOG chart that there was an approximate 16.6 year bounding box with 43% depth that could be repeatedly applied throughout the entire DJIA price history – stacked vertically and added horizontally. I have since discovered this was no accident, and the chart below shows you how it was derived, in both time and price.
The completed annotated DJIA chart – (using LOG based quartiles)
Notations show alternating periods, highlighted volatility, and the amount of growth in quartile boxes (in blue). A similar chart can be done using a quintile LOG chart, but the repeating range is predominantly in quartiles.
After a bit of Photoshop pasting with an overlay of Doug Short's Q Ratio analysis (sourced here), we get this interesting result.
The chart above shows that the previous growth cycles have all commenced on a Q Ratio low, as it did in 1983, and would also be timed similarly for lows in other market value ratios such as cyclical P/E ratios, etc. It further confirms the current level of the Q Ratio, after the growth period into 2000, is yet to reach anywhere near the low levels of the three previous consolidation periods.
Where do I think we are now?
As of January 2000, we had just completed another ten-fold increase in the DJIA index, as a result of a clear up-leg with excess rate of growth that was almost 3% steeper that the growth out of the 1932 low. This has ended in what appears to be a failed top similar to 1900-1910. So it stands to reason that we are in another sideways consolidation period. Using the 4181 cycle lines, the current cycle period expires approximately October 2015. The rise that has occurred during the previous cycle is the steepest sustained move in the DJIA history analyzed.
One century after the 1900's, it now seems obvious that we are heading back into the equivalent of 1930. The 20th century completed a large expansionary phase of historic technological advance on the back of the industrial revolution of the 19th century. Unfortunately we are now in the stronghold of rampant monetary stupidity, feeding banks with mindless public capital with a net result of simply blowing bubbles. Just as the early 1900's were to the 1800's, so too is this phase of the 21st century to the century past. Nothing has changed.
We are essentially in the 21st century version of 1910 heading into 2030 déjà vu all over again. As per the chart below...
...one hundred years later, do we find ourselves back in the same spot?
The apparently critical-when-its-going-up-but-ignore-it-when-it-is-falling index of the cost of dry bulk goods transportation has ‘crashed’ in the last few weeks to its lowest level since January 2009 (back below 1000 according to today’s levels). Whether this is seasonal output differences or weather impacts, it seems clear that lower steel output in China and a decline in European imports is having its impact on global trade. The index has fallen for 19 days in a row, down almost 50%, its largest drop since the harrowing period of Q4 2008.
The change over the past 19 days (of freefall) is almost 50%, its largest drop since Q4 2008…
and only the third largest ever monthly percentage drop in dry bulk rates…
Bloomberg Reports That Greek Private Creditor Deal Near, At 32 Cent Recovery, According To Hedge Fund Involved
Last year it was bank posturing, coupled with Germany and the rest of the Eurocore countries, when it comes to Greece. Now it is the hedge funds. Bloomberg has reported that the Greek private creditors have "reached a deal" with Greece on existing debt which "would give creditors 32 cents per euro", or a 32% recovery according to Marathon Asset Mgmt CEO Bruce Richards, who until recently was a bondholder, but recently has been rumored to have dumped his holdings, which makes one wonder why or how he is talking for the creditor committee. Of course, with Greece now a purely bankruptcy play, we expect various ad hoc splinter "committees" to emerge, coupled with an equity committee as well (yes yes, we jest). Bloomberg reports also that Richards is "highly confident" a deal will get done. Nonetheless, the Marathon CEO expects Greece won’t make the €14.5 billion ($18.5billion) bond repayment scheduled for March 20. However, he does see a deal with creditors to be in place before then. For now the Greek government has declined to comment. We fully expect the IIF's Dalara to hit the airwaves shortly and to make it all too clear that the implied 68% haircut is sheer lunacy. Naturally, should this deal come to happen, we can't possibly see how Portugal, Spain or Italy would then sabotage their economies just so they too can enjoy 68% NPV haircuts on their bonds. Finally, even if Marathon likes the deal, all it takes is for one hedge fund hold out to necessitate the application of Collective Action Clauses which would blow the deal apart, create a two-tiered market, and effectively create the perception that the deal was coercive.
More from Bloomberg:
There are still obstacles to concluding what negotiators term a “consensual restructuring.” Official lenders may object if they conclude that the deal would be too expensive for Greece, which would force the country to go back for more official support in the future.
“I can only tell you the negotiations are continuing,” said Frank Vogl, an IIF spokesman. “I can’t tell you whether they’ll be successful.” The IIF, a global association of financial institutions, is led by Deutsche Bank AG (DBK) CEO Josef Ackermann.
An agreement reached Oct. 26 called for private holders of just more than 200 billion euros worth of Greek government bonds to accept new bonds with a face value of half that amount, or about 100 billion euros. As part of the deal, euro-zone members agreed to kick in 30 billion euros in unspecified support. That could take the form of buying bonds from the private holders at 100 cents on the euro in cash, leaving them with new bonds with a face value of 70 billion euros.
Negotiations since then have centered on the interest rate new bonds will pay, with Germany among those insisting on a low rate and the private creditors demanding a higher one.
The new bonds will probably pay annual interest of 4 percent to 5 percent and have a maturity of 20 years to 30 years, Richards said. They may trade for about half of their face value, he predicted. Altogether, the net present value of the deal for the bondholders will be about 32 cents on the euro, he estimated.
It’s not yet clear whether the deal will cover all outstanding Greek bonds or just those maturing by the end of 2020, Richards said. He also said that the deal probably won’t contain a sweetener to reward creditors in case of a strong improvement in the health of the Greek economy in coming years.
The tentative deal may win support from investors holding 70 percent to 80 percent of the privately held Greek bonds, he estimated. He favors the deal, suggesting investors who refuse may get back less.
“There’s a very, very high probability that this goes through,” he said. “It’s the best deal creditors can get.”
Well as long as Marathon is talking for all the possible hold outs...
Finally, assuming this deal does go through, we can't wait for Greek people (and thus US taxpayers who are ultimately funding all of this) to understand they are giving hedge funds an immediate 28% return (bonds trading at 25 cents, recovery is 32) which they themselves are funding. On the other hand 7 cents nuisance value on $200 billion is $14 billion. As a reminder, on January 10th we said "We estimate the final tally, to US taxpayer mind you, will be about $20 billion, to remove the "nuisance factor" of hold out hedge funds." In other words, we were almost spot on where we said Europe (and thus America) would "tip" hedge funds to just go away.
Today we have a monster of a guest post from my friend the Finance Addict who blogs over at FinanceAddict.com. FA asks why all of a sudden JPMorgan and its legal representatives have seemingly disappeared from credit card collection judgments (as per a small piece in American Banker magazine). I have no special insights or opinions on this just yet but it certainly bears watching in light of how much the robosigning of mortgages has cost the banks. Enjoy! - JB
The following statement scared me more than the thought of a Rick Perry presidency. From American Banker:
“If sloppy record keeping and problems with false affidavits is a problem with mortgages, it’s 100 times bigger in credit card accounts,” says Michelle Weinberg of the Legal Assistance Foundation of Metropolitan Chicago.
Worse than mortgages, even? Let’s just review the mortgage situation:
- Robosigning consists of blatantly illegal practices in which banks and mortgage companies had their employees sign affidavits and other documents without verifying the information therein; forge signatures on documents; backdate documents; falsely notarize documents; create new documents to replace missing ones; or some combination of all the above. Did I mention that all of this is illegal?
- Contrary to what the banks would have you believe, robosigning was not a one-off — it happened on a systematic level. So much so that some of the nation’s largest banks (including Bank of America Corp. and JPMorgan Chase & Co., ) were forced to halt foreclosures to “review” these practices in late 2010.
- The companies that did this claimed that they had to cut corners because they couldn’t keep up with all of the paperwork created by the housing boom last decade. But we now know that this is not true — there’s evidence that robo-signing goes back all the way to at least 1998.
- This all means that thousands of Americans were foreclosed upon erroneously and that even homebuyers and sellers in good standing may be unable to prove their rightful ownership.
- The problem is so big that Sheila Bair, the former head of the FDIC, acknowledged that they don’t even know how big it is. It’s so big that the banks are willing to pay around $25 billion to settle the whole thing and be released of all liability.
- This also creates major headaches for institutional investors who bought bonds and structured products supposedly backed by these mortgages. If the mortgage banks don’t have correct legal documents showing that they owned the loans then there’s no way that they could have legally and correctly transferred them to the standalone trusts that are the essential component of these investments. According to the Securities Industry and Financial Markets Association, there are over $7 trillion in U.S. mortgage-related securities outstanding. The Federal Reserve, itself, owns over $840 billion worth of mortgage-backed securities.
So in short the widespread and systematic robosigning of mortgage documents have created a real unresolved nightmare. And now there are indications that similar issues may exist within the credit card industry. Consider the very curious behavior of JP Morgan Chase, as reported in that little-noticed American Banker article from last week:
JPMorgan Chase & Co. has quietly ceased filing lawsuits to collect consumer debts around the nation, dismissing in-house attorneys and virtually shutting down a collections machine that as recently as nine months ago was racking up hundreds of millions of dollars in monthly judgments.
When a bank leaves money on the table for no obvious reason, you know that something’s not quite right.
American Banker says that JPM’s retreat on these lawsuits was first reported by the Wall Street Journal last year and that “document irregularities” were cited for the move. JP Morgan Chase’s decision to fire the lawyers working on these cases was massive (several regional teams were fired) and urgent (the orders came down from on high, i.e. NYC headquarters.) Some of those fired claim that the OCC has been investigating.
To substantiate this, consider the case of one Linda Almonte, a former JP Morgan Chase employee. In 2010 Almonte filed a lawsuit against JPM alleging that she was fired for blowing the whistle on their robosigning credit card processes. As the San Antonio Express News reported, Almonte alleged that
Chase knew that about 5,000 accounts had incorrect balance information, and that more than 11,000 accounts on which it claimed it had court judgments lacked adequate documentation showing judgments actually were obtained.
In some cases, she said, the judgments were against Chase rather than customers.
Almonte brought her concerns to her superiors, warning them the bank was violating federal law by intentionally misrepresenting the accounts, her lawsuit states. Nonetheless, she said she was told to proceed with the sale [of the portfolio of 23,000 delinquent credit card accounts to an external buyer].
Who’s willing to bet that this a one-off case?
The Barron's Roundtable sees trouble in Europe, but bargains in the U.S. and emerging markets. Marc Faber and Oscar Schafer share their 2012 investment picks.
Inflation. Deflation. Rehypothecation. Bad rap lyrics, or the poetry of finance? You can judge for yourself when you finish this first installment of Barron's 2012 Roundtable, a verbal free-for-all that features high-falutin' words, scary predictions and, yes, some sound advice on how to prosper in the year ahead.
After a year of political turmoil in the U.S. and debt-fueled chaos in Europe, it's no wonder the 10 investment experts whom Barron's assembled last Monday at the Harvard Club of New York were eager to dissect the big picture: how the U.S. should gets its house in order (the Senate, too), whether Greece will get booted from the euro, why central bankers might print money until the world's ink supply runs dry, and, not least, when World War III will erupt (sooner than you think). To a one, these leading lights of Wall Street agreed that the world is a lot more dangerous than it was 10 or 20 or 30 years ago, when investors worried more about return on their capital than return of it.
That said, most Roundtable members also think pessimism equates with opportunity -- in this case, the opportunity for gains in 2012 in relatively undervalued U.S. stocks. Fred Hickey, our resident expert in all things tech, even allowed that the 12-year bear market in technology shares could be ending, which really would be something to celebrate.
You'll note a new face at this year's Roundtable, that of Brian Rogers, chairman and chief investment officer of Baltimore money-management powerhouse T. Rowe Price. He takes the seat long occupied by Archie MacAllaster, who sadly passed away in 2011. Archie likely would be pleased to know that Brian too is an optimistic sort; he lives by several upbeat maxims, including that the world doesn't end often. Try to remember that when you read the downbeat stuff in the pages that follow. (more)
There’s been talk in the blogosphere lately about whether or not developed economies are deleveraging, i.e. winding down their debt.
Some recent posts, under headlines such as “The Age Of Consumer Deleveraging Is Over” and “Deleveraging is So 2011,” have argued that at least in the United States, consumer deleveraging appears to be a thing of the past.
My take, however, is that in many sectors of the US economy, deleveraging hasn’t happened at all. In fact, the notion that the United States is deleveraging is mostly a myth.
Now to be fair, deleveraging has occurred in at least one sector of the economy: The US financial sector, which has significantly reduced its debt. But once you move outside of the financial sector to the real economy — households, corporations and government — the great deleveraging idea evaporates.
The dirty little secret is that US non-financial debt rose by more than $5 trillion from the end of 2007 through the third-quarter of 2011. In the last year alone, the real economy has added roughly $1.4 trillion in debt to the overall US non-financial total.
It’s true that US household debt has contracted in recent years, but the contraction has been modest and is mostly due to bank write-offs. Since a debt peak in early 2008, US households have shed roughly $800 billion in debt. And as pointed out by the blog posts cited above, new US consumer credit numbers show increasing consumer debt.
At the same time, corporate debt has been rising as companies take advantage of record low yields. Since 2008, corporations have added approximately $500 billion in debt to their balance sheets.
This half-trillion increase, however, pales in comparison to the debt binge of the federal government. Publically traded or net federal debt has risen by more than $5 trillion since late 2007. As you can see in the chart below, this puts overall US non-financial debt at a bit under $38 trillion (for the purists, this arguably understates the total by $5 trillion as it ignores government debt held by the Social Security Trust Fund).
In short, it’s hard to argue that the US economy has deleveraged. Since 2009 the US debt burden has been relatively stable when compared to GDP. Essentially, nominal private sector debt has stabilized, while public sector debt has skyrocketed in an attempt to ease a collapse in consumption.
As I’ve mentioned before, this can continue for a while longer. In a world in which investors are short of safe investments, most are still willing to give the benefit of the doubt to the US government and lend long for the privilege of a safe place to park their money.
But for those who believe that debt levels are still unsustainably high — as I do — there does eventually need to be a reckoning. When this eventually happens, lending to the government for 2% may no longer seem like a safe haven.