Thursday, August 16, 2012

McAlvany Weekly Commentary

Three Benjamins, Three Questions

About this Week’s Show:
-Benjamin Netanyahu’s critical decision
-Benjamin Bernanke, Mr. September?
-Benjamins in your pocket up in smoke

Dow Appears to be Forming a Triple-Top Volume and breadth shrinking; stochastic issues short-term sell signal

A better retail sales number led to a higher opening on Tuesday. And stronger-than-expected earnings from Home Depot (NYSE:HD) added to the optimism. But the market didn’t sustain the higher prices, as Europe’s woes put a halt to the early rally and stocks sagged from noon to the closing bell.

At Tuesday close, the Dow Jones Industrial Average was up 3 points to 13,172, the S&P 500 was even at 1,404, and the Nasdaq fell 6 points to 3,017. The NYSE traded 565 million shares and the Nasdaq crossed 382 million. On the Big Board, breadth was only slightly negative, but on the Nasdaq, decliners were ahead of advancers by 1.7-to-1.

Dow Chart
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Trade of the Day Chart Key

Like yesterday’s chart of the S&P 500, the Dow industrials appear to be forming a triple-top. Seven trading days have topped at just over 13,200, while volume and breadth continue to shrink. On Tuesday, the stochastic issued a short-term sell signal, which could break the Dow to its 20-day moving average and a temporary bottom at 13,000.

DJT Chart
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And while the industrials struggle with a triple-top, the Dow Jones Transportation Average continues its sideways, non-confirmation mode.

VIX Chart
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The CBOE Volatility Index (VIX) popped from its March low on Tuesday, and its stochastic flashed a positive signal — a negative for stocks. It’s a bit early to make decisions based on just one reversal of the VIX, but if a pattern of reversals from under 14 develops for a week or more, the indication would be bearish.

Conclusion: Some technicians say that you should never sell into a boring market. If that’s true, then what or who will kick the bull out of its slumber?

Perhaps the Europeans are working on a plan to bring together a viable financial union. If so, the triple-top will break to the upside.

But I think I’ll continue to wait for a resolution to the crisis and not bet my 401(k) on a strong political/financial relationship between the north and south of the European continent. There have been too many cans kicked down the road from Berlin to Rome, and it appears that there is an unlimited supply of them.

What Inflation Means to You: Inside the Consumer Price Index

The Fed justified a previous round of quantitative easing "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate" (full text). In effect, the Fed has been trying to increase inflation, operating at the macro level. But what does an increase in inflation mean at the micro level — specifically to your household?

Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI.

The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, here is a useful link.

The chart below shows the cumulative percent change in price for each of the eight categories since 2000. (more)

Goldman Pulls the Plug on More QE in 2012

One of the most vocal advocates of a NEW QE announcement next month, at either the FOMC meeting or Jackson Hole – Goldman Sachs – has just pulled the plug. From Jan Hatzius: “The US economic data continue to look a bit stronger. Tuesday’s retail sales report for July beat expectations, while inventory accumulation showed a further slowdown in June. Our Q3 GDP tracking estimate edged up to 2.3%. The recent news also has implications for Fed policy. While QE3 at the September 12-13 FOMC meeting remains possible, our best estimate is that it will take until late 2012/early 2013 before Fed officials return to balance sheet expansion.” Just as we have been saying. Which means the Fed is now out of the picture until the end of 2012. And with corn prices where they are, so is the PBOC. As for the ECB – talk to Rajoy, who will do nothing as long as 10 Year yields are under 8%. Which means that, as explained previously, Spain and Italy, and in fact the entire world, must all be destroyed first, before they are saved.

Full Goldman note:

The US economic recovery remains sluggish, but we believe that it will pick up a bit in coming months. Tuesday’s data were generally in line with this expectation:

1. Stronger retail sales. The July retail sales report showed a clear upside surprise, with a 0.9% gain in sales excluding autos, building materials, and gasoline. The month-to-month strength was broad-based, with sizable gains in most core categories, although it mainly served to reverse some of the declines in the prior month. (more)

Invest in Your Home, Not Stocks: Chris Martenson

Don't look to the major market indices to get a sense of the global economy. The Dow Jones Industrial Average (DJI) and the S&P 500 Index (GSPC) are headed toward multi-year highs and both have posted gains of 8 percent or more since January. This discord between investor sentiment and the current macro outlook has strategists like Chris Martenson confounded.

"It's almost inconceivable at this point that we're not seeing some money off the table," Martenson says in an interview with The Daily Ticker. "Markets don't always move in sync with the economy [but] we have a global slowdown right now…and there seems to be a lot of risk out there."

Martenson, the CEO and co-founder of the website and the author of "The Crash Course," says he expects coordinated global intervention by central banks to jolt the depressed economies of the U.S., China, Japan and Europe, going so far to say "we need something larger than we've seen before."

Eurostat, the European Union's statistics agency, reported Tuesday that the euro zone economy contracted in the second quarter, falling 0.2 percent from the previous three months. Most economists believe that the 17-member region has already entered a recession.

Meanwhile, economic growth in Japan slowed to an annual rate of 1.4 percent in the second quarter compared to 5.5 percent growth in the first quarter of the year. U.S. gross domestic product grew a modest 1.5 percent in the April to June quarter. And China — the world's second and fastest growing economy — has experienced six consecutive quarters of slower growth prompting concerns that the country is headed for a hard landing.

The rise in global markets has partly been a response to expectations that the Federal Reserve and European Central Bank will take more aggressive action — i.e. quantitative easing — this fall to prevent further economic deterioration. The Federal Reserve did not take new steps to boost the U.S. economy at its August policy meeting but said it "will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." ECB Chief Mario Draghi excited markets in late July when he vowed to do "whatever it takes" to save the euro but a week later softened his tone, proclaiming his bond buying comment was merely "guidance." Investors around the globe later dumped stocks.

The interminable guessing and conjecture about central bank action has caused hedge funds, institutional and retail investors to become speculators, Martenson says. Professional money managers have publicly acknowledged their own difficulty picking stocks. Hedge Fund titan Louis M. Bacon has decided to return $2 billion to investors after his Louis M. Bacon Moore Capital Fund was down 2 percent in 2011 and flat for the year.

Martenson's investment recommendations range from the conventional (he's a buyer of gold) to the unorthodox.

"One of the things we counsel people to do is consider investing in your own homestead," he says. "Plugging all the leaks" in your house yields a 10, 12 or even 18 percent return on investment by cutting the homeowner's heating and energy bills, he notes. "This is a time you have to consider other places for investments," he adds.

Goldman Sachs Is a Sell GS chart displaying death cross with broadening formation

Goldman Sachs (NYSE:GS) — This is one of the world’s leading investment banking and securities firms. But legal, economic and market conditions have resulted in three years of lower earnings, and recent investigations by the government have led to more declines and heavy insider selling.

The stock’s advance from June’s low at about $90 ran into its 200-day moving average, where yesterday, it reversed triggering a sell signal from our internal indicator, the Collins-Bollinger Reversal (CBR), and its stochastic.

Note the death cross in June, as well as the broadening formation that also began in June. This unusual chart formation is bearish and is always accompanied by declining volume.

Sell GS short with a trading objective of $90. Short-selling is a speculative technique that carries more risk than long investments. A stop-loss order should be used to protect against unlimited risk. Check with your broker for any margin requirements.

Trade of the Day – Goldman Sachs (NYSE:GS)
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Chart of the Day - Hershey Foods (HSY)

The "Chart of the Day" is Hershey Foods (HSY), which showed up on Tuesday's Barchart "All-Time High" list. Hershey on Tuesday posted an all-time high at $73.07 and closed up +0.61%. TrendSpotter has been long Hershey since July 30 at $72.17. In recent news on the stock, Hershey's Board of Directors on Aug 7 announced quarterly dividends of $0.38 on the Common Stock and $0.344 on the Class B Common Stock. The dividends are payable September 14, 2012, to stockholders of record August 24, 2012. It is the 331st consecutive regular dividend on the Common Stock and the 112th consecutive regular dividend on the Class B Common Stock. On July 31, Argus lifted its price target on Hershey to $82 a share from $78 and said it expects the company's growth prospects to improve based on several positive catalysts and it maintained its Buy rating on the stock. Hershey, with a market cap of $16.2 billion, is a leading snack food company and the largest North American manufacturer of quality chocolate and non-chocolate confectionery products. Hershey markets such well-known brands as Hershey's, Reese's, Hershey's Kisses, Kit Kat, Almond Joy, Mounds, York, Jolly Rancher, Twizzlers, and Ice Breakers as well as innovative new products such as Swoops and Hershey's S'mores.