It's Time To Get Out Of Stocks

This is for all you folks out there with retirement accounts in the general stock market. I've been warning for many months that the cyclical bull we've been in for almost two years is still just a counter trend rally in an ongoing secular bear market. I made that same warning about the last cyclical bull market from `02 to `07. Many people ignored me in November `07 when I said the second leg down in the secular bear had begun. I suspect many people wish they hadn't.

There are now warning signs that this counter trend rally may have topped, and even if it hasn't the potential upside is so small that it's not worth the risk of getting caught in the next bear leg to catch a few more percentage points.

As of Thursday and Friday the stock market has now broken below the prior daily cycle low. When a daily cycle low gets violated it invariably signals the start of an intermediate degree correction.

The warning bells are going off not so much because an intermediate degree correction has begun, those happen like clock work about every 20-25 weeks, but because of how quickly this daily cycle has topped. In only three days. That means we are now locked in an extremely left translated daily cycle.

It is those extreme left translated cycles that do the most damage. The daily cycle following the flash crash last year was a left translated cycle that topped in only 4 days. We all know what that led to.

The bigger picture is the intermediate cycle. Notice the market is now on week 16 of the current intermediate cycle. I noted earlier that an intermediate cycle low is due about every 20 to 25 weeks. On an intermediate term basis the market is now due to move down into that major cycle low. The next larger cyclical structure is the yearly cycle. That is also due to bottom with this daily and intermediate cycle. The combination of all three cycle durations bottoming at the same time will almost always produce a very severe correction.

Because of how the dollar cycle is unfolding (available to premium subscribers) I expect the stock market cycles to bottom pretty close to the 1 year anniversary of the flash crash.

As a point of reference the last intermediate cycle low occurred in November. The danger is that both the industrials and transports might drop below the November bottom during this correction. If that happens a Dow Theory sell signal will be generated. If a Dow Theory sell signal is generated the odds will be very high that this counter trend rally is over and the next leg down in the secular bear market has begun.

And unfortunately Bernanke is not going to be able to just crank up the printing presses and rescue the markets like he did last summer. The problem isn't that there is a shortage of liquidity. The problem is that there is too much liquidity. It is causing commodity prices to surge out of control.

Oil is back over $100 despite continued high unemployment and impaired demand. Food prices are going through the roof and have already trigger social revolt throughout the mid east and most emerging markets. Once the next leg down in the dollar crisis gets underway it won't be long before we here in the US will be looking at $4.00 or $5.00 for a gallon of gasoline.

As the dollar crisis intensifies Bernanke will be forced to end QE or risk breaking not only the currency but also the bond market. Without an endless supply of fresh money the markets and economy will quickly start to collapse. We saw this last summer when QE1 ended. The same thing will happen this time only Bernanke's hands will be tied by the dollar crisis and surging commodity inflation. He will be powerless to prevent the return of the secular bear forces. Well unless he's prepared to risk hyper inflation that is.

Personally I don't think Ben is willing to completely destroy the dollar and crash the bond market just yet. I suspect when he finally realizes that Keynesian economic principles have led us down a path of no return he will resign and someone else will put the finishing touches on his master piece.

The only question is whether those finishing touches will be to allow the deflationary depression that is required to cleanse 5 decades of debt from the system or whether we will choose the hyper-inflationary path to service the debt spiral we've gotten ourselves into.

In any case it is time to exit all general stock market funds and position oneself in cash to ride out the next leg down in the secular bear market. If one has a gold or precious metal fund available in their IRA we should have about two months left of spectacular gains as the parabolic finale unfolds in the gold and silver markets. But once that has run it's course even those positions will need to be exited as there is no real way to diversify against another severe bear leg down.

The simple fact is that in a severe bear market everything gets taken down to some extent. Gold will hold up much better than practically all other assets but even gold will take a 20-30% hit during a D-wave correction. And all parabolic C-wave finales are invariably followed by an severe regression to the mean profit taking event.

Unless one has the option of a gold fund, it's now time to get out of general stock funds and move IRA's to a money market fund until the next four year cycle low is reached (probably in late 2012).

Marc Faber says all govts will default on their debt...

Nifty 50-Day MA Signals S&P 500 Moves Fifty day moving average indicates reversals for chartists

After trading above its 50-day moving average for 130 trading days, the S&P 500 finally succumbed to the recent selling pressure and broke below this pivotal line in the sand during last Thursday’s bloodbath. Is this a minor bump in the road or a harbinger of doom for stock prices? Only time will tell. Understanding why options trading investors and other market participants place so much emphasis on this simple little line first requires an elementary understanding of moving averages.

Of the myriad of technical indicators available, moving averages have risen as not only one of the most popular, but also one of the most effective. Perhaps the popularity is due in part to their simple yet versatile nature. Traders can use them for anything from identifying trends and reversals to measuring momentum and crossovers. Moving averages are trend following in nature making them a particularly potent indicator during strong trending markets. In choppy environments they lose much of their mojo and can become downright useless. Though they can be measured on any time frame, the 50-day moving average has become a staple for most chartists. Indeed, it is usually displayed by default on most charting platforms and is often used to aid in identifying the intermediate trend of the market.

When it comes to trend reversals, the 50-day moving average has provided particularly timely signals in the S&P 500 Index over the past few years. When prices break above or below this moving average, many traders consider it a sign that the intermediate trend is reversing. To avoid too many false signals some wait for prices to break the moving average by 1% or more to confirm it’s a bona fide break. Consider the chart below highlighting the most recent signals (green for buy, red for sell). While the signals are far from infallible they do have a good track record of keeping traders on the right side of multi-month trends.

Whether or not the current signal proves as fruitful as the last few signals remains to be seen. Also, we have yet to break the 50-day moving average by 1% leaving some to contend that we need more confirmation before passing judgment. At the least, the resolution of the current testing of the 50-day moving average will be something many traders monitor with increasing interest.

Yale’s Shiller: Quake Could be Final Tipping Point for Markets, Oil

One of the nation’s leading economic analysts, Yale University professor Robert Shiller, believes the Japanese earthquake could spark a huge worldwide stock market drop as early as this week.

He points to the fact that a similarly huge decline occurred within days of the Kobe earthquake in 1995, which did far less damage than Friday’s massive earthquake and tsunami.

“There was a huge worldwide stock market drop a full week after that earthquake. That’s the kind of thing we have to worry about now,” Shiller told CNBC.

One big reason for such a shift: Japan has the second largest public debt in the world, just behind Zimbabwe, a third-world nation. Shiller and other experts say the huge damage done by this earthquake could be the tipping point for a nation whose population is rapidly aging while its bloated bureaucracy remains imperious to tough economic reforms.

In the United States and Europe, the Japanese disaster could be the kind of fundamental change in perspective that causes a stampede for the exits in risk assets,

“What happened in the United States, a week after the Kobe earthquake, is the Nikkei fell 5 percent in one day. Now, there wasn’t necessarily any connection to the Kobe earthquake,” Shiller says.

“What happened? I think it was the news stories, the stories of human failure, of mistakes, that the Japanese government couldn’t handle that earthquake. It kind of created a different emotional atmosphere. It brought up reassessments of our general, basic outlook,” Shiller says.

Even worse, Japan’s woes are already being felt in oil prices that have climbed in the last few weeks because of the revolts in the Middle East.

That's because the 8.9-magnitude temblor forced the shutdown of a number of Japan's oil refining facilities as well as some of its nuclear power plants. The loss of substantial refining capacity in the world's third-largest economy is likely to inject more volatility into gasoline prices — raising the risk of even higher pump prices for American motorists, the Los Angeles Times pointed out Monday.

Industry experts say that if Japan can't get its refineries back on line quickly, there will be a spike in that country's demand for gasoline, diesel and jet fuel. Global suppliers, including refineries in California, may find it more profitable to increase shipments to Japan instead of selling the fuel domestically, resulting in a bidding-up of prices, the Times reported.

"It's a 'yikes' situation," James DiGeorgia, editor of the Gold & Energy Advisor, told the Times. "The sudden importation of large amounts of distilled products is expensive and it's a heavy logistics burden. That is going to drive up the market price for everything from diesel and gasoline to jet fuel."

Stock prices today reflect what’s to come, Shiller adds. “It prices the indefinite future. It’s very vulnerable to news stories that suggest new information and new emotions relating to that,” he says.

Shiller, who is widely credited with being the first to predict the collapse in home prices in the United States, is this time being echoed by other economists in saying that Japan could turn into a giant sinkhole for the global economy.

As aid pours into Japan, investors are eyeing events nervously for signs that confidence might be shaken by the disaster. Moody’s, the ratings agency, said that the quake could push Japan to a tipping point in terms of its enormous, long-standing debt problems. The agency had Japan on Aa2 sovereign rating with a negative outlook before the quake hit.

Shiller suggested that the markets might react by this Friday, as week after the earthquake, as happened in 1995. “That would be too precise of a mirror of what happened in ’95, but it’s the kind of thing to watch out for,” Shiller said.

Shiller is a professor of economics at Yale University and chief economist at MacroMarkets and is co-author, with George Akerlof, of “Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.” He also is co-creator of the S&P/Case-Shiller Home Price Indices, the widely followed measure of U.S. home prices.

Japan’s massive debt burden, now more than double the size of its economy, is part of the problem, Shiller says.

Stimulus from the energy and construction rebuilding effort to come might offset some of the economic problems, following the quake and the obvious immediate humanitarian need. But “I don’t know if it will offset all the negatives,” Shiller said.

Foreign Central Banks Disappear From Treasury Bill Auctions

The indirect bids at today’s 13 week and 26 week bill auctions were down sharply from both last week and from the auctions of the expiring paper. That’s a sign that Japan and other central banks did not show up at today’s auctions. The bid tendered on the 13 week bill was just $5 billion, the lowest it has been going back to at least February of 2010. Typically the bid tendered totals between $8 and $15 billion. The indirect bid taken was $4.8 billion, down from $13.6 billion last week and $7.3 billion on the maturing paper at the time of that auction.

The story was similar on the 26 week bill. The indirect bid tendered was just $7.8 billion, far lower than the typical $10-25 billion. The indirect bid taken was just $5.87 billion, which compares with $8.8 billion last week and $12.6 billion back in September when the maturing paper was auctioned.

This tends to support the warning that I posted in this weekend’s Fed Report that the BoJ would probably need to start selling their holdings of US Treasuries to raise cash for the rebuilding effort. Stopping their purchases would go hand in hand with that. This would be just another bearish knock on effect of this horrendous human catastrophe.

So far the effects have not shown up in the yields on longer term paper. That could be coming next week when the Fed auctions 2, 5, and 7 year notes and 10 year TIPS. Foreign Central bank participation at these auctions has been gradually weakening for months. This could exacerbate the situation, although with the BoJ pumping $226 billion into the Japanese financial system today, some of that could create residual demand for US Treasuries. We’re in uncharted waters here. The initial signals look bearish, but that could change. We’ll get more clues from the 4 week bill tomorrow, and from the note auctions next week. I’ll have a complete update and perspective in the next Treasury update to be posted Thursday.

CHART OF THE DAY: Why The Newspaper Industry Collapsed

Irish Financial “Day of Reckoning” Just Ahead

By Joe Brennan / Bloomberg

Perched on a chair overlooking a wood panel-lined room in Dublin’s High Court, a bespectacled Judge Elizabeth Dunne has become all-too-used to hearing from the victims of Ireland’s economic meltdown.

Each Monday, Dunne presides over repossession hearings, with one in 10 Irish mortgages now in trouble. At the end of last year, more than 79,000 borrowers were behind on payments or had loan terms altered due to “financial distress,” the country’s central bank said on Feb. 28.

“Things are getting worse and worse,” said Dunne, as she weighed the case of a couple about 114,000 euros ($158,000) in arrears on a 558,938-euro home loan, one of 74 cases on her list on March 7. “Putting off the evil day is not going to help.”

Irish mortgages account for more than a third of about 270 billion euros of loans that remain with the nation’s so-called viable lenders — Allied Irish Banks Plc, Bank of Ireland Plc, Irish Life & Permanent Plc and EBS Building Society. The country’s new coalition parties are not convinced “that there has been proper transparency or full disclosure by the banks” on home-loan impairments, Alan Shatter told RTE Radio on March 7, two days before his appointment as Minister for Justice.

“There has been a continual under-estimation of loan impairments in Irish banks over the past few years,” Ray Kinsella, banking professor at the Smurfit Business School at University College Dublin, said by telephone. “I am seriously concerned about mounting loan losses in their mortgage books.”

New Stress Test

The bad loans may be reassessed as early as this month when Ireland’s central bank concludes a third round of stress tests on the country’s lenders. The results will determine how much of a 35 billion-euro international bailout fund Ireland will need to draw down.

A year ago, Irish regulators stress-tested for a 5 percent loss rate on Irish mortgages. This year’s review “will take account of the deteriorating economic conditions and hence” loan-loss assumptions “may be higher,” said Nicola Faulkner, a spokeswoman for the central bank, by e-mail.

Ireland is suffering after a decade-long real estate boom collapsed in 2007. Already, the state has bought 72.3 billion euros of risky commercial property loans from the banks, at an average discount of 58 percent. Irish house prices, which quadrupled in the decade to 2007, have since plunged more than a third. Unemployment has tripled to 13.5 percent over the same period.

House Price Declines

This year’s tests may stress loan books against the unemployment rate rising to 16 percent, house prices falling 60 percent from their peak and “negligible” economic growth, said analysts including Jim Ryan and Michael Cummins of Glas Securities, the Dublin-based fixed-income firm, in a note to clients March 9. The central bank declined to comment.

More than 300,000 households, or about 40 percent of mortgages, may find their mortgages are worth more than their homes, so-called negative equity, before the property market bottoms out, said David Duffy, an economist at the Economic & Social Research Institute in Dublin, who estimates that house prices will fall by as much as half from peak to trough.

Morgan Kelly, a University College Dublin economics professor dubbed “Doctor Doom” for his bleak assessments of Ireland’s housing market, wrote in the Irish Times on Nov. 8 that banks face “mass mortgage defaults” and a “wave of foreclosures.” Kelly declined to be interviewed.

EU Bailout

Iceland, where almost 40 percent of residential mortgages were in negative equity by December, decided that month to write off mortgages and other household debt by as much as $858 million. Unlike Ireland and other western nations, the Nordic nation placed its biggest lenders in receivership in 2008 rather than offer taxpayer-funded capital injections.

Ireland has bolstered its banks with 46.3 billion euros of additional capital over the past two years. The nation was forced to agree to an 85 billion-euro bailout on Nov. 28, led by the European Union and the International Monetary Fund. That package includes 10 billion euros to recapitalize the banks up- front and a further 25 billion euros of “contingency” capital to be used if required.

“When the teams from the EU, ECB and IMF arrived in November, they probably thought they would find huge holes remaining in the banks’ loan books, but they did not,” said Alan Ahearne, who was economics adviser to Brian Lenihan, the former finance minister. “It’s not that there’s some black hole in the Irish banks that hasn’t previously been discovered.”

10 Billion Euros

Still, a previous regulatory target for banks to hold 8 percent core tier 1 capital, a gauge of financial stability, “wasn’t enough to support confidence in the banks” given the economy’s problems, Ahearne said. Ireland agreed as part of the bailout to increase lenders’ capital levels to no less than 10.5 percent by the end of this month.

The 10 billion euros of initial capital destined for banks under the rescue package “pretty much covers our base case scenario” for remaining losses in Irish banks, said Ross Abercromby, a London-based analyst at Moody’s Investors Service, by telephone. “The additional 25 billion euros contingency fund would cover our stress scenario, which is pretty severe.”

Moody’s estimates that losses on Irish mortgages may be as high as 14 percent where the loan-to-value ratio is over 90 percent. That rises to 16 percent “in our worst case,” the ratings company said.

Household debt soared from 48 percent of disposable income in 1995 to 176 percent in 2009, catapulting Irish consumers into fourth place in 2008 in an international league table of personal indebtedness from 17th place in 1995, according to Ireland’s Law Reform Commission.

Savings Rise

On the other hand, Irish households’ net savings as a percentage of disposable income rose from zero in 2007 to 12 percent in 2009, according to the Central Statistics Office. The savings rate should remain around the same level for this year and next, the ESRI said on Jan. 20.

Irish Life & Permanent Plc Finance Director David McCarthy said he doesn’t believe there are undiscovered losses in banks’ mortgage books. The group, which has 26.3 billion euros of Irish home loans, saw arrears of less than 90 days peak in mid-2010, McCarthy said on March 2, and they’ve “been falling, albeit quite slowly, since then,” he said.

Bank of Ireland spokeswoman Anne Mathews referred to CEO Richie Boucher’s Nov. 12 statement to analysts that there was “clear evidence” that arrears were “beginning to stabilize.” Allied Irish and EBS spokesmen declined to comment.

‘Different Phenomenon’

The Irish home-loan market is “a totally different phenomenon” to the commercial real-estate market, said John Reynolds, chief executive officer of Belgian-owned KBC Ireland.

“Irish banks have been hamstrung by a narrative that has been allowed to develop that all their lending was as mad as their real-estate lending,” said Reynolds. “The reality is that the Irish banks, when they didn’t do the real-estate stuff, which was a seductive drug, did bog-standard, criteria-driven lending.”

“Banks are exercising huge forbearance on borrowers in arrears,” partly because of pressure from the authorities “but also because they don’t want to repossess houses as there’s no second-hand market to sell them,” said Kinsella, the banking professor. Lenders only held 585 repossessed residential properties at end-2010, according to the central bank.

The new government said on March 6 it may bring in a two- year moratorium on repossessions “of modest family homes where a family makes an honest effort to pay their mortgages.” Currently, mortgage holders can enjoy 12-month protection from legal action if they are co-operating with lenders.

The coalition also pledged to fast-track changes in laws requiring bankrupted individuals to wait 12 years before they are discharged from their debts.

Rising Interest Rates

The issue of full recourse for mortgage loans is positive for banks, if not for borrowers in negative equity, said Abercromby. “If that level of recourse is watered down, by introducing less stringent bankruptcy laws, you could be looking at higher losses,” he said.

There is also concern that rising interest rates will hit borrowers who have managed to remain out of trouble so far. ECB President Jean-Claude Trichet signaled on March 3 the bank may raise its benchmark rate from a record low of 1 percent as soon as next month.

Banks have already increased variable home loan rates from an average of 3.16 percent in mid-2009 to 3.87 percent by November, according to the ESRI. Lenders, including Irish Life and EBS, have hiked borrowing costs again since then.

Meanwhile, at least half of all Irish mortgages are so- called tracker products, with pricing linked to ECB’s key rate, according to the Irish Banking Federation.

Tracker Rates

While banks may be able to contain bad-loan losses on their mortgage books, “a big and ongoing problem is that a large part of their mortgage books are based on ECB tracker rates, which banks are funding at a loss,” said Karl Deeter, operations manager with Dublin-based Irish Mortgage Brokers.

Back in the High Court, Dunne is listening to how a house builder from Co. Cavan, close to the border with Northern Ireland, is 67,000 euros in arrears on a 360,000 euro home loan taken out three years ago.

Times are hard out there, says the man, who has a plant hire and quarrying business, but is making partial remortgage payments. “I understand that well,” says Dunne. “I see that every Monday.”