Why Fed Chair Powell is a Laughingstock

Fake Work

Clarity.  Simplicity.  Elegance.  These fundamentals are all in short supply.  But are they in high demand? As far as we can tell, hardly a soul among us gives much of a rip about any of them.  Instead, nearly everyone wants things to be more muddled, more complicated, and more crude with each passing day.  That’s where the high demand is.

One can always meet the perils of overweening bureaucracy with pretend happiness… [PT]

For example, executing and delivering work in accordance with the terms and conditions of a professional services contract these days is utterly dreadful.  The real work is secondary to fake work, trivialities, and minutia.  Superfluous paperwork and an encumbrance of mandatory web-based tools are immense time and capital sucks.

While each T & C may have been developed for one good reason or another, over time, they’ve piled up into something that’s an unworkable mess.  But like tax law, or local zoning codes, they must be followed with arduous rigor.

Crushing futility… [PT]

What’s more, many livelihoods depend on all the fake work that’s now built into what should be a simple contract.  Auditors, contract administrators, accountants, MBAs, spreadsheet jockeys, risk managers, and many other fake professionals, run about with rank importance.  What would happen to these plate spinners if the fake work disappeared?

Without all the unnecessary rigmarole, the unemployment rate would quadruple overnight.  Hence, like fake money, fake work is piled on by the boatload to stimulate the need for more fake work.  And like a handshake agreement – or sound money – the return to an era of greater clarity, simplicity, and elegance is mere wishful thinking.

Plotted Dots

So, too, clarity, simplicity, and elegance have disappeared from monetary policy.  Today’s fake money requires a crude network of central planners, and a crude system of price fixing.  The underlying theory of it all is that a committee of central planners can improve the future by jerking the chain of credit markets.

Integral to this process is something called the dot plot. If you happen to be ignorant of the dot plot, we must apologize.  What follows will forever end your bliss.

The dot plot – a central planner guessing game that suffers from a lack of crystal balls at the Fed. [PT]

The dot plot is a chart that includes each Federal Reserve Governor’s anonymous forecast for the federal funds rate.  The dots represent the best guesses of each central bank governor as to the appropriate federal funds rate at the end of each calendar year.  Annual dots are provided; extending out three years into the future, as well as a dot for the longer run.

Varying models are used by the central planners to ascertain the appropriate location to plot their dots.  Many of these models are calibrated using fake aggregate economic data.  Garbage goes in.  Garbage comes out.  Dots are placed accordingly.

The whole exercise is absolutely ludicrous, if you’re in the mood for a practical joke.  Yet this is the …read more

Stocks, Gold and the Economy – Precious Metals Supply and Demand

The Seeds of the Next Bust Are Closer to Sprouting

The price of gold was up this week, by $10 and that of silver by ¢6. Something is brewing in the fundamentals that we haven’t seen since… last year. We will show a picture of this, below.

There are many problems with assuming a rising stock market means a growing economy. We’ve written many times about the much-greater growth of debt, i.e., borrowing to consume, which adds to GDP.

S&P 500 Index, monthly – the huge rally since 2009 was accompanied by the weakest economic recovery of the post-WW2 era. Evidently, the stock market does not necessarily reflect economic growth. Very often numerous other factors prove to be far more important drivers of stock prices. A pertinent example is Venezuela’s soaring stock market, which is up by 88,500% in the past year alone (this is not a typo). Meanwhile, the country’s economy is contracting since 2014, with the slump accelerating to a stunning -16.5% y/y in both 2017 and 2018. The S&P 500 Index is an island of sanity by comparison, at least superficially (the ceteris are of course not paribus). [PT]

Today, we just want to note that stock prices can rise faster than earnings. We will ignore the so called wealth effect—a feedback loop in which higher stock prices drive greater spending, and hence earnings—and its temporary boost to earnings. Even so, the stock market gains since the start of the year have been due to traders being willing to give stocks a higher multiple (to earnings).

Or, as we look at it, lower yields. Yield is the inverse of price (something Keynes trusted to lure the capitalists on board his plan to overthrow the capitalist order). For four months, we have had a big drop in the earnings yield of the S&P 500. It went from 5.16% to 4.5% so far, a drop of 13%.

John Maynard Keynes takes a look at his book while plotting to overthrow free market capitalism… [PT]

The word for someone who thinks that if earnings go up, they must go down is a pessimist. The word for someone who thinks that if the earnings yield goes down, it must go up again is a student of history.

The bear market in earnings yields (i.e., the bull market in P/E ratios) began in September of 2011. We note this date, because something else began at that time. The bear market in the price of gold (i.e., the bull market in the price of the dollar).

Of course, correlation does not prove causality. And there is no law of the universe that says the same thing will happen again. We should note that the price of gold had reached an epic high by 2011, after running up massively in a decade-long bull market. In 2019, that is just not the case.

That said, there is something here to ponder.

Demand for money may decline during times of rising optimism. By demand, we don’t mean the rubbish …read more

Why a Chernobyl-like Financial Disaster is Inescapable

Why a Chernobyl-like Financial Disaster is Inescapable

In the early morning hours of April 26, 1986 – roughly 33 years ago – things went horribly wrong in the town of Pripyat, in northern Soviet Ukraine.  Reactor No. 4 at the V. I. Lenin Nuclear Power Plant, also known as the Chernobyl Nuclear Power Plant, was overwhelmed by an uncontrolled reaction.  There was no stopping it.

Chernobyl after the explosion (left) and today (right), encased in a steel sarcophagus. [PT]

Two initial explosions blew the top off the reactor.  Once exposed, plumes of fission matter were wafted into the atmosphere by an open-air graphite fire.  Before long, this radioactive material precipitated onto Western Europe and the Western USSR.

Nine days later the fire was finally contained.  But not before an estimated 400 times more radioactive material was released than from the atomic bombing of Hiroshima and Nagasaki.  Twenty-eight firemen and operators died from acute radiation syndrome in the following days and months.

A discovery channel documentary on the Chernobyl disaster [PT]

What exactly caused the Chernobyl disaster is still a matter of disagreement.  The first official explanation of the accident was later acknowledged to be erroneous.  But there is agreement on the fact that the nuclear disaster would not have happened when it did if the workers had played hooky and gone fishing.

Instead, an ill-planned late-night safety test to simulate a power-failure set in motion the very chain reaction that led to the disaster.  During the experiment, the emergency safety and power-regulating systems were both intentionally turned off.  Then the operators attempted to boost the reactor output; a violation of the approved test procedure.  Soon after, all control was lost…

A Moment of Silence

Most accounts we’ve come across assign equal blame to human error and reactor design flaws.  The shortsighted engineers failed to idiot proof the nuclear power plant for the operators.  The operators succeeded at being idiots.  Should we expect anything different?

Here at the Economic Prism we’re zealot aficionados of disaster – especially the human induced variety.  Hence, on the anniversary of the Chernobyl disaster, we take a moment of silence for disasters past, present, and future.  We also scratch for an inkling of tutelage that we can squirrel away like a silver eagle for a time in need.

Murphy’s Law, for example, states: “Anything that can go wrong will go wrong.”  Certainly, Murphy’s Law will always prevail over pant wearing human animals endeavoring to manage a complex system.  The Chernobyl disaster validated Murphy’s Law in spades.

Another point clarified by the Chernobyl disaster is that humans are fallible.  They’re prone to making big mistakes.  Some of these mistakes are attributable to sloppiness.  But many result from conceit and misperception of the limits of human control.

The Chernobyl operators thought they had a novel idea for how to boost reactor output.  Yet to test their idea, they had to turn off the emergency safety and power regulating systems.  They also had to attempt to operate the reactor in …read more

Kashmir: The Constant Conflict

Threats of Nuclear War

On February 26, 2019, the Indian Air Force, for the first time since 1971, conducted a raid inside Pakistan, and allegedly hit a terrorist training camp, killing more than 250 terrorists. Pakistan showed photographs of damage to a tree or two. According to Pakistani officials, no one died and no infrastructure was damaged.

Mirage 2000 warplane of the Indian Air Force in medias res. [PT]

Photo credit: hindustantimes.com

It is hard to know the truth, for India did not provide any evidence, nor did Pakistan allow journalists access to the site. Both governments blatantly lie to their citizens, retailing falsehoods so hilarious that even a half-sane person could see through them. But drunk in nationalism, Indians and Pakistanis normally don’t.

Photo of the damage the Indian strike of February 26 did as shown by Pakistan

Photo credit: BBC News

India’s intrusion was in response to a suicide car-bombing on February 14 in Kashmir, a bombing that killed 45 troops. Indians were moving a convoy of 2,500. They were in buses, not in armoured cars, as officially stated. Challenging the army is sacrilegious, so no one asks why their movement was so badly planned, and why they had not been airlifted, which would have been far cheaper and easier.

Image from the suicide attack in Kashmir that preceded the Indian air strike [PT]

PTI Photo / S. Irfan

In all the ramping up of emotions in the aftermath of the suicide bombing on the troops, it became very clear that Indian Prime Minister Narendra Modi would lose the next elections (which are due in a couple of months) unless he retaliated. Sending India to war was a small price.

Soon after India’s intrusion, Pakistan closed its airspace. Tension at the border went up significantly, and continues to be high.

A day later, Pakistan attempted airstrikes in India. In the ensuing challenge, one of India’s MIG-21 planes, known as flying coffins because they are very old and outdated, was shot down by a Pakistani missile. The Indian pilot parachuted into Pakistani territory. India claimed to have downed a Pakistani F-16. Pakistan denied the claim.

The Indian pilot captured by Pakistan was beaten up by locals and obviously by the Pakistani army to get him to praise Pakistani “hospitality” and “kindness”

TV stations in both countries were singing songs about the valor of their troops, which consist of uneducated rural people with no other job opportunities and absolutely no clue about what they are fighting for. These troops act as gladiators for the spectacle of the bored, TV-watching masses, who feel vicariously brave while munching their chips. Of course, the social media warriors know that it is not they who will be at the front-lines in any serious conflict.

A video from the Hindustan Times – “Pulwama attack triggers national outrage, protests at many places” [PT]

It is not in the culture of the Third …read more

Bankrupting Coffee Shops – Precious Metals Supply and Demand


Coffee, Milk and Gold

Last week was holiday-shorted due to Good Friday (it’s not an official holiday in the US, but it is in the UK. And this week’s report is a day late due to Easter Monday). The price of gold dropped $15, but the price of silver rose ¢4. Perhaps silver traders got word that we are paying interest on silver, which gives people a reason to hold silver? J

A silver bar plus interest…  [PT]

The discussion in the opening essay [which can be found here, ed.] is germane to the topic of the gold price. It should be clear that—whatever its virtues—gold will not protect you from the second cause of rising prices (i.e., regulation that destroys productive businesses, and thus supply of goods, and hence causes prices to rise). The price of gold does not go up just because the city bankrupts another coffee shop.

It is tempting to cling to the idea of the Quantity Theory of Money, the neoclassical notion that the price of money is inverse to its quantity. This sets the expectation of rapidly rising prices due to monetary policy. It is convenient to see rising prices due to the ever-increasing mandate to put useless ingredients in everything from coffee to the milk that goes in it.

Mainstream economics has one word to refer to rising prices, due to either cause. Inflation. And this biases gold analysis. If inflation is affecting the price of coffee in Seattle, then why isn’t it affecting the price of gold? The answer is simple, now that we have two clear concepts.

Inflation in this falling-interest rate cycle, is not monetary. Monetary forces are pushing prices down (due to falling interest rates). So if prices are rising, they are rising due to the increasing burden of useless ingredients.

But all the gold ever mind in human history is still in human hands. No one has the power to add useless ingredients to gold. So the price of gold does not go up from this cause.

This is one more reason why gold is the best way to measure declines in the dollar, and why the consumer price index fails. From the above discussion, we can see that coffee and milk are wholly inadequate measures.

Fundamental Developments

Anyway, let us look at the supply and demand picture of silver (and gold too). But, first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio fell.

Gold-silver ratio

Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price.

Gold basis, co-basis and the USD priced in milligrams of gold

The scarcity (i.e. co-basis) …read more

What Were They Thinking?

Learning From Other People’s Mistakes is Cheaper

One benefit of hindsight is that it imparts a cheap superiority over the past blunders of others.  We certainly make more mistakes than we’d care to admit.  Why not look down our nose and acquire some lessons learned from the mistakes of others?

Bitcoin, weekly. The late 2017 peak is completely obvious in hindsight… [PT]

A simple record of the collective delusions from the past can be quickly garnered from a price chart over time.  Market peaks appear so obvious, after the fact.  Perhaps with a little examination we can prevent some of our hard earned capital from being returned to dust.

Take bitcoin, for instance.  What were those morons thinking who bought bitcoin at over $17,000 in late-2017?  Why couldn’t they tell that a severe price collapse was imminent?  Now, over 16 months later, their bitcoins are about $5,230 – or roughly 69 percent less than what they paid for them.

What’s more, if bitcoin doesn’t hit $1 million by the end of 2020, John McAfee – the cybersecurity guy – will have to eat his most private part on national television.  Apparently, McAfee consulted his proprietary pricing model before making this outrageous claim.  Maybe he should have back tested it a bit more before going public with his findings.

A few years ago in some or other jungle: John McAfee, tech entrepreneur and crypto maverick (here reportedly seen on the lam from authorities in Belize). Should he still be in possession of his private parts by 2021, you will know that you should have bought Bitcoin. [PT]

Still, we won’t count McAfee out just yet.  He has 20 months left before his trade expires; anything can happen between now and then.  And while it’s unlikely that bitcoin will hit $1 million anytime soon, with a little luck, bitcoin buyers from late-2017 will break even much sooner than the new era dot com believers of the new millennium did.

Down Beyond Measure

The savvy fellows who bought the Nasdaq in early-2000 at over 5,000 were in full agreement over one very seemingly obvious point. They all knew they were getting rich.  But that was before the Nasdaq crashed over 75 percent and crushed their new era delusions into millions of tiny pieces.  Yet things could have been much worse…

Sometime around early-2015 the Nasdaq eclipsed its early-2000 high, and it hasn’t looked back.  After traversing a Grand Canyon sized bear market, the Nasdaq is about 60 percent higher than at the peak of the early-2000 dot com bubble.  In fact, just this week the Nasdaq spiked back up above 8,000.

NASDAQ Index, monthly – the tech-heavy NASDAQ market is home to serial bubbles. [PT]

Wouldn’t it be nice if markets were always this forgiving?

Certainly, the erstwhile investors who bought the Nikkei in October 1989 at over 38,000 would like a do-over.  They’re still down about 40 percent – nearly 30 years later.  Factor in the opportunity cost of what …read more

The Liquidity Drought Gets Worse

Money Supply Growth Continues to Falter

Ostensibly the stock market has rallied because the Fed promised to maintain an easy monetary policy. To be sure, interest rate hikes have been put on hold for the time being and the balance sheet contraction (a.k.a.“quantitative tightening”) will be terminated much earlier than originally envisaged. And yet, the year-on-year growth rate of the true broad money supply keeps declining noticeably.

The year-on-year growth rates of US TMS-2 (broad true money supply) and the narrow money aggregate M1. Y/y growth of TMS-2 has declined to a new 12-year low as of March 2019. For some background on the calculation of TMS-2 see Michael Pollaro’s excellent summary at Forbes.

It certainly seems as though the brief rebound in domestic US money supply growth triggered by repatriation of funds from the euro-dollar market in the wake of last year’s tax cuts has by now dissipated. Preliminary data indicate that the slowdown in TMS-2 growth continues so far in April – currently the y/y growth rate stands at just 1.7% (h/t Michael Pollaro). Meanwhile, the contraction in outstanding Fed credit has accelerated to a quite hefty 11% y/y.

The next chart shows the most recent data on G3 (US, euro area and Japan) TMS  growth rates. In the euro area TMS growth has moderately accelerated compared to the previous three months. At 6.9% as of February it remains below the 7% threshold though. TMS growth in Japan stands at just 5.4%. Both readings are substantially below their respective 2015-2016 peaks.

TMS-2 growth in the G3, via Michael Pollaro – while money supply growth rates in Europe and Japan remain significantly higher than in the US, they are probably no longer strong enough to effectively offset the slowdown in US money supply growth.

The Treasury Account Yo-Yo

“Austrian” money supply measures such as TMS-1 and TMS-2 differ in a number of aspects from official money supply aggregates, based on a very strict and straightforward definition of money (see Michael’s article for the details). One of the differences is that certain memorandum items on the Fed’s balance sheet are included in money TMS, for the simple reason that they do indeed represent money.

Before the 2008 crisis, these memorandum items made almost no difference to the total money stock and its growth rates, as the amounts involved were very small and changed only very little over time. This has changed since the crisis. In particular, the US Treasury’s general account at the Fed has become a factor that occasionally affects both TMS growth and economic and financial market activity. Below is a long term chart – we have highlighted the recent activity in the account:

US Treasury general account at the Fed since 2002. The two large spikes in 2016 and 2018 both occurred in the context of the repatriation of US dollars from the euro-dollar market. In 2016 money market funds redirected their investments into t-bills to comply with new regulations, …read more

Long Term Stock Market Sentiment Remains as Lopsided as Ever 


Investors are Oblivious to the Market’s Downside Potential

This is a brief update on a number of sentiment/positioning indicators we have frequently discussed in these pages in the past. In this missive our focus is exclusively on indicators that are of medium to long-term relevance to prospective stock market returns. Such indicators are not really useful for the purpose of market timing –  instead they are telling us something about the likely duration and severity of the bust that will follow on the heels of the current market mania. The first chart is an update of the current situation in RYDEX funds. Despite their small size, these funds have always represented a quite accurate microcosm of general market sentiment.

A RYDEX overview: RYDEX money market fund assets have recently declined to new all time lows; the pure non-leveraged bull-bear fund ratio is back above 29 (i.e., bull funds assets are more then 29 times larger than bear fund assets). At the top of the tech mania in early March 2000, this ratio peaked at roughly 17. Lastly, the amount of assets in RYDEX bear funds demonstrates that bears remain extremely discouraged. It is fair to say that at this stage almost no-one expects that the market could suffer a serious slump.

The next chart shows the leveraged RYDEX bull-bear ratio. Although it is well off its 2018 peaks, it remains in nosebleed territory at a factor of 16.4.

The leveraged RYDEX bull-bear ratio compares assets in leveraged bull and bear funds and is testament to the intensity of speculation on a rising market. Its all time low was made in June 2003 at 0.20; in November of 2008 it bottomed at 0.40. Both were quite propitious times to go long equities – the same can probably not be said of the current juncture.

The next chart is a very long term chart of the mutual fund cash-to-assets ratio. In late December 2018 it fell to a new all time low of 2.9 (i.e., a mere 2.9% of all mutual fund assets were held in cash). In short, not even a rapid and harrowing 20% correction was able to faze fund managers. This shows how deeply ingrained the bullish consensus has become.

Mutual fund cash is at an all time low compared to total mutual fund assets. This ratio obviously has primarily long term implications; prior to the beginning of the secular bull market, it frequently reached double-digit territory. The extremely low levels that could be observed since 2005 are historically unprecedented. In part this can be attributed to low interest rates, but the main reason is simply that everyone has become convinced that the central bank will always be able and willing to rescue the market when it falters. This is a dangerous attitude.

The next chart shows the ratio of assets held in retail money market funds to the market capitalization of the S&P 500 Index. This chart is very similar …read more

The Gold-Silver Ratio Continues to Rise – Precious Metals Supply and Demand


Is Silver Hard of Hearing?

The price of gold inched down, but the price of silver footed down (if we may be permitted a little humor that may not make sense to metric system people). For the gold-silver ratio to be this high, it means one of two things. It could be that speculators are avoiding the monetary metals and metal stackers are depressed. Or that something is going on in the economy, to drive demand for the metals in different directions.

As a rule the gold silver ratio acts as a proxy for credit spreads – this is attributable to the fact that silver prices are partly driven by the metal’s large industrial demand component (by contrast, the vast bulk of gold demand consists of monetary or investment demand; industrial and fabrication demand in the gold market are negligible by comparison). In the chart above we compare the gold-silver ratio to the IEF-JNK ratio, which serves as a proxy for corporate credit spreads (note: “unadjusted” means that only prices are compared, not total returns – interest payments received by holders of IEF and JNK are not included). An interesting divergence has emerged since the 2014-2016 oil patch mini-bust – while the gold-silver ratio is streaking to new highs, the IEF-JNK ratio has established a lower high in late 2018. We believe this is mainly due to the massive distortion of credit markets in the wake of the QE and ZIRP/NIRP policies pursued by the world’s largest central banks. One of these markets is wrong and it is a good bet that the market that has been manipulated by central bank interventions is the one that is giving a false signal. [PT]

One metal is money without counterparty risk. The other is also money but a big part of its demand is from its use in a wide variety of products.

Our president simultaneously told us that the economy is strong, and that the Fed ought to lower rates. If the economy were strong, the demand for silver should be higher. If the Fed lowers rates, then that should rapidly increase the quantity of money and, every speculator knows that should drive prices up.

From the price action, one would say that silver does not seem to be getting either of these messages.

Incidentally, we are doing something to affect the demand for silver—we are paying interest on silver, in silver. We are opening a fresh silver lease deal this week. Contact us, if interested (pun intended).

Fundamental Developments

Anyway, let’s look at the supply and demand picture of silver (and gold too). But, first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio went up again this week. It is now near a …read more

Unsolicited Advice to Fed Chair Powell


Unsolicited Advice to Fed Chair Powell

American businesses over the past decade have taken a most unsettling turn.  According to research from the Securities Industry and Financial Markets Association, as of November 2018, non-financial corporate debt has grown to more than $9.1 trillion [ed note: this number refers to securitized debt and business loans, other corporate liabilities would add an additional $11 trillion for a total of $20.5 trillion].

US non-financial corporate debt takes flight – the post 2008 crisis trajectory is breath-taking, to say the least [PT]

What is the significance of $9.1 trillion?  And what are its looming repercussions?  Here, for your edification, we’ll take a moment to properly characterize this number.

For one, non-financial corporate debt of $9.1 trillion is nearly half of real U.S. gross domestic product.  Hence, the realization of profits by private businesses has required a substantial accumulation of debt.  And this debt, like much of today’s outstanding debt, is shaping up to be reckoned with at the worst possible time.

Remember, when corporate debt is increasing faster than profits, it is like a plucked tomato sitting on a store shelf.  It goes bad with little notice.  Frank Holmes, by way of Forbes, offers the grim particulars:

“Through 2023, as much as $4.88 trillion of this debt is scheduled to mature. And because of higher rates, many companies are increasingly having difficulty making interest payments on their debt, which is growing faster than the U.S. economy, according to the Institute of International Finance (IIF).

“On top of that, the very fastest-growing type of debt is riskier BBB-rated bonds — just one step up from ‘junk.’  This is literally the junkiest corporate bond environment we’ve ever seen.  Combine this with tighter monetary policy, and it could be a recipe for trouble in the coming months.”

This by now slightly dated chart shows the upcoming wall of maturities in junk bonds and leveraged loans as of mid 2017 – n.b., this doesn’t even include BBB-rated liabilities, which represent the by far biggest potential concern (“Titans’ debt” refers to the debt maturity profiles of the companies carrying the largest securitized debt in absolute terms, such as e.g. AT&T). [PT]

But that is not all…

Compounding Dishonesty

Whereas $9.1 trillion of non-financial corporate debt is nearly half of real U.S. GDP.  And whereas this $9.1 trillion of non-financial corporate debt is the junkiest corporate debt ever seen.  This $9.1 trillion of non-financial corporate debt is nearly double what it was just moments before the financial system exploded a decade ago.

Specifically, the $9.1 trillion of non-financial corporate debt is a flashing red light and blaring siren that a grave malfunction has occurred.  In 2007, on the eve of the Great Recession, total non-financial corporate debt was nearly $4.9 trillion.  Today, non-financial corporate debt is 86 percent higher.  The risk of an epic breakdown has never been greater.

You see, today’s non-financial corporate debt is so ridiculously ugly that, upon review, it is downright diabolical.  One cannot imagine how human …read more

A Trip Down Memory Lane – 1928-1929 vs. 2018-2019

Boom Times Compared

It has become abundantly clear by now that the late 2018 swoon was not yet the beginning of the end of the stock market bubble – at least not right away. While money supply growth continues to decelerate, the technical underpinnings of the rally from the late December low were actually quite strong – in particular, new highs in the cumulative NYSE A/D line indicate that it was broad-based.

Cumulative NYSE A/D line vs. SPX – normally the A/D line tends to deteriorate before the market peaks, as the advance narrows and fewer and fewer stocks participate in the rally. This did in fact happen shortly before the early October top.

To be sure, there are still technical warning signs as well – for instance, a number of divergences remain in evidence and several (but not all) measures of positioning and sentiment are back at extremes. On occasion of the two previous major market peaks in 2000 and 2007 the S&P 500 Index streaked to a marginal new high after an initial sharp correction and only began to decline in earnest thereafter. It is possible that such a retest of the highs will once again prove to be  the turning point, but this is of course not certain.

What prompted us to write this post was the highly unusual timing and ferocity of the decline in late 2018. We were wondering whether there were any comparable historical precedents – and lo and behold, there is one. When the boom of the 1920s entered its final stretch, the stock market did something very similar: it fell quite rapidly and precipitously at the end of 1928 and recovered just as quickly. It then went on to make new highs in 1929. Alas, as is well known, this happy state of affairs did not last very long. It was rudely interrupted by a crash that was ultimately followed by the most severe bear market in history.

The sharp correction of late 1928 was just as unusual in terms of its timing as the one of late 2018 – and the market recovered just as quickly. The DJIA fell from a high of 295 points on November 28 1928 to a low of 257 points on December 8 (down ~13%). By December 31 it was back above the starting point of the decline, ending the year at precisely 300 points.

Naturally, if the unusual December correction were the only parallel, it would not be worth mentioning. But there are several interesting parallels between the 1920s boom and today. Among them are valuations in terms of the Shiller P/E ratio or CAPE (cyclically adjusted P/E):

The stock market’s valuation is actually slightly above the level of 1929. This will be mitigated a bit when the 2009 data are no longer part of the calculation, but even then the market will remain close to the upper end of the long term valuation range. Moreover, today’s valuations …read more

The Effect of Earnings Season on Seasonal Price Patterns

Earnings Lottery

Shareholders are are probably asking themselves every quarter how the earnings of companies in their portfolios will turn out. Whether they will beat or miss analyst expectations often seems akin to a lottery.

The beatings will continue until morale improves… [PT]

However, what is not akin to a lottery are the seasonal trends of corporate earnings and stock prices. Thus breweries will usually report stronger quarterly earnings after the summer season than after the winter season. You may not believe this to be possible, but many analysts are actually still surprised when breweries report strong numbers after the summer season. Share prices will often rise in such situations.

Technology Stocks Also Exhibit Seasonal Trends

Breweries are not the only companies whose earnings and stock prices exhibit seasonal patterns. In  fact, earnings seasonality is a feature of a great many different industries. As an example I have picked a well-known technology stock that exhibits seasonal fluctuations as well, namely Intel (INTC).


Intel Typically Rallies in April

The seasonal chart below shows the seasonal price pattern of Intel in the course of a year. This is not a standard chart of the stock price. Instead it was calculated by averaging the stock’s returns over the past 20 years. The horizontal axis shows the time of the year, the vertical axis the level of the seasonal index (i.e., the averaged percentage moves of the past 20 years). One can see at a glance at what time of the year Intel’s share price typically tended to rise or fall.

Intel, seasonal pattern over the past 20 years –
Intel typically rallies in April after posting its Q1 earnings report.

I have highlighted the seasonally strong period from April 14 to May 02 in dark blue. In this time period of approximately three weeks Intel’s stock price typically tended to advance quite rapidly. The average gain amounted to 5.54%, which is quite a lot given the brevity of the holding period. On an annualized basis it is equivalent to a very impressive gain of +207.29%.

The move is driven by Intel’s Q1 earnings, which are usually reported between mid and late April. These have often delivered positive surprises.

Intel Rallied in 14 out of 20 Cases

Intel’s share price rallied in the seasonally strong period from April 14 to May 02 in 14 out of 20 cases. In the 14 years in which gains were achieved, the return over this time period averaged 8.90%, in years in which the share price lost ground, the losses averaged just 1.90%. What makes this time period particularly impressive is therefore not only the fact that the stock price rallied quite frequently, but also the fact that the average gain exceeded the average loss by a substantial margin.

The bar chart below depicts the return of Intel’s stock in the time period April 14 to May 02 in every single year since 1999. Blue bars denote gains, red bars denote losses.

Intel, …read more