The Market Radar


We anticipate monitor and comment on market-moving global economic and geopolitical issues.  No dark side brooding, no wanting the world to end, no political rants.  Traders, investors, policymakers, or market observers can’t afford to ignore us.  In one word, perspicacity.

An educated citizenry is a vital requisite for our survival as a free people– Thomas Jefferson

By seeking and blundering, we learn. – Johann Wolfgang von Goethe

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Brexit Market Plummets – “The Clock Is Ticking”

After negotiations in Brussels failed to produce a  breakthrough, the odds at PredictIt of an official Brexit by November 1 tanked into the teens on big volume.  The market was only pricing around a 30 percent probability of a deal by October 31,  however.

Here’s some commentary by the FT,

Boris Johnson’s hopes of sealing a Brexit deal in time for a critical EU summit later this week were in jeopardy on Sunday evening after two days of intensive negotiations left Brussels baffled about the UK’s new customs proposals.

Michel Barnier, EU chief Brexit negotiator, told diplomats on Sunday evening that British plans to keep Northern Ireland in the UK’s customs territory while avoiding a hard border on the island of Ireland were fiendishly complex and not yet properly worked out.

There was “no breakthrough yet”, said one EU diplomat, while noting it was positive that talks would continue in Brussels on Monday. “If the British government wants a solution, it must move quickly now. The clock is ticking.” – FT

Global markets were all lathered up on Friday over the U.S.-China non-deal and the potential for a Brexit deal.   Monday’s trading will be interesting, to say the least.

 

Brexit_odds

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Heads Up! Friday’s Rare S&P Shooting Star Candlestick

We’ve been ignoring the daily noise of the stock market given the futility of trying trade against the blatant market manipulation but especially, after the S&P met our target of 3025, which we posted on April 1st,

If you have been reading GMM,  you know our thoughts on equities.  The sheer momentum of such a strong first-quarter carries over into the rest of the year, which is the justification of our year-end S&P target of 3025.  –  GMM, April 1st

Check.  The S&P peaked on July 26, closing at 3025.86.

Unlike most, however, we didn’t lift our target and began selling as we try not to let price action determine our fundamental view.

We have entered the selling zone — S&P 3025-3100 — to execute the Get Shorty trade.  This also provides an excellent opportunity for long-term investors to start cutting back on risk if they have not already been doing so.

You know our view.  Rarely should LT investors reduce risk in a significant manner, maybe just three to four times during their working lives, but this is one of those times, we believe.  – GMM,  July 26th

Friday’s Rare “Halloween” S&P500 Candlestick 

We do sit up and listen, however, with the type of rare price action exhibited in the S&P500 on Friday.

The rare shooting star candlestick formation has only exhibited all three of the following price action characteristics (greater/less than or equivalent % changes) once since October 2010.   On Halloween 2018.  Spooky.

  1. The large gap-up open of 0.85 percent is very rare and has only occurred 12 times since October 2010, or 0.5 percent of the trading days, all during the Trump administration, by the way, clearly reflecting the power of POTUS’ tweets and market manipulation.  Note, the cash S&P does not reflect the jankee-spanky, which takes place in overnight futures trading.
  2. Friday’s intraday trading range of 1.02 percent, though not rare, has occurred about 37 percent of the time since October 2019 and 11 of the past 16 trading days.
  3. Finally,  the S&P closed 0.24 percent off its intraday low, which, again, is not that rare, occurring 30.5 percent of the trading days in the timeframe.    

What is rare, however, is when all three of the above occur on the same trading day.  Again, only twice since October 2010, on Friday and last Halloween.

Shooting Star Candlestick – October 11, 2019

Candle_2019

Shooting Star Candlestick – October 31, 2018 (Halloween)

Candle_2018

S&P_Rare_Candlestick

Many other market indices experienced similar shooting star candlesticks on Friday.  Go to the Slope of Hope website for an excellent review.

 

Candle_Shooting Star_2

What Does A Shooting Star Candle Signal? 

Investopedia does a good job of ‘splaining.

A shooting star is a bearish candlestick with a long upper shadow, little or no lower shadow, and a small real body near the low of the day. It appears after an uptrend. Said differently, a shooting star is a type of candlestick that forms when a security opens, advances significantly, but then closes the day near the open again.

For a candlestick to be considered a shooting star, the formation must appear during a price advance. Also, the distance between the highest price of the day and the opening price must be more than twice as large as the shooting star’s body. There should be little to no shadow below the real body.  – Investopedia

The shooting star candle is not a perfect forecaster, nor is its signal of a pending price reversal always timely.  It is a warning flag, however, and traders should take heed when they witness one.

Halloween 2018

Take a look at last Halloween’s S&P shooting star.  The index consolidated the next few days then gapped up with a nice long green candle, which probably sucked in many traders into long positions.  The next day the S&P formed a long-legged Doji before rolling over to eventually crash to the December 2018 low,  forcing the market socialists to call, no scream for a Fed rescue.

Upshot

The key now is to watch the price action next week.

A break on Monday of 2960 (see below for key support levels) or the formation of more Doji candlesticks will further reduce the market fog and indicate the market is probably headed for some trouble.

TINA is not an attractive investment proposition for us and a dangerous gambit given the ubiquitous geopolitical and domestic political risk.   Moreover,  Friday’s price action was a giant meh to the hyped China trade deal, which was no deal at all and still leaves all the uncertainty in place for the business community.

Furthermore,  if you think the market was pricing the new October 15 tariffs to take effect, which were taken off the table, I’ve got a new conspiracy to sell you.

S&P Key Levels

We do have conviction the top, or near-top is in for the S&P.

In fact, we believe the bear market began in January 2018 and the S&P in the midst of forming a very long top.  Stock buybacks have restricted supply and there doesn’t seem to be as much leverage in the financial markets — x/ weaker credit corporates — as the liquidity created by endogenous money (deposits through credit expansion) that can vanish and contract during market panics has been, in large part replaced by QE.

We, therefore, suspect this bear market will be long and drawn death by a thousand cuts as it grinds and zig zags lower.

As always,  we reserve the right to be wrong.

Stay tuned.

Short-term S&P Levels To Watch

S&P_Key_Level_2

 

S&P500 – Support & Resistance Levels

S&P_Key_Levels

 

The S&P’s Long-Top

S&P_Long Top 

Rolling Head & Shoulders Chart Formation

S&P_H&S

Running Out Of Free Lunches

We are almost out of free lunches, folks, and will be posting only sporadically unless your support increases.   Donate whatever you think is fair by clicking on the PayPal button just below the Twitter and search icons on the upper right-hand side of the blog.  You do not need a PayPal account and can use almost any credit card.

Don’t be a free rider.  Thanks, so much.

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Another Potemkin Trade Deal

Chalk up another meaningless, photo-op trade agreement with the recent U.S.-Japan Trade Agreement.   The country and, especially, American farmers would have been much better off staying in the Trans Pacific Partnership (TPP).

The Japan deal is just another Potemkin trade agreement that will not move the needle one centimeter in bringing jobs back to the United States as was promised.

Free Trade

The dominant loop in the algo to predict President Trump’s behavior with respect to just about everything is to reject all things Obama even if it damages the country.  It’s really not rocket science, folks.

Here’s Forbes on the Japan trade deal,

Japan trade

If you’re looking for evidence that a U.S.-China trade agreement is a pointless exercise in economic futility, consider Donald Trump’s non-deal with Japan.

…Late last month, he [Abe] gave Trump a “deal.” That, Trump figured, would enable him to claim a much-needed win on the global stage and get his impeachment troubles out of the headlines. Knowing this, Abe’s team skillfully watered down the deal—essentially to TPP levels. All it means is that U.S. farmers missed out on nearly three years of increased access to Japan, Australia, Singapore, Malaysia, Chile and elsewhere.

Yes, the man famed for the ghostwritten bestseller Art of the Deal got played by Japan’s negotiators. And soon, Xi Jinping’s trade team will be able to make the same boast. Any U.S.-China deal will be a cosmetic affair that gives Trump a “win” and President Xi clearance to make China’s rise great again.

Trump is desperate for a face-saving way to end the trade war. Fallout on U.S. farmers and consumers paying higher import prices is imperiling Trump’s reelection odds for 2020. Yet backing down to Beijing would create its own problems with Trump’s base. Xi’s men are well aware of this, just like Abe’s.  – Forbes, Oct 8th

We have been very critical of the Administration’s trade policy simply because there is none.

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It Begins

 

It is starting to get real, folks.  The U.S. is in the midst of a major and potentially very destabilizing Constitutional Crisis.

Don’t listen to the talking heads flapping their jaws.   Everything is not awesome.  Any strength or rallies are a gift to reduce risk and/or get shorty.  Buckle the f$&k up!

Seat Belts_Mar24

 

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How The Rich Get Richer And The Poor Get Poorer

The power is off in Northern California but we want to get this out even though it is still in draft form.  We are working off the desk and not sure when power will be restored.  Take this as our first cut or swing in one of four at-bats.   

Summary
– We analyze the various components of the household balance sheet that drove net worth for the different percentile groups from Q1 2000 to Q1 2019
– The Top 1% are the ownership class, who hold over 60 percent of their assets in equity, in both public and non-corporate business and have benefited greatly from QE
– The Bottom 50% of households have not benefited from the great asset inflation of the past ten years as their debt liabilities have exceeded the 93 percent growth in assets, resulting in an 8.6 percent decline in net worth from Q1 2000 to Q1 2019
– This post is a work in progress.  Stay tuned for further updates when they turn the power back on in Northern California 

In keeping our commitment we made to GMM readers in the post, America’s Perilous Path Of Wealth Distribution,  we have another follow-up with some additional and very interesting data on wealth distribution in the United States.    If you haven’t read our previous posts, run don’t walk for some deep background to this piece.  Here are the links,  America’s Perilous Path Of Wealth Distribution and  Wealth Distribution In America

Review 

In the previous posts, we illustrated America’s growing wealth gap, where the the Top 1% of households now hold more wealth than the Bottom 90%.   The Top 1% are households with a net worth north of around $11-12 million.  We use the terms wealth and net worth interchangeably.

 

Wealth_Table_1

 

Wealth distribution in America is even more acute when comparing the 165.6 percent growth of the net worth for the Top 1% relative to the stunning  8.6 percent decline of the Bottom 50% of households.   Yes, you read that correct, the aggregate nominal wealth of the Bottom 50% of American households has fallen almost 10 percent over the past 20 years, which is politically destabilizing and explains much of the conflict in today’s body politic.

Wealth_T_Oct_1

In this post, we look at the composition of wealth by asset class and the contribution each has had to the change to the net worth for each percentile group from Q1 2000 to Q1 2019.

Stock Versus Flows

We only look at the change in the stock of assets and liabilities for each household percentile group, which includes the combination of capital gains, the cumulative income from assets, and the accumulation of new asset purchases with savings out of income.    The data is not easily available to breakout the later, so keep in perspective the data includes capital appreciation, asset income,  and the accumulated flow of new savings from income over the years.  That is the absorption of cumulative savings and thus implicit income growth over the time period.

The above complicates our wealth distribution analysis as households can move from, say, the Bottom 50% to the Top 1% by hitting the lottery, for example.  In a more real-life example, one of my daughter’s classmates who was a first-round pick in the recent Major League Baseball draft woke up one morning as a starving college student and went to bed that night with a $7.8 million contract, including a huge signing bonus.   Definitely,  a meteoric rise from the Bottom 10% to the Top 10%, assuming he and his girlfriend are counted as a household by the Census Bureau.

Income, savings, and the allocation of savings matter big to wealth accumulation.  What matters even more is building and maintaining wealth.

Liabilities 

Since liabilities also play a role in determining net worth, we also have a brief look at household liabilities.

How The Rich Got Richer 

The following chart illustrates the aggregate nominal wealth of the Top 1% of households increased by $20 trillion, 165.6%,  from $12 trillion in Q1 2000 to $32 trillion in Q1 2019. Most of the increase, 60.6 percent,  came from the appreciation and accumulation of public equities and equity in non-corporate private business:  $7 trillion and $4.7 trillion, respectively.

 

HH_NW_2000_2019_Top1

Real estate holdings accounted for 11.6 percent of the change in net worth and fixed-income assets 6.7 percent.

Impact of QE

How much of the Top 1%’s increase in wealth was due to the Fed’s monetary policy of quantitative easing (QE)?  We can’t really quantify at this moment and will leave it for a future analysis but it is fairly safe to say, a lot.   The Top 1% have effectively become asset surfers riding QE to unfathomable riches!

Is it any wonder why support is increasing for a People’s QE?

Liabilities

The Top 1% of households carry very little debt, less than 2 percent of total assets.

Contributions To Net Worth By Household Percentile Group

Asset_Contribution to NW

How The Poor Got Poorer

Though the assets of the Bottom 50% of households increased by $3.3 trillion, or 93 percent, over the period, the group’s net worth still fell by almost 10 percent because of their change in debt liabilities exceeded the increase in assets.

HH_NW_2000_2019_Bottom50

Almost 80 percent of the $3.3 trillion increase in assets was in real estate and consumer durables, such as cars, which illustrates just how little the Bottom 50% are invested in the financial markets.  Only 2.9 percent of the group’s assets are held in equities and 9.8 percent in pension entitlements (see Asset Allocation chart below).

Liabilities And The Dusenberry Effect

Some of the increase in liabilities over the period was student loans, which we believe, are included in consumer debt.

We were surprised to find that even at the apex of the housing bubble, when the value real estate assets of the lower 50% were growing double digits, aggregate net worth was declining as the group’s borrowing exceeded asset growth.  We suspect it was due to leveraging and using their home equity to finance additional purchases of homes and/or using it as an ATM to finance consumption.   Moreover, the toxic mortgage debt that was marketed to the lower-income groups also played a role, such as 12o percent mortgages and option ARMs.

Stagnant Real Wages

Just a quick note on relative real wage growth from 1979 to 2018 from the Congressional Research Service (CRS),

Real wages rose at the top of the distribution, whereas wages stagnated or fell at the middle and bottom. Real (inflation-adjusted) wages at the 90th percentile increased over 1979 to 2018 for the workforce as a whole and across sex, race, and Hispanic ethnicity. However, at the 90th percentile, wage growth was much higher for white workers and lower for black and Hispanic workers.  By contrast, middle (50th percentile) and bottom (10th percentile) wages grew to a  lesser degree (e.g., women) or declined in real terms (e.g., men). – CRS

We also suspect declining real incomes in a large portion of the Bottom 50% of households resulted in the Dusenberry Effect, where households took on more debt to sustain a fleeting standard of living,

One part of the “Dusenberry Effect” basically states that consumers do not give up their consumption patterns very easy even if their incomes decline.   They, in effect, “ratchet” down their living standard very slowly by first having a second wage earner enter the workforce as we saw in the 1970’s when women began to enter the workforce en masse and then by taking on debt to finance their previous standard of living.  — GMM,  August 2017

Whatever the case, the Bottom 50% carry a huge relative debt burden, 81.1 percent of assets, compared the 17.1 percent of the households in 50-90% percentile, the next most indebted group.

Asset__Liability_Profile_By_Percentile Group

The data also clearly illustrates why debt forgiveness is a major focus of today’s populist message,  even among the so-called moderate presidential candidates.

Debt Forgiveness

Democratic presidential frontrunner Joe Biden laid out his higher education platform today. There’s a lot in there, but I want to focus on one part: his proposal to make the income based-repayment (IBR) program for federal student loans more generous by cutting payments to just 5% of discretionary income. — Forbes, October 8th

When The Bottom 50% Was Insolvent

In an earlier post, we showed how the Bottom 50%, on an aggregate basis (i.e., not every household) was insolvent during several quarters just after the financial crisis. Interestingly, we found what initially brought the percentile group back above water was a sharp reduction in its liabilities, which we suspect was getting out from under their bad mortgage debt either through foreclosures or debt forgiveness programs.

 

Insolvent

 

Household Allocation Of Assets

We leave you with the following data on how each percentile group’s assets are allocated.  When the power comes back off we’ll have more commentary.

Main Observations
– The Top 1% are the ownership class, holding 60 percent of their assets in equities and equity in non-corporate businesses
– Pension entitlements make up almost 30% of the assets of the 90-99% percentile of households with 40% of their assets allocated to equities and real estate holdings
– The 50-90% percentile group hold almost two thirds of their assets in pensions and real estate with only 8.6 percent held in equities 
–  More than 70 percent of the Bottom 50% assets are held in real estate and consumer durables, such as autos, and only 2.9% in equities

Asset_Allocation_By_Percentile Group

 

Asset_Allocation_1%

 

Asset_Allocation_50%

 

 

Asset_Allocation_Total

Growth Of Asset Holdings

Interesting that the net worth of the top three percentiles outpaced the S&P500 and the Case-Shiller national home price index.  This clearly reflects the accumulation of assets through savings.   Also interesting the outsize growth of short-term assets by the Top 10%, which partially reflects the start date was the March 2000 peak of the dot.com bubble and the latest news that the rich are now hoarding cash.

 

Asset_% Assets

Upshot

It’s coming in the final print.  Stay tuned.

Running Out Of Free Lunches

We are almost out of free lunches, folks, and will be posting only sporadically unless your support increases.   Donate whatever you think is fair by clicking on the PayPal button just below the Twitter and search icons on the upper right-hand side of the blog.  You do not need a PayPal account and can use almost any credit card.

Don’t be a free rider.  Thanks, so much.

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Private Sector Job Growth

Just a follow-up chart to our weekend post, Job Creation: Reality v. Politics,  to reflect the sharp downshift in private-sector job creation.  The 3-month moving average of the monthly change in total private-sector payrolls is now at its lowest level since July 2012.

As we said, it is a difficult proposition to generate robust job growth with a shrinking labor pool and an unemployment rate at 3.5 percent, which we believe is a flawed and misleading measure of the true picture of the labor market.  See here

BLS_Private Sector Growth

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Walmart Nation Continues To Bleed Jobs

Just an update on our last post, Trouble Coming To Walmart Nation?  Warehouse clubs and supercenter retailers continue to shed workers.   Along with being Amazoned, the big box retailers are adopting automation at a lightspeed pace and have cut over 42k jobs in the last 12 months.

On Friday, the BLS reported the retail sector lost another 11.4k jobs, the 8th consecutive month of payroll losses.  Retail is one of the country’s largest employment sectors, ranking 4th behind education & health, professional & business services, and leisure and hospitality.

Moreover, Walmart is not only the world’s largest private employer but the largest employer in many states throughout the United States.

largest-employers_jan26

 

Walmart

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Job Creation: Reality v. Politics

A nice chart for those who live in a fact-based world.

Job creation in the first 32 payroll reports in the Trump administration is significantly lagging the prior 32 months before President Trump took office.

 

Trump v Obama

Employment Situation – September

On Friday,  the BLS reported a total nonfarm payroll monthly increase of 136k, including 114k private-sector jobs;  an unemployment rate falling to 3.5 percent, the lowest rate since December 1969, and average hourly earnings falling by 1 cent.

The BLS notes a big downshift in job creation from last year,

Total nonfarm payroll employment increased by 136,000 in September. Job growth has averaged  161,000 per month thus far in 2019, compared with an average monthly gain of 223,000 in 2018.  – BLS

Private Sector NFP Creation Lowest 3-mo MA Since 2012

September’s 114k monthly increase in private sector payrolls was the fifth-lowest of the Trump administration and, more disturbing, the 3-month moving average of private-sector job creation is now at its lowest level since July 2012.

To be fair, robust job creation is a difficult proposition when labor supply is so scarce as measured by a 3.5 percent unemployment (UR), though we believe the UR is a flawed measurement.  See here

 

NFP

The New Political Spectrum 

We are starting to wonder if facts matter anymore.

The post-modern nightmare now seems fully realized in today’s culture, where there is no reality only constructions of reality.  There is no truth, there are no facts.  It’s true only if you believe it’s true.

We reject this nonsense and are becoming convinced the new political spectrum is not about the left and the right anymore but it is bookended by a fact-based reality versus the conspiracy dominant, or, what we call the National Enquirer based.

Poltical Spectrum

 

Many from the traditional left and right live together, though not in agreement, on both extremes of the spectrum.   Our preference is for a fact-based lefty or righty over the alternatives any day.

Reality is a much easier reality and a better world when the facts are established and the conclusions are debated rather than arguing over two or many different realities.  Unfortunately, we are seeing this now play out in real-time in the U.S,, which is very destructive and, if not checked, will end up in economic disaster.

Lincoln And The Facts 

President Lincoln,  a great storyteller, had something to say about drawing different conclusions from the same established or, what economists like to call “stylized facts,”

During his days as an Illinois circuit court lawyer,  legend has it Lincoln would persuade juries with the use of his funny but truth piercing stories,

The story goes that Lawyer Lincoln was worried he had not convinced the jury during the closing argument of a civil case against a railroad.   The jurors had gone to lunch to deliberate.  Lincoln followed them and interrupted their dessert with a story about a farmer’s son gripped by panic,

“Pa, Pa, the hired man and sis are in the hay mow and she’s lifting up her skirt and he’s letting down his pants and they’re afixin’ to pee on the hay.” “Son, you got your facts absolutely right, but you’re drawing the wrong conclusion.”

The jury ruled in Lincoln’s favor.

Just the facts, ma’am!

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The Rise Of Deep Fakes

Time to question everything, folks.

Deepfakes have started to appear everywhere. From viral celebrity face-swaps to impersonations of political leaders – it can be hard to spot the difference between real and fake. Digital impressions are starting to have real financial repercussions. In the U.S., an audio deepfake of a CEO reportedly scammed one company out of $10 million. And with the 2020 election not far off, there is huge potential for weaponizing deepfakes on social media. Now, tech giants like Google, Twitter, Facebook and Microsoft are fighting back. With Facebook spending more than $10 million to fight deepfakes, what’s at stake for businesses, and what’s being done to detect and regulate them?

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QOTD: Foreigners RSVP For 2020 U.S. Election

Are you surprised?  The government has all but put out the welcome matt.

In addition to Iran, hackers from North Korea and Russia have already started targeting organizations that work closely with 2020 presidential candidates. – NY Times

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