Following are my personal comments on specific markets and issues. I chart markets for a hobby and my comments are the result. They are not recommendations to buy or sell anything and should not be thought of as such. They are for entertainment purposes only so enjoy.
David Bruce Edwards - Northern Front LLC September 18th, 2021
dedwards-1@comcast.net
Please remember, the following is pure speculation based only on my experience and chart patterns. "Every sunken ship has a room full of charts."
Note - On my wide screen monitor when I look at this web site with the screen size in full, the site spacing does not come out properly. By making the window less wide all of the text and graphics slide into place. Perhaps you are having the same experience. DBE.
As usual, I will show pictures and graphs found on Zerohedge.com, Sentimentrader.com, which include the Seasonality charts and charts made on Barchart.com. I will also mention "cycle low timing bands" suggested by another market website to which I subscribe, Cyclesman.com.
Hard data -
State by state initial jobless claims rose a bit last week to 332,000 after hitting a post COVID low the week before. Areas hit by the hurricane saw the biggest increase. The number of people getting some kind of jobless assistance also increased to just above 12 million. I thought that after the September 4th cut off of $300 checks, workers would return to restaurants, supermarkets and small businesses. I was in Michigan last week and saw the opposite. There were help wanted signs everywhere. Restaurants were closed or on limited hours because of a lack of workers. I went to a Chili's where there were only two tables occupied. The hostess told me that I could not be seated for 40 minutes at a table or the bar! She was the only one working in the dining room.
Producer prices are rising faster than Consumer prices leading some analyst to the conclusion that profit margins at many businesses will be squeezed. The build up of in bound ocean freight continues with ships anchored or drifting off of the west coast waiting to be unloaded. I spoke with a bike shop owner last weekend who told me he is still waiting for the delivery of bikes ordered a year ago from Chinese manufacturers.
Retail Sales for August rose 0.7%. It doesn't sound like much but analyst were looking for a decline. The chart on the right shows retail inventories relative to sales and explains why we can't find some of the things we want on the shelves. Analysts are hoping that in a post $300 per week government check world, demand for stuff will slow down, allowing shipments to catch up. Cynics say that if there is one very bad week in the stock market, politicians will rush to restore more free money. They note that when the government gives out free money to people who did not have to produce anything and those people buy stuff, you get shortages.
In past updates, I mentioned Evergrande, the huge Chinese property development company that can't meet their debt payments to banks and to individual and institutional investors who bought securitized units of their debt. They are not paying their vendors, hundreds of companies that build their properties. You should be following the collapse of Evergrande because the estimated 3 billion Dollars worth of outstanding debt that they owe is likely to default. Aside from banks and retail investors they borrowed heavily in China's shadow lending market. As all these loans become worthless other things will be sold to raise cash resulting in a chain reaction of liquidation. The PBOC injected 14 billion Dollars worth of liquidity into the banking system Thursday night but has not yet bailed out Evergrande and its creditors. There are demonstrations outside of Evegrande's offices and some employees are afraid to leave because of protesters who are losing lots of money. In China, people use real estate to store wealth. If Evergrande goes under there will be forced liquidation of its real estate holdings that will drive down the prices for everyone.
So far, the Chinese stock market is unphased but remember that in the summer of 2007 in the United States, mortgages began defaulting and the securitized packages of them became illiquid because no one knew what was in them. Credit began freezing up as those with cash pulled back from the overnight lending market fearing that counter-parties would default. The repo rates started rising just as they have in China. Our Dow Jones Industrial Average hit its high in October and ignored the probelm for another three months! Analysts who track credit creation in China warned last year that things were tightening up. Now they are saying that because of Evergrande the PBOC will unleash a wave of liquidity that will cause inflation and boost commodities prices in the next few months. Remember, in 2007 it was thought that problems in the U.S. Mortgage market were just a domestic issue that would not escape our border. Starbucks opened a lot of stores in China. If there is an economic panic in the country and consumers pull back on consumption its earnings could suffer. It could be the first Evergrande victim among U.S. companies.
The other huge economic story is from Europe where natural gas prices are going through the roof. Last month this site featured a chart showing the drop off in natural gas coming out of Russia and into Germany. Last winter it was very cold in Europe. Inventories of natural gas never recovered. The big Nordstream II pipeline from Russia is not open and gas supplies are not adequate for another cold winter. Under GREEN dictates, coal fired power plants were idled. Natural Gas prices are so high that a major fertilizer company that uses natural gas as an input shut down two of their plants . Electricity rates are rising rapidly and there are public disturbances because of the higher prices. France operates 56 nukes and is the biggest supplier of electricity to the United Kingdom. There was a fire in a major cable to the UK that will not be repaired until March of 2022. In the mean time, wind coming over the turbines in the North Sea is unusually calm, cutting electric generation from this undependable source. There is talk of possible black outs in England! Our domestic natural gas prices rose in sympathy and because of the hurricanes. Propane, that comes from Natural Gas also spiked higher. Good thing it is at the end of grilling season.
Crude Oil in the U.S. rallied a bit after Dept. of Energy reports showed a big drop in inventories. The culprit was a collapse in production from the Gulf of Mexico due to the storms. Prices pulled back late in the week. The question is how fast production can get up and running again.
The picture on the left shows how low domestic inventories of crude are relative to levels over the last five years. The shares of companies that explore for, produce, refine and distribute the stuff bounced a bit but are still at levels reached six months ago. Chart wonks will point to the five legged decline following the spring peak and then the three part upward correction. Most of the time, patterns like this lead to another sell off.
DBC, an ETF that tracks the CRB Commodities Index made a new high last week. The series of expanding moves between the red lines is often a topping pattern. That doesn't imply a crash. We could have a partial re-tracement of the previous up move that sets the stage for higher prices next year. Something similar to that is taking place with DBA, the ETF that follows the prices of grains and meats. Grains often sell off into fall harvest time and make their lows between now and November.
Two weeks ago, Apple looked like it was finishing a final burst higher following a large running triangle form. This week it turned the corner to the down side. If Apple topped for now it has implications for the major market averages, especially the NASDAQ and S&P 500 because of the way Apple is weighted in them. The Dow Jones Industrial Average is a price weighted index. We could be at the start of a major correction. Bulls will hope for the pattern shown by the red lines. We closed the week at levels last seen in early May.
The S&P 500 and NASDAQ 100 saw their best prices a couple of weeks ago. They didn't make much down side progress last week. Bulls can point to that as evidence that there is not much selling pressure. Bears will note that "Buy the Dip!" has been the rule this year. Last week, for the first time in a while buyers were not strong enough to turn the tide to the up side.
Companies are buying back their own shares in record amounts. The two sectors that are doing it the most are financials and tech. On the 13th, just as the market looked like it was headed for a bad week, Microsoft announced a four billion Dollar buy back of its own shares, reducing the float by over 2% and, by definition increasing the earnings per share. The stock rallied for a few days and because of its weighting in major averages, lifted the market. By week's end the thrill was gone. The compensation for top management in most firms is linked to the price of the company's shares. In past eras, buying back shares to pump up the price was seen as a form of manipulation. Now it is cheered as a "win, win" for both share holders and management. Investors learn that rule number 1 is "Buy low and sell high." Does Microsoft's buy back decision follow that rule? AlphaBet had its first selling spell in a while. On a long term chart it looks like a slight interruption but if you bought at the beginning of September you are down by over $100 per share.
The average investor owns more stocks as a percent of their net worth than ever before. The graph on the right tracks the ability to borrow and finance things and recent economic data relative to expectations (red.) Despite easy money everywhere, the economy is not doing as well as expected.
Interest rates didn't do much over the last couple of weeks despite daily reports of higher prices and shortages. The Fed is pushing the "transitory" narrative on inflation while continuing its massive government bond buying program. From a purely chart perspective, traders know that sideways action like this lasts for only so long before a strong move up or down.
Owners of junk bonds are hoping that there is no spread of anxiety from China, where junk bonds are crashing due to Evergrande They continue to buy this low quality debt with yields on most bonds lower than the annual increase in the consumer price index!
Two weeks ago the Dollar was "over sold" based on momentum oscillators and due for a bounce. It gained extra strength late in the week due to Europe's energy woes as traders sold the Euro against the Dollar. So far, the recent up move fits the pattern of an upward correction in a down market. To the right is a graph of the Dollar's typical seasonal tendency from the Sentimentrader.com website. It did not follow the seasonals for much of the last few months so we will see what happens in the coming weeks.
On an hour by hour basis gold is trading opposite the Dollar. A bullish interpretation of the pattern is that gold made a major low in August followed by the first leg of a larger advance. The recent weakness is a typical partial re-tracement of the up move. On the right is another Sentimentrader.com graph showing the seasonal gold tendency. It is the opposite of the Dollar's. We will find out if reality conforms to art early next week. The world wide economy seems chaotic with every country and millions of citizens living off of borrowed money and Central Banks just creating the stuff out of thin air! If there were ever a time for gold to do well it is now. The big thing I worry about is that events such as the default of Evergrande lead to a desperate need for cash and in situations like this, everything gets liquidated to raise money including gold.
Despite the rough week for gold it is still trading near the high end of its path over the last decade. The chart on the right shows the weekly closing price of gold in NY and a simple RSI momentum oscillator below in red. On a weekly basis gold is not yet in over sold territory but the oscillator is at levels that gold rallied from in past cycles.
I tried to be positive about silver last time and it thanked me by selling off again. Bulls will say that it is completing a large sideways consolidation before another rally. Bears will claim that it is close to breaking a shelf of support and that once it does, everyone who bought over the last year will be sitting on a loss making them potential sellers. On the right is a chart showing the weekly closing price of silver in New York in black, its one year moving average in red and the price of silver minus its one year moving average in blue. The scale for the blue line is on the right side of the chart. On Friday it closed $3.02 below its one year moving average. Red circles mark previous extremes. Two of those extremes marked temporary lows in a larger decline with prices bouncing only to be followed by another sell off.
Past updates showed seasonality graphs for platinum and palladium. The typical pattern for palladium is a low between now and mid-October. Platinum tends to bottom out in November. In any given year the prices of anything can move opposite seasonal tendencies. The reason given for palladium's fall is lack of car production because of computer chip shortages. Catalytic converters that go into cars are the most visible use for the metal. When I started my career in a Wall St. firm in 1980 they taught me about Good Till Canceled Orders (GTC.) They were orders to buy or sell an item at a specific price that were Good Until Canceled. Many of my clients use platinum and palladium and buy it from time to time. When the prices of these metals, especially palladium, went up they said, if it ever falls back to price "X" I am going to buy. Back in 1980, experienced brokers told me that what GTC really stands for is Good Until Close. This is because clients placed buy orders GTC way under the market. Then, when the price declined to the level where they previously thought the item would be of great value the sell off scared them or convinced them that it was going even lower so they canceled. their order. The same thing is likely to happen with physical users of platinum and palladium. Why do these metals tend to rebound in the fourth quarter? My guess is that most industrial users are not professional metals traders. They do their budgets in October then hope the metals go down in price and wait until the last 6 weeks of the year to buy. When the metals begin to bounce they all buy at the same sparking December rallies.
September and October are two of the worst months for copper. The price is stubbornly holding above $4 per pound for now. Iron Ore prices collapsed last week. China is restricting the production of steel plants to control the price and reduce pollution plus the collapse of Evergrande is causing a sell off in all things having to do with construction in China. Not all industrial metals are doing badly. Aluminum prices hit new highs last week!
Iron Ore prices might be down but there is a shortage of fabricated products. One of my clients usually uses steel drums to ship material. There are no steel drums available. They are using super sacks instead.
Covid Updates -
Last week the Zerohedge.com blog featured an article discussing why you no longer hear about Sweden in COVID updates. It was late in the week so if you go to the website you can page backwards and find it. Above are two graphs featured in the piece. It compared media headlines condemning Sweden for its COVID response to praise for Israel and Germany for their forced compliance on wearing masks, social distancing, closing down and then vaccines. Israel was the poster child for "doing everything right." Sweden was the stupid country for ignoring SCIENCE. So for those of you who believe that all the measures we are taking to thwart the bug have efficacy, what does the evidence tell us? When looking at the deaths in Israel please remember that they are one of the most vaccinated countries in the world.
The reddish line tells you if you were better off owning gold or the S&P 500. For another two week period, the stock market won even though it sold off a bit.
Best Guesses
Stocks - The major averages and some key stocks like Apple made an initial decline then didn't immediately rebound as they have over the last year. I am looking for more weakness. Will the Evergrande default spill over the borders of China? Watch JNK for an early warning.
Bonds - Taper or no taper they are a rigged market that pays next to nothing.
Gold and Silver - This should be a make it or break it week for gold and silver. I am hoping that gold follows the seasonal tendencies and gets a pop along with the Dollar selling off some. The best thing would be for the metals to rally no matter what the Dollar does.
Things I notice during my travels - I live in Massachusetts where dope is legal. At first the dope stores were a novelty and only a few were licensed and open. There were lines of eager buyers outside of them. Now, the state is issuing multiple licenses and the number of dope stores is rivaling the number of liquor stores. There is likely to be a shake out. The regulatory and security burden of operating them makes for high fixed costs. With stores open everywhere prices will drop and what was once a niche item will become like Bud and Miller Lite with volume the most important variable. The State of Massachusetts doesn't care about the economics of dope. They only care about the tax revenue they are harvesting from dope smokers. They figure that if they are getting "X" from five stores they will get "X times 2" from ten. Those of us experienced in business know that it doesn't work that way. I don't like dope or any drug for that matter. I was in high school in the late 60s and very early 70s. Some of my good friends who were in my college prep courses started smoking dope and fell by the wayside. They became painters or did other things that required less intellectual horse power and more importantly, less ambition. There is a big pay difference in jobs that require a clean urine test from those that don't and I fear we are in a two tier society driven by dope. On one side are people who feel good from accomplishing things and are paid accordingly. On the other are people who feel good from every day weed smoking, working in lower paying positions. Now that it is legal and because of the labor shortage there is a push to "liberalize" work rules and overlook some drug use. If you drive on the highways of Massachusetts you notice that most of the billboards advertise for dope stores. I thought this was a local thing. During my 8 trips this summer I saw that in states with dope stores the billboards were also full of weed advertising. In The Twelve Emperors, Suetonius writes that Caligula quickly drained the imperial treasury with luxury spending and desperately needed money. One of his remedies was to open his own brand of brothels. He ordered women to work there and hired salesmen to go to the docks and bars to drum up business. Our states see dope stores as pure conduits for cash to counter bloated spending. My prediction is that when revenue's fall short, Caligula's plan will be next.
Best of Luck,
DBE