Financial topics

[Higgenbotham]

All of this was predictable. In 1991 I wrote a book, Sixty Seconds That Will Change the World, about the consequences of a major earthquake in the Tokyo area, and discovered that the rest of the world would come off far worse than Japan. US treasuries would have to be sold to meet insurance claims and pay for rebuilding, resulting in falling bond prices and rising interest rates. The yen would then rise as these overseas savings were repatriated.

http://www.guardian.co.uk/commentisfree ... al-markets

[John]

I read a story somwhere today -- unfortunately didn't make a note of
the url -- that said that Japan was making a point of selling other
assets and NOT selling Treasuries.

This would be consistent with what happened in the Bubble that Broke
the World. Everyone knows that China and Japan can stop funding
American debt, but they won't stop because it would be disastrous for
them.

John

[Higgenbotham]

I read a story somwhere today -- unfortunately didn't make a note of
the url -- that said that Japan was making a point of selling other
assets and NOT selling Treasuries.

This would be consistent with what happened in the Bubble that Broke
the World. Everyone knows that China and Japan can stop funding
American debt, but they won't stop because it would be disastrous for
them.

John

That makes sense. I tried to delete my previous post with the article link but wasn't able to.

[vincecate]

Everyone knows that China and Japan can stop funding American debt, but they won't stop because it would be disastrous for them.

China and Japan combined have a net purchase of a bit over $100 billion total for the last 7 months. The Fed is buying about $100 billion per month now. They are no longer funding American debt, the Fed is.

http://www.treasury.gov/resource-center ... ts/mfh.txt

[vincecate]

You often seem to get wild swings right before a crash. These might count as wild swings.

http://finance.yahoo.com/q/ta?s=SPY+Bas ... lysis&t=1d

[vincecate]

They are now saying "stock market has erased gains for the year", which should convince more people to get out.

http://money.cnn.com/2011/03/16/markets ... /index.htm

[Higgenbotham]

This interview touches on many issues discussed here if anyone has an hour. So much of this seems to boil down to having an opinion about what the Fed will do. The interviewer says there will definitely be a QE3. The author says the Fed won't want to be responsible for debasing the dollar any further after QE2 is done.

http://www.financialsense.com/financial ... l-collapse

Reuters-Jefferies CRB Index is below the 2008 high:
http://www.crbtrader.com/crbindex/images/crb-cr.gif

Reuters CRB Index is at a new high:
http://www.crbtrader.com/crbindex/images/crb-ci.gif

CRB Spot Index is at a new high:
http://www.crbtrader.com/crbindex/images/crb-ci.gif

Billion price index that Vince posted goes up and up:
http://bpp.mit.edu/daily-price-indexes/?country=USA

The Reuters-Jefferies CRB Index is heavily weighted to petroleum, which makes up 33% of the Index, if I'm current on that. Petroleum products are still well below their 2008 highs, which probably explains why the Reuters-Jefferies Index is still below its 2008 high whereas the others are making new highs.

Daily chart of the 1987 crash:
http://www.chartingstocks.net/wp-conten ... _crash.gif

Nice general formula for a crash: Market drops about 10 percent in a month. Market rallies about 7 percent in half a month. Rally fails and market falls through the previous low and crashes. 1929 also occurred roughly this way. Of course, it doesn't have to happen this way at all. Why does it happen this way, though? I suspect traders bought the 10 percent dip and then set stops at the low because they were nervous and didn't really think the market should be that high or should necessarily be rallying. Seems a similar situation could be setting up.

[vincecate]

This interview touches on many issues discussed here if anyone has an hour. So much of this seems to boil down to having an opinion about what the Fed will do. The interviewer says there will definitely be a QE3. The author says the Fed won't want to be responsible for debasing the dollar any further after QE2 is done.

They are both right. There will be a QE3 and after the dollar is debased the Fed will try to say they are not responsible. Already Bernanke takes credit for the stock market being up but does not accept responsibility for any other prices going up.

Reuters-Jefferies CRB Index is below the 2008 high:
http://www.crbtrader.com/crbindex/images/crb-cr.gif

Reuters CRB Index is at a new high:
http://www.crbtrader.com/crbindex/images/crb-ci.gif

CRB Spot Index is at a new high:
http://www.crbtrader.com/crbindex/images/crb-ci.gif

It is kind of amazing that prices now are only 3.5 to 6.5 times as much as in 1967 given how much faster money is being printed now than back then. The Fed is making around $1 trillion new dollars per year now and back then it was single digit billions I think (can't find any data at the moment).

The graph for M1 shows around 7 times as much money as back then but going nearly straight up now. While M2 is about 18 times as much:

http://research.stlouisfed.org/fred2/series/M1SL?cid=25
http://research.stlouisfed.org/fred2/se ... =21&soid=1

Daily chart of the 1987 crash:
http://www.chartingstocks.net/wp-conten ... _crash.gif

Nice general formula for a crash: Market drops about 10 percent in a month. Market rallies about 7 percent in half a month. Rally fails and market falls through the previous low and crashes. 1929 also occurred roughly this way. [...]

The 1987 crash was the Monday after an options expiration. That would point to this coming Monday, which seems reasonable.

http://stock-index-options-alert.blogsp ... -2011.html

I don't know if they had options back in 1929, and if they did if expiration was on the 3rd Friday of the month as it is now. But Oct 24 1929 is in the week after the 3rd Friday. So this might also point to next week.

[Higgenbotham]

Daily chart of the 1987 crash:
http://www.chartingstocks.net/wp-conten ... _crash.gif

Nice general formula for a crash: Market drops about 10 percent in a month. Market rallies about 7 percent in half a month. Rally fails and market falls through the previous low and crashes. 1929 also occurred roughly this way. [...]

The 1987 crash was the Monday after an options expiration. That would point to this coming Monday, which seems reasonable.

http://stock-index-options-alert.blogsp ... -2011.html

I don't know if they had options back in 1929, and if they did if expiration was on the 3rd Friday of the month as it is now. But Oct 24 1929 is in the week after the 3rd Friday. So this might also point to next week.

This is a pretty tough call. An interesting fact is after the all time high of October 11, 2007 the market was subsequently hammered all through options expiration week similar to what is happening this week. After expiration, the market moved down a bit more, then recovered by the end of the week.

Another possible interpretation of the 1987 chart is that the market has made a mini version of that chart by dipping down after the February 18 high, recovering for a few days, then having a "mini crash" for a few days that has ended for the time being.

An interpretation that I think should be watched for is: Participants in the market seem pretty well divided into one group that expects a low near the end of this month and another group that expects a low this week and a new high between about mid April and early June. Therefore, if a panic setup were to occur, it might require that the market move higher, following the pattern of the 1987 chart. This would cause the first group to cover their shorts and the second group to get on board for the new high they expect, providing impetus for the 7 percent or so rally. At this point, the first group is seeing an "early" low and the second group is geared up for a new high in their predicted time frame. This would be the crash setup. If the market were then to head lower, it would provide the fuel for the bottom to fall out toward about April 18, consistent with the 1987 daily pattern. Another thing I'll make note of. Often times bad things happen right around April 19 for some reason (as they often do around October 19 which are on opposite sides of the calendar). Just off the top of my head: Waco, Oklahoma City, Virginia Tech, and the BP oil spill all occurred within a couple days of April 19.

[Higgenbotham]

Another model for recent activity in the stock market could be as follows:

The stock market made a high on July 19, 2007. The subprime crisis began to erupt and the market fell from there and made a low on August 16, 2007. This was one day before options expiration. Early on the morning of options expiration, the Fed intervened, cutting the discount rate and there was a relief rally. Further Fed interventions pushed the market up to a slightly higher high at the all time high on October 11, 2007.

This year the stock market made a high on February 18, 2011. The market began to roll over, then the Japanese crisis erupted, pushing it to a low on March 16, 2011. This was two days before options expiration. Early on the morning of options expiration, the Bank of Japan and the Fed intervened, flooding the system with liquidity and so far there has been a relief rally. If the 2007 pattern were to continue to trace out, then the peak for this rally would be expected about May 11, 2011.

Going further, I don't track the yield curve in detail, but heard a guy last night who said the yield curve started changing in the same way both in June 2007 and January 2011. Another similarity I see is in the behavior of the ECRI leading index - it is holding steady lately similar to what it did around that time in 2007. A subprime crisis can be managed more directly than a news driven scenario where the events are beyond the scope of finance, so it would seem that a lot will depend on how well Japan's nuclear problems are resolved and whether anything else that is unexpected pops up. 2011 should be more crisis prone than any 2007 counterpart.

I checked the interest rate behavior back in 2007 using my own methods. 10 and 30 year treasury yields peaked on June 13, 2007 and the stock market made a bottom on August 16, 2007. 10 and 30 year treasury yields recently peaked on February 9, 2011 at a lower high. The yields are following a similar pattern to 2007. If stocks and bonds move similarly to 2007, interest rates and the stock market will make one more low soon. Notice this year the stock market didn't hold up as long as it did in 2007 after the peak in interest rates.