Tower Private Advisors
- Market action
- Slam dunk recession?
- Restaurant review (I’m not kidding)
If you’re sick and tired of hearing of all the economic and financial nonsense, just skip on down to the first restaurant review on Obvious Insights.
Capital Markets Recap
The action of the last couple of weeks can be called a waterfall decline, for reasons easily discernable from the picture below. This sort of action doesn’t usually result in sharp snapbacks, as they shake investor confidence so badly that the recovery process is very gradual. The bottoming process usually involves a re-testing of the lows. In other words, the trees are shaken hard several times to shake out the weak players, so we’re likely to see 1119 (opening/closing lows), possibly 1101.54 (intraday low), and we may even make a nominal new low. Most of our key services are not suggesting aggressive selling, although the one that’s been in business the longest advised, today, going to the sidelines until some decisive policy action in Europe and the U.S. is taken.
The action shown above isn’t terribly surprising when we look back in time a bit, although you may have to suspend disbelief, as the following has to do with broccoli. Shown below is the S & P 5oo going back to the 2007. I’ve overlaid it with a Fibonacci retracement of the move from the 2007 high to the 2009 low, and the horizontal lines were put on the chart based on those two price levels, alone at that time.
The subsequent price action that coalesced or reversed at the various horizontal lines is either purely coincidence, or if you suspend disbelief for just a moment, preordained–or maybe we could just say not surprising. There are three key levels in the chart, shown as the circled points on the left. If prices move significantly below the “..and then this” line, the post-2009 rally is done, and we’re headed back down to the 2009 lows. Above that level, and we can still call this a correction in the cyclical bull rally market.
But what about broccoli? Well, the florets of a head of broccoli or cauliflower have the same relations shown above, although in the form of spirals, as do coneflowers and pineapples, while the pyramids of Egypt and Leonardo Da Vinci’s artworks reflect Fibonacci proportions equal to the percentages above.
There are many indicators one can look to that says the market’s action is based on panic, and for many indicators, one has to go far back in history to find their equal.
- Investors are buying put options (betting on and/or insuring against a decline) in record proportions to call options (the opposite.) When, in the past, today’s levels have been reached, stocks were higher after one month in 95% of the cases, for an average gain of 3.1%.
- Breadth, the comparison of declining versus rising stocks is pathetic. Historical analogs are also positive for this measure.
Here’s what SentimenTrader had to say today:
What we’re seeing now is an absolutely classic case of a panic followed by a re-test. As we discussed last week, we normally see a 1-3 day rally from crash (or mini-crash) conditions, then a re-test of the lows.
The re-test can show slightly higher or lower prices than what was seen during the mini-crash, so it’s certainly possible we have more selling pressure to come. But we should not see more than a slight undercut of last week’s lows, or spend more than a day or two below them. Anything more than that, and the probability of a complete failure rise significantly.
That shouldn’t happen given what we’ve looked at during the past week and a half.
There are essentially two things weighing on the markets right now. The first is the situation in Europe; the second is the U.S. economic weakness. Anything other than that is noise, such as this nonsense from Bloomberg: “U.S. Stocks Erase Gains as Economic Concerns Offset Valuations.” The markets are in crisis mode. Therefore, valuations don’t matter–they don’t matter. Intel sports a 4.3% dividend, is trading at 8.78 times the last 12 months’ earnings, which are growing by more than 11% year. Market participants don’t want dividends; they want out. The Europeans are sitting on their hands (ironically or Freudian slippingly, I had inadvertantly included an “h” in “sitting,” which would also describe what the Europeans seem to be doing) when it comes to a uniform response. There had been hopes pinned to a so-called Euro Bond, but it would have* required the strong northern countries to attone for the sins of the weak and profligate southern countries.
* Angela (pronounced ahn’-guh-luh) Merkel, Germany’s chancellor, said yesterday that Eurobonds, “are not the right answer.” To those who say it’s always darkest before the dawn (i.e. don’t give up hope yet, the Europeans will still come up with an unexpected solution), I say it’s darkest before it’s black. The European thing will not go well.
The market’s worst fears have to involve Europe, but the second biggest fear is that the U.S. is headed into recession. The Economist magazine–or as the British put it, newspaper–surely thinks so, as its cover of August 6 issue indicated. I love cover stories of magazines because, for one, they tend to be contrary indicators; on the other hand, the magazines do it over and over.
So, while we may come close to a technically-defined, two-negative-quarters recession, I don’t think we’ll have one before 2012, where our Strategas service has put the odds at 35%. As for 2011, it’s all too neat. When the average investor and at least one popular magazine are looking for the same thing, they’re likely to be disappointed, but what an evocative cover!
This week, however, those fears appeared to be well founded. On Monday, the New York Fed released its Empire State Manufacturing index. It had fallen to -7.72 from -3.76. That reading is similar to past recession levels, as well as other non-recession levels, so that’s easily explained away. When the Philadelphia Fed released its Philly Fed index, however, it showed what a disaster economic activity in the Philadelphia Federal Reserve District was. That index fell very sharply, so sharply that it’s at a level only seen in recession going back to its 1968 inception. Here it is in all its market-shaking glory (click for gigantic version.)
Restaurant Review – Larry’s on South Clinton
In the 2900 block of South Clinton in Fort Wayne sits Larry’s. It’s soon to be renamed “L & L’s Sandwich Shop,” as it seems that Larry’s brother felt left out.
And here’s Larry. He’s a great proprietor. He explained that he was looking for some sort of food stand to open, and when I asked him how he settled on Cheese Steaks, he said, “the Lord.” After thinking about selling Shish Kabobs he was led to start cooking up Cheese Steaks, and Fort Wayne is lucky he did (hello, Journal Gazette? let’s get on this one.) His waitstaff of provided us with great service.
Here’s a look at Larry’s menu. All four of us had the Philly Cheese Steak, although Larry provided us with some fries, “on the house,” after promising to “take care of you,” when he heard about the blog. Unfortunately for Larry and the business he expects to receive from this, there are only seven readers of the blog.
Stop in and see Larry and tell him the guys from Tower Bank sent you. Go see an entrepreneur in action and mention how good the lemonade is, while you’re at it.
Graig Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors
Tags: Restaurant review