Archive for the ‘Financial Markets Overview’ Category
Why China is Winning the Economic War
During what was called the “cold war” that ended with the fall of the Communist Totalitarian Regimes in Eastern Europe, one of the major fears was a military conflict between Russia or China and the U.S.
It did not happen. The potential of a military conflict has instead evolved into an economic war.
The U.S. was winning hands down for a long time. It used to be that the U.S. was number one in almost every category: education, technology, standard of living, economic and military strength; and as a moral and ethical leader of the world. It was leading the rest of the world into the future with the demonstrative power of democracy and free markets, for example, new technological breakthroughs in many fields: automation, computers, communications, energy, medicine and space travel, amongst others.
In recent years, a number of countries have surpassed the U.S. in specific areas, including consumer incomes, standard of living, and health care. The true economic powerhouse, however, has been China. Some of the statistics, and the speed with which they have changed, have been startling. Over the last ten years Chinas economy has surged past those of Canada, Spain, Brazil, Italy, France, and Germany, and is expected to pass Japan this year, to become the second largest economy in the world, behind the U.S.
Whether it is categories of manufacturing efficiency, high-speed rail-line technology, nuclear power plant construction, clean air energy technology or education, China is making impressive global inroads, even in areas where the U.S. still has significant dominance. Much of it has to do with Chinas massive population, about which the U.S. can do nothing.
For instance, while U.S. Internet companies dominate global headlines, China now has the worlds largest Internet market as measured by the number of users. Yet Internet use has only penetrated 22 percent of the population versus 75 percent in the U.S. Meanwhile, U.S. Internet giants like Google, Yahoo, eBay, Amazon and FaceBook are experiencing problems trying to transport their dominance into the Chinese market. Part of this are obstacles placed in their way by Chinas government, in support of Chinas state-controlled corporations. The result is Chinese Internet companies like Tencent, and Baidu, cannot help but become world leaders.
Here is a statistic of more importance: U.S. universities should graduate about 150,000 engineering students this year, while Chinese universities will likely graduate more than 500,000. Now that may be an unfair comparison since Chinas population is larger by approximately the same ratio. But that is not the issue. The issue is the degree to which China has moved higher education to the top of its priorities, and the fact that 500,000 new engineers a year will probably come up with more high-tech innovations than 150,000 can. Chinas great leap forward has been going through the same phases that the United States experienced in the turn of the last century as it worked toward becoming the worlds dominant economy.
In the midst of all this, it may be that China is starting to eat Americas lunch, never taking its eyes off the goal; while we squabble among ourselves, paying no attention. Thats unfortunate. As Sam Houston said in the U.S. Senate in 1850, “A nation divided against itself cannot stand.” Yet, for the last 15 years the U.S. has divided itself in increasingly bitter time and energy-consuming political arguments: the morals of President Clinton, whether or not war should be waged to remove Saddam Hussein from power in Iraq, whether the country’s current problems are due to the depth of the economic hole dug during the last administration, or ineptness of the current administration in pulling the economy out of the hole.
Meanwhile, China has instead kept its eye on the goal. It not only is making great economic strides, but on the financial side has become the worlds largest creditor nation, even as the U.S. has become the worlds largest debtor nation, with China holding much of its debt. The U.S. needs to interrupt its angry divisiveness and name-calling long enough to recognize the importance of what is going on. Unfortunately, historically speaking; this does not seem to be happening soon.
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The S and P 500 Showing a Major Topping Pattern
If you look to the Chart below you will see most evidently the major top I speak of. It is a Head and Shoulders top like the one in my US Dollar Index article’s Daily Chart. But this is on the Weekly Chart and therefore shows longer term patterns. This top is considered a long term major top and may play this role for some months to come. The target to fulfill the pattern may be below 950 point for the S and P 500 Index and may well spell the beginning of a long term downwards cycle for the world’s financial markets.
This is the way the Chart looks:
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China Res-Land: The Big Giant Goes Astray
For the last month and a half, the Chinese giant China Res-Land has been on a very promising road upwards. Exactly at the end of the last month, for some obscure reason, she went off her beaten track and broke her uptrend. In 3 days of trading she lost more than 8%. Quickly the M.A.C.D Histogram made a dive under the zero mark, a clear sell signal. The RSI also shows this with its own sell signal after dipping below 50% to selling territory. This is not however a short-sell yet as she has to pass a strong support at 14.0. But, keep watching this lady, and if she breaks 14.0, the short-sell would then be indicated.
This is way the Chart looks:
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Frankfurt’s Infineon Comes Up Short
Here is Frankfurt’s one and only INFINEON TECH, who has recently started a new upwards trend. Upon first glance at the chart below, it is my gut reaction to say “good time to buy” because it has indeed hit the supporting upwards trend line and should be at an optimum price for a strong buy. But technical factors, and too many of them, are in the way.
For one, a very natural line can be drawn above the current trend. This and the line of the trend itself form a pattern we call an opening fan. These can become unstable as they run their course and for the short term, these 6 weeks are enough. The pattern is expected to break soon and it will probably be in the downwards direction because several technical factors are here to influence this.
For one, the Moving Average 5 has been crossed by the MA 21 and the MA 13 is on its way to do the same. Five days ago the Directional Movement DI+(blue) crossed the DI-(pink) going downwards, a clear sell signal. And the Price Oscillator shows a slope down to zero and heading into negative territory, this being another strong sell signal. Add to this failure to be supported at current levels, and the fact that the nearest support below is at 4.43, about 10% below current market price, and here you have a good case for a sell-short position on this darling equity.
This is the way the Chart looks:
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A Market Forecast That Says ‘Take Cover’
With the stock market lurching again, plenty of investors are nervous, and some are downright bearish. Then there’s Robert Prechter, the market forecaster and social theorist, who is in another league entirely.
Mr. Prechter is convinced that we have entered a market decline of staggering proportions — perhaps the biggest of the last 300 years. In a series of phone conversations and e-mail exchanges last week, he said that no other forecaster was likely to accept his reasoning, which is based on his version of the Elliott Wave theory — a technical approach to market analysis that he embraces with evangelical fervor.
Originating in the writings of Ralph Nelson Elliott, an obscure accountant who found repetitive patterns, or “fractals,” in the stock market of the 1930s and -40s, the theory suggests that an epic downswing is under way, Mr. Prechter said. But he argued that even skeptical investors should take his advice seriously.
“I’m saying: ‘Winter is coming. Buy a coat,’ ” he said. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”
His advice: individual investors should move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come. (For traders with a fair amount of skill and willingness to embrace risk, he suggests other alternatives, like shorting the market or making bets on volatility.) But ultimately, “the decline will lead to one of the best investment opportunities ever,” he said.
Buy-and-hold stock investors will be devastated in a crash much worse than the declines of 2008 and early 2009 or the worst years of the Great Depression or the Panic of 1873, he predicted.
For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people “from buying stocks for 100 years,” he said. This time, he said, “If I’m right, it will be such a shock that people will be telling their grand kids many years from now, ‘Don’t touch stocks.’ ”
The Dow, which now stands at 9,686.48, is likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end, he said. That unraveling, combined with a depression and deflation, will make anyone holding cash “extremely grateful for their prudence.”
Mr. Prechter is hardly the only market hand to advocate prudence now, but nearly everyone else foresees a much rosier future, once current difficulties are past.
For example, Ralph J. Acampora, a market analyst with more than 40 years of experience, said he moved entirely out of stocks and into cash late last month. Now a partner at Alverita, a wealth management firm in New York, he said recent setbacks suggested that the market would drop another 10 or 15 percent, probably until September or October, before resuming another “meaningful rally.”
Over the next several years Mr. Acampora expects an “old normal market,” characterized by relatively short-lived swings that will provide many opportunities for smart investors — one that resembles the markets of the 1960s and 70s. “I’ve lived through it,” he said.
Like Mr. Prechter, he is a past president of the Market Technicians Association, the leading organization of technical market analysts, and he said that his colleague has done “some very good work.” But Mr. Acampora doesn’t agree with Mr. Prechter’s long-term theories, either intellectually or emotionally.
The “mathematics don’t work,” Mr. Acampora said, because such a big decline would imply that individual stocks would need to trade at unrealistically low levels. Furthermore, he said, “I don’t want to agree with him, because if he’s right, we’ve basically got to go to the mountains with a gun and some soup cans, because it’s all over.”
Still, on a “near-term” basis, he said, “We’re probably saying the same thing.”
Similarly, Larry Berman, who co-founded ETF Capital Management in Toronto and recently ended his term as the president of the technicians association, says he sees a “classic” short-term negative market trend developing now. But he doesn’t use the Elliott Wave theory, saying Mr. Prechter is trying to “measure the market in decades, which is too long a time frame for practical trading purposes or for risk management.”
Mr. Prechter, 61, lives in Gainesville, Ga., where he runs Elliott Wave International, a forecasting and publishing firm. He graduated from Yale as a psychology major in 1971,dabbled as a singer, drummer and songwriter in a rock band and became a technical analyst for Merrill Lynch.
He became fascinated by Mr. Elliott’s writings, which suggest that the market moves in predictable if complex patterns. Along with A. J. Frost, Mr. Prechter wrote “Elliott Wave Principle,” a 1978 book that predicted the emergence of a great bull market — a forecast that was largely fulfilled. By 1987, he was widely regarded as an expert in technical analysis. Articles in The New York Times said he was known as “the market’s leading technical guru” — and more. An article in October that year said he had “emerged as both prophet and deity, an adviser whose advice reaches so many investors that he tends to pull the market the way he has predicted it will move.”
He has far less day-to-day influence now, after years spent developing a theory he calls “socionomics,” which holds “social moods” as the cause not only of market cycles but also of economic and political events. A grand cycle is ending, he says, and the time for reckoning is near.
In 2002, he published “Conquer the Crash,” which predicted misery ahead. Even so, he said in 2008 that the market would soon rally sharply — then said late last year that stocks were about to fall and that the great decline would resume.
Since 1980, the advice in his investing newsletters, when converted into a portfolio, has slightly underperformed the overall stock market but has been much less risky, losing money in only one calendar year, according to calculations by The Hulbert Financial Digest. Mr. Prechter said he disagreed with the methodology used in these measurements, but offered none of his own.
For his part, Mr. Acampora says that the Elliott Wave has some validity as an indicator but that “it’s only part of the story” of technical market analysis, which also needs to be buttressed by economic and fundamental research.
Mr. Prechter says his unifying theory, socionomics, is a “young science.”
“We’re quantifying it,” he said. “We’re working on it.” In the meantime, he contends, it has enabled him to “look around the corner” and prepare for a dangerous future.
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Goldman As Humpty Dumpty
Goldman Sachs’ disastrously unfortunate year is halfway over, and questions about its conduct during the credit crisis linger on Wall Street and in Washington. The firm has made plenty of money, of course, amid the political criticisms and federal investigations questioning its ethics and business practices. But Goldman has lost something money can’t buy, something vital that must be reclaimed. And it isn’t just a big chunk of its reputation that’s at stake. Goldman has lost that special something that has always made its long-term greediness, to use a late chairman’s phrase, seem special, and that made the firm appear smarter than other banks. Indeed, that quality helped Goldman command top dollar, euro and yen for its services. Now, Goldman seems to be in danger of being viewed like any other bank, except somehow suspect for performing too well during the credit crisis. Wall Street knows any investment professional who is any good at what he does encounters potential conflicts, and the expectation is that those conflicts should be handled appropriately. If Goldman proves to have failed in this regard, its stock (ticker: GS), recently at $132, could be taken down a few more notches.
The shares already have been bashed, having fallen 23% during the past two years. They are wilting ahead of the second-quarter earnings release, scheduled for July 20. Analysts are lowering earnings estimates, and expectations suggest even Goldman’s stable of star traders had difficulty, like everyone else, making money in the second quarter.
As this harsh year for Goldman began, the bank seemed unable to extricate itself from a leading role in a polarizing post-credit-crisis news cycle. At the time, Goldman was preparing to pay $16 billion in staff bonuses, which indicated political tone-deafness and an arrogance that seemed to bode poorly as the financial crisis entered the recrimination phase that always occurs after Main Street has lost a lot of money on Wall Street.
There are always rumors that Goldman — which might have done absolutely nothing wrong, remember — will settle some sort of case with federal investigators, which could boost its stock price.
Goldman could say something on its earnings call that makes its troubles seem manageable, or it could even reveal massive profits and an optimistic view of the future that overshadows everything. In the markets, making lots of money always does that.
But, most likely, Goldman will end the call with a reputation that still isn’t commensurate with its distinguished past. Fixing Goldman’s public image is a huge challenge for the company’s chief executive, Lloyd Blankfein. For now, Goldman seems destined to remain Wall Street’s version of Humpty Dumpty, who, as everyone knows, suffered a big fall.
Should all the king’s horses and all the king’s men fail to put Goldman’s reputation together again, Blankfein will preside over a company that has become like any other bank, and that could be quite bad as Wall Street seems more and more like an assembly line.