Market Strength Building

SPY surged this week, rising 6.77 points, 3.3% to close at 209.31.  I wasn't too surprised to see the upward momentum and was anticipating a buy signal on my very short-term indicators.  They turned up at the open and again added to my bullish position as price moved through an expanding wedge formation at the 206 area.

As one can see, we are well on track for making the three-week test of the highs next week.  It will be a holiday week so whether the market will continue surging as we move into holiday season, is still yet to be seen.  With this past week's surge, it's possible that the strength will continue.

Although my daily indicators are not showing increases in volatility, the weekly indicators are. 

A simple weekly chart with price moving against the 4, 10 and 20 week averages show the 20 week average (red) moderating and starting to turn up while the 10 week average (green) is ready to cross over the 20 after price tested this level a week ago.  The four week average is rising smartly.  Looling at these strengthening trends, it would hard to be putting too much on the bearish side, although I do have some longer-term puts in place as insurance, and a possible three month test of the low in December.

Another indicator I am starting to watch is the relationship between the 4 day average and the 20 day average.  I haven't back-tested this thought but am looking at it to add to an Algorhythm should it show some promise as an indicator.  The indicator is just starting to signal positive now, close to a point where I would normally be thinking about taking profits.  As we know, a key to profiting in the markets is cutting losses early and letting profits run. 



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So as mentioned above, I also see the possibility of a three month test of the low occurring next month.

Who knows what words might come out of the Federal Reserve.  I saw some news that they will be having some kind of non-scheduled meeting tomorrow regarding bank reserves.  Something new, revealing the true state of the credit market could change everything in a blink of an eye.  And I suppose that is why I generally do not position myself 100% in any one direction.  While the market sentiment is bullish and the markets continue to rally, the underlying reality of the economy may not be as rosy as some believe. 

The Oil and Gas stock index is well off its highs as the price of oil remains suppressed.  Little discussion has been made about the debt situation of producers, especially those who require oil prices to be in the $100 range to be profitable.  For much of the decade, low interest rates have enabled bad businesses to continue on instead of failing, as they would if the cost of capital was at a realistic rate.

As rates are starting to rise in anticipation of the Fed's possible interest rate increase, capital is becoming harder and harder to come by for marginal producers.  Even Saudi Arabia itself is on watch by the rating agencies as they are facing continuing deficits to finance their society. 

There are certainly interesting times ahead.  As some question, should the market start going down, where would all this money move to?  One way to solve the problem is to open the market some 20% lower, destroying much of the wealth.  This would also destroy much of the debt that is supporting these elevated market prices.  In the end, where could one turn in an age of defaults?  Obviously, the goal of governments and central banks is to not allow this to happen.  Can they hold it off indefinitely?

And then what???

Anyway, have a very Happy Thanksgiving holiday all.  Enjoy the good times while we have them.

More Taxes Please

by Simon Black of Sovereign Man blog,

By the 19th century, the Ottoman Empire had become a has-been power whose glory days as the world’s superpower were well behind them.

They had been supplanted the French, the British, and the Russian empires in all matters of economic, military, and diplomatic strength. Much of this was due to the Ottoman Empire’s massive debt burden.

In 1868, the Ottoman government spent 17% of its entire tax revenue just to pay interest on the debt.

And they were well past the point of no return where they had to borrow money just to pay interest on the money they had already borrowed.

The increased debt meant the interest payments also increased. And three years later in 1871, the government was spending 32% of its tax revenue just to pay interest.

By 1877, the Ottoman government was spending 52% of its tax revenue just to pay interest. And at that point they were finished. They defaulted that year.

This is a common story throughout history.

The French government saw a meteoric rise in their debt throughout the late 1700s. By 1788, on the eve of the French Revolution, they spent 62% of their tax revenue to pay interest on the debt.

Charles I of Spain had so much debt that by 1559, interest payments exceeded ordinary revenue of the Habsburg monarchy. Spain defaulted four times on its debt before the end of the century.

It doesn’t take a rocket scientist to figure out that an unsustainable debt burden soundly tolls the death knell of a nation’s economy, and its government.

Unfortunately, it can sometimes take a rocket scientist to figure out what the real numbers are; governments have a vested interest in not being transparent about their debts and interest payments.

In the Land of the Free, for example, the government routinely doesn’t count interest payments that they make to the Social Security Trust Fund.

They’ve managed to convince people that those debts don’t matter ‘because we owe it to ourselves.’

Apparently in their minds, solemn promises made to retirees simply don’t count.

It’s like a person who is in debt up to his eyeballs with both credit card companies and family members has no compunction about stiffing Grandpa.

Obligations are obligations, no matter who they’re owed to.

Taking this into account, total US interest payments in Fiscal Year 2013 were a whopping $415 billion, roughly 17% of total tax revenue. Just like the Ottoman Empire was at in 1868.

Here’s the thing, though– it’s inappropriate to look at total tax revenue when we’re talking about making interest payments.

The IRS collected $2.49 trillion in taxes last year (net of refunds). But of this amount, $891 billion was from payroll tax.

According to FICA and the Social Security Act of 1935, however, this amount is tied directly to funding Social Security and Medicare. It is not to be used for interest payments.

Based on this data, the amount of tax revenue that the US government had available to pay for its operations was $1.599 trillion in FY2013.

This means they actually spent approximately 26% of their available tax revenue just to pay interest last year… a much higher number than 17%.

This is an unbelievable figure. The only thing more unbelievable is how masterfully they understate reality… and the level of deception they employ to conceal the truth.


Source:  http://www.zerohedge.com/news/2014-03-25/us-now-spending-26-available-tax-revenue-pay-interest

WHAT IF??? The Safety Trade Doesn't Work???

"What can they be thinking?' I keep asking myself as the Federal Reserve and US Treasury Department vow that they have a strong dollar policy. Even as the US Dollar continues to collapse, no doubt due to current monetary policies, our money leaders assure us that they are supportive of the strong dollar. Even as Japan and other countries shiver as the dollar reaches new lows and they vow to begin buying dollars, our leaders tell us one thing but enact policies that clearly show that they are shooting for different results.

This is not the time or place to discuss political issues so in defense of our leaders, I can only surmise that they truly understand the global financial situation AND KNOW, the in the event of a financial meltdown, the world will flock to the US Dollar in search of safety. Such is what happened this morning as news of a possible Dubai meltdown spread through the markets. Gold was down some $40 early, the Euro dropped significantly and the dollar rallied above the 75 level. As the dollar rallied, markets collapsed but then the attitude changed. Still enjoying my holiday, I paid scant attention to the talking heads commenting how a Dubai meltdown might actually be good for the US economy. Well, again, I sure didn't catch the jist of this comment but in the end, the dollar again began drifing down and markets recovered.

And now I ask, what happens if the dollar isn't the safe haven that it once was. What happens if foreign government and institutional investors refuse to buy into negative interest rates? Will the US really ever pay back all of the debt they are accumulating? What happens to the US Dollar and the economy if we have yet another banking system meltdown (a sure thing in my mind) and yet the dollar remains weak? Arggghhh! The US will have to devalue, default on debt payments much like our neighbors in the Gulf, interest rates will soar, fiat currencies will become worthless.

WHERE CAN YOU PUT YOUR MONEY????

I tend to agree that we are in the down part of the K-Wave or long term cycle and that all forms of assets will devalue. With this in mind, the concensus is that the safety of the dollar is the place to be. But look at the hourly chart of the dollar today. In the end, the dollar gave up the rally and headed back down.

REMEMBER LONG TERM CAPITAL???

This hedge fund, featuring Nobel Prize winning economists as model developers amassed billions in investments. The assumptions that they built in appeared to be flawless UNTIL!!!! In the end, economic assumptions are just that. Assumptions that will change over time and sometimes in a heartbeat, without warning. Yet the Federal Reserve and Treasury continue to act apparently with total confidence that their assumptions will hold true into the future. We can print as much money as we wish and borrow as much as we wish and the world will continue to beat a path to our doorsteps. The Government and Federal Reserve has made investments that no rational person would undertake. Has it been a blatant give-a-way? Are politicians and theoretical people so niave?

THE BEST BET, BE LIKE THE GOVERNMENT

In my mind, the best bet for individuals is to act just like the government. They know that all of the debt they amass now will eventually be worthless. Either they have no intention of ever paying it back or if they do, it will be in dramatically deflated dollars. Consult with your adviser to see if such a strategy makes sense for you. If you have nothing to lose these days, take it to the limits. As deflation pervades the economy, all of your assets will deflate in value. If all you have is debt, then that will also deflate. What do you think? Not the conventional line of thinking...but what is the government thinking? Shouldn't our leaders be setting the example??? Perhaps they are.