MarketVVizard's Market Thoughts

Top 750. Jan 5, 2004 4:19 PM

» Normxxx - From a 'Usually Reliable Source'

"Put/Call Ratios

"Bottom Line: Data from the CBOE suggests traders most wrong on market direction are betting heavily on further upside while more accurate traders are concentrating on protection.

"A 5-day moving average of the equity put/call ratio minus QQQ options is now the lowest in its history, going back to 2001. A low reading in this indicator means that equity options traders – those usually most wrong on market direction when they reach extremes – have been concentrating on calls compared to puts to a degree not seen at any other time over the past few years. The only other time this ratio has even approached as low a level as it is now was on June 20th, 2003, near the peak of the first phase of the Spring rally. The 10-day and 21-day averages are also now at record lows. This is an unequivocally bad sign for the market going forward.

"I am asked nearly every week why I prefer to exclude QQQ options, and the reason is because they are primarily an institutional instrument and should not be included in an indicator that tries to be a contrary guide. In fact, if we look at the QQQ put/call ratio itself, it actually has a positive relationship to future market performance – meaning that if anything, QQQ options are more of a non-contrary indicator than contrary. Also, as I’ve shown many times before, QQQ options have a huge impact on the other ratios on some days. Take last Wednesday for example, when QQQ put options accounted for over 50% of all equity put option volume. A majority of that volume was due to one institutional trader. For these reasons, I feel it is mandatory to back QQQ options out of any put/call ratio that has an historical track record of being a good contrary guide.

"The low equity put/call ratio is in sharp contrast to a 10-day average of the OEX put/call ratio, which is quite high. I consider the OEX p/c ratio to be a non-contrarian indicator, as these traders have a much better track record at timing the market than do their equity-option trading cousins. A simple spread between the two ratios is now at its second-highest level in the past few years - second only to the market peak in January 2002. Such a high ratio means that equity option traders are busy with calls while OEX traders are focusing on puts, which in the past has been a very bearish combination. However, it must be noted that the reason for the high OEX put/call ratio is two readings right around Christmas, which were extraordinarily high. Those two days should be viewed suspiciously though, since volume was 1/10th what it normally is. If we ignore the readings on those two days, or at least just make them average, then the spread that I discussed above is within its normal range and not particularly bothersome.

"Notes on Breadth

"Bottom Line: A couple of different looks at market breadth point to a market that may struggle to find additional upside.

"A couple of weeks ago, I showed an update of the Volume Adjusted Breadth indicator. This measure looks at breadth (defined as a 10-day moving average of the advance/decline line) in comparison to volume. If market breadth is oversold and volume is heavy, then the indicator will be low and suggestive of a market bounce coming soon. On the other hand, if the market is overbought and volume is light, then the indicator will be high. As of the close Friday, this indicator is the highest (most overbought) it has been in 25 years. Of course, it’s difficult to read a whole lot into this due to the light holiday volume and impact of decimalization as I’ve discussed before. Still, in the past truly extreme readings such as now have been decent short-term sell signals, with the market being lower 3 days later 63% of the time. This is troubling, but I’m not giving it very much weight due to the reasons listed above.

"On another note, I post a 10-day moving average of the advance/decline line to the site each day. Technically, I call it the Up Issues ratio since it tracks the percentage of issues that closed up on the day compared to all changed issues, but it’s essentially the same thing as the advance/decline line. Taking a very long-term view, a 252-day moving average of this ratio (equating to one trading year) is now the highest in the history that I have, going back to the early 1960’s. The next highest readings were in June 1983, which preceded a one-and-a-half year trading range, and April 1998, which of course preceded the crash that Fall."

-- posted by Normxxx

Top 751. Jan 5, 2004 10:30 PM

» Normxxx - 2004?

-- posted by Normxxx

http://www.nytimes.com/2004/01/06/opinio...

Top 752. Jan 6, 2004 6:35 AM

» Austrian - Rubin Gets Shrill

I do not like Robert Rubin, I think he is primarily responsible for the bubble of the 1990s. It is the treasury which prints money, not the Fed, and in late 1994, Rubin put his foot on the gas. A long term chart (20 years) of M3 shows this policy change in spades. Like any good politician, he got out while the getting was good. Create a time bomb, set the fuse for years after leaving office, then blame your successors for not diffusing the bomb.

In short very disingenuous, and politically motivated.

Having burned Mr. Rubin at the stake, I find his analysis compelling. This article fits into several themes previously posted, hegemonic decay, erosion of the US Dollar as the world default currency, debt bombs, bubbles, secular shift etc. When viewed holistically, these issues scream flight away from US paper assets into things, or the paper of commodity companies.

That is not to say a good analyst or stock picker can’t do extremely well buying conventional stocks or tech companies, like Kirk, or the Vviz, clearly that is possible. For me, the lower risk, higher reward play is in the commodity and commodity company arena.

Regards,

--Austrian

Rubin Gets Shrill
By PAUL KRUGMAN

Published: January 6, 2004

Argentina retained the confidence of international investors almost to the end of the 1990's. Analysts shrugged off its large budget and trade deficits; business-friendly, free-market policies would, they insisted, allow the country to grow out of all that. But when confidence collapsed, that optimism proved foolish. Argentina, once a showpiece for the new world order, quickly became a byword for economic catastrophe.

So what? Those of us who have suggested that the irresponsibility of recent American policy may produce a similar disaster have been dismissed as shrill, even hysterical. (Hey, the market's up, isn't it?) But few would describe Robert Rubin, the legendary former Treasury secretary, as hysterical: his ability to stay calm in the face of crises, and reassure the markets, was his greatest asset. And Mr. Rubin has formally joined the coalition of the shrill.

In a paper presented over the weekend at the meeting of the American Economic Association, Mr. Rubin and his co-authors — Peter Orszag of the Brookings Institution and Allan Sinai of Decision Economics — argue along lines that will be familiar to regular readers of this column. The United States, they point out, is currently running very large budget and trade deficits. Official projections that this deficit will decline over time aren't based on "credible assumptions." Realistic projections show a huge buildup of debt over the next decade, which will accelerate once the baby boomers retire in large numbers.

All of this is conventional stuff, if anathema to administration apologists, who insist, in flat defiance of the facts, that they have a "plan" to cut the deficit in half. What's new is what Mr. Rubin and his co-authors say about the consequences. Rather than focusing on the gradual harm inflicted by deficits, they highlight the potential for catastrophe.

"Substantial ongoing deficits," they warn, "may severely and adversely affect expectations and confidence, which in turn can generate a self-reinforcing negative cycle among the underlying fiscal deficit, financial markets, and the real economy. . . . The potential costs and fallout from such fiscal and financial disarray provide perhaps the strongest motivation for avoiding substantial, ongoing budget deficits." In other words, do cry for us, Argentina: we may be heading down the same road.

Lest readers think that the most celebrated Treasury secretary since Alexander Hamilton has flipped his lid, the paper rather mischievously quotes at length from an earlier paper by Laurence Ball and N. Gregory Mankiw, who make a similar point. Mr. Mankiw is now the chairman of the president's Council of Economic Advisers, a job that requires him to support his boss's policies, and reassure the public that the budget deficit produced by those policies is manageable and not really a problem.

But here's what he wrote back in 1995, at a time when the federal deficit was much smaller than it is today, and headed down, not up: the risk of a crisis of confidence "may be the most important reason for seeking to reduce budget deficits. . . . As countries increase their debt, they wander into unfamiliar territory in which hard landings may lurk. If policymakers are prudent, they will not take the chance of learning what hard landings in [advanced] countries are really like."

The point made by Mr. Rubin now, and by Mr. Mankiw when he was a free agent, is that the traditional immunity of advanced countries like America to third-world-style financial crises isn't a birthright. Financial markets give us the benefit of the doubt only because they believe in our political maturity — in the willingness of our leaders to do what is necessary to rein in deficits, paying a political cost if necessary. And in the past that belief has been justified. Even Ronald Reagan raised taxes when the budget deficit soared.

But do we still have that kind of maturity? Here's the opening sentence of a recent New York Times article on the administration's budget plans: "Facing a record budget deficit, Bush administration officials say they have drafted an election-year budget that will rein in the growth of domestic spending without alienating politically influential constituencies." Needless to say, the proposed spending cuts — focused only on the powerless — are both cruel and trivial.

If this kind of fecklessness goes on, investors will eventually conclude that America has turned into a third world country, and start to treat it like one. And the results for the U.S. economy won't be pretty.

-- posted by Austrian

Top 753. Jan 6, 2004 7:18 AM

» Normxxx - Re: Rubin Gets Shrill

In response to message posted by Austrian:

Like the little boy and the tiger, the rest of the world must hang on to the tail of the tiger (us!) and not let go as long as (in Steven Roach's words) "we are the world's 'mouth.'"

So long as the rest of the world relies on 1) a net export economy and 2) we are the consumer of last resort, the rest of the world has no choice but to support our 'habit.' [Japan just voted nearly $1 trillion (that's dollars NOT yen), just to support 'foreign currencies' against the yen --for 2004 only!]

P.S. The debt only matters to the extent of the cost to service it; but servicing costs only get serious when (as now) we have to go into more debt to service it. The deficit matters, especially when it is substantially growing. Anytime the deficit exceeds the debt servicing costs, you are on the downward spiral.

-- posted by Normxxx

Top 754. Jan 6, 2004 7:43 AM

» Normxxx - Re: Re: Rubin Gets Shrill

In response to message posted by Normxxx:

Greenspan and Rubin were completely sympatico-- neither did anything without the other's at least tacit approval. The reason for the great growth of money supply under Rubin was that otherwise, running a surplus would have severely contracted the economy, throwing us into a recession or worse (as in 1937).

-- posted by Normxxx

Top 755. Jan 6, 2004 8:53 PM

» Normxxx - Speculation? Na-a-a-ah!

On Tuesday, the total volume of “Bulletin Board” stocks was 4,197,180,416 shares, according to Yahoo!’s Finance site (http://finance.yahoo.com/m0?u). That is more than the combined total of all share volume traded on the NYSE, AMEX, and Nasdaq markets. According to technical analyst Alan Newman, it is also more than 9 times the average daily rate seen in 2000, and 4 times the average daily volume for last year.

-- posted by Normxxx

Top 756. Jan 6, 2004 10:02 PM

» Hu - Re: Speculation? Na-a-a-ah!

In response to message posted by Normxxx:

Fish where the fish are.

-- posted by Hu

Top 757. Jan 6, 2004 11:58 PM

» azxcvbnm - Re: Re: Rubin Gets Shrill

In response to message posted by Normxxx:

Yes, the deficit as a percentage of GDP is still reasonable--below that of the Reagan years. Our total debt as a percentage of GDP is also acceptable, and below other developed countries such as Italy. Being the reserve currency of the world gives us even more leeway.

The reason why we are fairly safe right now is because there is no real alternative to the dollar. European countries are running deficits of their own, and in MUCH worse economic shape. They have a much more burdensome pension and government social security system, plus they have fewer youth to pay for their retiring elderly. The Euro is even more dangerous than the dollar as a store of value. As for the Yen, it seems the Bank of Japan is determined to keep the Yen weak and must for Japan's economy to stay afloat. Japan's economy, like Europe's, is in much worse shape than ours. Gold has too many problems such as transportation costs, inability to contract or expand supply, etc., for it to be an effective currency (a return to the gold standard). So you see, there are no alternatives to the dollar so we are safe for now.

-- posted by azxcvbnm

http://www.usatoday.com/money/perfi/reti...

Top 758. Jan 7, 2004 5:09 AM

» Austrian - Pensions Again

Pension pressure for Gov't relief at pensionees expense continues. I think it will happen, when is the only question. In short, if you have a pension, be prepared to be unpleasantly surprised.

Regards,

-- Austrian

From McPaper

Companies consider pension freezes

By Christine Dugas, USA TODAY

A resurgent stock market has failed to reduce pension shortfalls, prompting more than a third of U.S. companies with a pension plan to say they'll freeze benefits.

If Congress and regulators do not provide relief, 21% of employers say they will freeze benefits at current levels, according to a survey of more than 200 large companies by consulting firm Hewitt Associates. And 17% say they will halt benefits to new employees.

The percentage of employers offering traditional pensions dropped to 45% in 2003 — from 83% in 1990 — as they switched to other pension types and 401(k) plans, Hewitt says. Between January 2001 and October 2003 alone, 13% of more than 1,000 plans reviewed by Aon Consulting had frozen benefits.

Companies are considering pension cutbacks despite big market gains last year, which boosted pension plan assets at companies in the S&P 500 by $112 billion, according to Standard & Poor's projections. That's because the amount of benefits they estimate they'll owe retirees has grown faster than assets, causing shortfalls to balloon.

As a result, the amount that pensions in the S&P 500 are underfunded grew to an estimated $259 billion last year, from $212 billion a year earlier, Standard & Poor's says.

Companies complain that benefit obligations are artificially high because they are required to base calculations on the 30-year Treasury bond, which is no longer issued. Though interest rates are generally low, the rate used for the 30-year Treasury bond is lower than corporate bond rates. Low rates cause estimates of future pension obligations to soar.

Lawmakers had been near an agreement on a temporary pension relief bill. It would have allowed companies to use a corporate bond rate for two years. But Congress adjourned for the year without passing it.

Even without legislation, the bond market has taken some pressure off pensions, says Howard Silverblatt at Standard & Poor's. Rates on the 30-year Treasury bond bottomed in June at 4.14%, vs. 5.18% now, he says.

The shortfalls are primarily a concern for investors because the money to fund pensions often cuts into capital expenditures, Silverblatt says. Most companies have sufficient funds to meet their pension obligations, he says.

Still, companies may be more inclined to consider freezes now because it can be hard to pass legislation in an election year, says Nevin Adams, editor of Plansponsor, an industry publication.

Many firms would like to convert their traditional pensions to so-called cash-balance plans, which are more portable, accumulate more evenly and can be less expensive. But regulators and Congress are at odds over rules on the conversions.

-- posted by Austrian