Monday, September 29, 2008


"Shifting debt from the financials to the government won't bail out this stagnant supertanker, and I fear that will be the subsequent sentiment when the bailout bill is passed." Ned Davis of Ned Davis Research.

I watched the Obama-McCain debate. The two spent much of the time talking about how they were going to get rid of earmarks and about how they were going to cut way down on government spending. Neither of them get it, they just don't see the picture. Consumers are not going to be spending, they'll be cutting back. Just as corporations and businesses are cutting back on their overhead and on their spending where ever they can (much of it will be in the way of lay-offs).

If the economy is going to improve, it will be up to the government to do the spending. Governments all over the world will have to run up big deficits and increase their spending. After all, what got the US out of the Great Depression of the 1930s? It was the massive spending of World War II that finally turned the US economy to the upside. The giant war effort and related government spending put everybody to work, including millions of America's women. Jobs were plentiful. And now Obama and McCain are competing in promises to CUT government spending! Forget it. To get out of this recession, the US government will have to spend as it never has spent before, along with running trillion dollar deficits. The government will have to embark on a giant "rebuild America program." Our streets and freeways are shot, our bridges are tattered, the US government will have to engineer a massive "make work" program to rebuild America. Unfortunately, as I see it, Washington will be tempting to start another war.

Is there anything more prescient and sophisticated than the stock market? Yes, there is, and it's the bond market. But how can we know what the bond market is thinking? There is a way -- it's called the Confidence Index (CI), which is a figure posted every week in Barron's. The CI is a ratio of the YIELDS on the highest-grade bonds and the YIELDS on medium-grade bonds. The bond market is obsessed with safety and the return of the money is considered more important than the return on their money. When the bond market feels confident, it moves toward the higher yields of the less-safe medium-grade bonds. When the bond market doesn't like what it sees ahead, it moves toward the safety and lower yields of the highest-grade bonds.

As bond buyers move to the safety of the highest-grade bonds, the CI declines. When bond buyers move to the higher and less-safe yields of medium-grade bonds, the CI rises.

Below are some CI numbers along with the dates. Many years ago the CI had a wide following. The old formula we used was that the CI projects the stock market trend two to four months into the future.

2007 --
May 25 - 87.1 -- A high CI number showing great confidence.
June 29 - 86.4 -- Confidence slipping.
July 27 - 82.8 -- Confidence still declining.
August 31 - 83.6
Sept. 28 - 85.0
Oct. 26 - 81.8 -- Getting worse.
Nov. 30 - 78.7 -- Dropping below 80, a bad sign.

2008 --
Jan. 25 - 76.1 -- The ominous declining trend of the CI continues.
Feb. 29 - 74.0
Mar. 28 - 72.3 -- New low in the CI.
April 23 - 73.8
May 20 - 75.0
June 22 - 72.6
July 25 - 71.6 -- Another low -- no comment needed; danger flashing.
Aug. 29 - 68.5 -- Under 70 often signals a recession.
Sept. 19 - 74.1 -- A slight improvement.
Sept. 26 - 69.3 -- This is the latest statistic, and it's an ominous new low. The bond market is still opting for the highest-grade bonds and thereby willing to sacrifice yields. On the latest numbers, the bond market is "saying" that the economy will be worse in the period of two to four months ahead. This is a caution signal for all buyers of stocks.

Gold -- European banks have reduced their sales of gold to the lowest levels in a decade. Much of the selling by European banks took place between October and December, last year (from today's Financial Times).

Below a chart of three years of weekly gold. Gold has climbed back above its (blue) 50-week moving average, and RSI is above 50 and is trending up. At the bottom of the chart MACD is about to turn up, and the histograms are approaching zero. The Full Stochastic at the very bottom of the chart is moving up and oversold bottom and appear to be heading up.

On top of everything else, down volume, as I write is 94% of up + down volume, meaning that today could be another 90% down-day. Goldman is down over 18 points, Morgan is selling at 20.94, GM is selling at 8.99, all in all, a ghastly day. There's a hard rain a'comin'. Start cutting expenses and try to save.

From: DOWtheory


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