Once a year at Gobbler’s Knob, Pennsylvania, the Freas – those guys standing around the town square’s podium in black tuxedos and top hats – bring out hibernating famed prognosticator of our winter season’s duration prediction, Punxsutawney Phil. This year, Phil saw his shadow… on a cloudy day: Six more weeks of a chilly winter season. But, I’m curious as to how one can one see their shadow on a cloud day?
To me, public sentiment for Punxsutawney Phil’s prediction is embraced by irrational behavior than using one’s common sense. Weather predictions are like Wall Street predictions. Whichever way the wind blows is based on Buffetology schematics, whatever we’re told is farther from the truth. Blame for our market performance failure is habitually pointed at foreign (emerging) market’s failures. I disagree.
When did Wall Street see its shadow? When former U.S. Federal Reserve Board Chairman “Dodge The Recession” Ben Bernanke announced the tapering of the Federal Reserve’s massive bond-buying policy at his very last FOMC speech in Philadelphia, PA on January 3, 2014; the blow back on Wall Street was predictable.
Consider what happened the last time he mentioned the “tapering” in October 2013. The market dropped like a rock, so Bernanke backtracked, most likely to save the banks investments. I think the backroom advice he received was wait until your tenure as the Fed chairman is coming to an end, and then make the announcement. That makes common sense.
Bernanke claims that he fostered transparency and accountability at the Federal Reserve “as one of my principle objectives.” If that transparency and accountability were truly implemented within bond-buying policy, Wall Street would not be showing a drastic sell off on Wall Street. The banks are cashing in.
How could Wall Street’s robust bullish market performance quickly flip into a bearish trend; all the way back to October 2013 price levels on the major indexes. That’s four months of lost gains. Economic prognosticator Bernanke knows that the $10 trillion trimming of the quantitative easing program, now running at $65 billion per month, reflects an incomplete economic recovery. Incoming Fed chairman, Janet Yellen is faced with the making of a perfect economic storm that has been building since 2006, when Bernanke was appointed by then President George W. Bush. Why?
Overshadowing our economic recovery is the continuation of bank speculation: The bond buying gave money to the banks who in turn invested for themselves in the stock market, driving market performance up to unprecedented highs while hamstringing the American economy with a minuscule interest rate that was at one point 0.01%. Statistics showed that the invisible hand has been in play.
The rule of thumb for bond buying is that when interest rates are up you buy bonds, but only when interest rates are expected to drop. Bernanke’s policy of bond buying, with interest rates low, hasn’t brought the light of day to our continuing overcast economic recession. Bernanke has stated “credible” worries that its massive bond buying could destabilize the financial system.
The much needed cash flow that should have been released to Americans, was horded by bailed out banks to speculate on Wall Street, while controlling the foreclosure real estate market; though mortgage interest rates median was 3%, in the past two years, intrinsic values of foreclosed properties have been inflated through 2013 from 20% to 60% by higher demand, less supply.
Real estate appraisers complain that purchases are going so fast that they could not put a true value on the home’s being purchased. Inflated price gauging by the banks real estate foreclosure sales is repetitive of what got us into this economic turmoil. It does not reflect progress under Bernanke’s fiscal polices for Main Street’s prosperity.
Moreover, cash-strapped Americans, who suffered credit-rating deficits for reasons beyond their control in a debt driven economy, are meticulously scrutinize. If qualified for a mortgage, they typically are out bidden by limited partnership investment groups.
Muscling in on the real estate market, these investment groups have become as predatory as the mortgage banks handing out home mortgages like candy from 2003 to 2008. Flipping foreclosures, called “Black Bark” homes, home ownership neighborhoods have become rental communities. A new kind of “red lining” has entered into the bank loan formulary: If a community exceeds a certain percentage of rentals, for example condominium complexes, banks won’t approve a mortgage.
Sentiment for bonds right now is taking center stage. I wouldn’t be that naive to think this is a safe haven. Interest rates are low. Returns are little or no better than current banking interest rates on money market accounts. The greenback is waning.
More story telling is portrayed in the futures currency market.
Right now, the Australian dollar has spiked to over 200 pips with 24 hours; XAU remains range bound though typically would go up when market performance declines; the Euro, that dropped over 300 pips last week, has pulled back about 100 pips, but is extremely undecided; the Yen has pulled the rug out from under the USD since January 22nd.
Just for the sake of the context of this thesis, that seeing one’s shadow on a cloudy Groundhog Day, I took Motif Investing’s copy on their American Bonds Motif “It May Be A Good Time For Patriotism” and pasted it into Daniel Soper’s Sentiment Analyzer.
The meter analyzes the text as to the tone, feeling and input of English text. The sentiment outcome: -100 (in the red – needled pegged to the bottom left). Translated: “this text is very negative/serious.” I agree, that’s an arbitrary way to present fact over sentiment, but it is in the same-framed context.
Statistical probability of the intrinsic p-value of the S&P 500 comes in around 1690; at September 2013 level. Though the velocity of the current sell off is nine days old, Punxsutawney Phil The Trader predicts a continuing bearish trend into early March. We’ve had the first plateau pullback on January 29th. Today, February 4th, we’re into the second pullback plateau, out of three. Targeted resistance level is 1779, at best. I’ve seen my shadow and it agrees.