Saturday, March 31, 2012

Supreme court and health insurance

It was interesting watching and reading about the Supreme Court arguments on the constitutionality of the health-care law.

This is an interesting moment for constitutional law. Are there limits to the commerce clause? What is the balance of Federal vs. State power? But this is an awful conversation for thinking about reasonable health-insurance and health-care regulation.

The central constitutional weakness of the law is the "individual mandate." We're all supposed to buy insurance, and if we don't we pay a penalty. So everyone is hot and bothered discussing the mandate. But the mandate is far from the central economic problem with the law. So, as a country, we're like a squabbling couple, fighting over who should do the dishes, when the real problem is "why did you buy that stupid boat?" 

Thinking of modifications to the law that make it constitutional are a pretty bad guide to modifications that make it better (less disastrous) economic policy.

For example, the consensus seems to be that a complete government takeover would be constitutional. After all, medicare is, so far, constitutional; so "medicare for all" would likely survive in the Supreme court.  The states have the "police power" to impose mandates. And if the Administration had just had the courage to call it a "tax," the constitutional fight would be over.  I don't think opponents have any of these outcomes in mind. Be careful what you wish for, you just might get it!

I noticed a gaping hole in the arguments: If not this, then what? The law wants "necessary and proper." The opponents seemed pretty strong on the (im) "proper" part, but not so good on the (un) "necessary" part. The Republicans say "repeal and replace" but not very clearly with what. The Administration's argument that health care and insurance markets are pretty dysfunctional went unanswered.  This exchange (from the transcript at NPR) sums it up: 
GENERAL VERRILLI: ...what matters here is whether Congress is choosing a tool that's reasonably adapted to the problem that Congress is confronting. ....
JUSTICE SCALIA: Wait. That's — that's -­it's both "Necessary and Proper." What you just said addresses what's necessary.... But in addition to being necessary, it has to be proper. And we've held in two cases that something that was reasonably adapted was not proper because it violated the sovereignty of the States, which was implicit in the constitutional structure.
In other places the justices seemed pretty nervous about just throwing out the law and leaving the country in a mess. Though in principle im-"proper" should be enough, it would have been more convincing with a clear statement that reasonable alternatives to the whole mess exist.

As blog readers will have guessed, I think the central problem is pathology of previous legislation and regulation, and the answer is  competition and deregulation. (Links below) I was interested that Solicitor General Verilli also pretty clearly blamed the dysfunction of the health care market on...previous legislation and regulation! From his opening statements:
.. for more than 40 million Americans who do not have access to health insurance either through their employer or through government programs such as Medicare or Medicaid, the system does not work. Those individuals must resort to the individual market, and that market does not provide affordable health insurance.
It does not do so ..because the multibillion dollar subsidies that are available for the.. employer market are not available in the individual market... That is an economic problem. 
No, that's a regulatory problem!  But if "multibillion dollar subsidies" for the employer-based group market are what killed the individual market, maybe, just maybe, the answer is to get rid of those subsidies?

Economists left, right and center have bemoaned the effects of the tax deduction for employer-provided group insurance. If your employer or you contribute to an individual plan, which you can take with you from job to job, and has guarantees that you won't be dropped if you get sick, it's not tax deductible.

Why is individual health insurance "unaffordable?" Because both Federal and State regulators have salted it up with mandated coverage that people wouldn't buy on their own. Young, healthy, uninsured need simple catastrophic coverage, or even just a contract that allows them to buy insurance later if they need it. They can't buy it because it's regulated out of existence.

Those same people could pay cash for their non-catastrophic expenses.  In a functioning market, like car repair, or vet services for your dog, you can pay cash and receive services. Lack of insurance is only a problem for a small sliver of people who don't have enough money for an unexpectedly large  needed service. But it's essentially impossible to just pay for health care. As Solicitor General Virilli pointed out
The Affordable Care Act addresses a fundamental and enduring problem in our health care system and our economy.  Insurance has become the predominant means of paying for health care in this country.
But whose fault is that? Isn't the answer to deregulate the cash market so it functions again, and remove payments for regular predictable expenses -- and the huge moral hazard that such payment engenders -- from legally mandated "insurance?"

I noticed two other curiosities in the economic part of the Supreme Court discussion.

First, nobody mentioned the fact the mandate is unworkable. The penalty for not buying health insurance is much less than the cost of buying insurance. Moreover, consider the stereotype uninsured person: making say $50,000 a year when employed, but perhaps unemployed right now, with health problems that make getting insurance or employment hard, maybe facing financial pressures. This might be the typical person that the Administration is trying to shower with mortgage forgiveness. We're really going to make a person like that pay a substantial fine for not having health insurance? Right.  

Second, the central argument for the mandate in the Supreme Court is the cost of emergency room care for uninsured people. This argument is correct as a matter of economics, but it is trivial in magnitude. Yes, if you are a charitable society that won't let people die in the gutter, then there is moral hazard that people will take advantage of charity and not protect themselves.

But emergency room and charity care for the uninsured is a trivial part of our bloated health-care expenses. The real expense problem is over-use (moral hazard) by people who have insurance, and by their doctors. (Honest doctors have a strong incentive to practice defensive medicine, for fear of being sued; and a few less-honest doctors have an incentive to pad the bill. After all, insurance is paying.) This  is what's driving the cost of insurance so high that people choose not to buy it, and the reason they have to be forced to do so. We could easily pay for charity care for the small number of indigent uninsured in an otherwise functioning market. 

The uninsured and preexsiting conditions are a real economic problem. The health law's answer is to force insurers to sell everyone insurance at the same price, and to force "insurance" to cover every imaginable expense. If you do that, the price is very high, so you have to force healthy people to join. Given "guaranteed issue" the mandate is needed. Yes, that makes the elements inseparable, so if the court strikes down the mandate, it has to strike down guaranteed issue as well. But that also means opponents need a clear alternative to a genuine problem.

But there  is a simple economic answer: individual, portable insurance that includes the right to buy insurance in the future. For more, see previous  ArticlesOpeds, Blog posts.  This approach recognizes that our current troubles are, as Solicitor General Verilli amazingly admitted, creatures of past legislation and regulation, not intrinsic market failures. And this can be the heart of a coherent deregulation strategy.

(Yes, I know there are theoretical problems with health care and insurance markets,adverse selection, asymmetric information. But we've never tried it to see just how bad those problems are in a really deregulated and competitive system. The same theories predict that markets for used cars, car repair, vet services and dentistry should not exist.  Just perhaps, the legal and regulatory burdens are what cause dysfunction in health insurance and care markets, not theoretical economic problems.)

This case also strikes me as a poor test case for the commerce clause. I'm rooting for the overturn of  Wickard v. Filburn too. (This is  the 1942 case against a farmer who grew wheat to make his own bread, in violation of  Federal wheat production limits. If that's "interstate commerce" so is anything.)  But the mandate is really a poor case for thinking about the limits of Federal economic regulation, as its constitutional problems are a poor framework for thinking about health reform.  As I'd hate to end up with a constitutional "medicare for all" solution, or "current law but replace 'mandate' with 'tax'", so I'd hate to end up with "the only limit imposed by the commerce clause is that the Federal Government can't force you to buy something."

One little piece of good news: 
 "GENERAL VERILLI: ..The — the rationale purely under the Commerce Clause that we're advocating here would not justify forced purchases of commodities for the purpose of stimulating demand"
 Whew! Write that in stone, please.

Blow-Off Top Rally Coming.

The 1st quarter is now officially over and what a quarter it has been so far! The stock market rise which started with the Santa Rally did not look back and kept rising. The bear camp including many famous names have been obliterated and ridiculed. But it was a rally which nobody loved. The bears hate it because it destroyed them. Bulls hate it because they were not fully prepared for it and could not get enough of it. Those on the sideline hate it because they never got a chance to join it after a pull back. Because there was no pull-back.

While I correctly predicted the start of the rally, I jumped down too early based on Technical Analysis while my cycle analysis and fund flow analysis were still positive. But in the Fed manipulated world no TA or fancy chart works. To get an idea of how the stock market really works just take a look at the following chart.

Do we need anything else to beat the stock market?

Question is where we go from here.  The answer possibly lies in the Fed action as well. The Operation twist is ending in June and there is no sign of more free money as yet. Combine the need of the Banksters with that of the politicians and we will get an answer which is fairly close. The Presidential election campaign will kick off in earnest from June. If there is no further liquidity pumping, the stock market will surely decline. If the stock market does not do well, that is bad news for an incumbent president.  So the Banksters and TBTF banks want more free money without which they cannot keep the ponzi scheme going and Obama need the Wall St. to keep pumping the stocks to get re-elected. There is no chance that the stock market will be allowed to perform on its own free will based on fundamentals till November. Bernanke has no option but to provide free money to the Wall St. even when he is aware that ZIRP is destroying the country and excess liquidity needs to be drained. They are boxed in a corner. (This is my theory and I may be wrong).

You may ask that if the above is correct and Operation Twist is still in operation why then the stock market should ever correct even remotely. Once again it is a matter of timing. If the stock market continues to operate at this present level till June / July, what justification Bernanke will have to pump more money. And if the stock market tanks in July / August, it may be too late to repair the damage from Obama re-election standpoint. So they have to start pumping the market again at least from the beginning of the 3rd quarter to have meaningful and positive impact on consumer confidence and voter behaviour. They do not want to take any chances. At the same time, they are banking on the theory that American Voters have the memory span of a goldfish.Take everything into consideration and my take is that we will get the correction in the 2nd quarter which will give Bernanke opportunity to start another QE.

So we are going into 2nd quarter and already there are signs that the blow-off top is starting soon. May be from as soon as this coming Monday. I think SPX will top between 1450-1460 and by April OpEx will be the top in terms of time. But the majority of these gains will come in the next 4 trading days. Take a look at the following SPX chart.
There is a pattern from last December which I have circled. The index goes down for about 3 days and then shoots up making a new high. This is not TA. Just simple observation. Combine that with the cycle analysis and seasonality and odds are high that what I said above is going to happen. From now till April OpEx there are three weeks.  If the market will listen to my plan, then the 1st week of April is when the market shoots up. 2nd week it retraces somewhat and goes back and forth. 3rd week it re-test the high and fails. The roll over comes thereafter.  Let us see how it unfolds but I do not see many other alternatives. If you have a better plan please let me know.

That the people in the know are preparing for that final melt up can be judged from the action of the treasury market. Friday, TLT had one of the biggest one day drops in recent history.
However, those who think that end of the bond market is here, are probably jumping the gun little ahead of time. If we are going to see correction in equities, bond bubble will not burst now. Also Bernanke cannot afford to let the rates rise now unless he himself initiates it. The time for that is around November.

Apple most likely has had its share of correction for now.
I think it will also re-test the high in the coming week.

The US $ ETF UUP is breaking down the trend line and if we see the final surge in equities, that may well correspond will the down-move in UUP.
Remember the market always inflict the maximum pain on maximum number of people. In the coming weeks, people will be convinced that the bond bubble has burst, that US$ is going lower and SPX is going to 1550. They are going to be so disappointed. When the correction comes, dip-buyers will buy again, only to give up all the gains of these months. The bears will not venture forth initially because they have been burnt so badly.  It is a game where the house always wins.

Thank you for reading my blog. I wish you all a very good week end. Please forward it to your friends and family and ask them to visit  and follow me on Twitter (@BBFinanceblog). You can post your comments in the blog or email me directly at I look forward to hearing your thoughts.

Friday, March 30, 2012

If Obamacare is Overthrown

If the Supreme Court tosses out Obamacare, the United States may have a unique opportunity to think about a framework for a rational health care industry.

The framework should begin with the free market. The guiding principle should be that individuals pay for their own health care. Without that guiding principle, health care provision will always be too expensive, inadequate for many, and absurdly inefficient. Check out the health care programs in Europe. None of them are any good because they all have too much government involvement.

Let us all admit that the free market isn't perfect. No question about it. The free market provision of health care will inevitably end up with situations that none of us like. No denying that.

But all policy decisions are a question of choosing among alternatives. No solution is perfect and government solutions almost always tend to be the worst available. Should the government really be delivering the mail?

We now have a completely absurd healthcare system. Hospitals are required, through the blunt instrument of denial of federal dollars, to provide health care to anyone who walks through the door. This absurd arrangement is a recent phenomenon. It wasn't always this way. There once was a time (pre-1960) that one had to prove that you could financially foot the bill before a hospital had to serve you. That concept worked.

To deal with folks who couldn't pay their way into a hospital, the US was dotted across the country in every locale with charity hospitals who took care of folks who couldn't pay their bills. There is no reasonable size county in the US that did not have such a charity hospital. This system worked and worked well.

But, the adoption in the mid 1960s of medicare-medicaid, spelled doom to the concept that hospitals could deny services to people that could not pay. In effect, the government took over the private hospital industry, by threatening the denial of federal funds connected to medicare and medicaid.

Now, it is automatically assumed that anyone has free and unfettered access to a hospital at any time they want simply by finding their way into an emergency room, whether they can pay or not. Meanwhile, charity hospitals no longer exist. Who needs them when every hospital becomes a charity hospital?

So, now we have a health care system that no one pays for (out of their own pocket). Any product that no one thinks they are paying for will find that it's price will increase without limit. Eventually, unchecked, the present health care system of providing free care for everyone will mean that all of society's resources will be consumed by the health care activities.

So, what to do? A return to a free market health care system is the answer. Individuals should pay for their own health care and should be denied access to health care in private hospitals unless they can pay for that health care. If the government wishes to get into the act, then the government should build charity hospitals and administer a separate system for folks who can't afford to pay, which would be a very, very small part of the population.

The market for catastrophic (in the sense of costs) care can be handled by the insurance market. Here is one place where state regulation of insurance should be abandoned in favor of a streamlined federal regulation that focuses only on "truth in packaging." The government should not dictate what insurance plans should be offered but should merely make certain that individuals are told straight up what the insurance plans offer and make certain that insurance companies deliver on the plans they sell to the public. In the case of pre-existing conditions, the government could subsidize some catastrophic plans if the citizenry deems that to be a good idea. But, individuals with heavy health care costs should shoulder much of the cost. No one should skate through the system paying little or nothing.

Those who fall through the cracks should become the wards of government-sponsored charity hospitals. No doubt, health care will not be as good in such places, but health care in such places will likely be far better than what governments provide currently in Europe.

There is no good definition of health care. I would not include provision of contraception as part of my definition of necessary health care, but it is clear that the Obama Adminstration does include such things. Let individuals make their own definition. The government is not omniscient. Citizens don't agree on what constitutes adequate health care.

One thing for sure: Americans don't like Obamacare. Even today, two years after passage, 57% of Americans favor repeal of Obamacare. That's pretty amazing.

Americans have traditionally believed in private responsibility and charity towards all. A free market in health care and a free market in health insurance, supplemented with charity hospitals for the indigent, is what the US needs, not federally dictated programs that deny citizens the right to choose the health care products and programs they desire.

Thursday, March 29, 2012

Endangered Bear.

Today’s report will be short as I am running an errand and short of time.

Three consecutive red days in SPX and yet it has not been able to break the low of last week. That goes to show that time is still not right for the bears. Both my calls for this week have come to pass. I had written that the last week of March will have some weakness and here we have three red days out of four. Most likely tomorrow will also be red but not much. I have also written that the maximum downside I expect is 1380 and we are well within the range. Of course we still have one more day left in the week and anything can happen. But I doubt that SPX will close below that level.

There is too much noise in the market place and everyone is trying to make a sense of the market action. Too many good folks are discussing world economics and depending on their conviction, taking position in the market. Some think Europe is going to blow up and will take the world with it. Some are taking precaution thinking Israel will attack Iran. Still others are buying because they think USA has de-coupled from the world and is growing. As they say, “Each to his own”.

I am trying to stay clear of economic analysis and stay focused on what the market is going to do. Apart from one call in late Jan, all my market calls so far have been spot on. Both for equities and PM. My method does not depend on TA alone and I do not believe in fancy charts. Charts have their usefulness but up to a point. I do not understand Elliot Wave and that is my weakness. Also because I was taken to cleaners by Robert Prechter in the past. But there are many who make good use of it and kudos to them.

Anyway, coming back to market, we got only 13 out of the 20 points that I was looking for. May be we will get some more tomorrow.  Depending on the price action during the day, I plan to go long for a very short time.

I will present my detailed road map for the SPX by the week end. Thank you for reading my blog. Please let me know what you think of my market calls. You can post your comments in the blog or email me directly at or follow me at Twitter. (@ BBFinanceblog)  I look forward to hearing from you.

Wednesday, March 28, 2012

Waiting For Tomorrow.

I was pleasantly surprised with today’s sell off. I thought it will drift lower in a range but at some point SPX was down about 1%. Alas, it gave back about one third but that’s OK. I wrote yesterday about the sign of life in VIX and Bond as well as in US$. Also, I have been writing about the weakness in the last week of March for a while now.

While many have been writing about quarter end window dressing which may take the markets higher, I have been harping on the opposite.  But I am also writing that such a correction, when comes will be a buying opportunity. Therefore my earlier plan of going long on Friday is still valid as of now. However if tomorrow we see a huge sell off, then it may have to wait. I expect the sell-off to be good but nothing that will derail the up-trend yet. Today NYMO has dipped to negative 26 only and there is good enough scope for further sell off.

 Today was one of those rare days when everything was in red. Gold and silver gave back a good portion of its bounce and once again, I stick to my earlier call of further fall in prices of PM.  I think a good bottom for PM is still far. Sentiments and technical parameters do not align yet for a good entry. What happened to those investors who purchased gold during August / September of 2011? Are they still holding on to those investment? Because if they are still holding on, the wait will be very long. Yesterday CPM group’s “ Gold Yearbook 2012” was released in New York. Jon Nadler of Kitco has done a good analysis on that report. I quote from Mr. Nadler:

For starters, the finding that gold investment demand fell by nearly 6% last year, at a time when we were all told (by certain agenda-driven newsletters) that investors were beating down the door of their nearest coin shop. Evidently, that was not the case.
We mentioned numerous times in these posts that record and/or near-record gold prices present an obstacle that many an investors is basically unwilling to tackle. CPM’s analysts found that “Such investor hesitance also was seen in gold coin buying patterns over the course of 2011, in Indian demand trends, and in other aspects of the gold investment market.” The research firm believes that investment holding additions will also decline in 2012-if not by much-and that while no major declines in the price of the yellow metal are in the cards this year, neither are new records.
The firm anticipates a possible trading range in gold of from $1400 to $1,900-and-change for the year. This, despite the incessant chants by mining firm CEOs that $2K and $2.5K gold are ‘in the bag.’ Note that high gold prices do matter and that “Investors as a result appear already to be reconsidering purchasing increased amounts of gold at ever higher prices as they have been doing over the past few years. They are instead showing signs of being increasingly willing to hold off on purchasing metal until prices soften from recent levels, a tendency that may continue in 2012 and beyond.
CPM also busted certain other myths that are present in abundance in the gold market newsletter space. One of them relates to gold as an inflation hedge. Aside from the fact that CPM noted that gold is a currency and that all currencies lose value over the long-term and that therefore gold’s purchasing power parity attribute is largely fiction, the firm also pointed out that investors may be placing their bets incorrectly when it comes to gold.
To wit: Quite a few gold investors are piling into the metal in proportions that a far larger than what a prudent portfolio allocation model might suggest, because they are convinced that we will get sharply rising inflation owing to the recent round of global fiscal stimulus. Investors have also bought the line that negative real interest rates are gold-beneficial. It turns out that, historically speaking, returns on gold have actually shown a tendency to decline when real interest rates dipped under -2%. As for the topic of Weimar Republic-style inflation, CPM said that, in the near-term, this type of threat is a non-issue that the anticipated future inflation levels may also not occur.”

In the world of investing, timing is everything. Ask someone who has purchased a house in 2007 and is now deeply underwater. This, when we were told that house prices never go down.

Coming back to the stock markets, everything is going more or less as per plan and I am waiting for tomorrow.  A good 20 point sell off tomorrow will validate my call for next week. But either way, a blow off the top rally is coming from next week.

Thank you for reading my blog. Please let me know what you think of my market calls. You can post your comments in the blog or email me directly at I look forward to hearing from you. Without your active participation, it becomes pretty boring! 

Greece's Future -- Red or Brown?

The mainstream political parties are losing their support in Greece, as one would expect, given the imposition of austerity. The communist party and neo-nazi parties are on the rise and threaten political chaos and civil unrest. Sound familiar? This was the Germany of 1922-23 as the German government faced a mountain of reparation payments from the aftermath of the Treaty of Versailles and an enforced austerity program. Now Germany is the enforcer and Greece may well become the new Germany.

This is the predictable outcome of the Merkel-Sarcozy-IMF bailout scheme. There is no way that this solution will hold. It will come apart and Greece will become a different country, unrecognizable from the rest of Europe. Portugal, Spain, and Italy will eventually be on that path as well, unless the Merkel-Sarcozy-IMF plans are abandoned.

Europe needs a reality test, not austerity. The sovereign debts in Europe are unsustainable and unpayable. This is a pretty harsh reality, but it is the reality. No amount of "political will" by Germany and France will ultimately matter.

Remember that the US situation is worse, once state and local debt is added to federal debt. Greece is our future as well unless the realization dawns that our debts are unsustainable and unpayable as well.

You can always tell when a country has lost it's fiscal sanity when it thinks that if only it could get more revenue out of it's richest citizens, it's fiscal problems would be solved. Taxing rich people is completely irrelevant to the fiscal situation of Greece and to the fiscal situation in the US.

What is driving the debt problems of the Western economies are the entitlement programs -- retirement and health care. There is no set of taxes that can support these systems -- not in the US and not in Europe. Absent private savings, there is simply no way to support our rapidly aging population and the health care needs of the future. The empty charade that "government programs can deal with this" is nonsense. The government is not providing any savings for the future and government policies have obliterated private savings.

So, watch the future play out in Greece. Coming to your neighborhood soon!

Tuesday, March 27, 2012

Double Top In Dow?

I missed it in my evening post:
Do you think it is a double top?
If so, then the correction target is very close, around 13000.As they say, DOW leads. It is in line with the short term cycle low this week. 

Dumb Money Still Chasing Stocks.

In the good old days or normal market behavior, I would have said today was a bearish reversal day. But now-a-days TA does not work so well when it comes to bearish prognosis, so I am little careful to say anything bearish. It might offend Bernanke. We cannot fight the Fed after all.  Although per cycle analysis, the last week of the March is supposed to be little weak, the 1st day of week has already covered for the rest and any selling is just to take out the overbought conditions.

After a free fall, VIX recovered somewhat today.
As you can see in the 5 minute chart, it was up for most part of the day while equities dived down much later.
On a daily chart, it looks like VIX has made a bottom.
While SPX has made higher high, VIX has not made a lower low. But I can tell you, this is temporary.  The lowest for VIX so far was 9 or so. I think that low will be broken.

Also up throughout the day were the US Treasuries.
TLT 5 minute chart is bullish. In fact TLT has been going up for a while equities are on a tear. Makes you go hmmm.

Also up was the US $ while AUD sold off.  

All these give the feeling that we might get that 2-3% sell off we are waiting for before the blow off the top rally.  Possibly today was the beginning.  But it is not time to go short yet.  As per Guy Lerner’s Dumb Money Indicator, as long as the indicator stays above the upper band, prices should continue to go higher.

This is consistent with what I have been writing all along that as of now dips are buying opportunity provided you know what you are doing and are ready to jump ship very quickly should it start to sink.

Thank you for reading . Please pass it on and join me in Twitter for live market commentary. (@BBFinanceblog). 

Monday, March 26, 2012

Slaughter of the lambs (Bears).

I expected today to be range bound but it turned out to be the day of a new high thanks to uncle Ben.  In a way it is consistent with the bigger theme which I have been writing for so many days. That while we can expect some weakness in the last week of March, we are ultimately going to 1450 in SPX. Any dip therefore is a buying opportunity. Question in my mind was about the degree of correction and after today’s price action we can be sure that it will not be much. Even 1380 would be lucky.  The following is from Uempel.

Today’s price action has pushed NYMO in positive territory from where a small correction can be started.

Why am I still looking for a small correction now? Among other things, seasonality. The following table is from Stock Trader’s Almanac.

So a correction in the range of 2-3% is in order.

Also, with the blow of the top rally due in April, markets cannot run higher when they are already extended. Therefore some profit taking before the quarter end is in order. That will also shake out the weak hands.

Will today’s high be considered a valid breakout?
Probably not but what does it matter. It is still a high and we are still looking for higher high. Already folks are talking about 1500 SPX by mid-April and everyone is getting giddy with excitement. So a little lesson in history is in order. The following is a chart from Chris Kimble which is self explanatory.

I am not suggesting that we have reached that stage and we may well renew the upward journey after summer but right now the market moves do seem parabolic. Let us see what tomorrow brings.

Thank you for reading . Please forward it to your friends and join me in Twitter for live market commentary. (@BBFinanceblog). 

Market update: S&P 500 at 3 year highs

It wasn't so long ago we were watching 1,260 as a key resistance level on the S&P 500 ($SPX).

Today we see the $SPX bumping up to 3 year highs.

Once the market closed above that same level and really held it after the start of the year, it stair-stepped higher with relatively tight pullbacks since. The last few months have been much more of a slow grind higher, as opposed to the choppy , volatile swings of last July through December 2011.

We are now approaching prior resistance levels near 1,440 from 2008. If the market can clear that, then pullback/consolidate and continue its move higher, we'll be approaching the prior peaks from the 2008 market top. 

Of course, a move towards 1,500 on the $SPX might be some time off given the extent of the move we've just seen.

Saturday, March 24, 2012

Free Fall Week Coming Up.

I told you so. They will somehow pain it green. And they did after the markets were down for better part of the morning. I also said that it will try 1400 again and fail it that attempt.  For the next part of the call we will have to wait till next week.

The market action of Friday confirmed two things. First, the uptrend has lost some of its mojo and a correction, however shallow is on us. Secondly, the correction will be very shallow, may be up to 1370 level before the blow off the top rally starts. Honestly, a 30 point correction is not a correction at all but sorry bears, that’s all you are going to get for now.

Many of the hedge funds have sit out of this rally and at this late stage of the rally they are thinking of joining the party.  I myself did not believe in the rally and have missed out a good 100 points which was there for taking.  One of the Fed’s regional head is also saying that there are lots of money sitting outside. The BOYZ know this and will do everything to bring that money on the table.  As such, every dip will be bought and some more.

This is called greater fool theory. We buy shares hoping that there will be another fool out there who will buy that rotten potato from us at still higher price. Till the music stops.  That is the nature of retail investing when people buy high and sell low.

But if the share prices keep going up on their own, then there will be no free money for the TBTF banks. Government will not buy their toxic assets like MBS and give them free money. So they will have to create panic. And they know that if they are able to create panic even for a short while in an election year, Obama will do anything in his power to lift the stock market up. There is no recovery anywhere! Stock price going up has nothing to do with unemployment rate of BLS. As per Gallop poll, who does that actual polling, the unemployment rate is well over 9%. Against all the hoopla that Europe has been saved, the fact is it has not been saved. Spain is daring ECB. We are seeing parabolic moves at different levels which is a pre cursor of the end game. As I have been writing, it is all a question of timing.

The TA is not a very useful tool in such manipulated market. There has to be a combination of many things but a clear understanding of the manipulation will surely help.  By the grace of God, so far my calls on the market have been correct except one, where I gave more weighted to TA over manipulation. That was a mistake and lesson learned.

Coming back to market, I expect Monday to be range bound with major damage being in the next 3 days. I plan to go long on Friday, 30th March for the blow off the top rally. I have been waiting on the sideline for a while for this opportunity. But this is not real and not for keeps. We will be running with the hares and hunting with the hounds.

Nothing much changed in the latest COT report. Commercials are still long EURO and JPY. That just re-confirms my theory of timing model. The trend is still up and dips are buying opportunity. So be nimble and play it safe.

Thank you for reading . Please forward it to your friends and join me in Twitter for live market commentary. (@BBFinanceblog). 

Thursday, March 22, 2012

Time To Get Real?

The FED’s PPT (plunge protection team) came out to talk the market up in the last hour of the trading. The Fed’s Evans gave a statement that more accommodation would be appropriate and the dogs of war started salivating. Do they think people are blind and do not notice anything? However, 3 days of red is kind of abnormal in this day and age. So for tomorrow they have confiscated all non green colours and only colour available in the market for tomorrow is green.  They will make their best efforts to paint the market green tomorrow. No wonder Ireland has made Obama an honorary Irish.  But with momentum down, it will be a difficult task. Difficult but not impossible. They may have to be satisfied with few points up before the plunge begins again next week or at least a short squeeze in morning.

I wrote last night that I would not be surprised to see a decent size sell-off and we got one. However I am not totally satisfied because it was not even a 1% drop. All that may well change next week.

The other news was the washout in TVIX.  It is a derivative of a derivative and CS has made it a closed ended ETF. I understand that they have now stopped supporting it. You may read more about TVIX here: What You Need to Know About the TVIX Freeze | Outside The Box Blog | Schaeffer's Investment Research

The following is a quarterly chart of Apple.

It reminds me of the tulip bubble. I have no words to describe it and staying far away from Apple. By the way, does anyone remember Qualcomm in the year 1999? I would like to quote from Phil Davis:
The bull case is all about recovery, which we're just not seeing on a global basis (and even the U.S. is debatable) and INFLATION. Inflation I consider a good reason to bet AAPL can go to $1,000 - because $1,000 is how much a new IPhone will cost once inflation takes hold and it's very likely it will take hold as the supply of money, worldwide, is through the roof - up over 100% since 2007. The problem is that money is not moving (no velocity) so the economy is not growing. Until we see the money move through the broad economy (wage increases, interest rates rising), we're not going to have inflation that sticks because the consumer is out of money.

However, short term trading and fundamentals are far removed. Although the market will eventually catch up with the fundamentals, the rigging and fixing game will continue at its own pace. We might as well go with the greater fool theory and hope that someone out there will buy the stock which we are holding now.

Coming back to the market, there is good bit of support between 1392 and 1390. Tomorrow it may try to break above 1400 again and a failure will start a cascade downward. For that I think we will have to wait till next week. I have been writing for past many days that cycle shows some weakness in the last week of March and that is consistent with seasonality.  

Thank you for reading . Please forward it to your friends and join me in Twitter for live market commentary. (@BBFinanceblog). 

Europe -- The Unraveling Process

German bonds are beginning to sink. A national strike has been called in Portugal to shut down the economic life of the country to protest the government's austerity measures. Bond yields in Spain and Italy have resumed their upward march. There is a growing awareness that Greek reforms will never take place.

No surprises here, unless your name is Merkel, Sarcozy, Bernanke or Geithner.

The European debt explosion marches on to its inevitable conclusion. The forces that drive sovereign debt expansion in Europe, in Japan, in the US, are alive and well. Politicians can huff and puff all they want, but it won't matter. The unraveling process is well under way. Check out the trend in US bond yields. We're going the same route.

In case you didn't see it, Ben Bernanke and Tim Geithner weighed in yesterday on how things are going in Europe.

Bernanke (to a House Oversight Committee): "In the past few months, financial stresses in Europe have lessened, which has contributed to an improved tone of financial markets around the world, including in the United States."

Geither (to that same House Oversight Committee): "The European economies at the center of the crisis have made very significant progress."

You wonder what these guys are looking at to make these kinds of statements. The American public is not well served by misleading statements from it's chief economic politicos.


I'm in Japan, one great data point on the ineffectiveness of fiscal stimulus, and the reason for blog silence for the last week or so. I will be giving a talk about asset pricing, based on the "Discount Rates" paper, at a Chicago Booth  event on Friday evening March 23 at the American Club in Tokyo, details here. Blog readers and ex-students most welcome. It's a public event, but you have to register.  

Wednesday, March 21, 2012

Is it Legal?

Is it legal to have two consecutive red days? We have to check the by-laws of NYSE and read the web site of the FED. It might be against the mandate.  But here we are. We had a bit of a squeeze in between. I was expecting a range bound day with slight up close. But it was a range bound day with small loss.  Like I said yesterday, earlier, the dip would have been bought and some more. The market does look tired.

I have borrowed a chart from ZH for whatever it is worth.
While I am sure rather confident that we will reach around 1450 in SPX by mid-April and the above chart is ultimately meaningless, it is relevant at this point of time. Short term cycles are calling for some weakness by the last week of March and that call is consistent with the seasonality factors as well. I would not be surprised to see a decent sized sell off tomorrow although Thursdays have been most bullish days since October 2011. This pull back will be short and possibly not too deep and a buying opportunity for the last pop.

For the 2nd day in a row, bonds were higher.
As you can see it is recovering from deep oversold level and has some good space to run. That again is consistent with the call for correction in equities.

While Euro was unable to break above the H&S level, US $ is making preparation for breaking its H&S range.
When that happens, it will cause some damage to the risk assets. I expect that to happen soon. On the other hand NZD fell hard after US close as traders were disappointed with NZ growth data. Will the algos follow the NZ $ tomorrow? Both the 2 HR and 4 HR comparison with NZD/JPY and SPX shows that SPX has lots of room to come down.
This is not an exact science and it does not always follow the same path. But seeing that the correlation has worked well in the recent past, we can only expect it to follow suit in future. More so when cycle and seasonality and liquidity in the market seem to agree.

Next few days are going to be important and will define how the market is going to behave in April.

Thank you for reading . Please forward it / re-tweet to your friends and ask your friends to join me in Twitter. (@BBFinanceblog).

Austerity, Stimulus, or Growth Now?

(This is also a Bloomberg "Business class" column, with minor improvements.)

Austerity isn't working in Europe. Greece is collapsing, Italy and Spain’s output is declining, and even Germany and the U.K. are slowing down. In addition to its direct economic costs, these “austerity” programs aren't even swiftly closing budget gaps. As incomes decline, tax revenue drops, and it is harder to cut spending. A downward spiral looms.

These events have important lessons for the U.S. Our government cannot forever borrow and spend 10 percent of gross domestic product each year, with an impending entitlements fiasco to boot. Sooner or later, we will have to fix our finances, too.  Europe's experience is a warning that austerity -- a program of sharp budget cuts and (even) higher tax rates, but largely putting off “structural reforms” for a sunnier day -- is a dangerous path.

Why is austerity causing such economic difficulty? What else should we do?

Lack of “stimulus” is the problem, say the Keynesians, epitomized by the New York Times and its columnist Paul Krugman, who has been crusading on this point. They claim that falling output in Europe is a direct consequence of declining government spending. Yes, 50 percent of GDP spent by the government is simply not enough to keep their economies going. They -- and we -- just need to spend more. A lot more.

Where will the money come from? Greece, Spain and Italy simply cannot borrow any more. So, say the Keynesians, Germany should pay. But even Germany has limits. The U.S. can still borrow at remarkably low rates, they point out. But remember that Greece was able to borrow at low rates right up to the moment that it couldn’t borrow at all. There is nobody to bail out the U.S. when our time comes. What should we do then?

The traditional Keynesian answer was: move on to monetary stimulus. Deliberately inflate and devalue. Break up the euro so the southern European countries can inflate and devalue even more.

Lately, Keynesians have been pushing an even more audacious idea: deficits pay for themselves. In a March 17 column, Krugman wrote: “there’s a plausible case that spending more now actually improves the long-run fiscal picture.”

U.S. Federal revenue is less than 20 percent of GDP. For deficit spending to pay for itself, then, $1 of spending must create more than $5 of output. Economists have been arguing about whether this “multiplier” is more or less than one; five is beyond any reported estimate. Keynesians made fun of “supply siders” in the 1980s, who made similar claims for tax cuts. At least those cuts had incentives on their side, which stimulus doesn't.

Is there another explanation, and a more plausible way forward?

The stimulus explanation is curious for what it omits. Think of Greece. Is it irrelevant that Greece is 100th on the World Bank’s “ease of doing business” list, behind Yemen, 135th on “starting a business” and 155th on “protecting investors?” Is it irrelevant that professions from truck driving to pharmacies are still rigorously protected, that businesses can’t fire people, that (according to a Greek colleague) you can’t even get a driver’s license without paying a bribe? Does it not matter at all that, as the International Monetary Fund delicately put it in its latest report on Greece, the “structural reform program” aimed at “deeply ingrained structural rigidities in labor, product, and service markets” got nowhere?

Does it not matter that Greece has a high combination of individual, corporate, wealth and social taxes, higher still under "austerity?" True, Greeks famously don’t pay taxes, but businesses that must operate illegally to avoid taxes are much less efficient.

Money is fleeing Greece, Italy and Spain. Does talk of exiting the euro, followed quickly by devaluation, inflation (the IMF predicts 35 percent in Greece, should it leave), and capital controls, have nothing to do with lack of investment?

Keynesians urge devaluation to gain competitiveness. Greek wages have in fact declined about 10 to 12 percent, according to the IMF -- so much for the impossibility of nominal wage declines. Yet investment and production aren’t turning around. Greek “demand” needn’t matter -- the whole point of the euro area is that Greece can sell to Germany, so long as Greece stays in the Eurozone. But it isn't happening. Is that a mystery? Would lower wages compel you to invest money in Greece, surmount a thicket of regulation, expose yourself to the threats of wealth, property and business taxation, currency expropriation and capital controls, or even nationalization?

In sum, isn't it plausible that a good part of Europe’s austerity doldrums are linked to “supply,” not “demand,” “microeconomics” not “macroeconomics,” weeds in the economic garden, not a want of fertilizer? Isn't it plausible that factors beyond simple declines in government spending matter in the economy’s response to a debt crisis?

That insight suggests a different strategy: Let’s call it “Growth Now.” Forget about “stimulating.” Spend only on what is really needed. We could easily stop subsidies for agriculture, electric cars or building roads and bridges to nowhere right now, without fearing a recession. Most "spending" is in fact transfer payments, which even Keynesian economics recognizes are not very stimulative, not the mythical (and curiously carbon-intensive)  roads and bridges, and most of that goes to people who are relatively well off

Rather than raise tax rates further on “wealth” and the “rich,” driving them underground, abroad, or away from business formation, fix the tax code, as every commission has recommended. Lower marginal rates but eliminate the maze of deductions. In Europe, eliminate the fears of wealth confiscation, euro breakup and currency devaluation that are driving saving and investment out of the south.

Most of all, remove the profusion of regulation and (increasingly) direct government management of the economy.

Growth is the key to paying off debts. The only way to escape large debt/GDP ratios is to embark on a decade or more of solid  growth. Growth like this comes from long-run productivity, not short-run stimulus. 

Europe is beginning to figure this out. Italy’s prime minister, Mario Monti, is addressing his country’s debt crisis by proposing far-reaching deregulation, now. While his proposals aren't complete or close to radical enough, and they are combined with some unfortunate business-stifling tax increases, it’s remarkable that anyone in Europe is beginning to talk about this approach.

“Structural reform” is vital to restore growth now, not a vague idea for many years in the future when the stimulus has worked its magic. Europe learned that it’s also a lot harder politically than the breezy language suggests. “Reform” isn’t just “policy” handed down by technocrats like rules on the provenance of prosciutto; it involves taking away subsidies and interventions that entrenched interests have grown to love, and support politicians to protect. They will fight it tooth and nail.

That is even more reason to address growth now, while there is a crisis. The will to do so will evaporate if better times return, and the ability to do so will disappear if the economies plunge.

Tuesday, March 20, 2012

Beautiful H&S in EURO

You can see the beautiful almost text book H&S formation in Euro. If Euro breaks above 1.33 then the stock market correction will be very mute. If it fails to break above 1.33 and drops below, then we have a good show coming up. Depending on which side of the fence you are, you may want to keep the fingers crossed!

Shifting Grounds.

Today was an example as to why everything has to line up together before we can take a trade. That way we can reduce the risk. The important word here is REDUCE. We can never eliminate risk is trading and there is no system in world which can guarantee you risk free trading. Let us start with a closer look at SPX 15 minutes.

The chart may look complex but actually there are two BB. The outside one in red colour is in 3 standard deviation. The one next to it is BB with 2 standard deviation which is our regular BB. Then we have two moving averages, fast and slow.
The continuous push higher has stretched the prices beyond the rule of physics. If history is any guide, whenever price has moved away over 5% from the 50 DMA, it has reversed to the mean quickly thereafter.  The red BB which is 3 SD from mean acts as the outer limit. When price push that limit, either up or down, price will correct shortly thereafter.

You can see that SPX has been pushing the outer limit (red BB) and is now time to revert to mean. Mean today stands at 1344. Will we see that correction? If and when it comes, will it mean that the up-trend is over?  Possibly yes and no. However, if the correction has to come, it has to be fast and furious. There has to be a 70-90 point correction in three days or so. A gentle correction will not do. That was the reason I did not take the short trade today although the hourly reversal was triggered at 1405.

Let us take a look at VIX.
It seems VIX has formed a bottom of sorts as of now. Can it go down further? Of course it can and it will. But not yet. In case of VIX, price has touched the lower outer limit (lower red BB) and here also it will revert to mean.

As I wrote yesterday, US $ index have staged a reversal after 3 days. I expect it to test earlier high of 81.50 in the next 7/ 10 days.
The difference in price action today was the way it covered the morning dip. From my perspective, today the rebound in the afternoon was not strong. Earlier, the dip buyers would cover any morning dip and some more. Today was one of those rare days when everything ended in red. Therefore I feel a kind of tiredness and exhaustion.  Also, the Demark sell set up is supposed to trigger tomorrow.

I think the market may be up tomorrow, at least in the morning when they will squeeze the fresh bears and then we might see long anticipated sell starting Thursday.

However at this point this is just a speculation and the trend is still up. The point of highlighting this possible correction is not to short in advance but to stay away from new long set ups and have a very tight stop.

Thank you for reading . Please forward it to your friends and join me in Twitter for live market commentary. (@BBFinanceblog). 

Trader Interviews: Overcoming Your Fear of Pulling the Trigger

Tim Bourquin at brings us this helpful discussion with top trading psychologists on, "How to Overcome the Fear of "Pulling the Trigger" On a Trade"

The full interview (and transcript) with Dr. Brett Steenbarger, Dr. Doug Hirschhorn, and Dr. Gary Dayton has been made available for free, so click through to check it out anytime. 

Here are a few key insights from Tim's discussion with these trading MDs. Now, not all of the interviewees agree on each and every Q&A topic, but there are some very interesting common threads running through each of the 3 interview segments. 

  • The interview begins with Tim asking Brett Steenbarger why some traders may have problems "pulling the trigger" on their trade ideas. Dr. Brett points out that we must first correctly diagnose the problem before offering a solution. In his view, there are likely two main reasons, one being a trader's lack of confidence (setup ideas haven't been tested, etc.).   
  • Paper trading and simulation with real market data, followed by live trading with small amounts of money, may offer the proper testing and experience-building trials a trader needs to build his skills and confidence (Steenbarger's view).
  • Performance anxiety is the 2nd problem highlighted by Steenbarger. He mentions some visualization exercises which can prepare athletes and traders for the anxiety of performing in a high-pressure environment. You should also focus on the process of trading, rather than the outcome of each individual trade.
  • Dr. Doug Hirschhorn tells us that a lack of personal trust is behind a trader's failure to pull the trigger on trades. He does not favor paper trading, but says traders should trade smaller sizes to practice building their skills and get comfortable with their market and style.  
  • Traders who get over the fear of failure more quickly tend to look at the larger statistical picture. They begin to see beyond the individual trades immediately at hand and instead look out to the next 100 trades, the collective picture of their longer-term trading process. 
  • Increasing one's trade size, getting bigger in a winning position, is another major theme in improving trading performance. Dr. Hirschhorn briefly offers his perspective here, and this is an area we may want to explore and study further.    
  • Tim's talk with Dr. Gary Dayton delves into the issue of dealing with fear and emotions in trading.  As Dr. Dayton points out, we cannot remove our thoughts and feelings from our daily work. He discusses the idea of practicing "mindfulness", which teaches us to defuse our emotions and be aware of what the mind is telling us (since our thoughts are impermanent and often inconsistent).
As you can see, there are some common threads running through this discussion. Anxiety, lack of experience or methods testing, and lack of preparation may hinder the trading process and lead to a fear of "pulling the trigger".   

These are issues I've had to deal with (and continue to work on) in my return to trading. What we can do, as businesslike speculators, is focus on defining our method/style and our edge.    

We also need some sort of learning process to help us begin to get comfortable with our chosen trading style. Whether it's some sort of realistic simulation or a "start small" process that has us trading real money with smaller position sizes, it seems some form of real-time trading education is key to building confidence and overcoming the fear of pulling the trigger.  
Have you faced these problems in trading? What have you done to overcome your fears? Share your experiences with us.    

If you're enjoying these posts and would like to see more, please subscribe to our free RSS updates and follow Finance Trends in real-time on Twitter and StockTwits. You can also check out our related posts below for more market wisdom and trading insights.  

Photo creditStudent Archer, via U of Iowa digital library.  

Related articles and posts:  

1. Zen and the Art of Trading.  

2. Mark Minervini interview: define and refine your approach.  

3. What Makes a Great Trader? Managing Risk

Monday, March 19, 2012

Deja Vu?

Once again, let me start with some of my morning tweets:

·         GM all. I don't have much of an upside target but may test 1410. Haven't seen any downside trigger yet. SPX hourly reversal at 1395
·         Retest of overnight high in ES failed. But also a small double bottom. lets just wait and watch which way it goes. No rush to front run.
·         Selling or shorting here would be dumb. At least we should see the hourly reversal.

That hourly reversal now stands at 1404. The daily reversal is at 1375 and long term monthly reversal is at 1320. So till 1320 is taken out we are still in an uptrend. Take that. I would expect almost everyone to be numb by now and resigned to never ending up move. Already we see talks of SPX 1600 and beyond!
But I think we are now entering in a correction zone.  The next few days may bear me out. I would expect between 3-5% corrections by the end of the month. However such a correction will definitely be a buy opportunity.  Precious metals continue on a sell signal and we may have to wait till Mid-April for a decent tradable bottom. Euro is making an inverse H&S and we may see a bounce upto 1.33. The AUD/USD and SPX correlation has now been replaced by NZD/JPY and SPX.
 This is a classic example as to how old correlations break down and new are formed. 

US $ index lost 3 days in a row but we may see a rebound from here.
 A lower close will give a sell signal and considering the total market, we are not ready for the blast off rally yet. May be next month.

As you can see, more often than not, it pays to follow the unbiased and uncluttered market analysis. I would be wrong from time to time but I have now incorporated the trend following algorithms with my other parameters which should reduce the whipsaw and will prevent front running.  No economic analysis or complex charts based on TA or EW. Pure trading and investing guidelines which works.

You may incorporate these signals with your methodology and see the results yourself. So pass it on to your friends and family who might be interested in stock market. And do follow me in twitter  (@BBFinanceblog) as you will find it useful. Thanks for reading