Nasty Shock Prompts Rebound

By: Bob Hoye | Thu, Feb 18, 2016
Print Email

The following is part of Pivotal Events that was published for our subscribers February 10, 2016.


 

Signs of The Times

"The capital spending slump that originated in the hard-hit energy sector appears to be spreading more widely across other U.S. Industries."

- Reuters, February 2.

"Toxic Loans Around the World Weigh on Global Growth"

- NYT, February 3.

"81% Think Federal Government Corrupt"

- Rasmusson, February 4.

"Chinese brokerages posted 'ugly' earnings for January."

- Bloomberg, February 5.



Perspective

Well, the polite way of saying it is that the markets have had a "nasty shock".

Shocked included lower-grade bonds and bank stocks, particularly European banks. The latter may have had too much faith in Draghi's oft-repeated vows to do "what it takes" to inflate anything that trades. The boast would only appear successful so long as there were enough believers to place bids. Then in a world of plenty - they ran out of "greater fools".

And this makes the point that central bankers need speculators to leverage up. Then the problem is that once prices stall out the power shifts to margin clerks. This was the case when the Fed used to increase administered rates in following the rise in market rates.

The really big problem now is that central bankers joined the party and became fully leveraged against soaring asset prices. They thought they had invented a perpetual motion machine.

Back in the day, Mister Margin had only to attend to private accounts and a few sovereign borrowers such as Egypt or Bolivia. Under the biggest intellectual and practical blunder in financial history central bankers will be receiving margin calls.

As the saying goes, "The problem has been promiscuous lenders and promiscuous borrowers". Central bankers should be prudent, not promiscuous.

To look to the brighter side, probity will return.


Stock Markets

Where are we?

We remained positive until May, when the old Dow Theory determined that the bull was over. Shanghai registered impressive Upside Exhaustions in June. Our July 7th "Special" concluded that most banks were a nice "Widows and Orphans" short. Credit spreads reversed in June and "broke out" in late July. This followed the pattern set in the disasters of 1998 (LTCM), 2000 and 2007-2008.

Technically, the key on the S&P rolling over was attempting to get above the 50-Week moving average. And then failing, which occurred in early November. The senior indexes taking out their October 2014 lows formally set the bear market. This was anticipated by the Transports, which took out the 2014 lows in the August hit.

How long will the bear last?

Typically, about 18 months. In using 2009 as an example, for the senior indexes it should end with a number of Downside Capitulations.

In the meantime, financial markets are having a hit equivalent to Shanghai's into August 24th.

European banks could be setting a "Black Someday", any day now.

In looking at yesterday's action in Europe, perhaps a "Grey Tuesday" is sufficient to clear immediate imbalances.

Indeed, Deutsche Bank (DB) is registering a Weekly Downside Capitulation - right now.

A relief rally that could run into March-April seems likely.

On the bigger picture, there could be a number of significant "hits", each at lower levels until the bear ends.

 


Link to February 12, 2016 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2016/02/european-banks-and-stocks-take-a-pounding

Listen to the Bob Hoye Podcast every Friday afternoon at TalkDigitalNetwork.com

 


 

Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.

Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or options or futures contracts. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.

Moreover, from time to time, members of the Institutional Advisors team may be long or short positions discussed in our publications.

Copyright © 2003-2017 Bob Hoye

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com