Financial topics

[aedens]

Thank you for the quality of your answer, I'll come back on this forum in less than one week, it was just to let you know that I read your post
Regards Burt

http://seekingalpha.com/article/151277- ... y-no-shame

Have a good week Sir, and in advance be ready to click out it appears
to be heating up. May the wise and honest repair for our grand children

[StilesBC]

John et al,

The earnings reports have been "blowing away" expectations according to CNBC and the rest of the circus act known in the US as journalism. However, it is hardly emphasized how this is being done and what, if any, meaning it has for future quarters. I wrote a much longer than expected note on what I've observed thus far:

We are more than half way through earnings season, and I thought that it would be important to take the pulse of what many of the companies are individually telling us. In all sorts of market environments (bull and bear), it is important to know how a certain company has reached the results it reports. It is not enough to simply see the headline number and draw any conclusions from it. Many of these companies are massive organizations with dozens of different income streams and products. In a way, they are little economies in themselves.

When looking for economic recovery, it is important to know where to look. Many people, the media being the major culprit, make the mistake of labeling anything that looks a return to the conditions present in the prior expansion as a sign of impending recovery. But economies don't work that way.

Economic expansions are led by increases in capital expenditures, investment and the application of theretofore unproductive technologies. The prior contraction is the lead cause of these factors. Wages typically fall as quality employment becomes scarcer, thus making new investment more "productive." Additionally, consumers and businesses have a propensity to save more during economic contractions. These savings provide the capital needed, at a lower rate of interest, to make these investments possible.

As the expansion wears on, the excess profits then derived from the previous gains in productivity are used increasingly for consumption goods. The perceived benefit to making further investments at that time is typically nowhere near where it was years earlier. Wages will be higher, machinery more expensive, interest rates rising, etc. It becomes more "economic" to satisfy one's immediate wants.

Read the rest here:
http://futronomics.blogspot.com/2009/07 ... ected.html

[Higgenbotham]

This week I ran across an interesting article by a physics professor who states that the stock market bubble in China is projected to begin bursting sometime between July 17 and July 27. He's stating basically that the bubble has gone parabolic and is mathematically unsustainable. This article can be found here:

http://yelnick.typepad.com/files/china-bubble.pdf

I found this fascinating because by my methods, which are totally different, I had projected (at about the same time this article was written) that the world economic bubble would reach a maximum sometime between July 17 and July 31. Therefore, I took a short position in the stock index futures on July 17 and am still currently holding this position at a loss.

As of now, the bubbles are continuing to grow.

The bullish sentiment that was out there on Friday seemed surreal.

I don't really talk much about my methods but they have to do with (in part) cyclical configurations that are common with various bubbles. This bubble is similar in many respects to the 1637 Tulip Mania and would be projected to reach a maximum in Asia on July 29 according to my methods.

Of course, these projections often fail. However, the fundamental and psychological backdrop is eerie enough to make this worth mentioning.

[John]

Dear Higgie,

> I don't really talk much about my methods but they have to do with
> (in part) cyclical configurations that are common with various
> bubbles. This bubble is similar in many respects to the 1637 Tulip
> Mania and would be projected to reach a maximum in Asia on July 29
> according to my methods.

> Of course, these projections often fail. However, the fundamental
> and psychological backdrop is eerie enough to make this worth
> mentioning.

I know that you've also done a lot of work studying the South Sea
bubble.

But how can you possibly know when a bubble is going to burst?

John

[agnostic]

I know that you've also done a lot of work studying the South Sea
bubble.

But how can you possibly know when a bubble is going to burst?

John

I have no idea what Higgenbotham's methods are. But if I had to time to attempt anything like a physical model of our economy I would use "credit" as the equivalent of temperature. Somehow the economy would be modeled as a solution that is super-saturated and ready to crystallize [crash] as soon as the temperature falls below a c ritical point. If you have an accurate model of how temperature [credit] is reduced over time, and your armchair model gives you a fair idea of where the critical point is, then you can forecast when the system will reach the critical point in its downward path.

[John]

> I have no idea what Higgenbotham's methods are. But if I had to
> time to attempt anything like a physical model of our economy I
> would use "credit" as the equivalent of temperature. Somehow the
> economy would be modeled as a solution that is super-saturated and
> ready to crystallize [crash] as soon as the temperature falls
> below a c ritical point. If you have an accurate model of how
> temperature [credit] is reduced over time, and your armchair model
> gives you a fair idea of where the critical point is, then you can
> forecast when the system will reach the critical point in its
> downward path.

This is a very interesting subject, and if it could be formalized in
such a way, then it would be a striking discovery.

I've been looking back at what I wrote in August, 2007.

** The nightmare is finally beginning.
** http://www.generationaldynamics.com/cgi ... 17#e070817

In that posting, I laid out the reasons why I felt that a stock
market crash would be only a few weeks or months away.

The methods that I used were the same generational methods that I use
for everything -- looking at massive changes in attitudes and
behaviors. It was clear at that time that something major was
happening.

It turned out that I was right about the changes in attitudes, but
they manifested themselves differently than I had expected. In the
stock market, there was no great crash; instead, the market continued
rallying until October, and then began a long-term plunge, of a type
that occurred from 1929-1932. The difference, of course, is that the
long-term plunge began AFTER the generational crash in 1929, but
today the long-term plunge is occurring without any generational
crash (yet) occurring.

But the real "crash" (if you want to call it that) that occurred in
August 2007 was what's become known as the "credit crunch," which
occurs to this day.

As I said, I presented my reason based on massive changes in
attitudes and behaviors, not on any analytic technique that somehow
measured the size of the bubble, and whether it was mathematically
possible for it to grow any larger, or whether some critical point
was reached.

So if there's any actual way to do that, it would be very
interesting.

Sincerely,

John

[Higgenbotham]

Dear Higgie,

> I don't really talk much about my methods but they have to do with
> (in part) cyclical configurations that are common with various
> bubbles. This bubble is similar in many respects to the 1637 Tulip
> Mania and would be projected to reach a maximum in Asia on July 29
> according to my methods.

> Of course, these projections often fail. However, the fundamental
> and psychological backdrop is eerie enough to make this worth
> mentioning.

I know that you've also done a lot of work studying the South Sea
bubble.

But how can you possibly know when a bubble is going to burst?

John

I can't know for sure. If this bubble had followed the same track as the South Sea Bubble it would have burst last week. At this point, this bubble is tracking most similarly to the Tulip Mania. It's not exactly the same, but it is very close.

I would compare it to tracking a hurricane. I've known for a few weeks that the bubble was tracking similarly to the South Sea Bubble and the Tulip Mania. You might remember that post I made a few weeks ago that said if the S&P tests the May 8 high, then goes down to 880 and then rises for ~20 trading days to near 1000, that may be the peak. The bubble began to track in that manner and then made a second detour back to 880 before continuing higher.

At this point, the bubble is essentially like a Category 5 hurricane that appears to be a very short time from landfall. It's tracking like the Tulip Mania (especially the Shanghai Stock Exchange Index as Didier Sornette notes) and we are close enough to landfall that I don't see what can be done to stop it. Sornette, if I interpreted his paper correctly, said there was about a 20% chance that the bubble could deflate slowly. Since he wrote that, this bubble has intensified and, thus, the crash outcome seems more likely to me. I don't see any possibility at this point that a crash will not happen (from the standpoint of comparing this bubble to the Tulip Mania).

But I probably wouldn't have said anything except for the fact that Sornette has reached the exact same conclusion using a different method, which is startling, and his method appears to be generic and not tied to the behavior of previous bubbles. As I mentioned previously, the fundamental and psychological backdrop is also consistent with the potential bursting of this bubble.

[John]

Since August, 2007, I've become incredibly impressed by the ability
of the Fed and other countries' central banks to keep things going by
patching things up with band-aids, duct tape and glue. The world
economy is like a cargo ship that's still afloat, but with so many
leaking patches that it's hard to believe that it hasn't simply
plummeted to the bottom of the sea. I want to see whether the Fed and
the People's Bank of China still have a sufficient supply of duct
tape to keep things going.

Sincerely,

John

[John]

I used to write about the MarketPsych anxiety index:

** Investor and public anxiety levels are sky-high following weekend twin bailouts
** http://www.generationaldynamics.com/cgi ... 14#e080714

** CNBC's Steve Lieseman talks about Armageddon
** http://www.generationaldynamics.com/cgi ... 23#e071123

** MarketPsych investor fear index forecasts sharply increased market turbulence.
** http://www.generationaldynamics.com/cgi ... b#e071103b

** More on the Marketpsych "Fear Index"
** http://www.generationaldynamics.com/cgi ... 18#e070918

** By one measure, investors are getting increasingly anxious and worried
** http://www.generationaldynamics.com/cgi ... 13#e070913

This index measures the anxiety of investors by examining media
stories. They have a computerized methodology that counts words in
financial stories to determine how anxious investors are.

Here's today's chart:



As you can see, the anxiety level of investors has plummeted to the
lowest level in over a year, and actually a lot longer.

This corresponds to what Higgie said: "The bullish sentiment that was
out there on Friday seemed surreal."

John

[Higgenbotham]

As you can see, the anxiety level of investors has plummeted to the
lowest level in over a year, and actually a lot longer.

This corresponds to what Higgie said: "The bullish sentiment that was
out there on Friday seemed surreal."

John

Part of my thinking is that it's the disparity between:

(1) the complacency (low level of anxiety) as measured by the graph (excellent concept), and
(2) the stock market level paired with real economic conditions (PE being a decent proxy)

that allows for the crash potential.