Up and Down Wall Street

WEDNESDAY, MAY 16, 2012

The Bear Is Back, Say Chartists

By RANDALL W. FORSYTH

Actually, it's just reawakening after having been lulled to sleep by central bankers





If you laid all the economists in the world end to end, they still wouldn't reach a conclusion. By contrast, a large cohort of technical analysts is remarkably unanimous in their view of the stock market's direction -- down.


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Richard Russell, the dean of the chartists who still is at it penning the Dow Theory Letters after more than half a century, declares the bear is back.


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"I've been saying that a primary bear market started in 2007 and that this bear market was interrupted by a terrified Fed in 2009 -- interrupted, but not ended. Once the primary trend of the market is established, it will go to its conclusion despite the best intentions of the Fed, the Treasury, Congress and the president," he wrote to his subscribers Monday.



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He also noted the Dow Jones Industrial Average had fallen nine sessions out of the previous 10. Tuesday made it 10 for 11, which Russell suggested might allow for a bounce from an oversold extreme. But his message Monday was unequivocal: "My advice now is to get OUT of all common stocks, gold mining included and most ETFs.


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This bear promises to take no prisoners. Subscribers who lose the least over the next two or three years will be the heroes."



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John Mendelson equally deserves to be called a dean of technical analysis. And from his present position at ISI Group, spies negative portents in a variety of charts. In particular, the Value Line Index, a democratic measure that gives equal weight to 1650 stocks and represents the broad market exhibits a number of negative characteristics, he writes in a client note.



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The Value Line index "failed to make a new high above its 2011 top during this winter's rally, (2) halted its winter advance in early February and began to move sideways, (3) decisively broke its uptrend line from the October lows in early April suggesting the formation of an important top in mid-March. I would also note the presence of a near-term "head & shoulders" top which is close to completion by breaking down from recent lows. I believe the [Value Line] chart indicates an important correction is underway."



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Similar negative signals are being sent by other indices, notably financial stocks as represented by the NYSE Financial Index and the KBW Bank Index. Finally, the Russell 2000 index of small-capitalization stocks, which Mendelson says often leads the overall market, exhibits the same pattern of failing to top its 2011 high, peaking in February and then forming a head-and-shoulders formation that tends to portend a top.


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Walter Zimmerman, who heads technical analysis at the United-ICAP advisory service, advised clients Friday if the New York Stock Exchange Composite Index were to break decisively blow 7719, "then it is all over for the bulls." Tuesday, the NYSE Composite closed at 7635.81, down 69.64 or 0.9%, which would count for a decisive break.



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Zimmerman asserted here a couple of months ago that stocks were headed into a "perfect storm" ("The Worst of Times to Buy Stocks?"), which would seem to describe aptly the deterioration of the European debt crisis, slowing growth in China and tepid growth in the U.S. with a looming "taxmageddon" in 2013. To him, the charts indicate a "powerful and relentless" decline is just starting.



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The good news, such as it is, is that a real buying opportunity is shaping up for February 2013. That's the view of Woody Dorsey, whose Market Semiotics advisory comes from Castleton, Vt. The recovery from the "wonderful capitulation low" of October 2011 has run its course. "Don't become caught up in the short term," which might feature some pops.
Instead, brace for declines into early October with a lower trend into next February, he advises.



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All of which echoes what Barrons.com technical guru Michael Kahn wrote last week: "Stocks Are Primed for an Ugly Slide".) The head-and-shoulders in the Standard & Poor's 500 was ominous then, and the decisive breaks of the index's 50- and 100-day moving averages indicate a breakdown in the market's trend.



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To take advantage of the potential to buy beaten-down stocks next February, an investor needs to have cash to invest. If the bear decimates your capital, you won't have any to invest when the right time comes.



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There's a saying among traders that the hardest trade is the right trade. Going to cash that yields zero is the hardest trade and made more so by central banks that are keeping a lid on interest rates.

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HEARD ON THE STREET
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May 17, 2012, 4:39 p.m. ET
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Peering Over J.P. Morgan's Hedges
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By DAVID REILLY




With big U.S. bank stocks again sliding, investors are wondering how much is due to Europe's woes versus blowback from J.P. Morgan Chase's JPM-4.31% trading debacle. One answer: The issues are intertwined.



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When J.P. Morgan revealed $2 billion-plus in trading losses, it said it had executed hedges poorly and failed to monitor them properly. This raised questions about J.P. Morgan's overall hedging abilities, including those meant to offset exposures to Europe. And, if J.P. Morgan could mess up, what about Citigroup, Bank of America, Morgan Stanley or Goldman Sachs?



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With investors in the dark on the degree to which the five banks are mostly buying and selling protection from each other, investors also have little way to assess contagion risks.



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Granted, J.P. Morgan and other banks have a record overall of hedging exposures. But one mistake can be enough to cause huge damage, so investors are still being asked to take a lot on trust.


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When speaking of European risk, J.P. Morgan chief James Dimon has often used hedged figures, guiding investors away from the bank's gross exposures. In his recent chairman's letter, he reiterated that the bank's exposure to Portugal, Ireland, Italy, Greece and Spain was about $15 billion. "And we estimated that, in a bad outcome, we could lose $3 billion, after tax," he wrote.



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But that exposure is after some $6 billion of "portfolio hedging," with $4.7 billion related to Italian sovereign debt. If hedges don't work as anticipated, losses could be higher. What also isn't clear is how much of those hedges are run through the bank's Chief Investment Office, which was responsible for the trading mess, although at least a portion of it likely is managed by that unit.



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For countries such as Germany, France and the Netherlands, J.P. Morgan said it had a net exposure of nearly $150 billion, yet didn't disclose the size of hedges or gross exposures. Muddying the waters further: Major country exposures reported in J.P. Morgan's quarterly report are based on its "internal risk management approach." This differs from cross-border exposures reported under regulatory guidelines, which J.P. Morgan reports only annually.



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Those regulatory figures show far larger total country exposures because of "commitments." These include undrawn lines of credit but also the value of credit derivatives, where J.P. Morgan has sold credit protection to other investors.



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The bank says this measure doesn't take into account offsetting purchases of credit protection. Still, the unnetted figure is interesting in case the offset doesn't work as planned or because a counterparty defaults.



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Including those commitments, the regulatory figures show J.P. Morgan had a combined exposure to those three, larger European countries of about $390 billion as of December. This data also show an exposure to Italy of $87.5 billion and to Spain of $57.5 billion, far larger than the netted figures. Similar differences can be seen at other big banks as well.



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Playing down the larger, gross figures, Mr. Dimon said on an earnings call last year that the numbers don't "include hedging. And we do a lot of hedging, both specific name and country hedging."


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Back then, that put investors at ease. Not so much today.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

jueves, mayo 17, 2012

A GOLD UPDATE / SEEKING ALPHA ( A MUST READ )

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A Gold Update

May 17, 2012
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by Jeremy Robson



I have written previous articles on gold here and here. Since those articles, the gold price has fallen in a consistent manner and is now around $1540 per once. All recent gold rallies have been sold and there is a pattern of lower highs and lower lows. This is the definition of a bear market. As discussed in the previous articles, I am not of the opinion that we are in a bear market for gold at this time. However, I think that it is very possible that the gold price will move substantially lower before resuming its upward trajectory. In summary I would say - the correction is not yet over but the gold bull market has at least another 3 years to run.


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Gold seems presently trapped in an association with risk appetites and is becoming increasingly correlated to risk in general. This is not a good sign, but it is likely a temporary phenomenon.


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Gold is, in my opinion, a hedge against the wildest excesses of central banks to prop up a system of debt and unproductive assets that wants to unwind. If the central banks of the world decide to stop money printing and zero bound interest rates and allow the excess debt and unproductive assets to be liquidated, the gold bull market will be close to being over. I say close to being over, as if this very unlikely event were to occur, there would be a period of chaos in which gold would surge. Once this initial chaos was over (and all risk assets had sold off) the gold bull market would be over. There is no sign at this time of central banks allowing the system to purge itself and so I continue to argue that gold is in a bull market.


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Corrections in bull markets of anything are normal and healthy and it is clear gold is in one of these corrections. The question for me is when will the association with risk, that gold has recently formed, be broken and the bull market resume. Below is a monthly chart of gold.
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(click to enlarge)
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The Fibonacci retracements are drawn on the chart for the rise from the bottom of the gold price in 2008 to the peak in 2011. Gold has risen from under $800 to over $1900 in that period. The retracement levels shown on the chart are


  • 23.6% at 1570.68
  • 38.2% at 1408.92
  • 50% at 1278.18
  • 61.8% at 1147.85


We have passed $1570 on the downside. There is a 5 wave down move for gold since June 2011 and we are oversold on the daily charts. In the short-term, a rally in the gold price to the $1600 level looks likely. Unless the $1600 level is broken, this will likely be a temporary rally and lead to another decline with gold falling in association with all risk assets. If this plays out, the next downside target would be $1409 and if that does not hold, $1278. Please be aware that this is based on monthly targets and if this pattern is correct, it would take another 6 to 12 months to play out. This highlights that the correction could have substantially further to go.


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If $1600 is broken to the upside, the next target is $1662 and then $1780. As stated, I believe that gold is in a bull market, so at some stage it will break these upside resistances.


Conclusion


I am presently long gold futures and I expect gold to take a run at $1600. If it fails there (or does not even reach $1600), I will sell my position and wait for the next downside target. If it breaks the $1600 level, I will let it run.

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The correction will only be over once gold has moved back above the $1780 level and is heading for $1900. It is always impossible to tell exactly when a correction is over and the technical levels shown above only have about a 60% chance of being correct (as technical analysis in general is only correct about 60% of the time). The alternative to trying to find a bottom is to dollar cost average into gold each month and remove the indecision.


OPINION
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Updated May 15, 2012, 7:27 p.m. ET
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The Big Danger With Big Banks
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Taxpayer safety nets such as the FDIC should be available only to banks that are in the loan business, not those in the investment business.

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By TOM C. FROST



In the early 1950s, when I was a young college graduate and a new employee of the Frost Bank, my great-Uncle Joe Frost, then CEO, told me that the very first goal we had was to return the deposits we received from customers. Our obligation was to take care of the community's liquid assets and manage them safely so others could use them (via loans) to grow.



Frost Bank was not big enough to be saved by the government, Uncle Joe told me at the time, so we would always need to maintain strong liquidity, safe assets and adequate capital. I was impressed that making money was not high on his list of priorities, but he implied that profits would come if we observed sound banking principles.



When we look at banking in the United States today, Uncle Joe's values seem so long ago and far away. The industry is now dominated by a few large banks.


In 1970, according to data from the Federal Reserve Bank of Dallas, the five largest U.S. institutions owned 17% of banking industry assets; in 2010 that share was 52%. Their business has expanded well beyond the role as steward of the community's assets into riskier endeavors that chase supersized returns.

Chad Crowe



As the financial crisis of 2008 showed, the very diversification, structure and size of most of our largest banks put the community's assets at tremendous risk. They had become "too big to fail," and the governmentreally the American taxpayershad no choice but to keep their colossal mistakes from bringing down the economy.



But as Harvey Rosenblum, the Dallas Federal Reserve Bank's executive vice president and director of research, wrote last year, "These rescues have penalized equity holders while protecting bondholders and, to a lesser extent, bank managers." In other words, by protecting people from the consequences of their errors, the bailouts raised the risk that the same errors will be made in the future.



There are many good proposals for minimizing, if not entirely eliminating, the likelihood of another "too big to fail" crisis of the sort we faced in 2008. Perhaps most prominent among them is the recommendation that we require banks to hold additional capital to protect themselves (and the rest of us) from loans and investments gone sour.




But even these recommendations would allow the big banks to keep their traditional FDIC-insured deposits, alongside their investment enterprises within the parent company. I suggest that we divide the two functions into separately owned, managed and regulated entities. That's the only way we can ensure that their riskier businesses don't undermine the insured deposits that are the foundation of a stable and healthy economy.



Taxpayer safety-net programs, such as the Federal Deposit Insurance Corporation (FDIC), should be available only to banks in business to provide insured deposits. Financial institutions that provide primarily investment, hedging and speculative services don't deserve protection either by the FDIC's explicit guarantees or by an implicit understanding that taxpayers will bail them out because there is no other alternative. Indeed, this kind of protection is a perversion of capitalism and can distort its good outcomes.



Uncle Joe was not a fan of the FDIC—he said it took his money to subsidize his inefficient competitors. I support the FDIC as a protection for the depositor, but, with a nod to my uncle's wisdom, I believe this safety net should apply only to banks that are allowed to receive FDIC-insured deposits.



There are actually two business cultures in the banking business, and they should be separated. The first focuses on establishing long-term customer relationships, building the communities in which the bank does business, and preserving depositors' liquid assets. Most of America's smaller banks do business this way, and this banking culture needs to be sustained for the sake of local, regional and national economic well being.



The second culture allows, and even encourages, risk taking that threatens the first culture if the two are bound within one institution. Please don't misunderstand: Financial institutions should be free to engage in services that insured-deposit banks can't. But they shouldn't expect taxpayers to bail them out when their risky activities fail.



We need a real and impregnable firewall that keeps one part of the banking system—and the economy—from being consumed when the other goes into flames.



The combination of both banking cultures in a single institution—which had been separated for decades by the Glass-Steagall Act of 1933 until the 1990sbrought us to the doorstep of global financial-system collapse a few years ago. If the nation stays on its current path, we could see another crisis.



We are approaching a state of affairs in which an oligopoly of a few major institutions dominates our entire banking system. There's little evidence those institutions will share the concerns and dedication of my Uncle Joe—and many like-minded bankers in his time and since. If we truly separate the cultures of commercial and investment banking, the clients of both will prosper.



Mr. Frost is chairman emeritus of San Antonio, Texas-based Frost Bank.


Markets Insight
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May 16, 2012 1:39 pm
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Only the IMF can break euro logjam
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By Charles Goodhart




Whether or not Greece has to leave the eurozone, and whether or not a growth compact is added to the fiscal treaty, there is likely to be a further call – or calls – on the International Monetary Fund for help with funding firewalls to protect the eurozone from meltdown. The IMF should take this opportunity to be more robust than it has been in the past in dealing with Europe’s problems.






Before the crisis, the IMF had come to be seen as a pariah by the developing world and as largely irrelevant by the developed world. It has used the second wind accorded to it by the crisis fairly well.




It appears to have learnt lessons from past follies and has made brave efforts to tackle the problems that justify its existence. In the eurozone crisis, for example, its prescriptions for an early restructuring of Greek debt, faster bank reform and a slower pace of austerity have been more sensible than those expounded by the European Commission and the European Central Bank, other members of the “troika” that co-ordinates support for troubled EU economies.



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Unfortunately, the prospect of more money being made available from the IMF’s own resources or in the form of G20 loans channelled through the fund has contributed to complacency in Europe. The presence of the IMF as part of the bailout programmes has given European leaders political cover for continuing to peddle ill-conceived, failing policies, delaying much-needed more sensible solutions to the crisis.


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The IMF’s traditional prescriptions of structural adjustment, quick bank resolution, austerity and adjustment through exchange rates do not work well in the euro area, partly because of the lack of an integrated banking system, so that national banking systems and national sovereigns have become linked in a dance of death, and totally fixed exchange rates.



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The eurozone’s current account (nearly balanced), trade account (mild surplus), overall fiscal deficit (manageable) or indebtedness (moderate), all indicate that its problems are internal, so solutions must necessarily come from within. Without political will in the eurozone, there is little outsiders can do to tackle the euro crisis. Or is there?



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Historically, the IMF played a crucial role in several developing countries by pushing for urgently needed reforms for which the political will could never have been mobilised from within. This is the role it must play in the eurozone.



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An external neutral arbiter such as the IMF can break the logjam. The failure to agree Europe-wide mechanisms for capitalising banks or providing funding guarantees to the banking system made sense for certain member states but was disastrous collectively. The harmful delay in the restructuring of Greek debt and EU leaders’ insistence on self-defeating harsh austerity measures also fall in the same category. The IMF must intervene to save the eurozone from itself.



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The IMF eurozone programme must focus on addressing the worsening problems in Europe. The European Commission, the European Investment Bank and the ECB would be natural counterparts for the IMF providing fiscal, investment and monetary support respectively to facilitate necessary adjustments. Conditionality must then not only apply to countries such as Greece and Spain, but also to France and Germany and to EU institutions such as the ECB. The current asymmetric and incomplete adjustment plan for the eurozone, which focuses solely on the peripheral economies, is self-destructive.



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Under such a strategy, the IMF must insist on allowing the European Stability Mechanism, the crisis fund, to directly inject equity into troubled banks and provide temporary funding guarantees. EIB resources must be doubled to drive an EU-wide infrastructure investment programme and the IMF should force EU countries to co-operate on imposing stringent anti-tax avoidance/evasion measures that will deliver a much-needed boost to revenues. The IMF must also overcome French and German resistance to a deepening of the single market in services. Last but not least, the IMF should demand a clear and credible road map for reforming the functioning of the eurozone.



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Given its historical mandate on exchange rates, the eurozone is the natural counterpart for the IMF, not euro-area member states. Discussion of a single seat for the eurozone on the IMF board also follows this logic.



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A successful eurozone-wide IMF programme would deliver a more symmetric method of restoring competitiveness, an EU-wide approach to stabilising the banking system, a greater focus on restoring aggregate demand, a deepening of the single market and a credible road map for the eurozone.


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IMF, help Europe help itself.



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Charles Goodhart is Professor Emeritus of Banking and Finance at the London School of Economics. This piece was co-authored by Sony Kapoor, Managing Director of the international think tank Re-Define


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Copyright The Financial Times Limited 2012.