Albert Edwards: Don't Buy This Dip

Albert Edwards is back to discussing the now conventionally accepted schism between the European core and its periphery, which he now sees as having passed the point of no return: "My own view of developments, for what it is worth, is that any ?help? given to Greece merely delays the inevitable break-up of the eurozone." What is more troubling is his insight into the psychology of Europeans, which unlike apathetic Japanese or US citizens, actually know when to say enough, and how to manifest their displeasure: "Unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain. Consigning the PIGS to a prolonged period of deflation is most likely to impose too severe a test on these nations. And the political "consensus" within the PIGS to remain in the eurozone could falter in the face of another of Europe's unfortunate tendencies - the emergence of small extreme parties to take advantage of any unrest. My own view is that there is little "help" that can be offered by the other eurozone nations other than temporary confidence-giving "sticking plasters" before the ultimate denouement: the break-up of the eurozone." We are not sure if the emergency of another Hitler for Gen Z is more concerning than the imminent end of the euro, so we'll leave it at that for now. However, for immediate trading purposes, daytraders may want to take warning in the following A.E. words of caution: "Investors should therefore be far more wary of buying on the dip this time."

From Edwards latest piece, first with a focus on geopolitics:

The recent slide in the equity markets continues to be mainly driven by ‘events’ out of the eurozone. The markets were also disturbed by the introduction of a mining super-tax in Australia and a slide in April’s PMI for China, coming hard on the heels of similar lower readings in India and Brazil. Yet the simple fact is that the equity markets were technically vulnerable to any bad news. We review some of these technical indicators and suggest why this correction may be different from that seen in January.

I am being asked regularly about my views of events in the eurozone and how they will develop. This is too important an issue to duck, so I repeat here my thoughts recently offered in the weekly of 12 February (Note: these are my own thoughts and not the SG House view).

My own view of developments, for what it is worth, is that any ?help? given to Greece merely delays the inevitable break-up of the eurozone. But, for me, the problem is not the size of the government deficits or solvency or otherwise of the governments in  Portugal, Ireland, Greece and Spain (so-called PIGS, but deliberately excluding Italy). The problem is rather that years of inappropriately low interest rates resulted in overheating and rapid inflation in the PIGS, even though rates might well have been appropriate for the eurozone as a whole.

Rapid inflation has led to overvalued bilateral real exchange rates (they do still notionally exist) for the PIGS and in most cases yawning double-digit current account deficits. With most trade done with other eurozone countries, the root problem for the PIGS is lack of competitiveness within the eurozone – an inevitable consequence of the one size fits all interest rate policy. Even if the PIGS governments could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, their lack of competitiveness within the eurozone can only be addressed through years of relative (and probably given the outlook elsewhere, absolute) deflation. Hence the PIGS public sector deficit will inevitably remain large as a direct consequence of this weak growth.

In my opinion this will not be tolerated by the electorates in these countries. Unlike Japan or the US, Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain. Consigning the PIGS to a prolonged period of deflation is most likely to impose too severe a test on these nations. And the political ?"consensus?" within the PIGS to remain in the eurozone could falter in the face of another of Europe?s unfortunate tendencies ? the emergence of small extreme parties to take advantage of any unrest. My own view is that there is little "?help?" that can be offered by the other eurozone nations other than temporary confidence-giving ?"sticking plasters?" before the ultimate denouement: the break-up of the eurozone.

And next on markets:

Much as we like to think that markets are driven by fundamentals, in the short run there is often very little connection. A general medium-term directional move will be punctuated by sharp contra-trend moves. In the case of the current cyclical rally in equities, it has become clear that the markets were very ripe for a correction. Keeping an eye on the technical indicators helps us determine how imminent these moves are. We always look at a variety of technical indicators. One notable event recently was the S&P struggling to get above the key 61.8% Fibonacci resistance (see chart below ? also note the rally failed at the 200-week moving average). And with the weekly MACD oscillators set to go negative, this could signal that a deep correction is unfolding.

We also look at Bull/Bear indicators closely. Recently investors seem to be getting really "?bulled up?", classically a good indication that a correction is imminent (see chart below).

We tend to monitor a couple of very useful websites quite regularly to keep track of what is going on. One is the Market Harmonics website which allows us to view the Bull/Bear ratios shown above, Put/Call ratios and many other tools ? see www.market-harmonics.com.

One of the most stretched technical indicators at the moment is the Put/Call ratio on stocks (again a good contrary indicator). Even within a cyclical bull market where the trend for this ratio is to decline, this looks very, very stretched indeed at present (see chart below).

I also regularly monitor the extremely useful www.indexindicators.com website. This allows us to look closely at various breadth measures on the market as well as put/call ratios. So, for example, the chart below shows that when 90% of stocks in the S&P are above the 50 day moving average a correction is typically imminent (see chart below).

So is this correction a buying opportunity like it was in January? One key difference is that the leading indicators have now topped out quite decisively (as we showed last week -? link). Investors should therefore be far more wary of buying on the dip this time.

Comments

[Crab Cake]

Your not going to do this again are you Toathis?  I want this, I don't want that, I'm scared, blah blah blah.

Nothing is forever, man up. 

Pulp Fiction - Breakfast Interrogation

http://www.youtube.com/watch?v=ru64-1dAbb4

Classic.  I don't mean this the wrong way Toathis, but you remind me of the guy in scared guy in the chair from the scene above.

[GoinFawr]

Spoken like a true sufferer of Stockholm Syndrome.

How much wider do you think our ass cheeks can spread before we get split in two? No offence, but with folks like you grovelling around the banks won't even feel the need to use lube anymore!

I say let's hit the 'reset' button, let's etch-a-sketch this bitch and have a do-over. The 'enemy we know' method obviously isn't working anymore.

Regards

[Fraud-Esq]

Funny. START THE AUDIT NOW.

You see, there's still national security powers. But, an audit law, in place, over the past ten years might have helped end this bubble naturally...a real crash and the normal free market delevring, pain and rebuilding on a reasonable timeline that doesn't protect bankers and politicians.

Pass the audit bill. Do what you can. 

From the letter, signed by Robert Auerbach, James Galbraith and Dean Baker:

Our careers have been tied to the cause of establishing a reasonable, forthcoming dialogue between the Federal Reserve and Congress on monetary topics. At every stage, for 35 years now, the Federal Reserve has resisted.

In 1975, the Fed resisted regular hearings on the conduct of monetary policy. They were nevertheless established, under H. Con. Res 133, and written into the Federal Reserve Act in
1978. Those hearings continue today, and are widely considered a very substantial policy success- so much so that when the legal mandate briefly expired, the hearings continued without one.

Once the hearings were established, the Federal Reserve resisted giving to Congress its economic forecast for the year ahead -- a resistance that was only broken by disciplined questioning at the Banking Committee. Today, that information is considered innocuous.

In the late 1970s, the Fed resisted releasing the policy directive at the end of each FOMC meeting. It preferred the silly practice of waiting until after the following meeting -- even though everyone knew immediately from the movement of the Federal Funds rate what the directive was. Today, the announcement is made immediately, and nobody thinks twice about it.

In the 1980s, the Federal Reserve pretended for years that it was not keeping verbatim minutes of the FOMC meetings. This deception eventually caused major embarrassment. Now the minutes are released after a five-year delay -- and the only consequence is that from time to time the public becomes aware of incompetence or deception that the Federal Reserve would prefer to conceal. An example was in the press earlier this week, as you surely know.

[mtomato2]

Removed

[Arroneous]

The real threat in this whole thing is Germany leaving the EU.  Merkel already hinted at it today.  Aside from that though, the run on banks throughout the PIIGS if talk even begins to heighten about kicking Greece out of the EU would be ridiculous.  Just think Argentina 2002 when they de-pegged.  Initially stated at 1.4 it immediately shot up to 4 crushing the populous and their so-called "wealth".  I find it hard to believe that Portugal, Spain and the like will wait around for the next shoe to drop when they realize their overly rosy gdp projections are worth less that the paper the pesata is going to be printed on.  Going to be an interesting summer. 

[Duuude]

Saw this referencing Argentina...

The financial world has never had ALL baseless currencies before, and never has a country as large as the US been brought down except during a war that exhausted all nations together. The risks are too high just to guess what will happen if we pull lever X instead of lever Y when the end comes. So you pick a country a lot like America. Productive, hardworking, modern, agricultural, having a corrupt, spendthrift political class and an uninvolved, unassuming, spendthrift-but-hardworking middle class—a country the most like America. And you run a little experiment.

http://www.oftwominds.com/blogaug09/KaPoom2CHS.htm

[Turd Ferguson]

I think that all will be well because Henry Blodget and Zxudjcurt Bhuspendratron say so.

http://finance.yahoo.com/tech-ticker/economic-slowdown-ahead-but-no-new-...

[Boston Wealth]

Don't worry when to buy.. just do your own due diligence to find value on stocks using a discounted cash flow analysis as well as earnings growth potential...

Here I have made it easy for you with a tutorial:

http://tinyurl.com/257wper

or watch it here:

http://www.youtube.com/BostonWealth#p/a/u/1/_oIsPxb15ew

[heatbarrier]

May I remind you that Fisher, one of the best economists of all time, lost everything by 1932.  

Discounted cash flow calculations have been used in some form since money was first lent at interest in ancient times. As a method of asset valuation it has often been opposed to accounting book value, which is based on the amount paid for the asset. Following the stock market crash of 1929, discounted cash flow analysis gained popularity as a valuation method for stocks. Irving Fisher in his 1930 book "The Theory of Interest" and John Burr Williams's 1938 text 'The Theory of Investment Value' first formally expressed the DCF method in modern economic terms.

http://en.wikipedia.org/wiki/Discounted_cash_flow

[GoinFawr]

Remember the good old days, before terrorists, terrorism, terrorismo, terror, tarot cards, etc.?

Days where this guy was KING:

http://www.youtube.com/watch?v=83tnWFojtcY&playnext_from=TL&videos=kwORHZFpJ74

[HarryWanger]

For what looked like it could be another blood bath, today turned out pretty well over all. It was pretty clear we wouldn't have back-to-back major sell offs so the morning dip was a pleasant gift to buy.

Today we saw a very good ADP number with revisions to the last two months. This bodes well for what may be a blow out number on Friday. 

Also ISM came in line as well. So the fundamentals were too strong today for any sustainable sell off. I almost forgot, the well was capped on one of the three heads to slow the oil. This is excellent news as well.

[Turd Ferguson]

Sunshine and lollipops for everyone!!!

[Pure Evil]

Don't forget the rainbows.

Sunshine, lollypops, and rainbows for everyone.

No wonder the Greeks keep rioting, who could live without government subsidized sunshine, lollypops and rainbows.

[mikla]

...and rainbows everywhere!

[dying_bear]

You guys are a bunch of panzies.

Lollypops, Rainbows

HUMBUG.

Evil lurks where you least expect it.  

ATTTTTEEEEEEEENTION!  Sargent Dying Bear
calls fourth all able bodied shorties, dollar
bulls, guns & ammo storing, absolutely BAD ASSES
margin up fellas  no friggin' optimist will
be left standing with his latte in one hand
and IPAD in the other.

ZIG HEIL RAHMSTER, ZIG HEIL!  awaiting orders...

[Spastica Rex]

Ohhhh! Yous make mes sooo MAD! Yous are such a rat bastard! My bloods preassure is goings up to the SKY HIGH!

I AM TROLL FOOD

[Simon Jester]

ROTFFLMFAO...

Capt Ramius: You will go with the crew. The officers and I will submerge beneath you and scuttle the ship.

Doctor: You'll receive the order of Lenin
for this, Captain.

[P-K4]

I am thinking "Tower of Babel" is a better analogy and the "euro" is the tower. We are already have the different countries (aka languages), and their mortar was made from inflated standards of living, crooked politicians and debased currency.  

And they were buying a staiway to heaven... oooh, it makes me wonder, if there's a bustle in your hedgerow.

[cougar_w]

Nice

[Seal]

are you saying sell in May and go away?

[LetUsHavePeace]

American citizens may not be nearly as "apathetic" as Tyler fears.  They seem, in fact, to be showing their usual pragmatism by lining up to get as much money from the government as they can while at the same time paying as little in taxes as the law may or may not allow.  Social Security enrollments and requests for benefits at the minimum age continue to expand dramatically, even though the public has been told for several decades now that they will get a better deal if they wait until age 66 and beyond.  Here in our no longer golden state of California personal income tax collections from estimated taxes and withholding continue to decline even as corporate tax payments - the ones where the decisions of individual citizens do not apply - revive.  One can even argue that Americans are sensible enough to realize that any form of a mass demonstration is just another excuse for the government employees to claim overtime and it is far more effective and much cheaper to call your Congressman's office and give the poor receptionist a piece of your mind.  As the people on the Hill will confirm, that indicator of dissent is going parabolic.