Tag: GFC

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S&P 500 target

My target for the current S&P 500 long-term advance has been 3000 for a number of years. The chart below explains the target calculation.

S&P 500 Target CalculationClick here to view a full screen image.

The Dotcom bubble retraced from a peak of 1500 to a low of 800. Readers who are familiar with my method will know that on a short- or medium-term chart I would simply extend the retracement above the previous peak of 1500 (giving a target of 2300) but long-term charts work better on a log scale.

If we extend the distance between peak and trough above the peak on a log scale chart, we get a target of 2800.

If we do the same for the global financial crisis (GFC), we get a target of 3200.

Mid-way between the two is another important target, of 3000, which is double the previous two peaks at 1500.

Of the three targets, I feel that 3000 is the strongest. Not only because it is the middle target and double the previous peaks, but round numbers are important psychological barriers. The Dow, for example, took more than 10 years to break resistance at 1000.

Now some may feel that technical analysis like this has as much significance as reading tea leaves or consulting your astrological charts. But observation shows that market activity tends to cluster around significant levels (e.g. 1500) or numbers and can present formidable barriers to trend progress.

Primary Support

The next question is: if the market reverses at 3000, how far is it likely to retrace? There is no straight answer, but primary reversals normally retrace between 50% and 100% of the previous gain, or between 25% and 50% of the current level.

There are two major support levels evident on the chart:

  1. The 2100 peak from 2015, a 50% retracement (on a log scale) of the preceding advance; and
  2. The 1500 peak from 2000 and from 2007, marking 100% retracement of the previous advance and also a 50% retracement from the current level.

A lot would depend on the severity of the reaction.

“You watch the market — that is, the course of prices as recorded by the tape with one object: to determine the direction. Prices, we know, will move either up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.”

~ Jesse Livermore

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Fed's 2007 Transcripts Show Shift to Alarm | WSJ.com

2007 Fed transcripts show that tremors in the US financial system were initially treated with complacency before shifting to alarm. Janet Yellen, then president of the Federal Reserve Bank of San Francisco, was one of the few who showed an understanding of the magnitude of the growing crisis. JON HILSENRATH and KRISTINA PETERSON at WSJ report:

“I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector,” [Ms. Yellen] said in June 2007. “The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst.”

By December, she was pushing the Fed to respond aggressively. She noted that the financial system’s problems were happening in the “shadow banking system”—that is, not in traditional banks but rather in bond markets and derivatives markets where hedge funds, investment banks and others traded mortgages and other financial instruments. “This sector is all but shut for new business,” she warned.

Read more at Fed's 2007 Transcripts Show Shift to Alarm – WSJ.com.

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The United States Is Not Europe and Texas Ain't France

Extract from remarks by Richard W. Fisher, President of the Dallas Fed, before the Cato Institute:

….Under both Republican and Democratic leadership, we did what was economically sensible. The result was a long-lived expansion. But it ended in tears. Success led to complacency; complacency led to a tolerance and even encouragement of excess. We spent more than we could afford; our government—Republicans and Democrats alike—continued, at an accelerated pace, down the path of promising more in social programs and other spending programs than we could sustain. And on the regulatory front, we turned a collective blind eye to economic malpractice, resulting in the spectacular failure of Enron and culminating with the collapse of megabanks for which even a cursory glance at their balance sheets would have revealed, in the words of one of my colleagues, “nothing on the right was right and nothing on the left was left.”…….

via The United States Is Not Europe and Texas Ain’t France: America as the Thoroughbred Economy – Dallas Fed.

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WSJ big interview with Sheila Bair

Former FDIC chairman Sheila Bair favors breaking up the big banks. She also discusses her differences with Tim Geithner during the GFC and how the Treasury Secretary skewed the banking bailout to favor Citigroup.

Click image to play video

Click image to play video.

Hat tip to Barry Ritholz.

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Silver reverts to mean

Spot silver has reverted to its “mean” — the spot gold price plotted against weekly silver. Reaction to the GFC was far more severe than gold in 2008 as industrial demand for silver slowed. Breakout above $20/ounce in 2010, however, ignited a steep ascent to $50. The inevitable blow-off followed and silver has now reverted to its 2007 ratio to the gold price. However, Newton’s Third Law of Motion — for every action, there is an equal and opposite reaction — has an equivalent in financial markets: if price over-shoots in one direction, the reaction/correction is likely to overshoot in the opposite direction. Expect another test of primary support at $26. Failure of that level would offer a target of $16/ounce*.

Spot Silver Compared to Gold

* Target calculation: 26 – ( 36 – 26 ) = 16

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Too-big-to-fail is here to stay

Lehman Brothers’ collapse in 2008 was intended to intended to teach financial markets that they could not rely on an implicit government guarantee for too-big-to-fail (TBTF) banks. What bondholders learned was the opposite: never again would an institution of that size be allowed to collapse because of the de-stabilizing effect on the entire financial system.

Rescue of Dexia by French, Belgium and Luxembourg governments is the latest example. Bond-holders received 100 cents in the dollar/euro. Markets are just too fragile to consider giving bondholders a haircut. Denmark earlier had to back down from forcing haircuts on bondholders when Danish banks found themselves shut out of funding markets. [WSJ]

Frequent calls for TBTF institutions to be broken up have proved ineffective. Instead the problem has grown even larger with post 2008 rescue/take-overs of Countrywide and Merrill Lynch (BofA), Bear Stearns and WaMu (JPM), Lehman (Barclays), and Wachovia (Wells Fargo) reinforcing Willem Buiters’ survival of the fattest observation.

Proposals to reduce systemic risk through adoption of the Volcker Rule, which would prevent banks form trading for their own account, are proving difficult to implement. The 298-page first draft offers few clear definitions of restricted activities, instead calling for suggestions or feedback.[Bloomberg] Drafters should consider turning the rule around, offering a list of approved activities that banks can pursue, rather than attempting to define what they cannot. I have great respect for banks’ ability to find loopholes in any restrictive list.

The Rule on its own, however, cannot protect taxpayers from future bailouts. It does not prevent banks from over-lending if there is another bubble. There is only one solution: increase capital ratios — and apply similar ratios to securitized assets. Increases would have to be gradual, as some banks could respond by shrinking assets rather than raising capital — which would have a deflationary effect on the economy. Changes would also have to be sensitive to the economic cycle. The easiest way may be to set a long-term target (e.g. 20% Tier 1 + 2 capital by 2030) and leave implementation to the central bank as part of its monetary policy.

Together with the Volcker Rule, increased capital ratios are our best defense against a recurrence of the GFC.

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HEARD ON THE STREET: Life in the New Macro World – WSJ.com

Macro issues such as the solvency of European countries and fears of a global economic slowdown have overshadowed fundamental differences between companies. The consequence is that stocks are moving in tandem, indicating a high degree of correlation.

Based on one-month trailing movements, S&P 500-index stocks have a correlation of 80%, even higher than the 73% peak reached during the crisis in late 2008, says Ana Avramovic of Credit Suisse.

via HEARD ON THE STREET: Life in the New Macro World – WSJ.com.

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