Wednesday, September 17, 2008

Looking for Changes in Trend

As I post this tonight, our tax-supported government has just bailed out AIG to the tune of $85 billion, on top of the $1 trillion it has dumped down various ratholes since August of last year. These staggering sums are now ho-hum, and I expect a "relief rally" tomorrow because the Federal "rescue" means "all is right with the world now" and "this must be the bottom."
You and I now own 80% of nothing, oops, I mean the broken shards of AIG. Whoopie.
Yesterday's entry had a strong moral/spiritual theme, and I honestly believe that there will be divine retribution for all the lies, all the bailouts, all the squandering of hard-working taxpayers' money on the rescue of tax-cheating multi-millionaires. We will all pay the price for remaining silent or for joining in the completely non-productive greedfest known as the Great Real Estate/Credit Bubble.

By all rights, and I mean on a spiritual level, the U.S. financial system deserves to go to zero--yes, complete bankruptcy of the entire Empire of Lies and Debt. A better system can be built in its place. We as a nation deserve that--if we demand it. Clinging to a rotten, disintegrating life-vest will not save us. We must strike out and swim for a new and better shore.

Other late news: Thanks to correspondent Craig M., we have news that the U.S. government indirectly gave Lehman $138 billion:

"JPMorgan Chase & Co. gave $138 billion this week in Federal Reserve-backed advances to the broker dealer unit of Lehman Brothers Holdings Inc. to settle Lehman trades and keep financial markets stable amid the biggest bankruptcy in history, according to a court filing"

Thanks to John Williams for spotting this Fed involvement in what appeared to be a debtor-in-possession article on Lehman. Needless to say the court documents directly contradict Paulson's public statements about no USG assistance to Lehman.

JPMorgan Gave Lehman $138 Billion After Bankruptcy

One of the few ways we as individuals can better our situation in trying times is to anticipate possible changes in trend. Now before we begin, please read the HUGE GIANT BIG FAT DISCLAIMER posted below. This is not investment advice, just some charts and my commentary based on my own limited knowledge.

Please go to to read the disclaimer and to view the 3 charts.

Longtime correspondent Cheryl A. recently asked me to confirm my primary trend theses, which are:

1. U.S. interest rates have bottomed in a shallow "saucer" formation from 2003 to the present and are set to start rising, very possibly in rapid leaps which will shock the preponderance of pundits expecting essentially permanent low rates.
2. Equities (i.e. stocks) will fall to levels the preponderance of pundits believe are impossible, i.e. 6,000 and then perhaps down to 3,000 or lower.
3. Oil and gold will climb ever higher in a long-term "secular" Bull Market.
4. Oil will fall dramatically in a "head fake" which supports a false confidence that peak Oil is far in the future. On the contrary, supply constraints will reveal the price decline as a "head fake" as oil prices begin a spectacular climb to $300/barrel and up.

Please refer to my new "little book of big ideas" Weblogs & New Media: Marketing in Crisis for more on the fundamental trends which are firmly in place globally. (Only $10.99, such a deal! Only 70 pages long, it's perfect for a few hour break from your usual toil.)

To help with these theses, I asked frequent contributor Harun I. for some charts which he has graciously provided along with some technical comments. Please note that I have trimmed the charts in size and added comments which are my own interpretation.

Let's start with the Dow Jones Industrial Average as a proxy for the U.S. equities markets. Harun selected three charts of the DJIA, showing three different time frames: very long term, intermediate and short-term. (All chart notes are mine.)

Here are Harun's technical analysis comments:

The logarithmic view of long-term charts is important because it reveals percentage movement. It should be apparent that the a move to 15,000-25,000 is not the same as a move from 5000-15,000. The Dow yearly chart with trend line (1900-2008) indicates how far price has deviated from the trend line. So far this has been a down year.

At the primary level price is at the support of the lower Bollinger band and the SE channel. This is an area of critical support. Failure of this support and a strong break below the lower band will bring in shorts in fairly significant numbers. This month the bar is down. Price has been languishing at the Jan. 08 lows. There needs to be strength going into October that overcomes the resistance at the top of the current range. If not, Sept. ends as a down bar with the only likely prospect for October trading is to test the Sept. highs or breakout to the downside.

One technical aspect that argues for a rally is the fact that at lower band support MACD’s major histogram is still in positive territory while the minor is oversold. This is not much but may be enough to entice buyers should lower band support hold. But there are some stiff headwinds.
At the intermediate level one can see the resistance traders will have to overcome to get rally going. This is not impossible but but it will take work, i.e., liquidity to get it going in a serious way. If the manipulation fails it would likely be disastrous.

Stocks may rally in October into November or even the new year and beyond but that would be a cause for concern. It there is a rally watch volume and OI in the futures for indications as to the quality of the rally.

Anything can happen and as you can see there are many variables to consider and I have touched but a few. Thank you, Harun. In other words, despite the catastrophic financial news, the stock market could perversely rally for months, presumably on the false conclusion that "the worst is over, hence the bottom is in."

On the other hand, these charts suggest a couple of flies in that "rally like 1999" ointment:

1. The DJIA could descend to the 6,000 level without breaking its long-term trendline.
2. Critical support of trend channels lies just below current levels at around 10,700. The lower band was tested in the 2002-03 period and it held, setting up a multi-year rally. But that was then and this is now, and it's noteworthy that the major histogram of MACD (the red-line) was kissing the neutral line in 2002 when the price line was still around the middle channel line.
Now we are at roughly the same place in terms of MACD but are dangerously close to the lower support. In other words, if MACD continues down into negative territory, that would suggest a breach of major support, and a trip down to 10,300 or so as a "first stop" on the Bear Market Express.
3. Major tops often reveal themselves in "head and shoulders" formations, and the DJIA sure looks like it's tracing out a complex H&S pattern.
4. The lower channel which was once support is now resistance, (last chart) and rather interestingly, it is approaching the 200-day Moving Average of the DJIA (not shown) around 12,300. This confluence of major support/resistance will offer a massive "line in the sand" which the DJIA will have to breach to move above the 12,000 congestion/resistance.

It doesn't take much of a crystal ball to see the DJIA sinking below 10,700 and touching 10,300 or even lower, then racing back up in a huge "yea, the bottom is in" relief rally that runs up to the 12,300 level and then stalls out, setting up the Bear Market move down to 9,000, then 6,000, then 3,000, etc.

Meanwhile back at Gold Ranch, the yellow metal store of value will be making its move in fits and starts to meet the DJIA at 3,000--i.e. gold at $3,000/ounce.
That is of course pure speculation (double entendre intended). Tomorrow we look at oil.

New essay on leadership by Chris Sullins: First, Do No Harm

Reader Comments

Chuck D.

The last part of today's entry Liar Nation: Finally Reaping What We Have Sown (September 16, 2008) reminded me of the Biblical story of Jesus and the rich man. The rich man came to Jesus asking, "What must I do to be saved, Lord?" When the answer was, "Give away all your possessions and follow me," he left in despair because he could not do it.
While I had never thought of the story this way before, it seems to me that both you and it are saying the same thing. Everyone looks at the story only in terms of the requested action of giving worldly items away (becoming poor) in order to re-focus one's life away from the worldly and temporal.

But perhaps the story is also about something more subtle -- the actions we do and take in order to acquire those things in the first place. The challenge Jesus gives us in this story is not the just the challenge of the giving of things away, but also of refusing to be tempted to acquire them in the first place.

Your entry pretty well describes what happens when we succumb to that temptation. It is the same point that caused Thoreau to go live in the woods and then write Walden.
If this is true, then we probably do stand at the edge of TEOTWAWKI. It's just going to be in a little different form than we expect it will be. But the re-framing of the collective consciousness and assumptions that it will generate won't be pretty while we work through it.

Dave Eriqat
I couldn't agree more!
Over the years I've observed that people are no longer constrained by what's technically legal. It seems the prevailing attitude today is "whatever you can get away with," legal or not. Powerful people are the most inclined to commit illegalities because they know their high priced legal talent can probably get them off. So they commit huge frauds, which underlie much of the rot that's becoming apparent in the financial system today.
These thoughts were the basis for my own essay titled Organized Crime Nation.
But a funny thing. As the dishonor, deceit, and dissembling become palpable all around me, my own resolve to not be like that is strengthened.

U. Doran
Lying in business is called by the UCC, Uniform Commercial Code of laws as, "Fraud in the Inducement of a Contract", and is the only action that is so reprehensible under the law as to carry a penalty of triple damages. Some of the class action boys should start dragging it out soon.
Zeus Y.
Okay, now I'm officially pissed. AIG just got bailed out by the government, not a "quasi-governmental" organization but a purely private organization. They are not even pretending anymore. "Moral hazard, what's that?" This NYT article calls it "the most radical intervention in private business in the central bank's history." A couple of important points to note.
1) This is an insurance company who played fast and loose with its money, and now we are insuring them to the tune of not only loaning them 85 billion dollars but buying an 80% stake in the company.

2) This was not legislatively authorized. It was done by fiat by two Bush appointees from the executive branch and the Fed, Henry Paulson and Ben Bernanke. (How can this even be legal?)
3) The plan to privatize social security seems to be in full swing, except now its being done through the back door. Instead of opening our trillions of dollars in social security benefits directly to Wall Street fraud, waste, and abuse, we'll simply use them as collateral in bailing out companies who have almost nothing but toxic debt on their books. (It's one thing to get stuck buying a lemon, but buying one on purpose to avoid the "ripple effects" of bad financial decision-making?)

4) Smart investors like Jim Rogers of Rogers Holdings who counted on the market actually being free and shorting these companies that deserve to go under and going bullish on commodities, get screwed as well, creating another moral hazard for good and smart investment. (If the fundamentals are screwed don't bet against them, because they will be bailed out, and you'll be caught holding the bag.)

Ahh, enough. I hope you are enjoying your days being right about a lot of this economic voodoo (and I hope you are wrong about Obama not becoming president), but with crap like this deliberately enacted to prevent the consequences of Bush economic policy from affecting the election, I am less than sure. I've re-read a couple of my old e-mails and they were right on to a scary degree.

David V. hurts, as the truth often does. Today's essay should be on the center front page of every newspaper in the world. Thank you, readers--and David, how I wish the entry could be in every newspaper-- free of charge.

New Book Notes: My new "little book of big ideas," Weblogs & New Media: Marketing in Crisis is now available on for $10.99.
"Charles Hugh Smith's Weblogs & New Media: Marketing in Crisis is one of the most important business analyses I have ever read. It is the first to squarely face converging global crises from a business perspective: peak oil, climate change, resource depletion, and the junction of key social cycles will radically alter the business landscape in coming decades...."

Thank you, Robert B. ($50), for your stunningly generous contribution to this site. I am greatly honored by your support and readership.

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