November 25th, 2014
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Permabears, Here’s How to Keep Your Cool

by Rick Ackerman on March 23, 2012 2:32 am GMT · 35 comments

[Many who receive my free commentaries each day and who visit the Rick’s Picks forum to share their thoughts are unfamiliar with the forecasts and trading recommendations that only paying subscribers get to see.  I would strongly encourage ‘lurkers’ to try the service free for a week so that they might begin to appreciate the finer and more purposeful advice that lies behind the headlines.  Click here and Webmaster Mike will set you up for next week. Then read the following, a response to a post by ‘Gary L’ suggesting that my permabear bias may be clouding my judgment about trades and investments. RA]

Gary, you haven’t taken the Hidden Pivot course, nor have you followed the detailed trading recommendations that I disseminate each day to paying subscribers, and so your impression of Rick’s Picks is likely to be based on the free commentary published daily at this site. However, and as any one of my subscribers would tell you, I focus obsessively on trading and forecasting strictly by-the-numbers. ‘Bullishness’ and ‘bearishness’ aside, for me and many ‘pivoteers,’ it all comes down to observing uptrending or downtrending impulse legs in different time frames.

This very simple idea guided me unfailingly during a time when I might otherwise have stumbled badly. In the weekly column I wrote for the San Francisco Sunday Examiner years ago, I dissed the dot-com boom as it played out, never deviating from the shrill warning that this remarkable eruption of greed and stupidity would take many investors down with it. The Examiner’s readers must have seen me as Chicken Little (until the crash, that is). However, at that same time, the customized daily forecasts that I was selling to groups of floor traders on the CBOE and PSE made even Merrill Lynch’s analysts look like pessimists. Moreover, Hidden Pivot analysis proved ideal for pinpointing swing highs and lows in the stocks that moved most violently, including JDSU, Qualcomm, Broadcom, AOL and Yahoo.

Some years later, in the summer of 2004, writing about the deflationary juggernaut that I believed (and still believe) will destroy the global financial system, the Dow was trading below 10,000, seemingly in the throes of a multiyear top. And yet, from a purely technical standpoint — the DJIA having created a bullish impulse leg on the daily chart six months earlier — I had to acknowledge that the blue chip average looked like it was developing thrust for a rally of more than 4000 points. That was extremely hard for me to believe, especially since the banking and housing disasters I had been predicting for years had yet to occur. Ultimately, I stuck with the charts and they never steered me wrong.

Even now, with a catastrophic credit collapse still looming and housing prices only halfway to the bottom I’d forecast more than ten years ago, my daily numbers for the broad averages have been finely in-synch with each new upthrust. And although, like every permabear, I have a jones for trying to catch the Mother of All Tops with a perfectly timed short, and for playing chicken with the bullish herd, I continue to attempt these feats — most recently with a 1412.75 short recommendation in the E-Mini S&P — only in ways that would subject subscribers to minimal risk. (In fact, most of these “failed” shorts have made a profit on paper, although the most recent of them looks unlikely to trigger because the so-far high fell a few points shy of my rally target.)

Gary responded by asking, “If you were of the opinion that the economic conditions are ripe for a huge rally this year how different would your calls be? Would you for instance stay away from bearish setups and concentrate on technicals that indicate a possible large move higher?

My reply:

“Most of those who frequent this forum do not share your view that ‘economic conditions are ripe” for a big rally. To the contrary, we believe the economy is so deeply and dreadfully sick that only a financial collapse can set it back on a path to health. I gather that you agree, even if you doubt that the collapse is imminent.

“At a more fundamental level, we apparently disagree over whether ‘the economy’ and the stock market are even connected. If so, it would seem that the relationship is neither rational nor predictable. What seems most obvious, if not to say indisputable, is that stocks have been responding to an unprecedented, global surge in credit money. In point of fact, nearly all of it, including a derivatives market with a notional value estimated at just under a quadrillion dollars, is wholly imagined. It could vanish in an instant — and inevitably will.

“In the meantime, we shouldn’t kid ourselves about the wisdom or value of trading on ‘fundamentals,’ since they are rooted in statistical legerdemain and subject to wildy exaggerated interpretation by Wall Street’s permabullish sales force. Charts, on the other hand, have the singular virtue of reflecting only what is.”

***

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{ 35 comments }

Colman March 23, 2012 at 3:24 am

I do not think we will have a deflationary situation in the end game. The leaders will print money tell the cows come home to head it off.

Rick Ackerman March 24, 2012 at 4:59 pm

Some $17 trillion “printed” already, Colman, with zero effect on a still-deflating housing market.

mario cavolo March 23, 2012 at 4:21 am

I’ll chime in that the “stock market” , while it may have been so in the past, is not today a “leading economic indicator.” Its more like a tool in the hands of the oligarchs. So some would say, oh no they can’t be that influential. Well?…apparently they can. The game that Rick often refers to which is quitely goosing the overnight futures is exactly an example. It doesn’t require trillions to manipulate, it requires such savvy, which includes an understanding of the game, the correlations, the strategy, the timing, to influence the trading patterns and sentiment…insidious stuff!

Cheers, Mario

Jill March 23, 2012 at 5:31 am

I agree, Mario. This is my revised version of the Efficient Market Hypothesis, which now says: The Big Playas trade efficiently, using no more money than necessary in order to goose the markets e.g. by doing it with futures, on low volume, in the middle of the night.

I love revising market theories. My revised Max Pain Theory was well illustrated last week: Max Pain Theory is a theory which wrongly assumes that stocks and indexes will be always be pinned at options expiration, at the prices where option buyers will feel the maximum amount of pain. Au contraire. Quite often, stocks will end up being pinned at the prices which causes the maximum amount of pain to those who trade off of Max Pain Theory.

John Jay March 23, 2012 at 2:21 pm

Mario,
Do you have any news about the “Coup” rumors in China that are popping up as news stories over here?
I agree about the stock market disconnect from the economic reality of the masses. Retail investors are still pulling money out of equities, or so I have read.
It could be some combination of fed up with Wall Street tricks and ten thousand boomers a day retiring to ZIRP bank CDs. The same problem is going to be facing all the State and municipal pension funds.
Ever increasing draw downs as more and more people retire and start collecting checks. Combine that with low returns and it gets interesting.
The present elevated level of the stock and bond market will help them raise cash for a while and meet pension payouts. The actuaries probably know when two line are going cross on a chart and create insolvent pension plans.

redwilldanaher March 23, 2012 at 4:50 pm

Right on Mario. I could add a lot more to back your position but I don’t. I’ve decided that I’ve already wasted enough time this week responding to Gary and Cam’s comments. Look below and you’ll see that Gary still treats the words of Bernanke and Bullard with respect. If that doesn’t prove just how sick the financial world is that we live in that I’m not sure what will..

mario cavolo March 24, 2012 at 10:07 am

JJ…I am purposely giving you an clear but indirect answer avoiding key words regarding your question about the question you asked…

I have confirmed via my friends in BJ , the answer is definitely yes there is some serious tension going on , it is centered around the person in question we have been reading about in other news reports… I would perhaps characterize it as an internal big ass fight…

It is not a subject for any public board that I will participate in, as I live here. Cheers…M

Rich March 23, 2012 at 7:11 am

Big4 are short Dollars, Dow and NDX, long ten year Treasuries…

John Greene March 23, 2012 at 7:37 am

Rick,

I was attracted to your site a couple of years ago because of the subject: gold.
Since I have a “regular” job, I cannot access your web site at any hour of the day or night so originally I did not believe “Ricks Picks” was a good fit for me.

But I continue lurking daily. I’ve stayed for the lean, muscular writing style. I enjoy the personal insights you offer on your past and many aspects of life. I love the humour. And I would still like to take a subscription.

Over the last eighteen months, I’ve tried to contact your customer service about taking a subscription but by making payment by cheque or money order. No answer from them.  I’ve tried to contact them to determine how to prevent autorenrwal should I decide not to continue. Again, no answer. 

I never take a trade without knowing the maximum I could lose. Unfortunately, that does not seem possible here.

I’d still like to join “Ricks Picks.” I”ve no doubt I could gain many benefits even if I’m not available 24/7. But I won’t do so unless I know my full cost going in.

John  

gary leibowitz March 23, 2012 at 3:22 pm

I stated at the beginnin of the year that if we were to have a good year investing in equities the concerns over deflation would be replaced by inflation fears. We have kind of a mixed bag from the Fed today. Ben sees the need for higher houshold spending to fuel growth, while Bullard sees a global inflation threat. I believe we are entering the stage where the fear for over stimulus will take center stage.

As for the disconnect between the economy and stocks, I have found one fundamental measure that has held true, earnings and future expectations. Unless there is a shock to the system, like the implosion of mortgage derivatives, earnings growth or lack of has been a great tool that seems to lead the markets direction.

Is there really a disconnect today? With earnings just being revised upwards in the financial sector and very tame wage growth it seem unlikely we will have a direction reversal anytime soon. While some have dismissed this as some sort of government manipulation it matters not. At the end of the day people and mutual funds base their investment on current and future earnings.

Let me give you some fundamental facts on a specific company that has doubled in the last 12 months. Sales growth of 66 percent, income growth of 85 percent, net profit margin of 25 percent. the current P/E is 17. The forward P/E is 12. Would you consider that overvalued? This happens to be AAPL.

I would agree all this means nothing if say a war broke out, or Spain defaults on its debt. Barring any shock to the system I believe most specifically forward P/E announcements changes is the key.

If anyone has facts or historic data to dispute this claim I am willing to adapt and change my thinking. Like I said, barring any shock to the system a current P/E on the SP500 of 14.5 is no where near a point where we have reached a top. I do not have the figures for forward P/E but i am sure it is lower than 14.

One last point. Investor participation is at a 13 year low. Crashing when most have not joined the party is not a likely scenario.

If we were back in 2011 and I was able to look into the future I would swear these are not my posts. I have never been so bullish in the midst of a debt implosion on the global scale. I believe we are in the “eye of the storm”. I would be very surprised if we have any volatile days ahead this year (over 1.5 % ).

A permabear that has temporary amnesia.

Rich March 23, 2012 at 4:02 pm

“I would be very surprised if we have any volatile days ahead this year (over 1.5 % ). ”

And I would be surprised if we do not:

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm

gary leibowitz March 23, 2012 at 4:30 pm

What is your point?

What were the P/E ratios at the peak of all bull runs?
Have we ever reversed into a protracted bear market with a P/E of under 15?

I believe high P/E ratios and public investment participation went hand in hand. It is most likely high P/E ratios are a result of the “dumb money” frenzy. Without the public coming aboard it is unlikely the ratio gets out of hand.

I will be watching to see if the public gets suckered in. I suspect it will start happening soon.

John Jay March 23, 2012 at 5:21 pm

Gary,
The disconnect between the stock market and the economy is that no matter how good corporate earnings etc. are, that money will never find it’s way to to the bottom 80%. Here is an example. A large trucking/warehouse company out here in Southern California is in trouble with the authorities. They act as a Distribution center for Wal Mart. They are “alleged” to have made warehouse employees sign blank time slips so the boss would not have to pay OT or for any down time between loading trailers. Not paying your employees will certainly help “earnings”.
I am surprised they have been taken to task for this, they must have really gone overboard for the government to step in. A nod, a wink, and a wrist slap will result. If they complained, the employees were told “I have a foot high pile of applications on my desk to choose from.”
That is the disconnect Gary.
The money keeps flowing to the “higher, tighter, righter hands” that George Bush Sr. spoke of.

Rich March 23, 2012 at 5:31 pm

The point Gary is that the earnings yields from cutting costs with layoffs peaked in December.
Now corporations face higher costs with lower sales. Earnings are rolling over with record insider sales despite stock buyback attempts to goose the numbers.
1966, 1969, 1987, 1990, 2007 all saw market crashes with earnings yields around current yields…

&&&&&&&

A breathtaking economic deceleration is imminent, acccording to our friend Doug Behnfield (whose friends David Rosenberg and Van Hoisington evidently agree). Doug is still a bull’s bull on T-Bonds and sees Q1 GDP coming in at 1%, down from an expected 2.7%. RA

Robert March 23, 2012 at 5:44 pm

“I believe high P/E ratios and public investment participation went hand in hand. It is most likely high P/E ratios are a result of the “dumb money” frenzy. Without the public coming aboard it is unlikely the ratio gets out of hand.

I will be watching to see if the public gets suckered in. I suspect it will start happening soon.”

Gary- after your reply to me the other day I put some thought into what P/E ratios really represent, and I can’t see where it has ANYTHING to do with public investor participation, I agree with you that this is a commonly held viewpoint, but P/E ratios are born out of liquidity, and liquidity is being pumped out of the Federal Reserve like a giant firehose. This is distortive of any nominal metric (which P/E absolutely is, since both are measured in nominal dollar terms)

Your entire premise is that the “smart money” is on Wall Street, and the “dumb money” is everyone else.

In the real world, however, the only way to make money on Wall Street these days is via derivative products that use highly advanced calculus and very dangerous leverage.

I agree it requires a high IQ to operate in this arena, but does IQ, combined with capital, really make one representative of the “smart money”…?

I will quote the immortal Albert Einstein:

“Any intelligent fool can make things bigger and more complex”

To borrow one of Rick’s terms- can you see the “pivot” in this analysis?

Complexity requires intelligence to engineer; but it requires even MORE intelligence to recognize that the complexity is unwarranted, unnecessary, and probably detrimental to the health of the system.

THAT is where the smart money is living these days…. not on Wall Street.

The “smart money” are the ones making the “big money” these days:

Sprott.
Bass.
Rogers.

The Dow can go to 20,000 over the next 3 months- The “dumb money” is still not coming back.

Do a simple anaysis of the financial titles listed New York Times and Amazon’s best sellers’ lists and see what the common underlying theme beneath nearly ALL of these titles is. It ain’t “blue chip stocks for the long haul” – That thesis is mortally wounded.

Half of the the “dumb money” is doing what their parents did- sticking their money into government instuments guaranteed to provide them a documented nominal return, while the other half is looking for people and ideas that they TRUST with their money. They are not looking for complex derivative ETF’s and leveraged products guaranteed in writing by the prospectus to decay steadily toward zero over longer periods.

Gary- you and Rick have had a healthy back and forth about how personal bias affects trade and investment decisions…

Have I been successful in demonstrating that “waiting for the public to get suckered in” is nothing but another form of this same type of bias?

At what point do you aboandon your thesis if the “dumb public” stays out?

Or put another way- if the market keeps levitating on suppressed P/E’s, then will you continue to stay long waiting for the dumb money to show up “any minute now…”?

Rich March 23, 2012 at 5:56 pm

Re “I would be very surprised if we have any volatile days ahead this year (over 1.5 % ). ”

Apple just had 9% volatility today:

‘Apple Flash Crash: Stock Halted After Trade Causes 9% Plunge ‘

mario cavolo March 24, 2012 at 10:21 am

Hi Gary…..always interesting debats….

On this point….”One last point. Investor participation is at a 13 year low. Crashing when most have not joined the party is not a likely scenario.”

…I have to chime in suggesting that clearly the structural makeup and game known as the stock market is a completely new animal. I would give the lack of investor participation a very low weight, against for example, the rise of the HFT machines, the ballooning derivatives market, the games occurring at the sovereign bank level, all of which I would give far heavier weight as to what factors are the ones which most greatly impact the markets… Cheers, Mario

Rich March 23, 2012 at 5:37 pm

There are a lot of people trading on the myth the stock market can’t go lower in a Presidential Election year.

Look no further than 2008, 2004, 2000, 1996, 1992:

http://stockcharts.com/freecharts/historical/djia1900.html

gary leibowitz March 23, 2012 at 6:22 pm

TTM P/E ratios show the ratio never was below 20 for all the dates you submitted. P/E 10 is a different matter. There have been instances where the market did peak near the current numbers, but given the fact that forward P/E’a are actually rising, and not falling it is unlikely to fall here.

As for the “dumb money”, in the past they did have a feeding frenzy before the steep drops. I suspect after 3 years of zero interest rates participation will increase.

Will I change my tune this year even if participation remains low? Absolutely. If external events occur, or forward P/E projections get taken down. Other then those 2 situations it is highly unlikely I would change my mind.

The number one reason mutual funds and individuals invest in a stock is because they see hidden value. While P/E ratio’s are not always a good barometer, especially with the high tech sector, it is a good starting point.

I can’t remember one instance, other than 1987, where forward projections on the P/E wasn’t taken down before a deep drop occured. It has always been a warning signs before the market took action. I can’t see why it would be any different. Please note that I excluded shock events (defaults, war, etc…).

I find it kind of funny that I am defending this market as if it should discard the fundamental analysis it does and assume, like you, that we are heading for Armageddon. Markets don’t show too much emotions, and they rarely agonizes over the future. The mechanism that markets use to dissect the future is forward earnings projections. To me that is the signal for future problems. Until they show up I will stick to my 1995 scenario.

If the markets listened to most of you 3 years ago we should have never had the market doubling and P/E ratios would be in single digits because of the fear of the unknown. Markets crunch numbers. Unemotional.

Steve March 24, 2012 at 2:20 am

Gary, the real reason dumb money people invest in the stock market is because the government forces them via 401, and like scams.

Rich March 25, 2012 at 10:22 pm

Dear Gary

In 2008, using the NYU Stern data on the link provided above, the trailing twelve month earnings yield (E/P) was 7.24%, a PE of 13.8. In 2004 the EP was 5.58% with 17.92 PE. In 1996, the 5.49% EP was 18.21 PE. All three were below your crash proof PE of 20 and the market still crashed in an election year.

Forward PEs have been falling since July 2011 according to Standard & Poors, so maybe you will change your mind?:

http://www.standardandpoors.com/indices/articles/en/us/?articleType=XLS&assetID=1245178702929

Wall Street is advertising, blathering on Barrons, Bloomberg, CNBC, WSJ etc and praying for retail accounts to come back so they can liquidate their overpriced inventory like corporate insiders and FB.

After Big Bad Auto Bank Bailouts at taxpayer expense, Congressional Insider Trading, GS and JPM naked short front-running with algobots, Keystone XL, Lehman, 0MFG, Solyndra, a Marxist Totalitarian Executive Branch and Cabinet, do-nothing Congress and hear nothing Supreme Court, and flash crashes without regulatory enforcement, why would they?

Exactly where did I say we are heading for Armageddon?

I have much better hindsight than foresight.

I observe according to PE ratios, dividend yields and other fundamental valuations, the stock market was a bargain most of the 1930s, 1940s and 1950s, but did not return to 1929 prices in real terms until the 1960s.

In fact, my Charts with Hearts on Stockcharts and JubileeProsperity.com were buying in early March 2009: AAPL, CDE, SIRI and XOM among others…

Regards*Rich

John Jay March 23, 2012 at 7:53 pm

Gary,
What you have seen in the stock market is the inflation caused by the Fed creating trillions out of thin air.
Gold, silver, and crude oil spikes are a reflection of that money creation. Main Street sees the inflation in food and gasoline prices. But the Fed doesn’t count that inflation, only wage inflation concerns TPTB.
If the labor market tightens up, out goes the “Help Wanted” signs on the Mexican border, and H1B Visas spike upwards yet again.
Those trillions are given away to the rich and powerful who proceed to get even more rich and powerful.
FHA 3% down loans (or less) are supporting the housing market. The Fed buys Treasuries to support the bond market.
I am not saying you can’t profit from the situation and make money. I am saying is that it is all an illusion, it is not based in reality.

gary leibowitz March 23, 2012 at 8:25 pm

I don’t disagree with most on the premise that the economic imbalance is at one of the widest ever recorded. I am not arguing that there are injustices. I am not even disputing that the path we are on can only result in a purging of some sort.

All I am saying is that for whatever reason earnings are doing well. People investing in say WalMart don’t give a hoot that their hiring practice borders on slave labor wages and benifits and that they displace higher-paid jobs by dominating a community. The market doesn’t care about home owners losing their homes, it cares about earnings and the prospect for even greater earnings.

No matter how you slice it I for one can’t argue that wall street is doing well. If the money flew out of a plane and the re-supply from other planes are in question that still will not prevent the market from taking what it can while it can.

If you are that person floating peacefully in a canoe, who am I to tell you to get out of the water because rapids are dead ahead. The market doesn’t care what people think will happen or why. They evaluate their own environment and when they spot trouble they will exit. I am pretty sure I know what lies ahead but don’t know when they will hit those rapids. You can either stay clear or stay with the market until the rapids are upon them. I choose to stay with the market till indicators tell me otherwise.

John Jay March 23, 2012 at 9:08 pm

Gary,
I think it all hinges on the Fed keeping the Treaury market in fantasy land.
The MIC, 22 million government jobs, $1 trillion in Student Loans, untold trillions in housing prices,
50% of the population on the dole to some extent.
And a trade deficit every year since about 1976 that grows biger all the time. Import cheap labor, manufactured goods and oil.
Export Dollars.
That is the US economy for the most part.
I am amazed each and every day that it all holds together.

gary leibowitz March 23, 2012 at 10:54 pm

Just read an article that fits right into this board’s arguments relaying all the horror and anger over the path this economy is taking.

The author agrees on almost all points that have been brought up. He does however agree with me in that this market should hold up till after the election and possible to the first quarter of next year.

It is afterall about timing. A year off on your bets can mean big losses or gains. Me, I’ll wait till I see the “whites of his eyes” before I reverse course.

Being angry and frustrated that the market isn’t where you think it should be doesn’t mean you should fight the market. It is afterall having a really good 5 month rally of 20 percent. I also like symmetry on my charts. From 2009 on we have a clear 5 wave pattern. Is this 5th wave going to truncate? Maybe. I will go with the “nicer look” where the 5th wave finishes cleanly.

gary leibowitz March 23, 2012 at 10:59 pm
mario cavolo March 26, 2012 at 5:44 am

JJ, it is ONE ZILLION percent the case that they have to somehow keep the Treasury market in low interest rate fantasy; myself and many others have written on this very obvious issue….a genuine tide of rising interest rates is the catalyst to hell and I don’t know a soul who disagrees on that point…

John Jay March 25, 2012 at 4:58 pm

Mario,
Thanks for the 411 on anihC puoC at your 20.
You are not alone, NSA just opened a huge Matrix like filter center in Utah.
I guess I should start calling them MRZ a la HAL in 2001.
Not to mention the SRZ and BHZ!
And, as always, I continue to love Big Brother and Dear Leader!

Rich March 25, 2012 at 10:30 pm

The truth is funnier than fiction JJ…

Jill March 25, 2012 at 10:15 pm

Interesting how everyone can argue over where the market is going in the intermediate term, ’til the cows come home. And every person has quite logical sounding reasons.

Being right is often a lonely activity though.

Jill March 25, 2012 at 10:18 pm

For those wondering about political tensions that could be going on in China, here is what the LA Times said about it, FWIW.

http://articles.latimes.com/2012/mar/22/world/la-fg-china-coup-rumors-20120323

Rich March 25, 2012 at 10:55 pm

To paraphrase Jill’s statement, being profitable can be lonely.

Re Rick’s statement:

“A breathtaking economic deceleration is imminent, according to our friend Doug Behnfield (whose friends David Rosenberg and Van Hoisington evidently agree). Doug is still a bull’s bull on T-Bonds and sees Q1 GDP coming in at 1%, down from an expected 2.7%. RA”

I am inclined to agree with Doug, Rosie and Gary, two of whom used to steer market strategy for the largest firm on Wall Street back when ethics mattered as much as profits.

Gary sees chronic -3% asset deflation, meaning the long T Bond yields 6.314%, which corresponds to 15.8 PE vs 16.02 PE for stocks right now, suggesting stocks are overvalued relative to bonds and silver, which has no counterparty risk.

http://www.forbes.com/sites/investor/2012/01/25/more-juice-left-in-treasurys/

Let’s do some simple math:
If the 3.314% nominal Long T Bond drops to 2.5%, that is a +33% move in bonds.

Of course if Treasuries default, it’s a moot point, the reason I still accumulate silver, having started at a dollar an ounce…

If

Rich March 25, 2012 at 10:57 pm

Some might be interested in VH research:

http://www.hoisingtonmgt.com/hoisington_economic_overview.html

Rich March 25, 2012 at 11:03 pm

In particular, High Debt Leads to Recession:

http://www.hoisingtonmgt.com/pdf/HIM2011Q4NP.pdf

Rich March 25, 2012 at 11:01 pm

As if things are not manic enough in the stock markets, a CA couple offered to trade their $29 M home for pre-IPO FB shares…

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