Federal Reserve Loses $66 Billion; Volatility Meets Fibonacci Sequence As Sucker Rally Extends

Here's a fun headline:

Fed piles up $66 billion in debt.

Now, since the Federal Reserve System has been known to conjure up money out of thin air, how can they incur losses, and, if they somehow manage that feat of economic alchemy, do they even matter. The author of the article says no, but the reality is that our fiat money system - and, with it hose of the rest of the world - are fantasies. The money created is all debt. Nothing but debt. Most of it is incurred when the US treasury - or the treasury of some other nation - issues a bond. It's debt, and it's bought by the Fed or one of their agents, and, viola! instant money is created.

Most of government-issued debt is never paid off, which is why the United States has a $21 trillion - and growing - debt. Some of it is owed to other countries, some to private investors (like the Fed), and some of it is owed elsewhere.

Getting back to the Fed and their debt, how they managed to get into debt themselves is pretty simple. They bought a ton of near-worthless paper called Mortgage Backed Securities (MBS) back in the halcyon days of sub-prime lending (2006-2011), and that paper is worth today, as some of it is maturing, worth less than what they paid. They did so to bail out their friends, the big banks, and now the piper is being paid. This will continue for some time, as theses MBS mature at different times. Like most mortgages, some won't mature for 30 years, so think 2036-2041 before they're all exhausted, though some will mature well before those dates.

The Fed wants to shrink its balance sheet, so this is how they're doing it, retiring debt. Do they care? Not particularly. To them, gains and losses are ledger entires and nothing more. They exist in a parallel universe from the rest of us who can't just roll over our debts indefinitely. The Fed will outlast all of us, and they know it.

As far as the impact this will have on the economy and markets and currencies, it's likely not good, but it isn't something to lose sleep over either. The Fed's money machine is massive and they'll just print more if they run into problems. However, for the rest of us, that may be inflationary, though that wasn't a huge issue all the time they were engaged in QE, printing to their heart's content to save the world from economic ruin.

As long as everyone keeps using their money, it's fine. If other countries shy away from the glorious dollar - something that some countries already are doing - it could get a bit rough in the international trade venues. Until very many people, businesses, and nations lose faith in the almighty greenback, we're all good, however. But the Fed will still be losing money for the foreseeable future. Nothing to worry about. They can - and will - make more.

As far as the stock markets are concerned, today was day two of the Mother of all Sucker Rallies which was presented yesterday. Stocks were once again bid higher, with the Dow up more than 450 points. Once again, the afternoon was telling, as sellers took control, leaving the Dow and other indices with reasonable gains.

With the rally ongoing, it might be instructive to concern ourselves with Fibonacci levels, as detailed below.

Fibonacci numbers are often used in technical analysis to determine support and resistance levels for stock price movement. Analysts find the two most extreme points (peak and trough) on a stock chart and divide by the Fibonacci ratios of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 100 percent.

Using Fibonacci numbers to exploit the current rally - using intra-day numbers on the Dow - maths out like this:

December 3 high: 25,980.21
December 10 low: 23,881.37

Difference: -2,098.84

First resistance (23.6%): 495.33 points = 24,376.70 (Dow closed at 24,370.24 on Tuesday, December 11; Close enough!)
Second resistance (38.2%): 801.76 points = 24,683.13 (the Dow exceeded this level today, but pulled back below it at the close. Watch for direction on Thursday.
Third resistance (50%): 1,049.42 = 24,930.79
Fourth resistance (61.8%): 1,297.08 = 25,178.45 (this is usually the key, where resistance is very high and a pullback can be expected. If the Dow powers through this level, expect it to go all the way back to where it started, i.e., 25,980.21 (100% retracement).

This should give a signal of when the current sucker rally is about to expire. After that, the resistance points will become support, and if the Dow plummets through them, get ready for another round of massive losing days.

Happy Holidays.

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51
12/10/18	24,423.26	+34.31	-1115.20
12/11/18	24,370.24	-53.02	-1168.22
12/12/18	24,527.27	+157.03	-1011.19

At the Close, Wednesday, December 12, 2018:
Dow Jones Industrial Average: 24,527.27, +157.03 (+0.64%)
NASDAQ: 7,098.31, +66.48 (+0.95%)
S&P 500: 2,651.07, +14.29 (+0.54%)
NYSE Composite: 11,943.29, +82.64 (+0.70%)

The Mother Of All Sucker Rallies

The Miracle Monday Rally has been encored by a follow-up, Terrific Tuesday, which pushed stocks further into a positive realm, though despite Herculean efforts, it didn't end that way.

Making the high of the day just minutes into the session, the Dow was up more than 350 points. Apparently thinking their work was done for the day, whoever was hitting the BUY button went out for coffee, a stroll, and lunch, because the Dow spent the next four-and-a-half hours leaking lower, to a point at which it was 200 points down by 2:00 pm ET.

Back at the controls, the clandestine clerk for the Federal Reserve got back to bidding up stocks, sending the Dow - and with it the rest of the indices - back into the green zone over the next hour.

The entire convulsion involved some seriously heavy lifting and an equally resolute effort by the sellers. From the low point on Monday to the early Tuesday high, the Dow rocketed 910 points, but then came back down another 570 before rocketing higher by 300 points. In the end it was all for naught, with the Dow losing 53 points by the closing bell.

Boo-hoo-hoo. It may be Christmas, but January's 401k statements are likely to be carrying a load of coal.

Whatever unnatural force is preventing a complete crash, it has friends in far-away places. All other indices around the world were sucked into the mother of all sucker rallies on Tuesday, saving the world from a long-overdue asset re-pricing that will, as sure as the sun rises in the East, continue to wreak havoc on the investing universe for the foreseeable - and equally, the unforeseen - future.

Bah, humbug.

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51
12/10/18	24,423.26	+34.31	-1115.20
12/11/18	24,370.24	-53.02	-1168.22

At the Close, Tuesday, December 11, 2018:
Dow Jones Industrial Average: 24,370.24, -53.02 (-0.22%)
NASDAQ: 7,031.83, +11.31 (+0.16%)
S&P 500: 2,636.78, -0.94 (-0.04%)
NYSE Composite: 11,860.65, -28.64 (-0.24%)

Seas of Red Ink; Global Collapse In Asset Pricing Underway; US Markets In Denial

Was Apple (AAPL), Amazon (AMZN), or Microsoft (MSFT) ever worth a trillion dollars?

All were, for a while, supposedly worth that high until the market considered the madness of such lofty valuations. Then, they were probably not.

A little quickie math is appropriate. For a company to be worth a trillion dollars, in rough terms, it would have to make a profit of $143 off every person on the planet (we're using 7 billion as an estimate) in a calendar year. Figuring a 15-year capitalization period, it's possible.

However, with the global median individual annual income at about $3000, it's unlikely. And for three companies to be worth that would mean every person on the planet, including babies and the elderly in nursing homes or hospices, would have to spend enough so that combined, Apple, Amazon, and Microsoft would net a profit of $429. So, for three companies to have that kind of valuation simultaneously is something right out of science fiction, because these people would have to spend about $2000 (figuring a rough profit margin of 20%) on products from just those three companies. Were this to happen, a third of the planet would die off because they spent most of their money on smartphones, software and trinkets from Amazon (with much lower profit margins, BYW), instead of food.

And what about all the other companies on the planet? From the corner store to multi-national corporations like General Motors, Nestle, Samsung, etc.? How much money do they extract from every person in the world with these three biggies crowding out everybody else? It simply doesn't add up.

That's why asset prices are collapsing. Companies, or rather, the stock prices representing shares of these companies are not worth what they're selling for, the big money knows it, and they're selling their shares to people less informed or desperate to make their investments pay off in the global rat race.

Let's face facts. US Stocks have more than tripled in value over the past 10 years. That doesn't make any sense. Were Americans suddenly three times as wealthy as they were 10 years ago? No. No. And Hell No.

Today, as stock prices tumbled around the world, US markets barely suffered a scraped knee and a paper cut. The NIKKEI was down 459 points, or, 2.12%. Japan's economy shrank by 2.5% in the third quarter.

Stock markets in Australia, New Zealand, Hong Kong, India, China, Indonesia, South Korea, Germany, France, England, Belgium, Italy, Greece, Spain, Brazil, Argentina, Mexico, and Canada were all down between one and two-and-a-half percent, again, after weeks of declines. Many of these indices are in correction. Germany, South Korea, China, Japan, and others are in bear markets, down more than 20%. That's just a sampling. But the US carries on, though the Dow is less than 325 points away from correction territory. All the other US indices are in correction, down more than 10%.

Dow Industrials were down more than 500 points in the morning, but finished, magically (same as last Thursday) well off the lows, in fact, with a small gain. Magic! Denial! HFT Algorithms! Programmed Trading! Central Bank Intervention! It's only temporary.

US stocks have performed better than the rest of the world, so far, but they are trending in the same direction - lower. Brokers and dealers on Wall Street are living in a La-la Land that would put Hollywood to shame. Many in the financial sphere are in deep denial. They don't believe the US economy can contract, that stocks can be re-priced lower, down 20, 30 or 40 percent or more. It has happened in the past, many times, and it will happen again. It is happening right now.

But, but, but, we can't have a stock market crash during the Christmas season, can we? Maybe stocks will not exactly crash this month, but the performance has been - on a day-to-day basis - underwhelming. Winter is coming (Dec. 20).

According to Dow Theory, the Dow Jones Transportation Index confirmed the primary trend change - from bullish to bearish - that the Dow Jones Industrial Average signaled on November 23. That's the second time this year Dow Theory confirmed a primary trend change. The last was through March (Industrials signaled) and April (Transports confirmed), but stocks bounced back quickly through the spring and summer. By autumn, the bloom was off the rose, however, and the false rally began to unwind, and it continues to unwind.

And, with that, today's musical selection, "Turn, Turn, Turn," released October 1, 1965, written by Pete Seeger, performed by the Byrds.



Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51
12/10/18	24,423.26	+34.31	-1115.20

At the Close, Monday, December 10, 2018:
Dow Jones Industrial Average: 24,423.26, +34.31 (+0.14%)
NASDAQ: 7,020.52, +51.27 (+0.74%)
S&P 500: 2,637.72, +4.64 (+0.18%)
NYSE Composite: 11,889.29, -52.64 (-0.44%)

WEEKEND WRAP: The Week The Wheels Fell Off

Was this the week that everything fell completely apart?

The answer is a matter of perspective and speculation, but it sure looked pretty bad. Stocks, with no significant deviation between the Dow, NASDAQ, NYSE Composite, and S&P 500 companies took a major hit, or, rather, a series of heavy blows. Stocks were bludgeoned with regularity, flogged within an inch of their lives, only to be flayed again the following day without respect to any particular sector or class.

Monday was the only positive day of the week, with all the major indices closing nicely in the green. Tuesday was a nightmare, with the Dow dropping nearly 800 points and the other indices dragged down the same abyss. By virtue of the death of former president George H.W. Bush, current president, Donald J. Trump issued an executive order, closing all federal offices for a day of mourning, thus shutting down not just mail service and other government functions, but the financial markets as well.

After the surprise day off, traders got right back to selling again, whacking away with the same ferocity as on Tuesday, but, by mid-afternoon, a suspicious rally emerged, sending the S&P and NASDAQ into positive territory by the close, leaving the Dow with a minor loss of 79 points after it had been down more than 700 during the session. As many expected, the lift late Thursday was either short-term short covering or some button-pushing by the PPT (President's Working Group on Financial Markets... remember them?), setting up Friday for a major collapse of another 558 points on the Dow with the other indices following the lead lower.

What actually was behind the carnage was difficult to discern, as a convergence of events helped shape the worrying. Wrapping up the G20 meeting in Buenos Aires on Sunday, President Trump and China's president, Xi Jinping, announced a 90-day calling off period on new tariffs that were supposed to go into effect and increasing the percentages on others already in force on January 1. Those changes were postponed until March 31, with the intent of the two leaders to work out a framework for trade policy going forward. Markets were obviously pleased on Monday, but by Tuesday felt that a mere 90 days would not be enough to develop long-term policy for either nation.

Politics also is playing a role in the background, as Special Counsel Mueller's bogus "Russia collusion" investigation drags onward with the expectation that a final report will is forthcoming in the very near term. The corrosive political climate in Washington is not only a worry for those involved or tangentially aligned, but it's also having a somewhat chilling effect on investments. Nobody likes uncertainty, but especially so, Wall Street, and when it involves the highest levels of the federal government, the fear gauge goes bonkers and skepticism reigns.

On top of that, there's still a general perception that stocks are not just fully valued, but some are significantly overvalued. More than a few analysts have maintained that the effects of the Trump tax cuts are wearing thin, the federal government is running enormous deficits and a profits squeeze will be apparent by the end of the first or second quarter of 2019.

A minor inversion of the treasury yield curve occurred - almost without notice - on Monday, when the yield on the three-year bill rose above that of the 5-year note. On Tuesday, the 2-year joined in, and both the 2-and-3-year yields ended the week above that of the five. The 2-year closed out Friday at 2.72%, the 3-year the same, and the five-year at 2.70%. The 10-year note was last seen with a yield of 2.85%, and the 30-year down to 3.14%. Bond vigilantes were out in force, and the flight from stocks sent both short and longer-dated bonds soaring. While not quite the textbook inversion of the 2s-10s that have preceded every recession since 1955, the indications are not at all rosy.

Finally, on Friday, November's non-farm payroll data came in woefully short, with expectations of 198,000 jobs met with the reality of just 155,000 new jobs for the month.

The short explanation is that the bull market is getting awfully long in the tooth, the economy is set to slow down a bit in 2019, and the big money on Wall Street is heading for the hills, i.e., bonds and cash or cash equivalents. Dow Theory is about to signal a bear market. The Dow has already sent the signal with its close at 24,285.95 on November 23. Confirmation will come if the Dow Transports close below 9,896.11. It closed Friday at 9,951.16.

With the Fed's FOMC meeting scheduled for December 18-19, and the widely-accepted view is that the Fed will raise the federal funds rate another 25 basis points, there's more than one good reason to be getting out of stocks and those in the know - or at least those who think they know - have been scurrying like rats off a sinking ship.

With the S&P now in correction and the NASDAQ, NYSE composite and Dow Transports already having been there, only the Dow remains above the magic mark of -10 percent. All the major indices show losses for the year and the Dow is just a few hundred points from correction.

Elsewhere on the planet, the number of countries in which their stock markets are already down more than 10 percent continued to grow, with Germany's DAX just a shade above bear market status. That's a huge issue, since Germany is Europe's strongest economy. Given the angst over Brexit, the unwinding of the ECBs massive balance sheet, and Japan's upcoming announcement about the end of QE measures, the focus could easily be on Europe, as it will almost certainly be headed for a recession in 2019. Since Japan's been in something of a recessionary decline for the past 25 years, any slowing of growth on the island nation will barely elicit more than a yawn.

If Europe is about to fall over, the US will almost certainly follow. So much for Making America Great Again (MAGA). The disassembly of the globalist power structure, the rise of populism (marches and violent riots in France) and a global economy on its knees after 10 years of fake stimulus may all be leading to a recession that will have long-lasting and severe consequences.

So, yes, this was the week the wheels fell off.

Here's how the Traveling Wilbury's see it, with the cheery "End of the Line."



Happy Holidays!

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79
12/7/18	24,388.95	-558.72	-1149.51

At the Close, Friday, December 7, 2018:
Dow Jones Industrial Average: 24,388.95, -558.72 (-2.24%)
NASDAQ: 6,969.25, -219.01 (-3.05%)
S&P 500: 2,633.08, -62.87 (-2.33%)
NYSE Composite: 11,941.93, -202.48 (-1.67%)

For the Week:
Dow: -1149.51 (-4.50%)
NASDAQ: -361.28 (-4.93%)
S&P 500: -127.09 (-4.60%)
NYSE Composite: -515.62 (-4.14%)

PPT To The Rescue, But For What Purpose?

Prepare for lower lows and lower highs.

It's long been maintained that central banks and/or governments should intervene in capital markets to keep people from panicking. That can also be read as "whenever stocks go down too much, too fast, we're here to protect our friends' investments."

For context, the Dow Jones Industrial Average was down more than 700 points today. It rallied to close with a minor loss. One problem. All other major stock indices around the world closed down between two and three-and-a-half percent. America is great, but not so great that it can avoid a global slowdown. Nefarious forces behind the scenes - much like the man behind the curtain in the Wizard of Oz - averted a major selloff. Globalism is ending, and with it, many multi-national stocks are going to be badly damaged.

That's what today's miracle late-day rally was all about, because if stocks lose value, the system falls apart. It's really that simple. For context, figure this: corporate buybacks have been at record levels the past three years. Corporations have been buying their own stock at a frenetic pace, at the highest prices. If stocks fall, these companies will be sitting on mountains of their own stock which they bought at ridiculously-high prices. When they are forced to sell to raise capital, they will be losing money on investments in their own companies.

It's not just stupid, it's corrupt to the core, and that, friends, is why stocks can't go down.

But they will.

For a little more context, consider that according to Dow Theory, the primary trend has changed again from bull to bear. More on this in a later post.

Caveat Emptor.

Dow Jones Industrial Average December Scorecard:

Date	Close	Gain/Loss	Cum. G/L
12/3/18	25,826.43	+287.97	+287.97
12/4/18	25,027.07	-799.36	-511.39
12/6/18	24,947.67	-79.40	-590.79

At the Close, Thursday, December 6, 2018:
Dow Jones Industrial Average: 24,947.67, -79.40 (-0.32%)
NASDAQ: 7,188.26, +29.83 (+0.42%)
S&P 500: 2,695.95, -4.11 (-0.15%)
NYSE Composite: 12,144.41, -77.57 (-0.63%)