All the bullish factors which have kept stocks aloft the past two sessions are still going at it. Hence, the futures’ snoozefest even as Trump is about to be impeached.
The only potential fly in the ointment remains oil and gas, which have reached an important decision point.
continued for members… (more…)
Inflation drives interest rates. Though the Fed probably wishes it didn’t, it’s an inconvenient truth. There are much tighter correlations, but consider the strong positive correlation between CPI and 10Y notes.
This matters, of course, because with $22 trillion in debt, the US faces the same problem as the ECB and Japan: High interest rates on rising debt levels (the blue bars below) would lead to insolvency. The slight increase in average interest rates (the black line) between 2018 and 2019, for instance, sent interest expense (the red line) soaring.
There are only two ways to keep interest expense from consuming untenable slices of the budget: cut back on spending or bring interest rates back down and keep them down. Since the government isn’t likely to cut spending any time soon, this means focusing on interest rates.
Japan and the ECB have coped with runaway debt by manipulating rates below zero — negative interest rates where you pay the government money to borrow from you. Though not there yet, the US is on the same path, seen most notably lately in the repo market through Not-QE.
The government plays lots of games with inflation. There are many different definitions, some of which include or exclude different expenses such as food, gas prices and rent. Although just as flawed as any, I like good old-fashioned CPI as it includes food and gas prices — things that affect the budget of almost every American and is factored into many important calculations such as cost of living increases.
CPI can be influenced in some very predictable ways, some of which are subject to manipulation such as oil and gas prices. Without harping on geopolitical considerations [see: Coincidences and Consequences] all over again, it’s obvious that the Fed’s effort to keep interest rates low is dependent on keeping inflation under control which, in turn, is dependent on keeping the annual change in gas prices under control. How so?
CPI (which, remember, is a measure of the rate of change in prices) has averaged +1.74% through October 2019, while YoY changes in the price of gas have averaged -6.79%. Months such as January and February, when CPI registered 1.55% and 1.52%, corresponded with the largest YoY drops in gas prices: -13.05% and -10.65%. In April, the only positive YoY change in gas prices (+1.58%) produced the highest CPI measure of the year: 2.0%.
The chart below illustrates the relationship so far in 2019 which simple regression analysis reveals is:
CPI = (0.0263 x YoY change in gas prices) + 0.01918.
In November, the rate of change in gas prices was only -3.16%. All else being equal, this suggests CPI will come in around 1.84% – a modest uptick. However, the first reading in December (unless gas prices fall) would indicate a 9.8% YoY increase in gas prices and a CPI reading of +2.18% or greater.
That, folks, is why the Fed is considering formal changes to the way it evaluates inflation as (not) detailed in the official gobbledygook offered last month. It also explains the various comments made by Fed officials – first suggesting that inflation should target a range rather than a specific level (i.e. 2.0%) and more recently suggesting that inflation should be allowed to “run hot.”
As the Financial Times reported:
The Federal Reserve is considering introducing a rule that would let inflation run above its 2 per cent target, a potentially significant shift in its interest rate policy.
The Fed’s year-long review of its monetary policy tools is due to conclude next year and, according to interviews with current and former policymakers, the central bank is considering a promise that when it misses its inflation target, it will then temporarily raise that target, to make up for lost inflation…
If the Fed adopts this so-called “make-up strategy”, it would mark the biggest shift in how it carries out its interest rate policy since it began to target 2 per cent inflation in 2012.
Most economists would probably suggest that the Fed has been working hard over the years to get inflation up to 2%. I strongly disagree and believe the Fed has used the constant shortfalls as the primary rationale for accommodative monetary policy – the purpose of which is to keep interest rates low and support equity prices.
This latest prevarication is intended to provide cover for the fact that oil and gas prices have been propped up in the lead up to the Aramco IPO. Now that the IPO is in the rear view, we’ll find out whether central banks can really stomach 2.2% CPI or gas prices are about to tumble a good 6-8%.
If the past is any indication, the Fed won’t take a chance on CPI over 2.0% and we’ll see oil and gas prices drop substantially over the next couple of weeks. The White House wouldn’t complain, especially if it helps keep interest rates low.
If I’m wrong, and inflation heads back above 2% (remember, the next tariff is scheduled to arrive on Monday) then we face bigger problems in January (when December CPI is reported.) I’ll post oil and gas price targets below the break.
Meanwhile, it’s Tuesday and futures were off substantially overnight, so of course there’s news on the trade front – particularly in light of the impeachment goings on. S&P futures have spiked 25 points off their overnight lows, but have yet to break out of the falling white channel that leads to a 3.5% correction.
continued for members… (more…)
Today is the 5th session since ES tagged our 3076 target. Four times it has bounced off the bottom of a very orderly, sharply rising channel — which is just what the doctor ordered. Will today be the fifth?
continued for members… (more…)
ES spent 6 1/2 hours yesterday anguishing over the trend line/neckline we discussed. When the Fed minutes came out, it even broke down a bit from the rising channel it had constructed overnight. The breakdown seemed like it was sticking. 
But, just after the close, WTI spiked and VIX dumped. That’s all it took to put ES back into bullish mode, prompting a 21-pt pop which fell apart overnight but is back in place as we approach the open. 
Meanwhile, VIX has constructed a little TL which could break down any minute and boost the algos if they should need help. But, what if it holds? (For the answer, see yesterday’s: This is a Test.)
Should be a very interesting day.
continued for members… (more…)
A reminder: our current membership promotion — which slashes the price of a quarterly subscription from $399 to only $299 — is slated to expire tomorrow, July 23. For details and to sign up now, CLICK HERE.
* * *
BA has just about reached our channel top target from Jul 3. From Algos to VIX:
BA’s [chart] indicates another interim bottom.
It has now bounced over 12% since our Jun 3 bottom call signaled by ES’s 2.24 tag and has nearly reached the top of the new, gentler falling purple channel, now at about 380. It’s an important test for the stock — boosted by a monumental PR and its on-again off-again stock repurchase plan.
Note that the current forecast page has been updated for all major charts including
continued for members… (more…)
First, a confession. In 2004 I sat next to a guy at a Sundance Film Fesitval screening who was very excited about his company that would someday be able to play movies on your computer or even your cell phone. “Why won’t this guy shut up?” I asked myself as I scanned the theater for an empty chair.
The “guy,” of course, was Reed Hastings. At the time, they were barely profitable, having just posted their first net profit ever (a whopping $7 million in 2003.) The stock was hovering around $5/share.
I couldn’t, for the life of me, figure out how they’d ever compete against Blockbuster — which had turned down an offer to acquire the company for $50 million a few years earlier.
The 2004 annual report cover, to the left, illustrated the problem. Why wait for a movie to arrive in the mail when you could run down to the local Blockbuster and grab a copy (along with some tasty Goobers) right now?
Reed was obviously on to something and soon figured out online delivery — though he still hasn’t cracked the eGoober challenge. A $10,000 investment in the common at that time would be worth around $1 million now. Live and learn, right?
* * *
The stock is under pressure this morning as subscriber growth fell short of Street expectations and the company’s guidance. But, I’ll leave that to my fundamental brethren to suss out. My concern is that the stock will test critical support.
Last year we took a look at the chart and noted that at 400.48, it looked particularly vulnerable. From Netflix: Watch It! on July 16, 2018:
A quick glance at NFLX’s daily chart shows it has significant downside potential. The most obvious downside target is the 100-DMA at 338.73. But, the 200-DMA is approaching the white channel midline and should cross it at around 298-300 on or about August 6. It makes for a nice downside target if the SMA100 doesn’t hold. Should the SMA200 and channel midline fail, the bottom of the white channel is currently around 200 and (obviously) rising.
The stock soon tested then failed at the 100-DMA, but bounced just before reaching the midline and popped out of the falling white channel. It thus postponed the midline/200-DMA test until October 11 where it bounced yet again before plunging through to the channel bottom which, by then, was up to 230.
There are a lot of things that could happen to the stock, which has traded as low as 313 in after-hours. But, the critical level to watch is 295-300 where it would drop through the 200-DMA and test the channel bottom as well as backtest the broadening wedge (aka megaphone pattern.)
Anything lower would be very problematic for a stock which has been locked in the same rising channel for 6 1/2 years.
One note to those focused on the fundamentals. The observations I made last year still apply:
As an aside… I’ve been mystified as to the value ascribed to the company based on its ability to produce original content. What about the risk? Anyone who has worked in film or television can tell you that most productions don’t turn a profit.
I don’t want to get into production. There are passionate, talented filmmakers out there and I would pollute the craft.
Reed Hastings, Inc Magazine: Dec 1, 2005
Netflix has clearly hit some home runs with House of Cards, Stranger Things, etc. And, theoretically, producing content in-house can lower acquisition cost and diversify revenues.
But, extrapolating an unending string of popular and profitable productions is just plain silly. Some would say borrowing $1.8 billion to fund said productions is downright reckless.
Think New Line, which followed up the hugely successful Lord of the Rings trilogy with the expensive flop The Golden Compass. Investors would do well to remember that beta works in both directions.
* * *
It’s been ages since we offered a discount on memberships. For the next several days, quarterly subscriptions – normally $399 – will be discounted to only $299 for the first quarter. That’s 3 months for less than the price of two on a monthly subscription.
Click here to join now.
Update for members… (more…)
There’s a lovely English figure of speech which suggests the ridiculousness of something happening: “when pigs fly.” In German, the same sentiment can be expressed by the expression “ich glaub mein Schwein pfeift” which means “I believe my pig whistles.” DB is surely trying, but it’s having a hell of a time whistling a happy tune.
We last visited the stock on March 13 [see: When Push Comes to Shove] when it was threatening to break out of a small consolidating triangle after breaking down below our previous short signal at 11. From the Mar 13 post:
A breakdown from a falling channel is incredibly bearish, but a move back above the bottom of the falling channel (around 9.50) would be net positive. To get there, it will need to break above the red TL and will then face its SMA200, now at 10.32.
A long position with very tight stops would make sense for those willing to roll the dice. However, if it can’t retake the channel bottom, then it remains a dead bank walking and a good short.
Obviously, shorting it in the hopes that the ECB lets it fail would entail some risk. No doubt the ECB is trying to figure out a way to restructure it in such a way that it’ll survive and, ideally, not take the rest of the world down with it. Until then, I think it’ll remain on life support.
As it turned out, the triangle broke down and not up. The stock spent 6 weeks being propped up around $8/share before finally breaking down again and shedding 28% in a nifty little falling channel.
* * *
Deutsche Bank has been a terrific source of trading ideas which have paid off nicely
over the years. While the stock has lost 32% since our initial forecast in Sep 2016, our
long and short trade ideas have totaled 237%. CLICK HERE for forecasts and results.
* * *
It finally bottomed at 6.49 in June and bounced back up above 8 where it collided with overhead resistance and is currently backing off in the wake of the latest restructuring news.
Make no mistake about it, DB is in a world of hurt. Given that it’s the 15th largest bank in the world with over $40 trillion in derivatives, its demise could devastate the financial system. Can this pig whistle? If so, is it just whistling past the graveyard?
continued for members… (more…)
Things are playing out as expected, with ES coming within 5 points of our next downside target (the SMA200) overnight.
The chart receiving the most attention is the 10Y, which broke below 22.94 and is on its way to our 21.72 target.
The one which should be receiving the most attention is SPX, which closed below its H&S Pattern neckline — adding credence to our lower targets.
Though it seems like more, 2776 will represent a 5.5% drop since our short signal at 2940 on Apr 30 [see: FOMC – Endgame.] Things will get really exciting if/when SPX fails to bounce.
continued for members… (more…)
It’s now been five days since futures bounced out of the falling white channel. It still seems fairly likely it was just a delaying tactic, as various currency pairs, commodities and indices are sliding toward our next targets.
continued for members… (more…)
SPX needed about 22 points downside to reach the support of its SMA50, a rising channel bottom, and a falling channel bottom. ES, which finally reached our 2655 target from last week [see FOMC: Endgame] is currently off 30 points.
At this rate, SPX will breach its support on the open, especially if USDJPY doesn’t bounce here at its new lows.
Is it time for bulls to get nervous?
continued for members… (more…)
