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     colin_twiggs
Member
Username: colin_twiggs
Post Number: 3058
Registered: 09-2002Rating: N/A
Votes: 0
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| | Friday, November 23, 2007 - 10:06 am: |  
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Mail received concerning Thursday's Recession Warning newsletter:
Colin, I call BS on your latest email. I don't believe your statement: "whenever the yield spread (maroon line) falls to zero, a recession follows." There have only been two official recessions since 1981 in the United States, and it took Gulf War I, the dot.com tech stock bubble, and 9/11 to cause these two recessions. History has shown that it takes extraordinary events to throw the US into an actual recession with two consecutive quarters of negative growth. The liberal media is working overtime to talk our economy into recession, and the last thing we need is objective people like you throwing out unsubstantiated statements about our economy. If you're going to make a statement like that, then show us all the data you used to reach that conclusion. If you're right, then there should only be two occasions when the yield spread fell to zero since 1981. OK, I'm waiting for you to show us your data. Good luck with that, J.W.
Thank you for writing, I enjoy a good debate on issues like this. The data I use is obtained from the Federal Reserve and is presented in the chart below:
You will note that each NBER certified recession in the last 45 years is preceded by the [maroon line] yield differential (10-year minus 3-month treasury yields) falling to zero. This squeezes bank interest margins causing a tightening of credit and a consequent slow-down of consumer spending and new investment -- which drags the economy into a recession.
The banks thought that they had found away around this: lending on narrow margins and then on-selling the loans into off-balance sheet SIVs in order to avoid the reserve requirements. All this achieved was to postpone the inevitable -- lending on narrow margins is and always shall be bad banking practice, no matter what clever structures are developed to hide this from investors/regulators. What the banks actually achieved was to leverage the problem and allow it to fester into a far bigger crisis than the original threat.
Regarding your points:
- The US economy is able to withstand one-off shocks like 9/11 and Hurricane Katrina. The 2001 recession started in March of 2001 according to the NBER - well before 9/11.
- Wars can create uncertainty and push the economy into a recession if they are seen as a serious threat to the country as in WW1 and WW2, but smaller conflicts have more of a stimulatory effect due to increased defense spending. Edward Leamer, professor of economics at UCLA, points out that defense spending on the Korean War rescued the economy from recession in 1951 and the Vietnam War performed a similar service in 1967. These are the only two times since 1946 that a housing collapse has not led to a full-blown recession. There is similarly no evidence to suggest that the Gulf War caused the recession in 1991.
- Slow-down in software investment after Y2K certainly contributed to the recession in 2001, but this on its own would not have caused a recession: the contagion has to spread to the broader economy. And the most effective vector for spreading infection is the banking system, where a $1 reduction in reserves has a $10 impact on bank lending (and consequently on spending).
What we are witnessing is serious and protracted mis-management of the US economy, where interference with the market-related interest rates has caused a series of consecutive shocks; each shock of greater magnitude than the last -- and requiring a more severe response. The last three recessions have each required more drastic action from the Fed, with lower interest rates than the preceding cycle. The Fed had to lower interest rates to 40 year lows in order to stimulate the last recovery. This is a self-reinforcing cycle, with each wave bigger than the last; so where do we go to from here? The longer we try to postpone the inevitable, the worse it will become.
There are some very clever people running the Fed, but there are also clever people running Citigroup and Merrill Lynch. The problem with clever people is that they are prone to over-estimating their own ability.
The market is more powerful than any individual or organization and if you try to force it away from its natural equilibrium, opposing pressure will gradually build until it becomes an irresistible force.
Regards, Colin
(Message edited by colin_twiggs on November 24, 2007)
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holycow
Member
Username: holycow
Post Number: 3466
Registered: 08-2004
Rating: N/A
Votes: 0
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| | Friday, November 23, 2007 - 11:12 am: |
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Colin,
I have attached the latest cpi numbers for your reference. You can get the whole thingy here: http://www.bls.gov/news.release/cpi.nr0.htm
The point I am trying to make is this - "official" numbers are tricky stuffs. So if you are going to debate an "official recession", I think, it is going to be a very long winded and probably a useless exercise.
In general, I believe the on going credit crunch, the dramatic and drastic decline of the US$ and the unprecedented high oil price are "extraordinary(enough) events" that will provide the impetus for a recession. But whether we will ever see an official acknowledgement is another matter.
Cheers.
a very "lame" inflation if we exclude both energy and food, but we know how "inflated" their prices are!
HC
... hopelessly addicted to charts!
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tbreak
Member
Username: tbreak
Post Number: 130
Registered: 06-2004Rating: N/A
Votes: 0
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| | Friday, November 23, 2007 - 02:41 pm: |
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There might be a rabbit in the hat yet TA wise 
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saved
Member
Username: saved
Post Number: 1
Registered: 11-2007Rating: N/A
Votes: 0
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| | Tuesday, November 27, 2007 - 01:17 pm: |
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Colin,
What do you mean by "crash". I can see a major correction coming! Do you think it could have a quick knee jerk reaction, then back down? Reason I ask is a lot of companies have good balance sheets " cash to ride out a storm" and a lot people are in cash right now, being out stocks and bonds all together. I know my stock accounts are virtually cash minus my short term TA trades. Looking for input on how this could all play out. Got to admit I have been following your news letter for about 8 months, and I'm totally blow away how accurate you have been.
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colin_twiggs
Member
Username: colin_twiggs
Post Number: 3059
Registered: 09-2002Rating: N/A
Votes: 0
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| | Wednesday, November 28, 2007 - 10:10 am: |
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Saved, By "Crash" I mean a bear market.
Arguments for this include:
- A negative yield curve in 2006/2007
- the Fed making cuts to the fed funds rate
- the full impact of the subprime crisis has not been felt yet
- Fedex, often a lead indicator for the economy, broke out below long-term support at $100 and is falling sharply
- Dow Jones Transport index is in a primary down-trend
- Dow Industrials closed below primary support at 12800, signaling the start of a bear market
Arguments against:
- price earnings ratio is 18, indicating the market is in stage 2 rather than stage 3
- DJIA reversed above 12800 today
I would say the chances of a bear market are 80 per cent or higher. The only thing keeping the market afloat is the Fed pumping more money into the economy, but this is a "hair of the dog" cure that will only create bigger problems down the track.
Thank you for your support. Please spread the word about our newsletters. The only way we can maintain our free service in the long-term is by expanding our readership.
Regards,
Colin
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saved
Member
Username: saved
Post Number: 2
Registered: 11-2007Rating: N/A
Votes: 0
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| | Wednesday, November 28, 2007 - 11:34 am: |
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Thanks for your reply. I would think in the current downward channel that a DIJA close above 12800 is still expectable. I thought today's resistance was about 12970, I guess will see if we can close above 13000 near term. On a side note I'm definitely want to order your chart service...just need to find a way and time to tutor myself to use them correctly. I do really like your stuff.
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captain_chaza
Member
Username: captain_chaza
Post Number: 2861
Registered: 02-2003Rating: N/A
Votes: 0
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| | Wednesday, November 28, 2007 - 06:12 pm: |
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I don't think MAN (as in Mankind) will ever see a Recession again
On Earth, Mars or Jupiter and including those on space shuttles
It just can't happen
BECAUSE
It won't be allowed to happen.
Didn't ya know that the Global Exchanges can now be tweaked like clockwork?
(Just allow for a little time delay for tweaking and Leeway))
SO Why Worry?
Just appreciate that NOT all boats rise and fall with the tides
Some are designed and are being developed for this new age but some are not
It always gets back to the BASIC'S of SEAMANSHIP
"The Wind Calls the Tune"
AND
"Ship Design is Everything"
Salute and Gods' speed
"While we stop and think, we often miss our opportunity." Publilius Syrus, 1st century B.C.
"I believe the future is only the past again, entered through another gate."
Sir Arthur Wing Pinero 1893
"There are two times in a man's life when he should not speculate: When he can't afford it, and when he can." Mark Twain, 1897
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colin_twiggs
Member
Username: colin_twiggs
Post Number: 3062
Registered: 09-2002Rating: N/A
Votes: 0
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| | Wednesday, November 28, 2007 - 08:47 pm: |
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Saved,
We could have more consolidation or a reaction above 12800 before the follow-through.
Regarding your second question: have you tried the Getting Started pages?
Regards,
Colin
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trader888
Member
Username: trader888
Post Number: 18
Registered: 07-2004Rating: N/A
Votes: 0
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| | Wednesday, November 28, 2007 - 11:25 pm: |
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Some charts for discussion regard OZ market.
main message : I agree with Colin that there are signs of a "bear" market coming. Stock market is a probability and risk management game. The risk to the downside is significant. It may not happen as "The Captain" point out - The big brothers are pumping $$$$ into the market, but are enough warning signs out there for me to exercise 3 Rs : Rest . Relaxation . Recreation . Holiday Season coming - I am 70 % Cash 30 % in my life-long stocks. Live to fight another day.
Let me make some basic comments on charts above.
chart1: XAO - now at Stan Weinstein 150WMA / also at level support . Interesting to see if there is a boucce. A break of support level is very bearish
chart2: A-D graph / 200MA ( Stan Weinstein book ) - Few interesting . A-D peak inFeb 2007 then XAO continue to rally. Noted A-D divergence. In Aug A-D drop below 200MA. Stan Weintein MI look bearish. All these are classic signs of market top. Just remember when the herb start to sell it can a very messy sight. Again i don't forcast panic sell may not happen. I like to watch and react.
chart3: Classic 52 Hi - Lo chart showing peroids of corrections / volality
chart4: Show Relative strength large cap/ mid cap / small cap . Note since Feb 2007 LArge caps outperform Again its a signs bull market is under pressure
chart5: Messy chart ( relative strength sectors ) Noted sector leaders : energy / material peak early oct and now trending down . Sectors Health / Consumer staples trend up -- Classical signs of market top..
Happy trading
Regards
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eblode
Member
Username: eblode
Post Number: 623
Registered: 11-2002Rating: N/A
Votes: 0
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| | Thursday, November 29, 2007 - 09:01 am: |
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Bye,Bye bear market. DOW 321
Eugenio
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colin_twiggs
Member
Username: colin_twiggs
Post Number: 3065
Registered: 09-2002Rating: N/A
Votes: 0
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| | Wednesday, December 05, 2007 - 01:05 pm: |
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Des2,
Where did your post disappear to?
The longer-term channels do not have much use in warning of primary trend changes. Here is an example of an S&P 500 channel drawn from 1982 to 1987.
Higher GDP growth is a surprise, but we should not under-estimate the turmoil in the financial sector and the impact that this can have on the entire economy. We need to be exceedingly cautious until this has played out.
I welcome the news that HSBC is unwinding its two SIVs and taking the assets back on their balance sheet. That is the best way to restore confidence. The fact that other banks have not done likewise will leave investors questioning their ability to do so (i.e. their solvency).
Regards,
Colin
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cat_lady
Member
Username: cat_lady
Post Number: 349
Registered: 10-2006
Rating: N/A
Votes: 0
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| | Wednesday, December 05, 2007 - 02:07 pm: |
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Colin
it was my understanding that the other banks were going to be part of the formation of the super SIV(M-LEC). Last I read was that Bank of America, Citicorp and JP Morgan Chase & Co. had agreed on a structure and that Blackrock would manage the assets. although I'd leave it to others more qualified to judge, the opinion piece I read indicated that "the engagement of Blackrock is the first hopeful sign that this plan may yield some productive results since the firm has the expertise and resources to bring value to the project."
HSBC's going it alone was regarded by some commnetators as a negative :
"since it meant HSBC would not be participating in the Super-SIV, but HSBC would seem to be doing more than its part by assuming $45 billion of the estimated $300 billion problem"
cat lady
Without my morning coffee I might as well be a dog
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colin_twiggs
Member
Username: colin_twiggs
Post Number: 3066
Registered: 09-2002Rating: N/A
Votes: 0
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| | Wednesday, December 05, 2007 - 02:46 pm: | | | |
