Freight Train Analytics
November 19th, 2007 by Leonard
A trader and a Wall Street economist are walking along a set of train tracks. The trader says to the Wall Street economist.
“I think there’s a train coming” “Oh really? How can you tell?” “Well I can hear it, I can smell it, and I can feel it vibrating the tracks on which we are standing!” “Well that might be your experience but ………..ooooooppppps OH Wow, I didn’t see it coming”
“Are you for real? You actually didn’t see it coming?” “ Nope, there was no statistical evidence that a train was coming”. “Well why not take your head out of your statistical ass-ets and look around. There’s a world out here”.
Yah …..Freight Train Analytics. Don’t see it till it runs me over. There are legions of these literal types working in insulated towers with fancy titles, lots of university degrees, and not a lick of sense. They work as analysts at major banking institutions and brokerage houses, rating agencies, housing associations, and governmental agencies. Some are TV pundits, and some operate professional advisory services. They as a group in the service industry apparently do not think that a housing affordability ratio of 8 to 1 relative to yearly income is insane, was insane, or very abnormal.
But even if they questioned as to whether an 8 to 1 housing affordability to yearly income ratio was normal, what kind of miscalculation took place that would cause these very smart financial statisticians and economists to sell themselves on a containment theory? Is it that financial aneurisms are hard to see until they explode? Is it a political ideology? Or perhaps it’s a socio-economic phenomenon with roots going back to the end of the industrial era that has built in a set of unrealistic expectations.
I’m not a PHD of economics but I am a student of human nature. Over the last 35 years, living beyond our means has been institutionalized in America. Sure, maybe you are one of those people for whom this does not apply. Makes no difference. The greater majority of this nation’s population are not savers. They are spenders and that will affect you who are savers.
I remember when the term Yuppie came into vogue. I remember that as a group trait, they seemed to be particularly aggressive asset collectors. Sometimes the simplest message is the most poignant. Madonna released “Material Girl” in 1985 which seemed to highlight the movement. Bruce Willis and Cybill Shepherd were the quintessential Yuppies in the TV show “Moonlighting”, also 1985. They were glib, smart, with it, argumentative and living the high life. They were also emotionally cold, and suffered from a narcissistic right to entitlement.
The first Yuppie Boomer surge of collecting assets took place during the late 70s hyperinflation housing market. Add to those gains, the collected assets of Yuppie’s parents, who survived and thrived through the “Golden Years” after the Great Depression.
My father, having lived thru the Great Depression, was a machine screw operator. He worked in a factory and made machine screws. Bought and paid for his home in 10 years. He bought a new Chevy every 3 years, and always paid for his autos with cash. Did not have a checking account, but had a savings account. Had a cellar filled with dry goods, canned goods, and bottled fruit, that my mother would bottle (called canning), and it was enough food to last 8 months. He fed us, clothed us, sent us to music lessons, and took a month vacation every year when we would travel by car, to see the wonders of this great country.
He never had a credit card in his life, and the day before he died on an operating table, took me down into the basement and pointed to all of the places in the ceiling behind vents and pipes, where he had stored cash. We were a third generation American family living the American dream, and we were part of the greater middle class.
We had one of these.
The majority of middle class Americans during the 1950s lived the American Dream as one income families. But by the 1970s, it became apparent to us young adults, that doing the same things that my father did, was not going to produce the same results in terms of life style. My point to all of this is that 2 income families, deferring cash payments now with loans and credit, and speculation began supplanting real income as a measure for boomers to maintain a style of living equal to, or better than that of their parents. The world changes, doesn’t it. Hello Yuppies (Young Urban Professionals)
PERCEPTIONS OF THE YUPPIE
A 1986 survey by Louis Harris and Associates found the following:
73% of Americans believed that yuppies were primarily intent on making more money; 81% of yuppies agreed that they were.
72% of the public believed that yuppies were more concerned with their own needs than with the needs of others; the same percentage of yuppies agreed.
70% of those surveyed thought yuppies bought flashy cars and clothes in order to set themselves apart from others; 81% of yuppies said this was so.
Enter the credit card, leverage, and debt, and the end of the great industrial era. The cost of living began outpacing income, and to this day, income continues to fall behind the monthly nut. This doesn’t mean that the quality of life has fallen off. Not in a New York minute. It just means that as a nation, the creation of debt, and the abuse of credit have become institutionalized. Elevated lifestyle addiction comes at a cost. The ever recycling of asset bubbles has been the fix. Each time a bubble is created, Yuppies find it necessary to be very aggressive about pushing the envelope as quickly as possible, in order to optimize their bank rolls that have become depleted by the rising costs of services, and excessive spending, after the most recent bubble deflates.
It’s been said that the Yuppie disappeared after the 1987 crash of the stock market, but that’s not true. They morphed into the mainstream “Boomer” nation and they blended into other cultures. And as they got older, they got a lot smarter about how to create, and extract money out of bubbles. They recruited younger followers, and developed inroads into government, de regulating everything in their path, and dismantling many of the protections of our economic and financial systems, that were legislated because of hard learned lessons from the Great Depression of the 1930s.
Supply Side Economics replaced Keynesian models in the late 70s, and in the 1980s was sardonically called, “Voodoo economics”, and the “Trickle Down Theory”. It began with lowering taxes, and massive deregulation of utilities, banks, transportation, and telecommunications. The theory was, that deregulation raises competition, thereby flooding the market with a cheap supply of products and services, while stimulating the economy. Union busting was part of the process (scheme), which also served to dismantle the political machine of the Democratic party. This was the real end to the industrial age.
Here’s a side thought. The jury is still out on the success of Supply Side economics. Globalization was bound to happen thereby providing a pool of cheap labor throughout the world, that has served to limit income gains in the U.S. But producing cheap products, on the backs of cheap labor overseas, may be just strengthening the corporate ledgers. That wealth is not “trickling down” as fast to the middle class, as supply siders may have touted. Corporate profits have a tendency to stay within the corporate culture of investors (yuppies). And services have not cheapened. Have you visited the dentist lately? How’s your health plan doing?
Additionally with the growth mania of third world countries that we have put to work, we may be at the end of the “cheap labor” cycle. We could be importing inflation soon enough with rising prices of goods. The explosive growth stage for the BRIC countries (Brazil, Russia, India, and China) may be topping out. And do the a’ hem financial experts of these BRIC countries have ANY experience with bubble markets and how they top out and crash?
When these imbalances get corrected we will have a better picture of the success of supply siders. I know that I would laugh myself into a coma, if all of the third world labor pools began unionizing because they found Jimmy Hoffa. Wouldn’t that be a hoot? It would be another example of how economic statisticians always presume that the “constant” in their little magical formulas never changes.
History has shown us that many a system trader has gone down following a system that does not factor in volatility. But why bother with history? Ask any 20 something adult what was the Great Depression and you might find them referring to the time that their parents took their cell phone away from them over a summer weekend. Poor things. What goes around comes around.
The demand for better stock performance, more return on investment dollars, larger bubbles with more acceleration may be the actual end result of supply side economics.
Since real income can’t possibly keep up with rising costs of goods and services, there seems to be an endless supply of highly leveraged “innovative” investment products that are circulating throughout the world’s banking and financial institutions. Some person, or some financial entity, invested in “make believe”. Whoever blinks first is the loser. This is an entirely fascinating game unfolding in the investment world now. If it weren’t so potentially tragic, it might be entertaining to watch the buzzards scrambling.
Time for my disclaimer: There’s nothing wrong with collecting assets, and enjoying a wonderful life, as long as you’re not backing your truck up over other people to load it up.
It has been fairly clear to me, that when we line up all of the bubbles since the late 1970s, that they are one large “Boomer Ball of Equity” bouncing all over the world. Here’s the list
1. The gold, silver, and housing hyper inflation bubble of the late 1970s,
2. The housing and equity speculative bubbles of the late 1980s,
3. The internet bubble of the 1990s,
4. The housing and stock market bubbles of the new millennium 2000-current.
5. The Unregulated Credit Derivative market bubble (CDOs CDSs SIVs).
They all share in the same systemic abuse of leverage, creation of debt, and excessive credit expansion, being used to supplant real income relative to the cost of living. It’s the same large Yuppie Boomer money ball, pushing from one bubble to another. It’s many of the same people, shifting capital into a newly created bubble forums. With the advent of the internet, hunting for bubbles is truly a world wide past time. In a sense it’s just one ball of equity roaming around the world looking for re-inflation.
What is most insidious is the way Wall Street insiders have abused and used the American economy to create “financial innovations”, targeted specifically in areas of speculation that are unregulated. When no one is watching, the cookie jar gets raided.
Gimme an H, Gimme an E, Gimme a D, Gimme a G, Gimme an E and wha da ya see?
Looks like a heck of a hedge, of a hedge, of a hedge to me.
Oh sorry, I’m so used to seeing cheer leading on CNBC, I couldn’t help myself.
This puts undue amounts of pressure on young people to create bubbles. Are we products of our environment, or do we create it? College graduates who do not have country club moms and dads, get entry level jobs as managers of stores in shopping malls at $12 an hour. The country club grad gets an entry level job at a chemical company, two to three times that salary. But even so, both groups of grads will create lots of debt in order to maintain a life style within, and beyond their particular wealth stratum.
The creation of debt through lending, leverage, and the so called “new financial innovations” is at epidemic proportions. If there is a way to create a hedge, of a hedge, of a hedge, the morphed Yuppie will find it, and exploit it. We won’t hear about it until it implodes. It is a prime reason why we are seeing graft, and corruption, at unprecedented levels, only seen just prior to the great Depression.
At the beginning of this piece I talked about Freight Train Analytics, and the folks with the literal nose in the statistical book, who have little capacity to actually create, and formulate a train wreck. But what about the crafty ones, the fraudsters. They might have learned their crafts from this Pee Wee Herman episode.
In one of Pee Wee Herman’s episodes, Pee Wee shoots and kills a deer. He doesn’t want to field dress the deer, so he drapes the deer over his left shoulder and decides to drag it back to his truck. As he is coming towards us, dragging the deer across the highway, a state trooper stops him and points to a sign behind Pee Wee’s right shoulder. In very large letters it reads “NO DEER HUNTING ALLOWED”. Pee Wee acknowledging the sign, tells the trooper something to the affect that he understands, and agrees with the law. The trooper befuddled and frustrated, points to Pee Wee’s left shoulder and says, “Well then what is that!?” Pee Wee says “What is what?” The trooper in astonished dis-belief impatiently yells, “that thing on your left shoulder?” Pee Wee slowly looks at his left shoulder and with bugged eyes and a wild scream, frantically brushes the deer off of his left shoulder.”Oh my God, How did that get there!!!”.
The fraudster tatics involve the purposeful dumbing down of the self, in order to sell an idea that has a popular following, in order to benefit thy self. . And just like with Pee Wee and the state trooper, the manipulative side of the sale is covered, by pretending to be the victim as well. Sometimes they pretend that what they are doing is good for you and the economy.
The peacocks of pandering can say anything to cover manipulation. That’s when Freight Train Analytics kicks in. “I didn’t see it coming”. It is a perfect exit out the back door of responsibility for the manipulator, or the literal dim wit. This is why many economists are able to proclaim a recession, six months after we are into it. They can conveniently now see hard facts that support a recession after it is blooming. Of course 4, or 5 stores in the shopping mall that they frequent, have closed their doors several months ago. And an 8 to 1 yearly income to housing affordability ratio, is not a speculative bubble problem that could add to the probability of a recession.
So on one hand we are advised by ethical dim wits that live in insulated, and over protected worlds. They never “see it coming”. And on the other hand we are advised by not so ethical, but intelligent manipulators, who are the first to jump ship when things get rocky. They use bullhorns from their lifeboats to instruct those still on board to remain calm and steadfast. “Uhhh This is your CEO. Please don’t be alarmed that I am selling 75% of my company owned stock. It was part of my compensation plan, and has no bearing on my belief that this is a fine company on the rebound”.
Time for my second disclaimer: There are good CEOs out there who do not back their trucks up over their employees for the sake of their own personal wealth.
Recession or no recession, let’s take a look at the long term charts. Below is the Weekly Dow Jones
There is sell divergence on the charts. For you non-technicians it means that if you align the 2 peaks of the timing indicators (MACD and Stochastics), under the down slanting red lines, with the 2 peaks of market at the top, you should see that the although the market made a higher high in October than in July, that the second peaks of the timing indicators did not agree with the market, in that they did not also make new highs. This represents a loss of upward momentum. The bottom indicator is an ADX trending tool. The ADX line moves up when the market is trending. Currently, the market is not trending. It is said to be in de-trend (neutral).
One of the traits of Double Tops is that the tops need to be somewhat equi-distant in time. That is, if the left top is created over a period of 18 weeks, then the right top should take about 18 weeks to complete the pattern. We are not going to squabble over a couple of weeks difference from a target date, however the pattern tends to be invalidated, particularly if the second top is completed very early. This is because it would represent a severe decline acting more as a climactic blow off. The bulls are not supposed sense a top, and believe that they are buying a bottom. So for the bears, they would prefer a softer landing on the neckline of the pattern (red horizontal line on the market). Let’s move on to an extension of a possible broader bearish pattern.
In the chart above you will see that I have drawn further out in time as a possible bearish path, called a Head and Shoulders Top. Should the market rebound in early January, then I would expect for a right shoulder to form, and complete itself by mid May 2008.
I might add, that currently there are no confirmed distribution patterns on the chart as of today. Additionally, the 50 week moving average (50 bar MA) is currently slanted upwards. The market has used this moving average to launch at least 5 rallies over the last 3 years. Therefore we are not in a bear market, even though the market has been hit hard over the last 4 weeks. But bears will gladly take sideways for now. A market has to first lose it’s upward momentum, before turning bearish.
The tendency for bullish traders to use the 50 bar MA as a launching pad has been successful enough, that I remember seeing a particular young man looking a little wet behind the ears, on CNBC several weeks ago. He said the following sound byte. “The market will build on it’s own scar tissue, and inoculate us from further spooking down the road”.
Well from the mouth of babes comes the truth. He is exactly right. He echoes the sentiment heard from money managers, and pundits, who never really seem spooked by breaks in the market. The modern bull sees all breaks as minor profit taking, or buying opportunities, or over reactions to negative news.
Won’t they be surprised one day when old faithful doesn’t geyser. That’s exactly what causes a panic. Though volatility is high, we have not seen anything yet that could be called a panic move. You will know when it comes. It will be spectacular.
So if I were to make up some imaginary fundamentals to fit the charts above, it would be a massive wave of foreclosures showing up, starting in the first Quarter of 2008 based on the mortgage resets taking place now. It will take a while before the foreclosures will actually show up. That certainly wouldn’t help the valuation of all of trillions of dollars of derivatives floating around the world, so include massive write downs, and bankruptcies of major institutions.
Now if you are strictly a fundamentalist, then you have the right to consider the charts above, and below, as drawings from an imaginative mind. But you can bet that every CNBC analyst touting stocks based on fundamentals, has looked at a chart and most likely, knows a lot more about technical trading, then you might guess. It’s just easier to make viewers believe in imaginary fundamentals, than imaginary drawings. Viewers like to have story lines that make perfect sense, before they lose their money. Secondly, fundamentalists are the very first people to run into the chartists office, when the market is in the throes of a panic move. And chartists always want to know what’s going on. “Is there any news?”
Let’s do a bullish scenario since I’m in the mood for drawing
This is easier, The bulls just need to keep the accumulation going. For immediate results, they will need to launch a rally from the current levels since the market is sitting on the 50 bar moving average. Should the market slip below the 50 bar moving average on the weekly chart, there is still room to launch a rally. Any movement though, below the August lows at 12,500, will begin to cause worry beads on the foreheads of buyers.
I guess the fundamentals going along with bullish scenarios is that global markets go crazy to the upside, and we tail along for the ride. And that the prices of homes remain at astronomical levels, and that every corporation decides to double and triple everyone’s incomes, while stock investors learn how to share in the profit margins.
That’s the best I can do for now, but I’m sure that the yuppies must have a plan, or at least another bubble developing somewhere.
By the way, I am frequently asked if the work that I do in training traders is long term position trading, This is because of my blog. The answer is, that the major work we do as traders is in electronic day trading with highly specialized charts, but all of the traders I train understand, that the use of Novy Principles of Market Flow, universally applies to all time frames, and all markets. Have a very Happy Thanksgiving
This information is for educational purposes only. Trading with this information is done at your own risk. All concepts and writings including the Novy Training/Trading Method NTM© are proprietary and the sole ownership of Leonard A. Novy and may not be reproduced for profits without expressed written permission. Copyright1995-2007
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