For Friday, November 30, 2012, We Recommend Against Investing


Technical Comment:

The S&P 500 advanced 0.4% on Thursday with volume slightly below Wednesday and lighter than the 30 day moving average volume.  If the S&P 500 declines about 31 points (-2.2%) on Friday our forecast could change to an uncertain trend.

Subjective Comment:

With Thursday’s volume just slightly below Wednesday our pattern detection system did not classify Thursday as a strong-volume up-day.  Patterns are under development but nothing of predictive value has been identified in the daily market data.  If the market up-trend that has been developing for the past few days continues with increasing daily volumes we might see a pattern form.  Until then or until something else changes, we still do not see enough in the data to make a subjective recommendation to invest in US markets, at least not yet.

On Thursday the Federal Reserve published updated US M2 money supply data through 11/19 and US banking reserves data through 11/28.  US M2 (not seasonally adjusted) continues to accelerate in its growth rate, but just barely.  For the past 30 weeks the straight-line annualized growth has been around 8.7%.  We use a residual control chart to identify changes in the growth rate.  This chart does not show anything out of control, but there is a visual indication that growth is accelerating.  Based on the visual pattern on this control chart we think an out-of-control above the upper limit condition could occur in 2 to 3 weeks.  It appears the growth acceleration occurred when QE3 began.  The gradual nature of the change has to be watched closely to make sure what is apparent visually is eventually confirmed with an out-of-control condition.

The update US banking reserves data now shows a clear change in trends which has been developing since QE3 was launched.  Required Reserves are growing around 25% (annualized) while Excess Reserves are holding stable around $1.43 Trillion Dollars.  QE3 money appears to have encouraged banks to accelerate their originations of new loans as shown by the growing Required Reserves and steady Excess Reserves.  The timing of all of this is consistent with the visual acceleration in the US M2 money supply discussed in the prior paragraph.  Since January of this year (11 months ago), US banks have been stingy with their loans.  New loans were being made at the same rate as old loans were maturing.  Excess reserves have moved up and down but seem to be holding now above $1.4 Trillion.  Banks seem to have become comfortable with their level of Excess Reserves and are using QE3 money to accelerate loans.  This explains the uptick in the US M2 growth rate.  Starting in December the Fed might continue asset purchases at the same rate while suspending the selling of short-term Treasury bonds.  This would be the end of “operation twist” with a continuation of unsterilized purchases.  We don’t know if this will happen, but it has been speculated as a possibility.  If it happens, the unsterilized asset purchases from QE3 would double.  Assuming US banks in turn further accelerate originations of loans, US M2 growth would further accelerate.

It is not yet time to invest in leveraged index funds that track US markets, but we are getting very close to making this recommendation.  The money supply growth is accelerating and our pattern detection software is seeing a growth pattern develop.  We still are guessing it will be January before the opportunity to invest in US markets becomes optimal, but it could happen sooner.  We will continue to track the data and comment every day US markets are open.  In the meantime continue to avoid Eurozone stocks, and avoid all bonds.  Price inflation will get worse as the money supply continues to grow at a faster rate, so price inflation hedges are good investments for the long run.

3 Responses to For Friday, November 30, 2012, We Recommend Against Investing


    Jon Hilsenrath reported that the FOMC is likely to vote for QE4 when the committee meets on December 11-12. In September, the FOMC implemented QE3, i.e., an open-ended commitment to purchase mortgage-backed securities at the rate of $40 billion per month. The Fed’s Operation Twist is scheduled to terminate at the end of the year. Under this program, the Fed purchased $45 billion a month in long-term Treasuries, paying for them with the proceeds from its holdings of short-term debt.

    Now some members of the FOMC are pushing for more purchases of Treasury bonds. However, the Fed is running out of short-term securities to sell. Hence, QE4!

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