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Disclaimer: well over a year
ago, we admitted that the data for our lead charts on Dollar Trading Volume
were becoming increasingly difficult to find and to rely on. However,
we had claimed our charts were likely off by no more than 2% from actual
activity. We have since found a source and will continue to compile
the data as we find it but we continue to stress that our presentations
can only be construed as estimates. Interestingly, our previous estimate
was purposely constructed as conservatively as possible and wound up grossly
underestimating Dollar Trading Volume. Our new estimate is far higher
but is likely quite close to the mark.
As of the last article in June, our estimates of
Dollar Trading Volume were compiled from data in much the same fashion
as in the years before. Unfortunately, the market has metamorphosed
to such a degree in the last few years that almost nothing is as it appears.
For example, the reported volume sound bites we have been accustomed to
hearing on the six o'clock news every day are not only suspect - they are
For example, back in early 2006, NYSE volume was
roughly 75% of NYSE composite volume across all exchanges. By mid-2007,
it was only 50%. By the spring of 2008, it was only 30%. Thus
far in 2009, it has only been as high as 40%, but has been as low as 15%
and is averaging only 25%. That's right. The NYSE trades only
one-quarter of the volume traded on all exchanges for NYSE listed stocks.
In the month of August, the NYSE averaged 1985.3
million shares per day. The BATS exchange traded 1139.2 million shares
per day, Direct Edge traded 1750 million shares, Nasdaq 2148.19 million
shares and Amex/ARCA traded another 348.8 million. They are all intertwined
in such a fashion that constructing a total from the break down of components
as in the past seems an almost impossible task. In fact, in the market
activity section of the NYSE website, they have separate listings for activity
in Amex, ARCA and even Nasdaq issues traded under NYSE auspices.
Inconsequential? Hardly. So far in 2009, NYSE dollar volume
in Nasdaq listed issues alone is running at a pace of well over $1.6 trillion.
Throw in the existence of so-called "dark pools" (see http://tinyurl.com/mtch75
for a teaser), and who knows what is what today?
We simply cannot get a handle
on everything that is traded anymore.
However, given the fact that NYSE only volume is
roughly 25% of NYSE composite volume across all exchanges, we can make
some back of the envelope calculations and guess how much trading has actually
expanded. After a bit of further analysis and duoble checking, you
see the result below. Stunning, no?
Again, please bear in mind that the above chart
now only represents our estimate and that we also believe we could again
be significantly UNDERSTATING the matter. Just one look at how BATS
breaks down notional values of daily trading (see http://tinyurl.com/yagc3qc)
is certainly sufficient to throw all kinds of doubt into our equations.
When we last checked on Wednesday, October 7th, BATS claims consolidated
notional values had averaged $243.5 billion over the preceding five days.
At that pace for one year, total dollar trading volume would be $61.37
TRILLION, quite close to the $58.05 trillion we have estimated for this
report. Thus, we have good reason to believe we are quite close in
our estimate, but simply cannot account for whatever may not be reported.
Q: what might not be reported? A: possibly
some transactions in so-called "dark pools" (see http://tinyurl.com/5kknks).
In 2005, dark pools accounted for less than 2% of all traded equity volume
but are now in excess of 12%, or one of every eight dollars traded.
The pools are unregulated. Given the extreme metamorphosis of the
U.S. markets, we are in an environment where almost nothing can be trusted,
including trading statistics.
Is our estimate above close to accurate?
If not, it is likely understated.
Could our chart be understated
Perhaps it is. We can
Amazingly, as in the previous two bubbles, margin
debt is once again expanding to levels that indicate yet another bubble
is in progress. The only prior instance in which margin debt recorded
a worse extreme was in 1929, which was followed by the most devastating
bear market in history.
The peaks in 1987, 2000 and
2007 were the greatest of the last 50 years.
They were followed by either
a crash or a horrific bear market.
Margin debt vs. GDP fell rapidly
after 1929, 1987 and 2000.
Margin is holding at relatively
high levels now,
indicating far too much speculation
and risk taking.
Investment is dead. It's
all about trading.
The following article was the
lead article in our September 7, 2009 issue.
Gold: Upside To $2000 Per Ounce
After a six month hiatus, it is time to revisit
the outlook for gold and gold stocks. We last examined the potential
for the yellow metal and the more well known gold mining companies in our
March 9th issue (see http://www.cross-currents.net/m030909r.pdf),
the same issue in which we cited the "best reward/risk ratio in years"
for the stock market. We highlighted five "selected popular" gold
issues and offered an average upside potential of 70%. Our call on
the gold stocks came right on the nose and the subsequent rally took our
five selections up an average of 29% over the next two months and change.
Underwhelming? Not at all. Most importantly, we
posited that "the five gold stocks....offer excellent potential for the
long term and will eventually exceed their old highs, likely with much
room to spare." Given the consolidation mode in place for both bullion
and gold stocks, we believe our forecast is still on the mark.
We have been super bullish on both bullion and
gold stocks since the terrorist attacks of 911 and have repeatedly stated
that although the catalyst may have been terror and the uncertainty promoted
by same, our principal rationale was the threat of a derivative event unlike
any seen before. Clearly, the fiasco that unwound last year and into
the spring of 2009 met our criteria. The meltdown threatened to rupture
the financial system and likely came within hours of causing irreparable
damage. We have continued to follow the course of the derivative
markets and believe huge threats to the system still exist. We're
satisfied that another shoe is not likely to drop tomorrow, but inevitably,
the other shoe will drop. These threats will most likely be covered
in the November 9th issue of Crosscurrents, so mark your calendar in anticipation
of several amazing charts.
We expect our rationale for the continuing super
bull market in gold and gold issues to morph again soon, from terror to
derivatives to an unexpected surge in inflation when the secular bear market
finally concludes in the latter half of 2010. Given that the threat
of terror has not yet been eradicated and that another derivative event
is inevitable, the rationales for gold grow brighter and brighter every
day. Despite the phenomenal rally in stocks, up as much as 48.2%
from the March 6th print low, the Dow/Gold ratio has "corrected" only nominally
from the February low of 7.5 to 1. Interest in gold and gold issues
has not declined and instead, appears to be tracing out a very bullish
consolidation pattern within the super bull market. Our "eventual
target" ratio of 5:1 was last seen in the latter part of 1988 and we see
no reason to prevent a return to these levels. Even a return to the
February '09 level would likely mean a significant rise in bullion and
gold stocks. If the Dow traded at only 8000, a Dow/Gold ratio of
7.5 to 1 would equate to bullion trading at $1067, 14% higher than today.
At Dow 10,000, a Dow/Gold ratio of 7.5 to 1 would equate to bullion trading
at $1333 per ounce. At Dow 10,000, a Dow/Gold ratio of 7.5 to 1 would
equate to bullion trading at $1333 per ounce, 43% higher than today.
And if we are correct about an end to the secular bear market for stocks
and the Dow trades at 15,000 within five years, bullion has the potential
to reach at least $2000 per ounce.
To date, the resistance levels shown in previous
charts have worked quite well, but we have made a slight adjustment to
the chart at left below. While the first resistance level is precisely
the same as before, the labeling for the second level has been altered
to read “inflection point.” Technically, this level should still
represent resistance, but once breached, we expect a sudden and widespread
realization that the rationale for ownership of bullion has changed again,
this time to the fear that inflation is about to rapidly erode the value
of fiat money. Despite the negative rate in the CPI since May 2008,
there is clearly a precedent for a surprising reversal. The CPI bottomed
in June 1972 at a modest 2.7% but a year later was at 6%. Another
year later, the CPI was 10.9%, before peaking at 12.3% in December 1974.
Given the background of the greatest debt intensification ever seen, it
makes sense that we inflate our way out of the mess. Deficit reduction
and tax increases can go only so far towards paying down $9 trillion (see
Thus, our “inflection point” now takes on a special significance and once
bullion is past $1075 per ounce, clear sailing should be expected.
Bear in mind, higher inflation will raise our targeted levels by roughly
the same amount.
The veracity of gold’s bull market is illustrated
in our chart below right. We have arbitrarily selected the inflation
adjusted September 2002 low for the Dow vs. gold for our comparison.
In the span of time since that date, the Dow has risen just 5.1% versus
a 151% surge in gold. Despite the huge run up in stocks since the
March ’09 lows, the inflation adjusted Dow is only bumping up against the
’02 low while bullion is fighting to break out to a new generational high
and indeed, seems destined to achieve the pinnacle. The last time
the inflation rate went bonkers, gold prices exploded from the August 1976
low of $102 per ounce to $850 per ounce in January 1980. The annualized
rate of inflation as measured by the CPI, reached over 14%. A similar
run from the 2001 lows for bullion would place the precious metal above
$2000, an additional precedent for our forecast.
Regarding the five issues we selected for our March
9th issue focus, there should still be plenty of upside remaining once
bullion breaks through resistance and especially when the “inflection point”
is breached. The list has been updated for your perusal. The
“upside” shown simply represents the old highs. Given an environment
of sustained high inflation, we would expect the old highs to be surpassed
by a country mile.
[prices above as of September
[these stocks were initially
featured in the March 9th issue at much lower prices]
Below, reprinted from the August
17, 2009 issue of Crosscurrents.
Buy And Hold Is Dead
Two greatly respected observers, James Montier
and Marc Faber, have recently shown the average holding period for stocks
on the NYSE is now down to six months. We have covered this aspect
of the market several times, most recently in our March 30th issue (see
link on page 2, first column) wherein we illustrated turnover for certain
selected ETFs was down to an average of only one hour and 43 minutes!
Not only is this not your father's stock market anymore, it is really not
an investment market at all. Investment rules do not apply and the
arena is all about high frequency trading (HFT), program trading and momentum
“investing.” Mutual funds do not purchase individual issues based
on merit or valuation, but buy them because they are bought by others.
Mutual funds do not spend down cash because they have confidence in the
fundamentals, rather they do so because others are doing so in order to
compete. A manager who holds back cash when the market rises faces
immediate career risk. Ironically, a manager who has spent cash only
to face a crashing market can easily point to everyone else in the same
basket. Not my fault, it was the market. Career risk
avoided. It is the very same Groupthink mentality shown by David
Dreman decades ago (see http://tinyurl.com/natsc7).
If managers cannot act as independent authorities and utilize proper investment
criteria, then they are not investment managers and are simply throwing
in their lot with everyone else and with zero regard for the consequences.
As shown below, using only the last month’s data,
the average holding period for the top ten Dow constituents of the Dow
Diamonds Trust (DIA) is roughly eight-and-one-half months. Given
that volume is down over 37% since March, average holding periods were
considerably smaller back then, probably somewhere in the neighborhood
of 5.3 months. Thus, the data illustrate that investment has almost
totally disappeared as a rationale for involvement in the stock market.
Below, this chart is reprinted with permission
from the August 2009 issue of Marc Faber’s “The Gloom, Boom & Doom
Report” (see http://www.gloomboomdoom.com).
We have taken the liberty of adding a single line at a point marking an
average holding period of exactly one year. Note that the line accurately
delineates the periods we have identified as certifiable stock market manias,
periods during which investment criteria were totally ignored. We
further note that the episode of the roaring Twenties was soon reversed
while in the current era, holding periods (if you can call them that) continue
Although volatility has contracted substantially
as the major averages have rallied, the short term focus will undoubtedly
catalyze an opposite reaction when prices finally begin to correct.
When the time horizon for participants is brief, value is not important,
Since value has far less relevance,
the tendency is to push prices to overvalued levels.
The Flip Side For The Long
In the last article, we ended with a perspective
on why the long term "may finally portend well," illustrating that the
ten-year annualized return for the Dow Industrial had fallen to historically
low levels and was due to rebound.
Clearly, it has. From the March 2009 lows,
the Dow rose as high as 55.6% print basis, and climbed over 1500 points
from our June 29th report. Ten-year annualized returns were as low as minus
3.9% but are now nearly flat (minus 0.2%).
Thus, the previous forecast
has already proved correct.
But the tremendous rally in stock prices does not
mean the trend will remain in place without interruption!
In fact, the 20-year perspective below illustrates
tremendous risks remain on the horizon. Although we are not expecting
a replay of any of the episodes of the four previous decades in which returns
were negative over 20-year rolling periods, we certainly have a robust
expectation that 20-year annualized returns will eventually fall to at
least the 5.1% average over the life of our chart and perhaps to less than
the 5% horizontal line drawn across the breadth of our chart.
If the Dow simply remains at the 9864 closing level
of October 9th, the 5.1% historic average would not be achieved for another
four years in October 2013. At the same closing level, a 5% annualized
return would be achieved less than two months later.
If we instead postulate the Dow trading and remaining
at 12,000 (20% higher than today), the 5.1% historic average would not
be achieved until May 2015. At the same 12,000 level, a 5% annualized
return would be achieved one month later.
Despite the huge gains since
March, risk has not disappeared.
On the contrary, risks have
now risen to intolerable levels.
We expect annualized returns
for 20-year periods to eventually revert to the average.
There is no rationale to invest
when everyone else trades.
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*THIS USED TO BE OUR FORECAST SECTION
Some of our readers may be aware
of a recent "study" of stock market forecasters, published by an internet
blogger. In our case, this blog reported accuracy ratings that we
can only describe as devised and so far from accurate as to be laughable.
Needless to say, our forecasts were interpeted incorrectly and denigrated.
We have no desire to direct any traffic to this blog and if you are interested
in seeing the "study," you will have to search for it.
The blog admits "The Crosscurrents
forecasts/targets frequently include qualifications/embellishments that
makes testing difficult," yet the ratings were undertaken as if gospel.
The blog further admits that "a few very bad forecasts make the average
absolute error high." Ironically, and most disturbingly, those very
same forecasts begin and end with our initial forecast of a secular bear
market bottom at Dow 6400, originally published on our website as far back
as 2003 and published in our Washington, DC speech before the International
Federation of Technical Analysts in November of 2003. However, as
our initially cited time target was pushed out with each new forecast,
the aforementioned study considered the entire forecast before it to be
utterly wrong and in some cases, awarded us a rating of minus 80% accuracy.
That is a stunning misapplication of statistical science, in that the actual
bear market low to date was Dow 6469 print basis on March 6, 2009.
On a number of occasions, we also specifed an SPX low of 680, about as
close as one can get to the actual 683 closing low. We not only forecasted
the actual price bottom with pinpoint accuracy, we did so six years before
Moreover and most importantly, we
have usually cited the upside parameter as "potential" and the downside
parameter as "risk," in order to highlight both the best and worst possible
cases. The study incorrectly interprets each of these parameters
as actual forecasts, which must, by definition, make one or the other of
our parameters hopelessly wrong. The market cannot move in both directions
at once. If an actual forecast has been issued in the past, it is
typically not accompanied by a disclaimer, such as upside "potential" or
It has always been accepted wisdom
in our business that one does not forecast both price and time together.
If a time is specified, never specify a price. If a price is specified,
never specify a time. It is sufficiently difficult to forecast one
of the two aspects alone. Most forecasters follow this golden rule.
When we issue a forecast, we typically do not follow the golden rule.
However, the denigration of our forecast results by this faulted study
has cast a serious pall on our desire to continue publishing price and
time forecasts for the benefit of the public on the free portion of this
website. The Crosscurrents website has had more than three-and-a-half
million visitors since it was established in 1999 and we are quite proud
to display just a few of the many kudos accorded us by readers at http://www.cross-currents.net/kudos.htm.
We did not earn these kudos by publishing wrong forecasts time after time.
Despite our desire to continue serving
the public, we will no longer expose our analysis to faulty studies and
inadequate math on the free portion of our website. Therefore, our
policy is now changed. While we will continue to publish the very
popular Pictures of a Stock Market Mania feature, we will no longer provide
any price and time forecasts or parameters as have accompanied this feature
in the past. The subscriber portion of our website will have the
same article accompanied by price and time forecasts and other parameters
as we deem significant, as it always has. If you wish to see these
forecasts and or parameters, we suggest you subscribe
or purchase a copy of the full article for $20 [CLICK
HERE]. If this policy change does not
meet with your approval, we certainly understand and nevertheless, invite
you to continue reading the free articles we post for the benefit of the
OF THE ENTIRE WEBSITE ARE COPYRIGHT 2009 CROSSCURRENTS PUBLICATIONS, LLC
I hope you have enjoyed your visit. Please
return again and feel free to invite your friends to visit as well.
Alan M. Newman, October 15, 2009
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All information on this website is
prepared from data obtained from sources believed reliable, but not guaranteed
by us, and is not considered to be all inclusive. Any stocks, sectors
or indexes mentioned on this page are not to be construed as buy, sell,
hold or short recommendations. This report is for informational and
entertainment purposes only. Persons affiliated with Crosscurrents
Publications, LLC may be long or short the securities or related options
or other derivative securities mentioned in this report. Our perspectives
are subject to change without notice. We assume no responsibility
or liability for the information contained in this report. No investment
or trading advice whatsoever is implied by our commentary, coverage or