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The Cream of the Crop is Crumbling


Home prices are falling, thus consumer expectations are crumbling. Hence, the art market is wobbling.


The Cream of the Crop is crumbling. The 'elite' are eroding and it is no coincidence that while two US stocks that might best represent the 'elite,' and might best exemplify the secular trend towards paper wealth reflation as the dominant 'macro-theme' in this decade, are finally cracking wide open, and that the Japanese Yen is now, finally, busting loose at the same time.

This is a most ominous sign, as it relates the current secular trend change that is currently taking place in the macro-landscape, away from monetarily driven, debt-credit derived, paper wealth reflation towards a credit crunch and possible full-blown debt-deflation.

I speak of Goldman Sachs (GS) and Sotheby's (BID).

Indeed, the latter held its annual auction of impressionist and modern art this week, and only 74% of the works ("lots") put up for sale were sold, while the largest offering, a Van Gogh expected to be sold for $35 mln, failed to generate a single bid!

To make matters worse, today the company posted a larger than expected loss for the third quarter, and the share price is now collapsing.

Fear of a slowdown in the "high wealth" art market, in line with the intensifying price deflation in US housing, is on the rise as a result of this week's poor auction results. For sure, the wobble in the art market segues perfectly into a dissection of the plunge in Consumer confidence data, as revealed in the Michigan November survey released this morning. Note:

  • Headline Confidence Index: 75.0, down sharply from October's reading of 80.9, sliding further from September's 83.4, and far below the July result of 90.4.
  • Expectations Index: A lowly 64.7, plummeting from 70.1 in October, down from 74.1 in September, fifteen full points below the 81.5 reading posted in July (before the credit crisis began).

In fact, since reaching a two-year high in January, the headline index has reversed hard, and has plunged by (-)23% to its second lowest level in 16 years (lower only in October of 2005 following Hurricane Katrina).

Observe the chart on display below defining the University of Michigan Consumer Sentiment indexes, coming courtesy of my buds at

Click here to enlarge.

Home prices are falling, thus consumer expectations are crumbling. Hence, the art market is wobbling and the share price of Sotheby's is collapsing, as defined in the weekly chart on display below.

In fact, since making a new all-time high just last month, Sotheby's share price has been sliced by nearly half, in a matter of weeks. In the process it has violated the multi-year uptrend line and the secular 2-Year EXP-MA. More 'telling' (and troubling) is the action in the On-Balance-Volume indicator which has yet to breakdown, suggesting there are plenty of longs 'trapped' by the speed of the decline. Indeed, just three weeks ago someone bought this $30-something stock, at $60-something.

Click here to enlarge.

The monthly plot of Sotheby's is eye-opening to say the least as each of the last three major wealth-reflation 'episodes' and each of the subsequent 'disinflation' periods can be clearly identified within the price action. Moreover, we can easily see that each paper-wealth-reflation has made a higher high in line with each successively more aggressive Fed monetary stimulus trend. Within that in mind, the 'violence' of the current reversal, along with the plunge below the long-term 5-Year EXP-MA appears to be a most ominous sign, as per the potential 'depth' of the disinflation that is now unfolding.

Click here to enlarge.

Perhaps even more ominous is the similarity, violence wise, and the converged timing of the reversal mapped out by the 'cream' of the investment banking 'crop', Goldman Sachs. Evidence the very revealing, and most disturbing, weekly candlestick chart of Goldman, noted below, and observe the four major trend reversal candlestick patterns generated above $230, with last week's 'Long Shadow", key downside reversal the most bothersome in terms of the longer-term macro-market message. Also note the extreme case of bearish divergence in the 6-Month ROC, which has plunged into overtly negative territory.

Click here to enlarge.

Digging deeper, check out Fannie Mae (FNM), with a look at sister agency Sallie Mae (SLM) which is breaking down today, and in the process, is violating and reversing a long-term secular uptrend. Evidence the mega-macro-monthly chart on display below, and note that the 5-Year EXP-MA is being violated, and is rolling over directionally amid the plunge below the February '07 low. Moreover, note the significant bearish momentum divergence and decline into negative territory by the ROC, which has fallen to a twelve-year low this week.

Click here to enlarge.

Also I note some interesting data released today by credit-card heavy, Capital One (COF):

Credit Card Delinquency Rate: 4.75% in October, up from 4.41% in September, and up by more than 30%, or one full percentage point, from the year-ago Oct. '06 rate of 3.62%.

Again, as I have stated repeatedly in the past, the ABS market in Credit Card backed securities is nearly $700 bln, and this could be the next shoe to drop, in terms of the intensifying US credit crunch. Note the violent response in the share price of Capital One.

Click here to enlarge.

With that in mind, as it relates to credit card 'receivables-derived' asset backed securities, I shine the spotlight on the latest data from the US Federal Reserve Bank detailing the weekly change in Asset Backed Commercial Paper:

Asset Backed Commercial Paper Outstanding: Plunged by (-)$29.5 billion in the latest reporting period, a huge single-week decline, and more than half the size of the decline posted during the entire month of October. This marks the worst decline in two months, and the thirteenth weekly contraction in a row.

Note the total ABCP Outstanding and the sequential decline since July:

  • July '07: 1,174.3 billion
  • August '07: 979.5 billion
  • September '07: 924.9 billion
  • October '07: 874.7 billion
  • End-first week of November '07: 845.2 billion

Indeed, in just thirteen weeks the total Asset Backed Commercial Paper Outstanding has collapsed by (-)329.1 billion or (-)28%.

At the (three-month) pace of decline seen since the end of July, there would be absolutely no Asset Backed CP left, within a year. None, Nada! Not a single dollar's worth.

We can 'call' this a crash, case closed.

Note the visual evidence of the collapse as evidenced in the chart below, which comes courtesy of the Federal Reserve, and focus on the 'yellow' line (which reached the highest peak in July, as reflected and defined by the 'scale' on the left hand side).

Click here to enlarge.

And amid all this, the JPY breaks out to the upside against a broadening number of currencies, and Gold gets whacked!

Crumbling, and more to come.

Evidence the pair of charts on display below plotting the Eurocurrency versus the Japanese Yen. These charts reveal key technical pivot points, and the eye-opening 'tightness' in the positive correlation between this FX cross, and the US equity market, as it relates to the top-down macro-monetary 'reflation-deflation-balance.'

EUR-JPY violated the 100-Day EXP-MA, on the back of a negative MACD pattern and double-top pattern. A push below the most recent downside pivot point at 160.50 yen per euro constitutes a significant break, and would put the summer lows 'into play', just below 150.00.

Click here to enlarge.

A move to 150 by the yen against the euro would bode ill for 'reflated asset prices', since an appreciation in the Japanese currency would imply more 'tightening' in global credit conditions, amid capital repatriation.

Indeed, the US equity market might be particularly 'exposed', with the August lows coming into view for the bears. Naturally, a violation of those lows, in the context of an intensified rally in the JPY would imply a significant worsening in the current 'credit crunch'.

Click here to enlarge.

Positions in S&P, 2-Year Note, Copper, Yen Futures, EUR-JPY, AUD-JPY
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