Tony Cherniawski Blog | Municipalities Suffer From The Pension Blues | Talkmarkets
President, CIO at The Practical Investor, LLC
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Anthony M. Cherniawski is a principal of TPI. He has a Bachelor of Communication Arts degree from Michigan State University (1972). His business experience is as follows: 

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Municipalities Suffer From The Pension Blues

Date: Saturday, September 21, 2019 1:13 PM EDT

Mike Shedlock observes, “Multiple cities in Illinois are forced to cut police, fire departments and other city services to fund pension plans.

Third Domino

Illinois does not allow cities to file for bankruptcy but that is the best word to describe many of them. East St. Louis is the latest.

Wirepoint reports Third domino falls: Illinois Comptroller set to confiscate East St. Louis revenues to pay for city’s firefighter pensions.

On Tuesday, the East St. Louis’ firefighter pension fund demanded that Illinois Comptroller Susana Mendoza intercept more than $2.2 million of East St. Louis city revenues so they could be diverted to the pension fund.

The fund trustees said the city shorted firefighter pensions by $880,000 in 2017 and another $1.3 million in 2018. Under a 2011 pension law, the state comptroller gained the powers to intercept city revenues on behalf of police and fire pension funds shorted by their municipalities.

Harvey was the first municipality to run afoul of the intercept law. North Chicago, a Chicago suburb of 30,000, was the second. Now it’s East St. Louis’ turn.”

If this is the best economy ever, why can’t municipalities fund their pension plans?This may be coming to a city near you.

VIX made an extended Master Cycle low on Thursday, then rallied above weekly mid-Cycle support/resistance at 14.97, creating a new buy signal. Once a Master Cycle low is made, there are usually 2-3 weeks of rally.

(MarketWatch) Bond-market guru Jeff Gundlach says he’s watching a few areas of the market to gauge whether the current bullish dynamic is starting to unravel in earnest. On Wednesday afternoon, during a CNBC interview, he said that he’s sees some early cracks that are worth investors’ attention.

Those include readings of consumer sentiment and a disparity between gauges of volatility in the bond and the stock markets.

SPX reverses.

SPX reversed out of its Thursday morning high without breaking above the July 26 high.$353,000,000,000.00 of POMO activity this week by the Federal Reserve could not keep the SPX from cracking.The Cycles Model suggests two or more weeks of decline lies ahead.

(MarketWatch)U.S. stocks closed lower Friday, for the first weekly decline in a month, as investors looked beyond a litany of central-bank decisions of the past week and focused on the state of China-U.S. trade talks.

U.S. stocks turned lower in afternoon trade, dragged lower by the technology sector XLK, -1.17% and consumer discretionary shares XLY, -1.15% after a report that a Chinese delegation had canceled plans to visit farms in Montana as a part of its negotiations with the U.S. delegation.

Traders were also on the watch for any effects of “quadruple witching day” on Wall Street, the simultaneous quarterly expiration of stock-index futures contracts, single-stock futures, and options on stock-index futures and individual stocks, which often spurs higher volumes.

NDX loses traction.

NDX was unable to gain any traction to overcome its September 12 high this week.NDX was on schedule for its Master Cycle high while SPX delayed a week due to rotation from momentum stocks to value stocks.This appears to be the end of the Cycle which began on December 26.The subsequent decline may be as steep as the rally out of that low.

(Bloomberg)How can U.S. stock indexes be right back up at their record highs when there are strikes on oil installations in the Middle East, the money markets are in revolt, negative bond yields show despair at the prospect of growth anywhere in the world, and any number of decent indicators are signaling on-coming recession? It’s a good question. And the answer, according to one investment strategist I spoke to this week, is clear: “It’s because everyone is in the Larry Summers trade.”

Summers is one of the most prominent economists of this era, of course, but my friend used his name as shorthand for his concept of “secular stagnation.” Markets are positioned for Summers’ negative theory to come true in full force. That leaves central banks with little choice but to work on the Summers assumption.

High Yield Bond Index stalls above its support/resistance cluster.

The High Yield Bond Index made its weekly high on Monday and drifted lower since then. The sell signal is temporarily suspended until it declines beneath support again.. The Cycles Model warns the next step down may be a large one.

(SeekingAlpha) With interest rates at extreme lows, investors continue to frantically search for investments that generate an acceptable yield. Interest rates want to go higher. As witnessed by the ongoing repo market fires, the world is running out of cash and the free market is beginning to demand higher rates.

If rates go higher, people will put more money into their savings accounts and the repo market shortage would end due to an increase in excess reserves (which would stabilize IOER). Despite this, the Fed lowered rates again, which only serves to further decrease cash and push investors into increasingly risky investments.

Treasuries bounce off Intermediate-term support.

The 10-year Treasury Note Index bounced from Intermediate-term support at 128.98 to test the Cycle Top resistance at 129.94. Should overhead resistance hold, there may be a resumption of the decline. This week the markets were kept afloat through permanent open market operations (POMO) to stabilize bank reserves and keep the markets liquid. This may continue through mid-October as taxes and pension payments must be made.

(Bloomberg) After the chaos this week in short-term funding markets, the Federal Reserve faces yet another tough task: how to shore up the multitrillion-dollar network that keeps funds flowing through the U.S. financial system without stoking fears of a systemic problem or fueling talk of a recession.

Morgan Stanley expects the central bank will turn to rebuilding its balance sheet by announcing permanent open market operations — known as POMOs — to support funding markets. These procedures aren’t anything unusual for the central bank, which has long used POMOs to help stabilize reserves, and offset the growth of currency in circulation. But the Fed will have to communicate how they’re distinct from the aggressive asset purchases it undertook in the wake of the 2008 crisis to help drag the economy out of recession.

The Euro declines toward the Neckline…again.

The Euro was repelled at Short-term resistance at 110.01 this week.It remains on a sell signal that may get further confirmation as it crosses beneath the neckline.The Cycles Model suggests a period of weakness stretching through the end of October.

(FXEmpire)The Euro broke down a bit during the week, to reach towards the 1.10 EUR level, an area that would make quite a bit of psychological importance to traders around the world. However, the overall downtrend should continue, although it is very choppy.

The Euro fell a bit during the trading week, reaching down towards the 1.10 level. That is an area that will attract a certain amount of attention because it is a large, round, psychologically significant figure, but at this point in time it does look like it will be tested and perhaps break down through there. The previous two weeks should offer support, and therefore if we were to break down through those candlesticks, the market should unwind down towards the 100% Fibonacci retracement level, looking towards the 1.04 EUR region.

EuroStoxx rally loses momentum. is not displaying the Euro Stoxx 50 Index at this time.

The EuroStoxx 50 SPDR consolidated between the September 12 high of 38.22 and mid-Cycle support at 37.21.The Cycles Model suggests a probable decline through the end of October.

(MarketWatch) European stocks edged higher on Friday as markets looked set for calm at the end of an eventful week.

The Stoxx 600 SXXP, +0.29% rose 0.3%, the CAC PX1, +0.56% climbed 0.4% and the DAX DAX, +0.08% lifted 0.2% as equities built on Thursday’s gains after central banks across the globe loosened monetary policy.

U.S.-China trade talks resumed on Thursday for the first time in two months, boosting stocks, but gains were held back as Chinese state media played down a potential deal.

The Yen makes a Master Cycle low.

The Yen made a Master Cycle low on Wednesday and rallied toward Intermediate-term resistance at 93.32.It has been a longer than usual shakeout, but may now support a resumption of the rally through mid-October.

(Reuters) – By adding vague new language to its latest policy statement, the Bank of Japan is hoping to keep unwanted sharp gains in the yen in check, without having to tap its depleted policy tool-kit or tying its hands on future monetary action.

In a statement announcing its decision to keep policy steady on Thursday, the BOJ prompted some head scratching by saying it would “re-examine” economic developments at next month’s rate review.

In particular, it said “closer attention” was needed to the possibility that the economy could lose momentum to hit its 2% inflation target.

Nikkei remains above mid-Cycle resistance.

The Nikkei Index rose higher but could not break through its April 17 high at 22345.19.  It extended its inverted Master Cycle until Thursday. A sell signal may be given beneath mid-Cycle support at 21709.04. The subsequent decline may last through the end of October.

(Reuters) – Japanese stocks rose for a second day on Friday as consumer-related shares gained on speculation the Bank of Japan will follow other central banks and ease policy next month.

By 0155 GMT the Nikkei index rose 0.43% to 22,138.16. Nikkei shares were on course for a 0.7% gain this week, which would be its third straight week of gains.

There were 166 advancers on the Nikkei index against 52 decliners.

The BOJ kept policy steady on Thursday but signalled its readiness to expand stimulus as early as next month by issuing a stronger warning of overseas risks threatening the export-reliant economy.

U.S. Dollar consolidates above Short-term support.

USD consolidated just above Short-term support at 97.96.Should the decline continue next week, we may see the USD challenge its trendline at 96.00.USD may reach its Master Cycle low by the end of the month.

(CNBC)The U.S. dollar was mixed on Thursday morning, weaker against the euro, the Swiss franc and the Japanese yen, but stronger versus the Antipodean currencies after a slew of central bank decisions came in more hawkish than expected.

The Federal Reserve on Wednesday cut interest rates by 25 basis points to provide insurance against risks including weak global growth and resurgent trade tensions, while signaling a higher bar to further reductions in borrowing costs.

Subsequently, the Swiss National Bank, the Bank of England and the Bank of Japan all kept their policies on hold. Norges Bank increased its key policy rate, moving its rates in the opposite direction of the United States and European Union.

Gold bounces at round number support.

Gold bounced at 1500.00 which is an important support level.Beneath this lies a sell signal that is confirmed by Short-term support, also at 1500.00.This may set a more serious decline in motion that may have bigger implications for gold investors.

(MarketWatch) Gold prices finished higher Friday to end the week with a gain for the first time in about a month, as President Donald Trump announced more sanctions on Iran and China reportedly cut short its trade negotiations with the U.S., fueling haven demand for the precious metal.

“The confrontation with Iran [is] still very real,” said Jeff Wright, executive vice president of GoldMining Inc. “So you have safe-haven interest perking up into the weekend.”

Trump called the Iran sanctions the highest ever imposed on a country. He had promised earlier in the week to impose new Iran sanctions in retaliation for Tehran’s alleged role in strikes on Saudi Arabian oil facilities.

Crude smashes higher on Monday, but the gains don’t last.

Crude made a high not seen since July but could not hold on to its gains.The Cycles Model suggests a possible brief probe higher in the next week.

(OilPrice) Flooding from a tropical storm hit the Houston area on Thursday, with some calling the situation worse than Hurricane Harvey.

Heavy rainfall inundated the Texas coast, flooding Houston and Beaumont, home to massive oil refining, petrochemical and export facilities. The storm was downgraded to just a tropical depression, but those classifications only measure wind speed. The real threat from Imelda was “major, catastrophic flooding,” according to the National Weather Service.

“Extremely persistent thunderstorms” created the potential for 6 to 12 inches of rain, with higher levels in certain areas. “Storm total rainfall could be in excess of two feet for some areas before the weather finally begins to improve!” the NWS said in a notice. The forecast predicted that through Friday, some parts could see rain reach as high as 25 to 35 inches.

Agriculture Prices challenge Short-term resistance.

The Bloomberg Agricultural Subindex challenged Short-term resistance at 38.24 on Monday, then eased down.This action proposes a potential “buy the dip” opportunity as the rally develops legs.

(MarketWatch) The U.S. Farm Belt, already battered by low commodity prices, the trade war and mounting bankruptcies, is bracing for even worse times ahead.

Record flooding this spring across the Midwest and Great Plains damaged stockpiles of corn and soybeans in some areas, while the extremely wet weather led to widespread planting delays.

Now the threat of a weak fall harvest and the danger of an early frost could amplify hardship felt through stretches of Wisconsin and Minnesota and tip more family farms into bankruptcy.

Shanghai Index reverses at mid-Cycle resistance.

The Shanghai Index challenged mid-Cycle resistance making a new high on Monday, as mentioned last week.However, it closed beneath resistance at 3014.45 this week, giving a potential sell signal.A further decline beneath Intermediate-term support at 2922.27 confirms the sell signal.

(ZeroHedge) On October 1, to mark the 70th anniversary of the People’s Republic, Chinese President Xi Jinping will deliver a speech that unreservedly celebrates the Communist Party of China’s record since 1949. But, despite Xi’s apparent confidence and optimism, the CPC’s rank and file are increasingly concerned about the regime’s future prospects – with good reason.

In 2012, when Xi took the reins of the CPC, he promised that the Party would strive to deliver great successes in advance of two upcoming centennials, marking the founding of the CPC in 1921 and the People’s Republic. But a persistent economic slowdown and rising tensions with the United States will likely sour the CPC’s mood during the 2021 celebrations. And the one-party regime may not even survive until 2049.

The Banking Index repelled at Diamond trendline.

— BKX reversed at the upper trendline of the Diamond formation but has not emerged beneath the lower trendline yet.It may give a sell signal once it crosses beneath 100.00 again.  The Cycles Model suggests a probable decline through the end of October.

(ZeroHedge) When it comes to occasional (or chronic) dollar shortages, and the plumbing of the overnight lending market, which as everyone knows suffered a spectacular heart attack early this week when the overnight repo rate soared to 10%, the New York Fed and its open markets desk, is the authority on any potential plumbing blockages. Yet it now appears that the most important regional Fed when it comes to maintaining market stability, is just as clueless as the rest of us as to why the repo market froze up. sending funding rates to never before seen highs.

In an interview with the FT, New York Fed president John Williams, who earlier this year unexpectedly fired not only the head of the NY Fed’s markets desk, Simon Potter, arguably the most important trader in the world, manning the world’s most important trading desk but also the second most important person at the NY Fed’s “Plunge Protection Team”, the head of the Financial Services Group, Richard Dzina, said that the New York Fed is examining “why banks with excess cash failed to lend to the overnight money market, following a week that revealed cracks in the US’s financial plumbing.”

Specifically, Williams questioned the hesitancy of the large, liquid banks, saying “the thing we need to be focused on today is not so much the level of reserves [held at the Fed]. It’s how does the market function.”

(Bloomberg) The European Central Bank’s latest offer of free cash to lenders attracted little interest on Thursday, in a sign of just how much liquidity is already sloshing around the financial system.

An offer for three-year loans — at a rate that starts at zero and could fall as low as the deposit rate, currently minus 0.5% — was taken up by 28 banks for a total of just 3.4 billion euros ($3.8 billion), well below predictions of 20-100 billion euros.

The loans are part of a stimulus package by the ECB president to boost economic growth and inflation. But European lenders have little trouble accessing funds following years of loose monetary policy and some are even keen to turn away deposits to avoid charges from the ECB’s negative interest rates, which Draghi pushed even further below zero this month.

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