Wednesday, May 6, 2009

What’s next? DOW 10,000 or 5,000? Or Both

What’s next? DOW 10,000 or 5,000? Or Both

Back on February 23rd I wrote that a bottom was near and a sharp 30-50% rally taking 3-5 months would happen. Well it only took 8 weeks for a 35% rally so far. Many stocks went from $2-3 to $10-15. A truly amazing achievement but the sharpness of the decline was also unprecedented resulting in a stampede. What’s next? If one has looked out their window the Obama giveaway is starting to land. Although the consumer is starting to save for the first time in years, our wonderful government has taken over that problem. The DOW could see 9500-10,000 before giving way to the end of the bear market rally and DOW 5,000 within the next 2-3 years.

If the DOW closes above 8500 the next resistance is 9,100. There is very little resistance from 9150 to 10,000-10,200 except around the 9600 level. For the most part the strength of the bear market rally will depend how aggressive the shorts are on the way up. Always put a trailing stop. On the downside a break of DOW 7750 gives way to 7400. A close below 7350 would mean a high probability of retesting 6600.

The big problem of buying and holding and working in the upcoming years is highly remote. Our government printing press is in overdrive and the percentage of our debt to GDP is closing in like a freight train. This week the government has huge auctions. The 10 year bond has gone from 2% to 3.20% in the past few months. The 10 year is how mortgage rates prices are determined. If they keep going up, mortgage rates will follow. Our government can’t control the long term movement of the 10 yr. It’s just too big. Our government is printing money and using that money to purchase 10 yr. bonds all the way to 1 month bills to artificially keep the mortgage rates low. They are forcing people into riskier assets by giving no return on short term money. Something is close to giving. It might be the fall of the dollar or jump in rates or both. It’s a very risky game especially with our tax dollars.

Don’t be fooled by the increase in housing sales. About ½ of the sales are foreclosure sales. Expect these foreclosure sales to re-enter the market in 3-6 months. Most of these foreclosures need work before being put back on the market. Housing is years away from being a good investment inflation adjusted.

Besides Chrysler which is private there have been very few bankruptcies. So far all the money being created and borrowed has delayed the ensuing slew of failures. It is only a matter of time before the house of cards collapses. Higher taxes and stagflation is on the horizon. The rapid increase in money supply leaves the FED on a tightrope of trying to inflate housing prices while leaving other consumer and producer prices stable. It’s an impossible task as we learned last summer with energy costs soaring. The FED is trying to inflate housing prices so people are above water on their equity value which will result, in the banks will be out of trouble. Higher taxes, rapid money supply growth, job loss, too much inventory, credit availability being curtailed all spell trouble on the horizon. Not to mention the government trying to control our financial institutions.

There needs to be failure so stronger companies can grow. With GM and Chrysler being backed by the government this is penalizing the successful car companies like Ford, Toyota and Honda. Capitalism is at risk with the no failure policy. The cost in the long run will be a move toward socialism. Stocks markets don’t flourish in this type of environment.

Tax polices and increase government control spell trouble for the next 2-3 years. Our budget deficit is going to push interest rates higher and slow down our growth. The current 2 month rally can last longer but keep your stops tight. Most of the easy gains have already occurred.

Our government is backstopping everything – credit, auto parts, cds’,cdo’s pensions etc... Once people realize the backstop is the taxpayer not some factious entity don’t be the last one out the door. Smart money is selling into this rally.