Wednesday, October 14, 2009

Is the Stock Market Safe to Invest Again?

Is the Stock Market Safe to Invest Again?

What has happened since the March lows in the DOW besides a 3400 point rally? Back in March, pessimism was rampant. Eric Schmidt CEO of Google was very negative on the economy with his stock trading in the $320 level. Just last week he became optimistic about the future with his stock already up 65% off the lows to $530. The current market psychology has gone in a complete 360 reversal. An important top in the market is at hand. We are in the latter stages of a cyclical bear market that started in March of 2000. A real cyclical bull market will re-emerge in 2-3 years. The current rally is just a big head fake. Below are a few reasons why-

Dollar falling
Shippers near their lows
Higher commodity prices
Zero business investment as % of GDP
Government spending out of control
Recent IPO’s open lower than their IPO price
Nearing the 50% retracement in the DOW which is 10,300 level
Commercial real-estate loans due in next 2-5 years
Lack of any housing appreciation even with tax credit.
Unemployment at least 10%.
Government intervention in health care
In recessions companies usually lose money.
Repeat of 2002 with free money

There has been no country in modern history that ever was prosperous when their currency falls apart. It was one of the reasons why we crashed in 1987. People don’t want to hold a currency that loses its value overnight. Remember Germany and the wheel-barrel? Give me the wheel barrel and forget the $$. Sure it might help the trade deficit a bit but it also raises foreign import prices. We are net IMPORTERS of goods.

If economies of the world have a positive GDP and are out of recession then why are shippers near their lows? Most shippers haven’t participated in any part of this rally. The dry shipper’s index has barely budged from its low of $8,000 to its current level of $21,000. Still it’s off its all time high of $230,000 made May 2008 and more importantly its June high of $70,000.

The Fed’s current easy money policy was supposed to inflate house prices instead its inflating commodity and financial assets. Heating oil prices have rallied even though there is plenty of heating oil in storage. This is the same with oil and natural gas. The latter has no more storage places left. It bottomed at about 25 cents and now trades in the 45 cent level. Funny thing with oil is it’s trading around $74 a barrel but pump prices are only $2.65. When oil was $140 we were paying $4.40 a gallon. Talk about manipulation.

How can the FED lend out money at .25% while the DOW yields over 4 ¾% and not expect a flood of money into the markets. The current yield is about 2.90% which is very low to historical yields. Money has also flowed into the bond market also keeping yields low. It doesn’t help that our government is also a buyer of bonds. Didn’t we make the same mistake in 2002? Haven’t we learned our lesson?

Our government is spending like they just won the lottery. Don’t they understand that somebody namely the people of the US will end up paying for the current misgivings? The value of the dollar is reaching a critical point where it will harm our markets and the future of America in a very negative way. It’s sad only a chosen few can cause problems for the masses.

There is resistance in the DOW around 10,000 followed by 10,300 then 10,500. If the market doesn’t break 10,000 by the end of the month then odds favor another bear move down. The panic to get out of the market won’t happen until we close below 8850. A return next year to 6600 is a high possibility.

Don’t be fooled into thinking everything is fine. We are walking a tightrope of fiscal irresponsibility and monetary shamefulness. History will soon repeat itself. Where are the bankruptcies? Companies that don’t make money in a recession are making money now because of cost cutting i.e. job cuts. That can’t last for long.

One sign of market weakness is the current IPO’s that are trading below their initial offering. Companies are issuing stock to raise capital which in a way is good but they don’t use the money to expand rather just payoff debt via equity.

Gold is looking frothy but could easily go into orbit like oil did in 2008. Adjusted for inflation gold should be about $2300 an ounce. Gold could easily hit $1500 over the next 6 months, but like in 1980 the down move can be ugly. This makes one wonder if it’s really a hedge of inflation or just a mirage. Commodities are rising on fears of inflation not demand. Commodities are a better hedge against inflation than gold. Stagflation will be the theme 2010-2013.

The government wants to inflate its way out of the large deficits. It’s the 1970’s all over again. Won’t be surprised to see the bell bottoms come back. Does a war, falling dollar, rising commodity prices and weak stock market sound like a remix of the 1970’s that left this country in stagflation? Paul Volcker is standing in the background shaking his head.

There was cash for clunkers which helped Honda and Toyota move their inventory. There was a tax credit for first time home buyers which stabilized the housing market.
There was an $870 billion dollar stimulus package. There was a US winner of the Nobel peace prize who is running the country. In the end the inevatable will happen. Companies will go bankrupt and the weak will disappear laying the groundwork for a stronger economy. Our nation will go back to real growth and be a stronger country. The politicians who put us into this mess will be defeated. America will wake-up. Unfortunately it won’t happen for a while especially if the policies that are in place stay with us for a while.

Where’s the wake up call? Maybe the defeat of Chicago not making it past Japan for the Olympics is the beginning. Chicago came in 4th in a 3 country race. Maybe the Olympic committee figured out that Chicago politicians are crooks. Some went out and bought land where the future Olympic site was planned. Maybe now they will use it for a casino. Many of these crooks are now in Washington.

On a final note of how sad our country has gotten. The nightly news was showing the awful killing of school kids over the past years. Intercity kids don’t attend and the unattended usually end up in gangs. It was getting so bad that the Obama administration decided to send the head of education to address the problem. The funny thing about that is the guy used to be in charge of the Chicago schools before he left for Washington. Talk about a waste.