Wednesday, December 15, 2010

2011- The year reality hits Government

2011- The year reality hits Government

The November election fostered a wake up call to Washington. The markets which already had been rallying from the QE2 announcement in August have continued to climb to the current DOW 11,457. I’ve been wrong about the strength of the current rally. It seems all that QE2 has added fuel to stocks while doing the opposite to bonds. The 10 year bond was trading around 2.50% when QE2 was announced but has since fell to 3.52%. What would have happen if the FED wasn’t buying billions of dollars of bonds everyday?

There have been a few positives as the dollar has gotten stronger and it looks like tax rates will remain the same for the next 2 years. However in the passage of the bill they loaded it with billions of giveaways. On the negative side our budget deficit is increasing and interest rates are moving higher on that debt. States like Illinois are likely to default. Our government has successfully managed to sell out of some banks and GM but Fannie and Freddie remain dark clouds. The attitude of no one can fail as the government will bail you out hopefully end as the good government investments get repaid while the remaining ones struggle to pay or default causing a wave of negativism toward government bailouts.

What remain big concerns going forward into the coming years include-

1. Banks still marking to model
2. Special tax breaks
A. McDonalds doesn’t have to pay for the new health care plan. (Along with 100 others)
B. GM getting a 50 billion tax break from Congress (being able to use bankruptcy tax losses)
C. Giving Ford a 12 billion tax break after giving GM a break.
3. Foreclosures being delayed with “Extend and Pretend”
4. States defaulting
5. Congress keeps spending while the FED keeps printing money.
6. Weak Housing as high real estate taxes pressures any appreciation.
7. Over confident that FED will bail out any market sell off.

The day of reckoning of the government gone spending crazy is approaching in the next few years. The only difference between our budget shortfalls and Greece, Spain, Ireland is that we can print money. Our fiscal responsibility concerning the deficit of 13 trillion and counting is all talk. Congressmen blame it on the other side and claim they want to lower the deficits but their actions sharply differ from reality. When Senator Mitch McConnell came out and stated that his goal was to make sure President Obama has only one term this statement shows how Congressman really think about solving any problems like the deficit in the next few years. Hopefully all these bums get voted out during the next few elections. As long as the attitude in Washington remains in spend mode our country remains on the cusp of disaster.

The Fed’s liquefying the system has created “free money “for many companies. Companies that couldn’t raise a dime 2 years ago now raise millions with ease. The corporate bond offerings are at records. What will happen in 3-5 years when they have to payoff the bondholders? We have seen a 3 standard deviation move in the 10 yr. bond even with the government’s QE2. What will happen if 10 yr. rates move above 4.5%? This bond market crash would devastate not only bond holders but our government debt interest payments will surge killing off the current recovery. Corporate bonds would also get hit but big multi-nationals would be the safe haven away from government bonds and will out perform in the upcoming years.

As for the stock market DOW 11,550 -11.632 and SPX 1247-1260 are lines in the sand for changing my bearish stance. The above levels need to be breached for 3 days for me to change to a bull. The downside is ugly with a minimum 10% drop (more likely 30-40%) likely during the first half of 2011. The risk to the downside is scary more so now than in 2008. All the programs that our government has pursued like “cash for clunkers”, tax credits for buying a house or a refrigerator have done nothing but postponed the upcoming washout.

What will trigger the collapse? How about some of the scenarios taken below as loading the gun –

1. Bonds rates surge as our government cost of funding the deficit spins out of control
2. Current bullishness as measured by market sentiment is at 2007 levels
3. The US dollar drops 10-20% over a 2-3 month period.
4. European countries default.
5. China’s slowdown accelerates as property values fall (also in Hong Kong)
6. Banks need to mark to market
7. Massive foreclosures hit the market sending down prices.
8. Cities and states default
9. Congress fails to reach a long term budget that reduces the deficit in a meaningful way.
10. Interest rates for housing go to 6%
11. Riots in the street like in Europe spread worldwide.

Bottom line is one should keep close stops as a “mini crash” 8-12% in one day is possible. Also markets don’t crash at the highs rather a crash could occur after a pullback of 5-10%. The panic won’t happen until the DOW breaks 9850. The “extend and pretend “pattern is about to run into reality in 2011.

On a funny note it amazes me how stupid the government can look. The treasury made over 1 billion of the 100 dollar bill until they realized the error which can easily be seen. Excuse me but 1 billion NOT just a couple hundred bills until this flaw was realized? This error cost over 120 million. I’m sorry but you add the postal system, Amtrak, Fannie and Freddie to the equation you end up with one costly messed up system and that’s not even considering all the pensions problems. The economy needs a cleansing of the current system even if it does mean a double dip. It could take a few years to evolve and run the course but for the long run it would be a winner. The government’s “ponzi scheme” is about to be discovered by the average investor. Extreme caution is warranted. Stay in cash and short-term investments. The housing drop is in the latter innings but still has 15-30% to fall. Gold is due for some pullback and higher interest rates will cause a sharp pullback in gold to the $1150 area. Other commodities are also expected to correct from their recent surge. China’s cost of $5.50 for a gallon of milk on a $350 month salary adds up to rioting in the street. Believe it or not China’s stock market is down over 10% this year and over 25% from it peak while our market is up 10%. Something doesn’t add up here.

Tuesday, October 5, 2010

The House of Cards

The House of Cards

Today Japan came out with their own quantitative easing program which not only included buying their bonds but also stocks. Japan doesn’t like their strong currency as they are the biggest exporter to China. We are trying to increase our exports worldwide with our own quantitative easing and destruction of the dollar. There is a move around the world from Europe, Japan and the US to destroy their currency in an effort to export their way into growth.

Our FED came out a few weeks ago declaring the need for inflation. The FED has been desperately trying to prop up housing prices but instead have weakened the dollar and caused soft commodities- corn, wheat, etc to surge. In the next 6-12 months food prices will soar. What will happen when food and energy prices rise to 2008 levels while housing prices and activity stay soft?

The politicians are out trying to influence their vote. One of the biggest issues is the Bush tax cuts that will expire at the end of the year. Obama is on record stating he is for only middle tax cut while leaving the upper sector to pay the bill. He is also telling congressman he is for the extension of tax cuts for ALL. How can this be? Why doesn’t he publicly come out and just state for ALL. He is simply using Chicago style politics. His constitutes are out stating tax cuts remain for everyone just to get the vote. After the election if he doesn’t extend the cuts for everyone he can state he never stated it. The markets have already priced in a Republican congressional victory. If it doesn’t happen the house of cards will fall.

Class warfare is in full swing. The consumer which accounts for over 70% of overall consumption is in save and debt payoff mode and isn’t going to spend anytime soon. Our government has taken over spending and when they started in 2009 they have had no respect for a spending limit or the number of trees used. Don’t they realize someone eventually will have to pay?

The “extend and pretend “scenario is still alive. Many foreclosures that were going to happen have been delayed due to banks using a robotic signature. It will be a lawyer bonanza and will keep the influx of bankruptcies to stagnate. Some people who haven’t paid their mortgage and were due for eviction will be able to stay in their bank-owned house longer. Nothing like rewarding those who game the system putting a damper or delaying the inevitable.

Besides the personal tax rates, the capital gains and death tax rate will expire (and go up) at the end of the year. If they aren’t extended the incentive to “sell” will be huge. So far nothing has been stated about whether the tax will expire. Another concern that is in the health care bill is a new sales tax of 3.8% on house transactions. Many think once the republicans get the majority they will repeal the health care bill. Both democrats and republicans are to blame for the current economy doldrums and should be shown the door.

The printing presses are in full swing. We are racing with other countries to devalue our currency. We are going to pay back our IOU’s with cheaper dollars. The problem occurs when we issue debt what foreign country is going to invest in our paper when the dollar keeps going down? This will cause our interest rates to spike. In Greece their rates went from 6% to 24% in 2 weeks. I doubt this scenario will happen this quickly here but a move from 2.5% to 4% in the 10 yr. bond would spell trouble for our economy even if it happened over a 6 month period.

My last blog I was very concerned about the market and it has gone straight up. The move was boosted by the FED actions and the negative investor psychology. Mutual fund cash is very low meaning whatever cash they receive they are putting it to work. This also shows the bullishness by fund managers. They believe the market will rally because the FED will keep the market up. This “don’t fight the FED” has worked 90% of the time. I think this time it won’t work and the market is in a very critical juncture. Some of it is politically motivated to keep the market up through the election.

One positive result of this free money is companies are able to raise money through debt issuance (or is it?). Many companies are using proceeds to buy back stock or increase their dividend. Short term this keeps their stock propped up. Longer term the bond will have to be paid off reducing the company’s cash.

What makes me so bearish? The market is still in a cyclical bear market that started in 2000. The markets are rallying the past year on less volume on up days and higher volume on down days. Sentiment has gone from bearish to bullish over the past 6 weeks. Traders are taking on risk believing our government will bail them out by keeping rates low. It’s a win/win situation if rates get pushed toward zero stocks will rally and if the economy pick up stocks will also rally. There is only fear and greed never a win/win situation.

The new highs/lows list, advance/decline line and trin all are misleading the strength in the market. The expansion of EFT’s , preferred stock and interest sensitive issues currently mask these indicators to the upside. Many technical indicators that worked well in the past are worthless.

The upcoming decline will make 2008-9 look orderly. Some individual stocks will lose 20-30% in one day. No one will be able to claim the short seller was at fault since short interest is very low. The market goes down 2/3 faster than it rallies. DOW 6,000 could easily be seen by next March.

What will change the bearish outlook? The list is too long but below are a few-

1. Stronger dollar
2. Reduced government spending.
3. Stable tax rates
4. Keep capital gains rate the same.
5. Free trade
6. Stable consumer prices
7. Companies go bankrupt
8. No extend and pretend
9. Balance both state and federal budget
10. Fund state pensions to a realistic level.

Technically a move above 11,250 for a few months would be a good signal. There are some important long term cycles that are currently activated that indicate a long term trend (2-4 years) will be established over the coming months. If the markets don’t turn soon the trend will be higher.

Gold has kept its run intact. The July decline was very shallow keeping the naysayers running for cover. The FED wants to inflate and gold is a hedge against a weaker dollar and higher inflation. The trade is crowded and when it does drop the drop will be sharp. Play gold on the long side and use stops. Higher interest rates will cause the price of gold to fall if they ever rise. The rise in rates needs to be caused by a better economy not a failed debt auction otherwise gold goes higher. The 1980 top in gold when adjusting for inflation needs to trade for about $2300 an ounce in which people might be taking their gold fillings out.

The current environment in our financial markets is at a cross roads and will lead to a resumption of the bear market. Most people are leaning on one side of the boat that being long gold, long stocks and long bonds while being short dollars. It will end ugly. If the market acts well for the next 3-4 months then the trend mentioned earlier will leave plenty of time to make money. As for sectors which will under perform on the upside and lead the downside include- restaurants (margins squeezed), retailers, jewelers, housing, financials and some tech (competition creates oversupply of phones, TV’s and pads) .

The upcoming weeks bring a deluge of earnings. Earnings will be up sharply but REVENUE and future guidance will put pressure on the market. Many stocks will beat the bottom line, show no top line growth and guide down future quarters.

The house of cards is ready to fall so extreme caution is needed. Use stops for those in the market. Just as only a few can win the lottery one can’t count on the US government to keep both the bond and stock markets from falling. Just ask Japan. A 2-3 trillion dollar stimulus is cup of water in the ocean compared to bank derivative exposure of 223 TRILLION.(As of June 2010). Remember its return of capital not return on capital. Putting some capital overseas is a way to diversify against a weak dollar and inflation. Australia and Canada are countries in much better shape than the US.

Tuesday, September 7, 2010



With the elections just around the corner it’s time for the Illinois politicians in Washington to shine at their best. The Democrats are behind in the polls and there is a good chance they lose their majority in the house thus bringing a relapse of the mid-1990’s stalemate. Back then President Clinton moved toward the center and things got done in Washington. Currently the surprise in the markets won’t be a Republican victory. Their victory is already priced in the markets.

There is one thing which is highly probable – The stock market will establish a trend in the next month or so that could last for years. The question will be which direction? Is the rally off the March 2009 low a bear market rally or the beginning of a bull market which recent action being a small correction from the April highs?

The odds for a continuation of the cyclical bear market are higher than just a correction in a bull phase. The next month or so will give a better clue and IF the market can get above 10750 that tune would change. Conversely a drop below 9625 would bring out the bear in full force.

Historically September is a bad month for the markets although the last 4 of 5 years have been positive. August was a terrible month for stocks with some recovery this past week. Usually a long holiday weekend has a counter trend push followed by a resumption of the trend after the Holiday. If this is the case this week should mark the current rally top and the market should turn down from here.

Recent activity in August namely the death cross (50day MA crossing the 200day MA) and the Hindenburg omen point to an upcoming decline. The Hindenburg omen’s theory takes a few different variables namely percentages of new high/lows, McClellan Oscillator and 10 week MA. One problem with the omen indicator is with all the new ETF’s and interest rate related issues trading on the NYSE that are making new highs as our quantitative easing policy has dropped the 10 yr. back to 2.5%. Instead of looking at preferred stocks, trusts and ETF’s one should look at REAL stocks. The theory behind the omen shows instability in the market when there are a lot of new highs and lows at the same time. Currently there are signs of this unstable activity over the past month.

Another warning that has been occurring over the past 3-4 months is the way the S&P 500 stocks have moved in a high correlation to each other. Currently the ratio is over 80% with 44% being the long term average. This 80% reading is rare and very bearish. Its highest reading was just before the 1987 crash at the 88 level.

There are a lot of cycles namely the midterm presidential cycle. This year the cycle is not different as market weakness is expected during the 2nd and 3rd quarter of a mid-term election. The market usually bottoms in the 3rd quarter and moves higher for the following 2 years. When the market doesn’t follow this tune the decline is ugly.

Another cycle is the 8 year cycle. It’s more of a trend indicator that can last for years. It doesn’t show a trend reversal but rather shows the period when either an old or new trend will be established. If it’s a low it could last for 10-20 years (some lows still haven’t been touched) or if it’s a top it could last for years. The 1930 top took 24 years to break. This indicator is a long term trend and it occurred this past week however as with all long term indicators there is a month or so margin for error on both ends.

The DJIA has resistance at 10,490, then 10,590 then 10750. Support at 10,307 then 10,250 and 10,150. A move above 10,750 will take us back to 11,120 while a push through 10,150 would result in retesting 9660.

The May 6th “flash crash” was the beginning of the instability of our market. It was a warning shot which the average Joe has responded with mutual fund outflows of $50 billion. They are happy getting a return of their investment instead of a return on investment.

Getting back to the upcoming election there will be an increase in promises and more extent and pretend. All those tax increases slated for next year will be on the fence giving the voter a false sense of reality. In reality our government owns over 50% of ALL mortgages through Fannie and Freddie. The mortgage crisis is far from over with 23% of mortgages UNDER their current house value. Our FED is printing money like crazy while our deficits are out of control. How can our government expect to raise money in auctions to pay off the interest and principle (although very little going to the latter) while creating a weaker dollar? Foreigners will stay away from these auctions because of currency risk.

The current bond bubble will end in a crash but that could be years away. Just look at Japan. People thought in the 1990’s they were in a bubble. Their rates remain near zero.

The bottom line is our country is spiraling downward. What will get us out is fiscal responsibility and tighter money. It will be painful for a year or so but the outcome longer term will be worth it. Current policies now in place only drag out the process only making things worse. It will feel like depression but won’t statistically be considered one. The government wants the consumer to spend but the consumer is either paying off debt or saving. Maybe the other shoe should be on the government’s foot?

Monday, August 9, 2010

Here Comes the Helicopters

Here Comes the Helicopters

Tomorrow the Federal Reserve will probably change its wording to include that they will do everything possible to avoid any deflation or slowing of the economy. With rates at almost zero it seems the FED has nothing left in the cards? No, they can print MORE money and buy everything in site with the money they print. They have been buying mortgages, treasuries and probably S&P’s futures (but this will never be confirmed) over the past few years as their balance sheet has swelled by just a trillion. Helicopter Ben is in his final panic mode that will send the markets reeling just like Japan did in the 1990’s. Our government is trying to artificially prop up the financial markets, housing while keeping interest rates too low. The move to keep the “no failure policy” alive any longer will just cause more problems down the road. Just as a forest fire rejuvenates the forest to grow stronger a recession does the same to the economy in the long run. Bankruptcies and restructuring of the balance sheets is the outcome from economic forest fires.

The question will be can the FED’s “free money” jump start the economy? Just look at the long term results for” cash for clunkers” and the “housing tax credit” for some answers as to whether these programs helped long term growth. The public sector is in save and pay back debt mode and doesn’t want to get extended anymore with credit assuming they can get credit as the banks already have enough loans under water. During the past 12-15 months our government took over the spending and now is looking at ways to pay for it. With the private sector tapped out and the government in spend mode and feeling the heat from doing another stimulus the next step will be an economic slow down and even double dip. Taxes at ALL incomes are going UP period in 2011. Everything will be done prior to the November elections to mask the economic weakness.

Since the last update July 5th the market has roared past the 10,250 level toward 10,720. Right now it’s the dog days of August with very thin markets. The DJIA could easily make a double top at the 11.200 level. However the next big move will be lower and will be a sharp wake up call. The time frame for this important top to occur is within the next month probably next 2-3 weeks. The bear will re-emerge in earnest in the fall. The “extend and pretend” era is still running strong. As for the government buying everything in sight and keep our stock and bond markets rallying just look at Japan and see what their results were in the 1990’s.

Let’s think about the current environment for savers. Savers aren’t getting any return but have returned into saving rather than spent. This is telling us something. Consumers aren’t spending like they have the past 20 years. Their trend of being net spenders has faded and this by itself is a big game changer. The problem with the equation is government. The public can be net savers but if government spends like they have causing trillions in deficits in essence sooner or later will be paid by the US taxpayer. On one hand the American people are doing the right thing in saving but on the other their savings will be destroyed by our government spending and the weakness in the dollar. The balance between the public and private sector is out of line. Today’s profits will be taxed away tomorrow.

What can be done on the bullish case for stocks? Basically change everything opposite of today’s current economic environment- Higher interest rates, lower taxes, privatize some government programs and address the immigration issues. As with most Chicago politicians the issue isn’t why they get caught but when. Hopefully November brings change on both ends. Get rid of them all without any party bias. Then the markets will rally like in1982 and a new bull market will begin.

Monday, July 5, 2010

The Economy and Market mid- Year 2010 – Insights

The Economy and Market mid- Year 2010 – Insights

As the 2nd quarter comes to a close in a horrific manner one wonders what’s next. The year started out rocky in the month of January after seeing 6 consecutive monthly positive closes on the Dow Industrials. This correction only lasted into early February when the market resumed its track upward for 8 consecutive weeks. It seemed that nothing could halt the upward march as the DOW moved up 28 out of 34 trading days. During this span there were 3 occasions of at least 6 consecutive up days in a row. Then on April 26th the DOW topped out at 11,258 without any fanfare. It just seemed to go higher everyday for 2 months until it didn’t. As stated in the March 30th blog “The current rally probably can make marginal new highs into April or May with DOW resistance as follows – 10,960 then 11,032, 11,080 then 11,131 being the top level. If we close above 11,150 then 11,500-11,600 come into play. On the downside support is 10,550 then 10,250 followed by 10,183 then 9850. The first drop from the areas mentioned above should stop around 10,200 level before a bounce that would take the market NOT to new highs. The failed rally would send the market down to below the previous lows. It is from this point where a crash would be highly probably. In short, a top within the next two months at the 11,100 level followed by a decline to 10,250 which then would rally maybe back to 10,550-10,800 and from here another decline to retest the previous lows. The lows fail to hold and a crash ensues.”

From the April top the market dropped to 10,241 (not counting the flash crash) and spear-headed back to the 10,900 level before taking out the 10,241 low and failing below our 9850 crash “ALERT” level. The market has had its first 7 consecutive down days this year (and counting) last week. Expect the current decline into the 20% correction level where the question would remain is it just a correction or resumption of the cyclical bear market? There could easily be a sharp rally from the 9000-9100 level which is expected to be the “summer rally” but 8200 and lower is expected as the market heads into the second half of the year. Under 8200 is an air pocket to DOW 7364. A close above 10,250 would take me back to the table, but all the ingredients for a continued move lower remains until all the excesses from all the credit expansion (free money) and company failures are rung out of the system. In short a cleansing process which the strong survive and the weak FINALLY go out of business. Our government has done a good job so far of avoiding the latter but it will finally happen over the next few years.

This process of weeding out the losers will accelerate once it starts. The markets will anticipate the process and will turn months before the bottom in closures. There have been weekly local bank closures that have accelerated over the past year. Problem is the Fannie and Freddie bailout will far outpace the community bank’s losses. The credit bubble took 20 years of free money where each step down rates made a lower low. Now with rates near zero there is no lower low left. We have already started to correct the excesses over the past few years but it will take a powerful whiff of inflation to reduce the credit impact. Our government has been trying like mad to get home prices to rise. It hasn’t happened nor will it until the credit bubble washes itself out.

Gold dropped $50 in one day this past week. Everyone loves gold and now with deflation accelerating gold will have a sharp 30-40% correction over the next 6-18 months. As with most commodities when they drop they drop fast meaning it could easily drop from $1200 to $900 in a matter of weeks. Most of the public is in gold from the $900 to 1,000 level. Gold will be in crash mode once it closes below $900. A move below $1050 would give way to $900 and eventually to the low $700’s. GLD is the 4th largest ETF with money pouring into it at an unsustainable pace. Experienced traders should short the GLD between $118-122 and use a $125.30 stop. As they say in the pits “it’s a crowded trade”. Just as oil dropped from $147 to $33 in seven months gold is now in the same boat. My $720 target might be too high as $500 is the more likely scenario.

Our economy had a 20 year credit boom followed by the bust in 2007 and is still correcting. The consumer is in frugal mode. In 2009 our government which has been expanding at a terrifying pace instilled a 700 billion dollar spending spree to pick up the slack. Most of the stimulus money will be spent by the end of the year. The upcoming rise in taxes for those that have a job along with the new taxes for the health care bill among others will keep a damper on our economic expansion. The biggest wild card in the next few years will be the deficit and how it will be handled. So far the bond auctions have been overall well received but this could change on a dime as both the public and private sector scramble for credit.

For now stay very nimble and gradually put money into the market as it falls over the next year. There are many indicators that put a high likelihood (75-80%) of 2010 being a down year.
The January indicator, years ending in zero and the presidential cycle are some of the indicators that portray a negative bias continuing. As long as the market is below 9850 a crash mode is in effect. Don’t forget it’s the return OF capital NOT the return ON capital that is the current golden rule. There are many stocks that went from $1 or $2 in March 2009 then rallied to $20-25 and now are cut in half over the past 2-3 months. They could easily retest $1-2 and the pain between here and there is tremendous. The markets are currently at a cusp of returning into its cyclical bear market which is in its 11th year. Some think it ended in March 2009 but once we break the 20% correction criteria the continuation of the cyclical bear market will be confirmed. It will be only a matter of time.

Sunday, May 9, 2010

The next Step- Reality

The next Step- Reality

All the mirrors that were talked about in the past blogs are now taking form all over the world in ways that should cause major problems in the next 2-5 years but longer term will be deemed as a “best thing that ever happened” scenario. We don’t want to see the “pretend and extend” period last much longer. The protests in Greece will spread across Europe and eventually to the U.S. We see it now on the Arizona’s bill on immigration even though the AZ law is no different than the federal law. Arizonians see their state suffer from all the added costs associated with the free lunch that illegal’s get and want to enforce the federal law. Protests and lawlessness come from not only economic factors but also from social factors. As we have been stating in the past, “When your neighbor tells you he got a zero percent car loan, works 4 days weeks, got a home and student loan reduction as well as interest rate relief, a cost of living raise, free school lunches and health care that might send one over the edge”.

As for the market actions the past few weeks we have seen cracks starting to form. On April 14th the market dropped over 100 points then made a marginal high followed by a 200 drop April 27th. The following week volatility surged and the drop ensued. Then this past Thursday an earthquake in the financial markets sent the markets down over 950 points although the drop was NOT REAL. It was more like 550 points. There was a train wreck between computers and human actions.

There were a multiple set of events that contributed to the decline. First many traders had sell stops, second once certain technical levels were violated and selling intensified but the 3rd factor of program trading caused the air pocket. Most of the free fall were NYSE stocks that printed far below their previous trades on ECN’s that didn’t have any liquidity. NYSE specialists can hold their stocks for up to 90 seconds if they have a massive imbalance. Over 80% of NYSE stock’s volume traded on the NYSE exchange 10 years ago. Specialists would freeze a stock for up to 90 seconds then put a block up before resuming trading. If the specialists couldn't resume an orderly market they would halt the stock for 15 minutes. The problem is that the 80% market share has diminished to less than 30%. This left the other ECN’s to make markets but when they saw the NYSE hold some of their stocks, the other ECN’s either stopped making markets or dropped their bids. Program trades cancelled their NYSE orders and went to other ECN’s where there weren’t any bids near the previous trades. Over a 4 minute stretch the market moved down 500 DOW points thanks to some excessive stealing by some ECN’s. The biggest rip off was Accenture stock trading at a penny although that trade and many others were busted. The slower specialist system prevailed over computers gone wild.

The frenzy lasted only 4-5 minutes but the lawsuits will last for many years to come. It can happen again and will probably happen during the upcoming crash. Guess it proves that speed can hurt. Just as the 1998 Long Term Capital collapse caused markets all over the world to fall unless the current rules are changed the collapse of our stock market like 1987 where program trading was the main culprit will repeat itself. Long Term Capital thought they had all the correlations figured out and it worked for a while until it didn’t. And when it failed the professors were dumbfounded. They thought their system was infallible. Now we have more programs that not only work on speed but correlations that will work until they don’t.

There is a strong likelihood that the April highs will hold for the year and maybe many years to come. There are many stocks like the restaurant sector that have lost 20-30% in a matter of 2-3 weeks. Dow 10,250 level remains support even though it was broken because of bad “prints” this past Thursday followed by 10,183 then 9850. A crash will occur once 9850 is broken. After last weeks decline a bounce back to 10,750-10,823 is likely. If the DOW closes above 11,300 it would signal a move higher. With free money here and in Europe it could delay the crash from later this year to next year although this scenario is less likely as countries like China raise rates. China’s property values have risen ridiculously the past few years and their collapse could be the tsunami wave that hits the US. China has a glut of buildings and vacancies that make Dubai look good.

The market’s tide has changed from buy the dips to sell the rallies until the proof of closing above 11,300 occurs. The old saying of “sell in May and go away “should be valid this year especially in a second year of a president’s term. Technically the tremors have started and it’s only a matter of time before the bear train resumes. As we saw in the past week markets fall at a faster rate than they rise. Sectors leading the next wave down- restaurants, hotel, auto and auto parts, retail and housing along with banking and insurance sectors. The US consumer is done. Higher taxes and inflation are in Santa’s stocking. The bill is coming due and the manner which the government handles the payments will determine how far the shoe drops. DOW 5,000 in the next few years is not out of the question. Hopefully we stop the printing presses and save all the trees we need to pay our way out of debt. Currently it's difficult to see this scenario from becoming reality.

Tuesday, March 30, 2010

A Market for everyone: For Now

A Market for everyone: For Now

Where else on earth can one find so many mirrors that can reflect a perception that everything is alright. Besides the governments new venture into health care maybe they can reflect the disaster in their handling of Amtrak, Medicare, social security, Fannie and Freddie and the post office. Feel sick? Not to worry now as we have free health care for all. But one would state how about their venture into the TARP? Money is being paid back with interest? Yes, there are companies paying back but how about AIG, GM along with hundreds of small banks which will either pay back some or none of the money. The good companies already paid while the rest will struggle.

Banks has been liquefied by helicopter Ben. Our government’s goal of inflating houses so banks can recover their losses hasn’t shown up yet even with their market to model accounting method. This quarter should be interesting as banks must now put off balance sheet stuff onto their balance sheets. It will be interesting what junk they have been hiding but also the model they use to market these assets. There are so many extend and pretend offerings. How about 2% loan for 40 years? How about the 40,000 ex-Countrywide customers offered principal reduction? How about the government spending billions on programs for low interest rates and principal reduction? All these programs reward the deadbeat homeowner. Nothing like showing our youth that responsibility doesn’t matter in making choices because the government will bail you out doesn’t set a good example.

Our printing presses are in overtime mode creating one of the few jobs getting overtime. The velocity of money has slowed over the past few years to .79% from a 2-3% in the 1985-2000 era.. This means that for every dollar created it doesn’t turn over. If that changes inflation will explode as the turnover of money in the system accelerates. With the printing presses at full speed increases in money turnover would spell disaster. Our politicians want inflation back in the worst way. They think inflation will bring back housing and low budget deficits as a percentage of GDP. Inflation instead will devalue our dollar and erode our spending power.

Since the mid-1990’s the federal government has lowered federal taxes but on the state level taxes and budget shortfalls have increased to a level which in some states could cause a default. States have raised taxes from sales tax to real estate tax to the local level in fees. With an estimated 3.5 trillion dollar federal debt issue for 2010 states are left having a difficult time in competing with the federal government. Most of the raised debt is just to pay off the interest. This can t last long. Legacy costs are killing state budgets and show no sign of getting better anytime soon.

It’s been a year since the market lows. The sharp rally of over 75% has reflected the opposite in fear and greed and it has happened in such a short time period. Free money has been doing its job keeping the market afloat. When the debt bill arrives in the mail only then will this mirror game end and end badly. There is a high probably of a market crash sometime within the next 12-18 months. Meanwhile it seems that everyday is an up day. Earlier this month the DOW started a trend of being up 18-22 trading days. The market is in the 9th inning but it might go to extra innings.

A market top takes time to form. We need to see fewer stocks making new highs. We need to see the advance/ decline line turn over. Mutual fund money is at historical low levels which is a sentiment indicator. We already have high bullish sentiment among newsletter writers. Remember last year how lawmakers wanted to ban short selling blaming them for the market decline. A year later and market up 75% ends the debate for the need to change the current rules. There are few short sellers left standing. This is a bearish indicator as they will be very little short covering to stimulate a good old fashion short squeeze rally.

The current rally probably can make marginal new highs into April or May with DOW resistance as follows – 10,960 then 11,032, 11,080 then 11,131 being the top level. If we close above 11,150 then 11,500-11,600 come into play. On the downside support is 10,550 then 10,250 followed by 10,183 then 9850. The first drop from the areas mentioned above should stop around 10,200 level before a bounce that would take the market NOT to new highs. The failed rally would send the market down to below the previous lows. It is from this point where a crash would be highly probably. In short, a top within the next two months at the 11,100 level followed by a decline to 10,250 which then would rally maybe back to 10,550-10,800 and from here another decline to retest the previous lows. The lows fail to hold and a crash ensues.

What would cause this collapse? How about the realization of another Japan like era? Our banks haven’t written down enough bad mortgages both commercial and residential. The extend and pretend game is still on. US banks have stopped lending to the small guy. Instead they take the free money and buy treasuries or even put it into the stock market. Free money is not the answer. We need more bankruptcies and to stop rewarding failure.

End all the free money programs in autos, student loans and housing. Illinois is among many states that are looking into a 4 day school week as is the post office cutting out Saturday delivery. Work less and get out of the government subsidizing everything they can get their hands on and then tax it sounds like socialism. The individual has backed off their spending because the banks cut off their credit and free money. Now the government took over the credit card and upped the line and started to spend like crazy. Don’t we realize that the bill will eventually be paid by a lower standard of living for our kids?

As for sectors that should do bad in the next leg down expect –housing, retail, airlines, banks and autos. Gold will have another up leg but first could drop below $1,000. Longer term gold should double as our government put a torch on inflation only temporally. They wish for inflationary pressures to emerge but when you gas the fire it takes a while before the flame shoots up. When it does everyone’s hair will get singed.

My feelings on the politicians are that everyone should be voted out of office. What they have done in the past 10 years to our economy and future will only be realized as time moves on and it isn’t good. The 10 trillion dollar deficit is really a 40-50 trillion deficit when you look at all the entitlements.

As I finish this confusing report we are heading in a seasonal strong part of the year which is the first week in April and the Good Friday Easter weekend. I’m not that bullish nor am I that bearish near term although I would use a March 31st sell off to go long into the first week of April. Keep stops close. A blow off top next week over 11,100(or even up to 11,500) would be a perfect time to short the market. Remember that short term there are too many people wishing for a pullback. Once they chase the market and we get an up 150 open and close lower that would be a textbook top. It just might happen in the next week or two. The mirrors will either break or blind the public back into reality. A massive protest or two by year end is a high likelihood considering all the mirrors that were needed to fool the people in the first place. When your neighbor tells you he got a zero percent car loan, works 4 days weeks, got a home and student loan reduction as well as interest rate relief, a cost of living raise, free school lunches and health care that might send one over the edge.

Tuesday, January 5, 2010

2010 – The year of Reality

2010 – The year of Reality

The FED has released trillions of dollars in various programs. All indications point to a return of growth in the US but at what price and for how long? The government’s main goal is to inflate housing prices but so far they have failed. Instead what have they created? Only time will tell. I thought all this liquidity would end last fall and keep the market from going much above 10K. As we enter into 2010 the massive and unprecedented inflow of money supply has kept the market chugging upward. It should continue into part of the first quarter of the year before a major retreat of 14-30 %( or worse) in the DOW.

The markets strength into the 1st quarter of 2010 could see 11,700-11,800 once the 10,800 level is broken. The move could be violent and be similar to other blow off tops like 1987 and 1999-2000. Speculative stocks could be the place for 100-500% returns in just a few months. Many stocks have already rocketed off the March lows by as much but it’s the massive short squeeze that needs to occur. Short interest is currently at low levels.

My bullish stance would be voided if the DOW breaks below 10,200 for 2 days. Some think we have been in such a move the past few months but I think we are entering it now. The push or squeeze higher happens every 10 years or so. It’s a parabolic move that sucks everyone into the market. It recently happened to oil, bonds and gold. Once this top occurs probably around early February-March a selloff of over 5% followed by a rebound to lower highs will then setup the move for a steeper selloff.

Stocks like AAPL(10 months), GOOG (13 months) have been up at a statistically irrational monthly rate in the row while WDC, HPQ, WHR, FCX, MMM and LIFE have only missed a month from matching the AAPL or GOOG string. This parabolic move is in the 7th or 8th inning. There are signs of 2010 being the same as 1987 and 2000 when a short sharp drop spooked the market but kept on going parabolic for months. Meanwhile by keeping stops close there will be a load of opportunities. Stocks like MBI, RDN, MTG, FCEL, YRCW, and DRYS could show big returns in a short time.

The market’s momentum has shown impressive strength and won’t be turned around overnight. Even our government can’t mess up things that fast. 2010 will show many deep weaknesses in the economy that won’t be fixed overnight. The consumer isn’t coming back with consumer credit contracting. This is a long term trend. Higher taxation and government red tape is another trend that is a negative. The value of our dollar will continue to decline and will accelerate if the bond auctions run into trouble.

Below are a few problems that could turn into a disaster for both the economy and financial markets-

Iran attacks Israel
The government puts another spending program into place
All taxes go up and services fall
Protests in the street turn into riots (yes in the USA)
A major politician is caught in a scandal that effects all major countries
There is a major catastrophe to the food supply
A worldwide trade war
6-10 States default
A trend toward hyper-inflation emerges
Gold hits 2K
Housing bankruptcies accelerate to record levels.

Many of the above problems will have reared its head in the upcoming years. Our government so far has failed to inflate housing. Their goal is to inflate their balance sheet to make the liability column shrink as a percentage of assets to liabilities. If they do get housing going it will be the last asset class to re-bubble. (This would be 15-20 years out) Our bond market is in a bubble with stocks a few months away and 2-3K DOW points.

The mirages of our leaders competency will final come out and cause panic and distrust of our current system. Free healthcare won’t satisfy the masses once they realize it’s not free. Our freedoms have suffered greatly since 9/11 and will continue to do so.

2010 will be the year when the American people realize all the band aids put on the previous years problems have made things worse. Once we get some companies declare bankruptcy, states and federal spending increases stop, we turn off the printing machine, housing is allowed to fall, no more 3.5% FHA housing deals (with the rebate its no money down), stop programs like cash for clunkers, subsidies to companies that can’t compete and most importantly legacy costs need to actively be addressed otherwise last years market drop will be a cake walk compared to the next fall. Bottom line- Our countries net worth continues to fall to lower lows and our standard of living declines. It’s not a pretty picture. At this point our leaders have no clue their actions of the past 8 years can’t be solved by spending our way out. It hasn’t worked for the private sector and now with government taking up the slack looks like much of the same.

The credit card bill is arriving soon. So are the mid-term elections which probably mean zero rates till next fall. It’s hard to imagine that coming out of school 30 years ago a government job would outpace a private sector job when it comes to all the benefits and risks of retirement. Those who worked hard all their life only to lose their retirement and health benefits because their companies underfunded the account or stole from it. The time of reckoning is just about to begin this year and will last for 2-3 more years. They will be difficult but longer term will make this country much stronger and pave the way for real growth. As they say in NASCAR - Start your engines!!! Things that one would think weren’t possible here will happen. History does repeat itself although not in the exact form.