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.