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.