Monday, July 4, 2011

The Big Picture

The Big Picture

The Dow Jones broke above the 12,500 level but didn’t quite make it up to the 13,000 level. On Friday June 10th it broke a key support level of 12,080. The transports topped out at the 5500 or 5565.78 to be precise. The SPX made it in between our numbers of 1345-50 then 1400 with a high of 1370.58. The question now is if these are the highs for the year? The rally from the recent lows made on the 23rd will determine if the next BIG move (10% or more) is up to new highs or lower lows.

With the printing press on ice packs waiting in the wings to be called upon with any sign of a struggling economy re-emerging the FED must realize the problems are more fiscal in nature. This brings us to 2012 and the elections. There needs to be some fiscal stimulus in some areas but cutting in others. The credit card has been overused. So far nobody has any answers. They all talk about and know what the problems are but they don’t know how to fix them. Since 1973 our country has been talking about a need for an energy policy and yet nothing has been done.

Natural gas is one of our major resources after the recent discoveries. If we put all the trucks and buses on natural gas our oil dependency would drop by 25%. The T Boone Pickens plan does have some very good ideas but for some unknown reason we end up with government not changing direction on our thirst for the stuff.

Since the 1980’s our deficit has been moving vertically with only a slowdown during the 1990’s when President Clinton cut back on state’s funding. It only took 10 years for some states to sink into big deficits. It might be 10 or 20 years but sooner or later the budget deficit will cause major problems on the federal level. I thought it was going to happen last year but the “extend and pretend” attitude continues the masquerade party.

The markets bounced near their 200 day moving average. There will be some support at or just below the 200 MA. The current rally which isn’t expected to take out the May highs could last 2-3 months but end up going not much higher than current levels (12,600). Instead be a choppy summer market that is in a range of 12,600 to 11,900. A move to new highs for a week would change the bearishness. Conversely a break of the 11,900 level would be a huge danger signal for a steep decline.

Statistically the current year being a pre-election year is usually a strong one. Also with the January indicator showing an up year there are many who feel 2011 will be a strong one. So far the market is up slightly and only time will tell but I remain on the bearish camp.

There still have not been many issues addressed regarding the “flash crash”, debt ceiling, budget, housing, foreclosures etc. I could go on and on. The past blogs have been very cautious and continue to worry that until we get a wash out of all the excesses of the past 20 plus years the market will be vulnerable to the downside. Once the wash out occurs that will set-up for a new bull market phase that can last 12-15 years or longer. Since 2000 the market has been a dud and in a long term bear phase. The band aid approach only pro longs the inevitable. It is a slow motion train wreck.

The economic pain will be a world wide affair but won’t be another lost decade. If voters decide to vote in those that will get rid of the band aids and limit spending to reasonable levels and rid the system of excess regulation maybe real growth and prosperity can return.

Over the past few weeks there are major signs of deflation returning. The government’s goal of inflating our way out of the deficits and declining house prices has failed. Their results only increased oil and food prices. Higher commodity prices have cut into demand which seems to be happening. China’s thirst for commodities has slowed and their monetary tightening could turn into a hard landing. The declining value of the dollar has put pressure on china. Their cheap imports strategy has stalled with the weaker dollar.

Greece is on its way to a pure washout. It will be the model many countries will follow down the road. If they extend and pretend by pushing out the outcome and putting a band aid on the problem it will only prolong the strikes, inflation and job problems. Greece will continue to suffer short term but down the road they will in much better shape once they implement fiscal responsibility. The question remains will that happen?

The idea of trying to inflate the world out of debt and into prosperity will end badly for those countries that keep extending and pretending it will eventually have a day of reckoning. The big picture shows a slow motion train wreck. It seems to me most see it coming and will get out of the way. Other will be caught in the downward spiral. Once the wreck occurs we can pick up the pieces and move on and realize we were on the wrong track for much too long. We should have cut the track short.

Here is one stat that is still on the track. Banks reported last quarter that 19.7% of their mortgage loans are LATE/FORECLOSURE. Banks are hoping for inflation to take them to the Promised Land or are they happier now that they can mark to model their portfolios? I think the latter. This guarantees them showing a quarterly profit.

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