Sunday, December 1, 2013

Ground Hogs Day: Continues

Ground Hogs Day: Continues

As we move into the last month of the year and the strong seasonal bias going into early January one has to wonder what if anything can bring the market down. The perception of the FED being there buying 85 billion a month is assuring no significant market decline can occur even though the FED was heavily involved in easing in during the 2002 and 2008-9 bear phases. Just as time heals, in markets a 4 year bull phase to all-time highs in most indices heals the bear market and the psychology that goes with it.

Near zero interest rates have allowed corporations to issue debt and either buy back stock or pay a dividend or both. Low rates have also brought down interest expenses. This helps the bottom line with reduced float and lower carrying costs.

What are the reasons why a bubble in the stock market has formed? How about the ones below-

1. Margin debt at record levels

2. Many stocks have gone parabolic

3. Massive issuance of new issues

4. Complacency by lack of stock volume

5. Debt issuance near a record.

6. The FED policy and perception they will step in if the markets fall.

The sad thing to read in the papers every day is the number of companies paying these hefty fines. Most have been in the financial area but not all. Every day it seems like a new settlement is reached. Also prominent are companies wanted tax credits to stay in a certain state otherwise they might consider moving. This is holding the state tax payer hostage. Unfortunately the states are handing out free money to these companies to keep them to stay.

On the positive side the seasonal period for a continuation higher into early January, lower oil prices and low interest rates will hopefully offset the huge increases for insurance effective January 1. Those in California are forced to go on exchange. They will be the first to shout when they see their rates.

Going into 2014 the ground hog effect has to come to an end. Right now to predict a 40-60% drop in the market is considering off the wall especially when reasons discussed above have been going on for over a year. Is this time different? Will the bear stay hibernated? When the market does start to go down, the first 10-15% usually produces no panic. It’s when the reason for a decline then become evident the next 20-30% is painful.

The economy isn’t booming by any meanings, housing has topped, corporate profits that jumped due to lower financing is done, real jobs are far and few between. Those under employed continue to grow. The final straw could be a combination of higher insurance rates, higher defaults on school loans, overseas turbulence and the end of extend and pretend. Fingers will be pointed everywhere. The FED has used most of its bullets. Congress is worthless and has been for 10 years. All they do is regulate more, issue more fines and have hearings that only line up the lobbyists at their door with more donations. No wonder why Congress has seen their report card stay low in all these polls.

Going forward the final upcoming bear phase will lead will lead to a new cyclical bull market that will last for 15-20 years. When the ground hog days stop watch out. All cyclical bear market phases end badly. This will be no different.

Thursday, October 10, 2013

Ingredients for a blow off top

Ingredients for a blow off top

The DJIA made a marginal new high last month at 15,709. That move was created in part to the response the FED getting cold feet and deciding to postpone the end of QE. Since the announcement and the September high the market has given everything back. We are today testing key support levels. The surge in the VIX over 20 and the massive concern about the government shut down and debt ceiling has led to the 900 decline in the DJIA over the past 3 weeks.

Technically, the DJIA has formed a triple top. A break above 15,700 would start this blow off top. Even if the DJIA breaks below today’s lows of 14,719.43 it should be short-lived. The line in the sand for a continued decline is the 14,377 level. Any close below that level for 2 days would indicate a triple top is locked in and a bear market.

As the title states all the ingredients are in for a powerful surge –

1. Continuation of printing money.

2. Janet Yellen becoming the next FED chairwomen and her dovish stance.

3. Bullish market tendencies for next 2-3 months.

4. The recent reduction in borrowing needs increasing the crowding out effect.

5. The perception that a 15.5 P/E is cheap and earnings will continue to grow.

6. Once the government either pushes out or fixes the issues the market will rally.

7. Rising real estate prices

8. Low/stable inflation

9. Relatively high VIX (22 level) suggesting a possible low although a number in the upper 20’s would be better. A move into the 30’s hasn’t happened since the 2011 and actually would be very bearish.

Of course a failure of our wonderful government to compromise in a timely fashion would set the seeds of disaster. A lasting effect of 3 months or more of gridlock would put the economy into a deep recession not to mention the long term effect on the credit rating. This scenario is highly unlikely. It was interesting to see all the government workers protesting the shutdown. Congress solved the bad press by given them back pay essentially giving the workers a paid vacation. Holding small parts of the government hostage in this stalemate will not be forgotten. For those currently holding office it’s a lose/lose situation.

Longer term all those concerns mentioned in previous blogs remain of great concern. The first to stumble was the consumer followed by the business sector. Our government has picked up the spending of the credit card. The problem now is there is nobody left to bail the government out of the massive debt and spending problems. Sure the government can print more money but that bonze scheme can only last for so long. At the end the majority are losers. The perception the FED can keep the ball rolling will end with the consequences to be felt for years. Just ask Japan how free money has been working out for them the last 20 years.

Gold made a low at $1186 in July. $1270 is very important support and if it fails a retest of $1146 at best is expected. A move over $1439 would be very bullish. As discussed in July a low is expected in the fall. One can start nibbling into gold at the current level. When scaling into a position use a certain dollar amount and buy every drop of $50-$100. Gold could still drop below $1,000 in the next year.

Bottom line is keep trailing scale stops. The market has rallied over 130% off the 2009 lows. Now is not the time to be super bullish but beware the ingredients for a blow off top are very possible. Right now the weak hands are selling especially in the momentum stocks. If the government does fail all bets are off. The assumption here is a deal will be struck. Just like 1999-2000 and 2007-2008 there was a big blow off top. Could the September top be it? It’s a triple top but worth watching however the ingredients for one move higher are still active especially if the Congress reaches some deal. The push the problems down the road and extend and pretend scenario is still very much the political case however next year’s election will change it. As we all know the market anticipates 6-9 months ahead, this blow off top if and when it happens will lead to every sharp minimum decline of 40-50%.

Friday, July 12, 2013

2013 Mid-Year Update

2013 Mid-Year Update

Back on May 9th the thinking was a top would be made by the end of June. The market did make a peak at 15542.4 a few weeks later only to be followed by a slight pullback of just over 5%. Today we made a new closing high. Now what? Technically the market isn’t in bad shape. However when one takes a step back there is a strong case that this market is long in the tooth.

In the long run this secular bear market should end over the next 1-3 years. There is a chance it already has ended but there are too many questions that would indicate otherwise. When the next secular bull market starts it will last for 14-20 years. However there should be one more down leg in the market. Then one can buy and hold.

There have been too many Band-Aids used since the 2009 market bottom. Many houses are still caught in the foreclosure process especially in states like Nevada where they have almost shut-down the process. Thousands still live in their home for free and will continue to do so. Housing has recovered in many areas and would use this strength to sell. The real estate market has weathered round one. Higher interest rates, building costs and taxes will crimp the rebound.

While the world economies are looking for a way of growing their economy there still seems to be too much unemployment, rising costs and limited liquidity to kick start most countries. Take China, a few weeks back the liquidity in the secondary loan market caused short term rates to jump to over 10%. China is in deep trouble as they have food inflation, too many parked commodities from hoarding a few years back and too many vacant properties. These problems are spilling into India and other Southeast Asia countries.

The U.S. has kept rates low. The problem isn’t the low rates it’s that most people can’t borrow. Japan and Europe also have kept rates low and this experiment on the monetary side can only do so much when the overall debt levels are so high. Giving another beer to an alcoholic that’s passed out doesn’t result in more beer sales. Fiscal responsibilities have failed and been delayed. Bottom line is all the excesses created in the 2008 bubble have not been fully played out. Unfortunately they created a bubble in the bond and to some degree the stock market. As we saw in June the exit can be ugly and only getting a 5% correction is just a tremor before the earthquake.

As stated a few months back a bottom in gold isn’t expected until the fall. Gold stocks and other precious metal stocks could bottom sooner. Oil has shot up but longer term with natural gas trucks and buses being bought the price of oil in 3-5 years will be much lower.

The stock market is in high risk territory. The following are some of the reasons to be wary.

1. Bull move is over 4 years long. No correction of over 10% in a long time.

2. Margin Debt at record levels. Similar levels back in 1987 and 2000 were tops.

3. Revenue growth by corporations has stalled.

4. Benefit of low rates to refinance is over. Apple floated bonds at the bottom.

5. Triple top in stock market

6. Interest rates can still rise even while the FED is buying. The bond market is just too big.

7. Fiscal activity stuck which is actually good in the short term.

Once the June lows are taken out the acceleration to the downside will snowball. A drop below DOW 14385 leads to 13684. In any case keep stops close as volatility will surge. The choppiness seen since May is consistent with a topping formation. As for what event would lead to this sell off is likely an overseas shock either from China/Japan/Germany.

Thursday, May 9, 2013

I’m Back JUST in Time

With all the government regulation I felt being employed with a securities firm and writing a blog to all was not worth all the disclosures. Now that I’m a lone wolf it is time to inform all a few words of wisdom. What has happened since my last blog on many accounts on both the political and economic side is downright scary. Not that living in Illinois is adding to the worries but having our country run by those that contributed to running our state into the ground keeps me on edge. Here a few reasons why –

1. Currently U.S. and Japan are buying everything with goal of inflation rate of 2%..

2. ECB has just recently joined the insaneness.

3. China whose numbers are fictional are always manipulating their numbers

4. Margin debt in the U.S. stock markets is nearing an all-time high.

5. Housing inventory for sale will increase

6. Student loans default rates continue to increase.

7. Commodities are falling/crashing

8. US companies revenues are falling


10. Loans to small business shrinking

11. Taxes at all levels going higher.

12. Glut of energy but exporting will keep prices high in U.S.

13. Money supply velocity stagnate under 1

14. Government loans to high risk buyers

15. Banks/funds holding large quantities of housing on hold.

16. The great U.S./Japan experiment

17. Gold –still a commodity

18. Gas Prices manipulated

19. U.S. government wanting people to be dependent on government.

20. Coming currency war.


22. The next Bull market in stocks- The Bear market WILL end

23. Political predictions

24. War

25. New laws

26. Inflation


28. Dollar as a commodity

29. Remove reserves

OK maybe it’s more than a few reasons. Right now the U.S. and Japanese government have decided to spent/create money to buy everything from bonds/stocks/commodities. The governments are crowding out the investor into buying risky assets for HIGHER yield. Investors should realize that it’s the return of money NOT the return on money. Unfortunately the current trade is to borrow and LEVERAGE money to buy risky yield.

Who would have thought the savers of the world would be punished for saving. They are being forced to find higher yield without realizing its return of money NOT return ON money. Savers have been frustrated with the negative yield adjusted for inflation being negative. That’s what deflation does to savers in a perceived inflationary environment. Japan has been in a deflationary spyro for over 20 years. Now they are throwing in the towel and deciding to print more yen and in essence devalue their currency. It sounds like a great idea for exports and creating a cheap currency for export. Problem is every country in the world thinks exporting their way out will lead to growth. The bottom line is WORLD capacity is OVER capacity. There is too much deflationary world capacity to CREATE inflation which all the politicians want to achieve in trying to reduce all their debt to GDP not to mention all the banks holding underwater mortgages

Margin debt for equity purchases are at levels that preceded the 1987 crash and the 2000 top. It probably will make a new high before the market tops out but is clearly at a danger point. Everybody is looking to sell in May and go away. May will likely be an up month as will the most of June. A late June top is expected. It will be an important top. This bull market is in the latter stages of the final phase of the secular bear market that started in 2000. The good news is this bear market is near the end. The bad news is a sharp drop below DOW 10,000 and mostly likely retests the 2009 lows.

There was an interesting stat about family wealth since 2008. 93% of households are still below 2008 levels. The remaining 7% have seen their wealth increase 28%. The free money policies are clearing not getting to the majority of people.

Another interesting stat is about 35% of corporate profits in the 1st quarter are due to the benefit of lower rates. This can’t last as the rates can’t go much lower. Corporations can’t get their interest expense much lower. This benefit of low interest borrowing to finance equity repurchases and stock buy-backs is a longer term problem when the debt becomes due in 5-7 years,

Gold’s recent sharp fall reflects how commodities trade when they sell-off. Years back oil fell from $145 a barrel to $45 in just 9 months!! Gold could easily fall under $1,000 or even $850 over the next 5-8 months. Even $500 could happen. I’m looking more for a time frame to purchase than a price. Once commodities crash they tend to over shoot to the downside and gold will not be any different. A move over $1800 would change the view.

The return of the bear market will heed the buy on the dip mentality. This is the opposite of the mentality just a few years ago. That’s what happens when market rally over 100% from the 2009 low. It’s funny how history repeats itself and how short people’s memories are of past selloffs in the stock market. That just reinforces the fear and greed theory.

The mentality of the U.S. government holding up asset prices through the purchase of bonds and mortgages in the tune of 85 billion a month. That’s about 90% of the mortgages each month. The FED is crowding out the investor into buying risky assets in search for yield. Japan took it a step further and will buy stocks directly. The ECB lowered rates last week. When is all this going to end isn’t an issue rather it’s how it ends. There is only one exit door and everybody can’t sell at once.

For every buyer there is a seller. If the FED slows or stops buying bonds who will buy the bonds? It would be a FED tightening as the public would be the buyer. Interest rates would rise before the natural level of buying and selling reaches a neutral state.

The way the markets are trading the upcoming bear market will end with a sharp drop that will happen quickly. The market could lose 30% in 1 month instead of 6-9 months. Computers and software has changed the game. Program trading which includes high frequency trading makes up a scary 80% of daily volume.

On the bond market side the treasury issues 80% of debt in short term paper. If rates move higher the treasury will have to pay higher interest and issue more paper assuming the U.S. budget deficit doesn’t reverse. Bottom line is the low debt service in the short run could easily backfire into a major problem if rates move up. Having the FED buy paper from the treasury will end up a disaster.

Corporate bonds including junk bonds are being issued at record levels. CEO’s are issuing bonds to increase or pay a dividend like Apple or buy stock back. If CEO’s are so bullish why are they dumping stock at such high levels? It could be that since March 2009 the DJIA is up 133%, SPX up 145% and COMP up $170%.

Over the past few weeks the market has seen the laggards rally, the high short-interest stocks rally and the cheap penny stocks rally. On the short term expect a pullback to SPX 1576-1600 but again a late June top is expected. A move below 1561 would be very negative.

Oil supplies remain at record levels while the cost of gas in the Chicago area hits $4.35. The only thought here is price manipulation. It’s true the summer blend cost more but even with that variable and a higher tax rate the prices are still .30-.40 overpriced!

In summary the market is at dangerous levels so keep stops close. Expect volatility to increase over the coming weeks but the market trend still should be higher until late June.