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.

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