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.