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.