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.
Monday, July 4, 2011
Sunday, April 24, 2011
More QE ?? But different results.
More QE ?? But different results.
As the market enters the Easter weekend there are many clouds on the horizon that need to play out. With QE2 scheduled to end in June will the market drop as it did after QE1? Will the dollar continue to decline pushing oil to $125 or higher? Will housing and unemployment improve? Will our fiscal policies and large deficits FINALLY be resounded? Will extend and pretend still be the name of the game or will enough be enough? The next 6-9 months will answer some of these questions.
One big concern is what happens after the FED stops buying all the treasuries in June. Interest rates will trend higher giving the stock market some competition. So far the drowning out effect of FED buying has kept real short term bill rates negative forcing yield to take on more risk. When the crowd is on the same side of the trade in the long run it will tip over even with the Bernanke (crazy Eddie) attitude of buying everything and anything. QE3 is a question of when not IF it will happen.
Ever since housing took the plunge the FED has been trying to find a way to re-inflate them. Inflation in housing boosts not only consumer wealth but also confidence and bank balance sheets. Unfortunately the boom and bust in housing has only inflated things that consumers use a lot – food and energy. It’s amazing how the national average for gas is $3.83 while in all the major markets the price is over $4.20. Even though the national average is $3.83 the majority of the US population pays above $4.20. Back in 2008 with oil at $140 gasoline was where it is currently. What will happen if we get back to $140? Five or $6 per gallon is not out of the question. Technically $115 is strong resistance then $125.
The supply of oil in Cushing OK. is almost at capacity. Even the Saudi’s are cutting production because demand is not there. The old economics’ 101 supply and demand vs. price curve is not working. The speculators aren’t totally to blame because they don’t normally take delivery they have to sell or roll their positions. The problem lies deeper and more political between the Middle East and 9/11 and rising oil prices. Our energy policy or I should say lack of a policy has been around since 1973 and will hit a major crossroad in the upcoming year. True the decline of the dollar has led to some of the price increase but the price/demand equation should kick in at some point. Gasoline prices are at a breaking point to the economy. Any further price rise will bring down the economy and consumer.
Eventually housing will rebound but prices won’t keep up with inflation. The supply of housing and the lack of giving anyone a loan without a good down payment will hamper housing from outpacing the inflation rate. On the positive side for existing housing the sharp increase in construction costs will push more buyers into buying existing homes. The number of homes in the foreclosure process is far from over. The banks have just put an “extend and pretend “tag on them.
Another worry that is sweeping across the world is not only higher inflation but world unrest. The riots that were predicted last year are starting to spread across the oceans. It will only get worse with riots occurring in the US by the end of next year. From Chinese truckers complaining about rising costs to Middle East countries trying to overthrow the rich dictatorships to the European countries run against socialistic principles unrest will remain a focal point. Unfortunately the end result will be war. Wars do lower the unemployment rate but at what cost?
Here we are facing mounding budget problems. The road to disaster remains and will come to a crossroad of no return over the next 12-18 months. Promises from the politicians to lower the deficit have failed since our deficit first hit the trillion dollar mark under President Reagan. Now 14 trillion later nothing has changed to address the spiraling budget deficit. The tax code is abused so badly now that any law comes with so many asterisks attached giving tax breaks or exemptions to whoever controls Congress. The tax code is like Swiss cheese. The lobbyists and congress think Americans are naïve or just plain stupid. Once the riots in the streets occur they will realize otherwise. The government can’t give special status or exemptions to everyone.
Have a complaint about paying higher health care costs as McDonald's is doing no problem they get an exemption. In General Motors those 50 billion in tax credits which are not available to any bankrupt company picked up an exemption. Ford complained about it and they ended getting some 10 billion in credits. GE pays no tax thanks to their good lobbyists and crafty accounting. Bottom line is the free market system has been compromised. Don’t even get started on the banks marking to model their assets. Their creativity blows away the concept of accounting all together.
Unfortunately it seems that our FED wants to inflate its way out of the deficit just as they did back in the Carter era. Add in the record budget deficit, the ratio of GDP to the deficit and all the special tax breaks and exemptions and that spells out trouble down the road. The consumer not only has to deal with higher taxes and inflation but the decreasing value of the dollar. What will happen when foreigners slow down buying all our paper assets? Currently QE2 is helping squeeze the supply but that ends in June or will it? There is no doubt that government intervention of asset buying will continue until the cleansing process of all the excess that extend and pretend has produced the past 20 years gets rung out. QE3 will likely be announced later in the year or early next year. You can fool someone once or twice but the third time usually doesn’t work as the markets are much too smart. The markets positive reaction to QE1 and QE2 will be different when QE3 is announced.
As the printing machine is in full throttle in an effort to inflate an investment strategy that takes advantage of the situation should be sought. Commodities, precious metals, foreign currencies and dividend (income) stocks work well in this environment. Also rentals would work but don’t expect a big rise in the underlying as housing appreciation will under perform the inflation rate. Of course the former have already have had a big rise and are do for some type of shakeout soon. Always scale into positions.
As for the stock market it has responded well to QE1 and QE2. In the belief we are in the last third of a cyclical bear market which started in 2000, the last flush out should be a dozy. The two declines so far have been sharp declines and with electronic trading things now happen faster the 3rd wipe out should be the worst decline. Short term there is resistance in the DOW at the 12,500 level then around the 13,000- 13,240. The transports have resistance at 5405 then 5500 level. There are many signs of a possible major top occurring in the next couple of weeks but the trend remains higher until the DOW breaks 12,080 and the transports 5110. The SPX has resistance at 1345-50 level then the 1400 level.
The bottom line is the stock market keeps rising, commodity prices keep rising and the dollar keeps falling. There is no doubt the manipulation of the markets will end badly. It’s only a matter of time. Keep the trailing stops for the Cinderella story does have an ending and in this case it won’t be good. With 2012 being an election year all the stops will be pulled out. This election will be one of the most important in US history. The details why will come out in the next blog. Most of the stuff is plain as day.
As the market enters the Easter weekend there are many clouds on the horizon that need to play out. With QE2 scheduled to end in June will the market drop as it did after QE1? Will the dollar continue to decline pushing oil to $125 or higher? Will housing and unemployment improve? Will our fiscal policies and large deficits FINALLY be resounded? Will extend and pretend still be the name of the game or will enough be enough? The next 6-9 months will answer some of these questions.
One big concern is what happens after the FED stops buying all the treasuries in June. Interest rates will trend higher giving the stock market some competition. So far the drowning out effect of FED buying has kept real short term bill rates negative forcing yield to take on more risk. When the crowd is on the same side of the trade in the long run it will tip over even with the Bernanke (crazy Eddie) attitude of buying everything and anything. QE3 is a question of when not IF it will happen.
Ever since housing took the plunge the FED has been trying to find a way to re-inflate them. Inflation in housing boosts not only consumer wealth but also confidence and bank balance sheets. Unfortunately the boom and bust in housing has only inflated things that consumers use a lot – food and energy. It’s amazing how the national average for gas is $3.83 while in all the major markets the price is over $4.20. Even though the national average is $3.83 the majority of the US population pays above $4.20. Back in 2008 with oil at $140 gasoline was where it is currently. What will happen if we get back to $140? Five or $6 per gallon is not out of the question. Technically $115 is strong resistance then $125.
The supply of oil in Cushing OK. is almost at capacity. Even the Saudi’s are cutting production because demand is not there. The old economics’ 101 supply and demand vs. price curve is not working. The speculators aren’t totally to blame because they don’t normally take delivery they have to sell or roll their positions. The problem lies deeper and more political between the Middle East and 9/11 and rising oil prices. Our energy policy or I should say lack of a policy has been around since 1973 and will hit a major crossroad in the upcoming year. True the decline of the dollar has led to some of the price increase but the price/demand equation should kick in at some point. Gasoline prices are at a breaking point to the economy. Any further price rise will bring down the economy and consumer.
Eventually housing will rebound but prices won’t keep up with inflation. The supply of housing and the lack of giving anyone a loan without a good down payment will hamper housing from outpacing the inflation rate. On the positive side for existing housing the sharp increase in construction costs will push more buyers into buying existing homes. The number of homes in the foreclosure process is far from over. The banks have just put an “extend and pretend “tag on them.
Another worry that is sweeping across the world is not only higher inflation but world unrest. The riots that were predicted last year are starting to spread across the oceans. It will only get worse with riots occurring in the US by the end of next year. From Chinese truckers complaining about rising costs to Middle East countries trying to overthrow the rich dictatorships to the European countries run against socialistic principles unrest will remain a focal point. Unfortunately the end result will be war. Wars do lower the unemployment rate but at what cost?
Here we are facing mounding budget problems. The road to disaster remains and will come to a crossroad of no return over the next 12-18 months. Promises from the politicians to lower the deficit have failed since our deficit first hit the trillion dollar mark under President Reagan. Now 14 trillion later nothing has changed to address the spiraling budget deficit. The tax code is abused so badly now that any law comes with so many asterisks attached giving tax breaks or exemptions to whoever controls Congress. The tax code is like Swiss cheese. The lobbyists and congress think Americans are naïve or just plain stupid. Once the riots in the streets occur they will realize otherwise. The government can’t give special status or exemptions to everyone.
Have a complaint about paying higher health care costs as McDonald's is doing no problem they get an exemption. In General Motors those 50 billion in tax credits which are not available to any bankrupt company picked up an exemption. Ford complained about it and they ended getting some 10 billion in credits. GE pays no tax thanks to their good lobbyists and crafty accounting. Bottom line is the free market system has been compromised. Don’t even get started on the banks marking to model their assets. Their creativity blows away the concept of accounting all together.
Unfortunately it seems that our FED wants to inflate its way out of the deficit just as they did back in the Carter era. Add in the record budget deficit, the ratio of GDP to the deficit and all the special tax breaks and exemptions and that spells out trouble down the road. The consumer not only has to deal with higher taxes and inflation but the decreasing value of the dollar. What will happen when foreigners slow down buying all our paper assets? Currently QE2 is helping squeeze the supply but that ends in June or will it? There is no doubt that government intervention of asset buying will continue until the cleansing process of all the excess that extend and pretend has produced the past 20 years gets rung out. QE3 will likely be announced later in the year or early next year. You can fool someone once or twice but the third time usually doesn’t work as the markets are much too smart. The markets positive reaction to QE1 and QE2 will be different when QE3 is announced.
As the printing machine is in full throttle in an effort to inflate an investment strategy that takes advantage of the situation should be sought. Commodities, precious metals, foreign currencies and dividend (income) stocks work well in this environment. Also rentals would work but don’t expect a big rise in the underlying as housing appreciation will under perform the inflation rate. Of course the former have already have had a big rise and are do for some type of shakeout soon. Always scale into positions.
As for the stock market it has responded well to QE1 and QE2. In the belief we are in the last third of a cyclical bear market which started in 2000, the last flush out should be a dozy. The two declines so far have been sharp declines and with electronic trading things now happen faster the 3rd wipe out should be the worst decline. Short term there is resistance in the DOW at the 12,500 level then around the 13,000- 13,240. The transports have resistance at 5405 then 5500 level. There are many signs of a possible major top occurring in the next couple of weeks but the trend remains higher until the DOW breaks 12,080 and the transports 5110. The SPX has resistance at 1345-50 level then the 1400 level.
The bottom line is the stock market keeps rising, commodity prices keep rising and the dollar keeps falling. There is no doubt the manipulation of the markets will end badly. It’s only a matter of time. Keep the trailing stops for the Cinderella story does have an ending and in this case it won’t be good. With 2012 being an election year all the stops will be pulled out. This election will be one of the most important in US history. The details why will come out in the next blog. Most of the stuff is plain as day.
Sunday, January 2, 2011
Some ideas for 2011
Some ideas for 2011
The markets ended 2010 with gains in everything from the stock market to most commodities to bonds. As we turn to the New Year for short term traders there is a set-up in the making that has a high probability of profitability. The direction for this trade has yet to be established but will show its hand in the coming days. The main point to take away from this set-up is that the market will move 500 to 1200 points in a time frame of 3-13 trading days.
The set-up has occurred because the following conditions have recently developed.
1. Trading compression
2. VIX rises 20% with no move in market in either direction
3. Number of up/down days consecutive or over at least a 20 day period.
4. Market in oversold or overbought territory
5. Extreme pessimism/optimism
6. Technical patterns
7. Historical patterns
8. Time cycles
The past 20 trading days have NOT produced a daily trading range of more than 100 points. True it’s a holiday period but nonetheless a trading range of less than 100 points over a long period of time is setting up for a sharp directional move. This compression is ready to explode.
The VIX recently hit yearly lows at 15.40 and quickly jumped almost 20% with no ensuing move in the averages. The VIX is low compared to the past few years but that doesn’t mean much. Rather the quick 20% move in a day or so in either direction sets up for some type of sharp move.
The past 22 trading days has produced only 6 down days for the comp, 5 down days for the SPX and 8 down days for the DOW. When there is a steady move with many consecutive clusters justifies the out set for a sharp move and that move can be in the same direction. Back in March and April the DOW was up 30 of 40 days but did however move sharply and in this case it was lower.
Over the past few weeks even with the market having a strong upward bias as the advanced/decline line made a new high the 10 day closing tick has been stuck in negative territory throughout. A move back into positive territory has proven to be a good buy signal 4 out of the past 5 times it has occurred in 2010 but more importantly the market had a sharp move in every event.
Now we are in the 3rd year of a presidential cycle there has been a strong upward bias dating back to 1940. But on the flip side getting double digit returns for 3 years in the row (2009 and 2010 both up) is unlikely. We also have to wait for the January indicator which states a higher January has a better than 70% chance to produce an up year although the past 2 January’s were down while the market was up.
The percentage of bull/bear newsletter writers is nearing the October 2007 level which marked an important top. This indicator is a warning sign but near term the market can thrust higher as can the current readings. It’s something to pay attention to in the longer term.
Technically, the Transports close above 5120 it looks like a breakout to 5325. In the SPX 1260 gives way then 1310-1315. For the DOW a break above 11646 resistance leads to 11920 then 12055. The above averages and index need to stay above their resistance levels for at least 2 consecutive days thus hoping to avoid a fake out.
Cycle-wise there are 2 important ones namely the 149 and 232 day cycles that point to an important top happening this week- January 6th and 7th.
Reading the above paragraphs should leave one confused as to what will happen in the first quarter of 2011. One thing for sure that will emerge in the next few days or by the end of the week will be the beginnings of a sharp directional move of at least 500 points but more likely in the 800-1,000 point range in the next 3-12 trading days. There could be a big fake out so I would wait till the market moves 200 points and a few days. (Trail the stops)
In the transports if we trade above 5120 for 2 consecutive days stay bullish but if they fail watch out below. With the DOW it would be 11,646 and the SPX 1260 as the line in the sand or swing points. Gathering all the info doesn’t make one lean bullish or bearish so let the market tell you what it wants to do as the trend established after the first 200 DOW points should remain intact. Being back spread should also work but once the trend is established stay with the move.
With Mutual fund Monday and the beginning of the month and year trading should start with an upward bias. Longer term not withstanding the next move the market’s return of the bear will resurface. The financial mirrors that have been used for the past few years are about to crack.
Good Luck to All in 2011 and keep the stops close.
The markets ended 2010 with gains in everything from the stock market to most commodities to bonds. As we turn to the New Year for short term traders there is a set-up in the making that has a high probability of profitability. The direction for this trade has yet to be established but will show its hand in the coming days. The main point to take away from this set-up is that the market will move 500 to 1200 points in a time frame of 3-13 trading days.
The set-up has occurred because the following conditions have recently developed.
1. Trading compression
2. VIX rises 20% with no move in market in either direction
3. Number of up/down days consecutive or over at least a 20 day period.
4. Market in oversold or overbought territory
5. Extreme pessimism/optimism
6. Technical patterns
7. Historical patterns
8. Time cycles
The past 20 trading days have NOT produced a daily trading range of more than 100 points. True it’s a holiday period but nonetheless a trading range of less than 100 points over a long period of time is setting up for a sharp directional move. This compression is ready to explode.
The VIX recently hit yearly lows at 15.40 and quickly jumped almost 20% with no ensuing move in the averages. The VIX is low compared to the past few years but that doesn’t mean much. Rather the quick 20% move in a day or so in either direction sets up for some type of sharp move.
The past 22 trading days has produced only 6 down days for the comp, 5 down days for the SPX and 8 down days for the DOW. When there is a steady move with many consecutive clusters justifies the out set for a sharp move and that move can be in the same direction. Back in March and April the DOW was up 30 of 40 days but did however move sharply and in this case it was lower.
Over the past few weeks even with the market having a strong upward bias as the advanced/decline line made a new high the 10 day closing tick has been stuck in negative territory throughout. A move back into positive territory has proven to be a good buy signal 4 out of the past 5 times it has occurred in 2010 but more importantly the market had a sharp move in every event.
Now we are in the 3rd year of a presidential cycle there has been a strong upward bias dating back to 1940. But on the flip side getting double digit returns for 3 years in the row (2009 and 2010 both up) is unlikely. We also have to wait for the January indicator which states a higher January has a better than 70% chance to produce an up year although the past 2 January’s were down while the market was up.
The percentage of bull/bear newsletter writers is nearing the October 2007 level which marked an important top. This indicator is a warning sign but near term the market can thrust higher as can the current readings. It’s something to pay attention to in the longer term.
Technically, the Transports close above 5120 it looks like a breakout to 5325. In the SPX 1260 gives way then 1310-1315. For the DOW a break above 11646 resistance leads to 11920 then 12055. The above averages and index need to stay above their resistance levels for at least 2 consecutive days thus hoping to avoid a fake out.
Cycle-wise there are 2 important ones namely the 149 and 232 day cycles that point to an important top happening this week- January 6th and 7th.
Reading the above paragraphs should leave one confused as to what will happen in the first quarter of 2011. One thing for sure that will emerge in the next few days or by the end of the week will be the beginnings of a sharp directional move of at least 500 points but more likely in the 800-1,000 point range in the next 3-12 trading days. There could be a big fake out so I would wait till the market moves 200 points and a few days. (Trail the stops)
In the transports if we trade above 5120 for 2 consecutive days stay bullish but if they fail watch out below. With the DOW it would be 11,646 and the SPX 1260 as the line in the sand or swing points. Gathering all the info doesn’t make one lean bullish or bearish so let the market tell you what it wants to do as the trend established after the first 200 DOW points should remain intact. Being back spread should also work but once the trend is established stay with the move.
With Mutual fund Monday and the beginning of the month and year trading should start with an upward bias. Longer term not withstanding the next move the market’s return of the bear will resurface. The financial mirrors that have been used for the past few years are about to crack.
Good Luck to All in 2011 and keep the stops close.
Wednesday, December 15, 2010
2011- The year reality hits Government
2011- The year reality hits Government
The November election fostered a wake up call to Washington. The markets which already had been rallying from the QE2 announcement in August have continued to climb to the current DOW 11,457. I’ve been wrong about the strength of the current rally. It seems all that QE2 has added fuel to stocks while doing the opposite to bonds. The 10 year bond was trading around 2.50% when QE2 was announced but has since fell to 3.52%. What would have happen if the FED wasn’t buying billions of dollars of bonds everyday?
There have been a few positives as the dollar has gotten stronger and it looks like tax rates will remain the same for the next 2 years. However in the passage of the bill they loaded it with billions of giveaways. On the negative side our budget deficit is increasing and interest rates are moving higher on that debt. States like Illinois are likely to default. Our government has successfully managed to sell out of some banks and GM but Fannie and Freddie remain dark clouds. The attitude of no one can fail as the government will bail you out hopefully end as the good government investments get repaid while the remaining ones struggle to pay or default causing a wave of negativism toward government bailouts.
What remain big concerns going forward into the coming years include-
1. Banks still marking to model
2. Special tax breaks
A. McDonalds doesn’t have to pay for the new health care plan. (Along with 100 others)
B. GM getting a 50 billion tax break from Congress (being able to use bankruptcy tax losses)
C. Giving Ford a 12 billion tax break after giving GM a break.
3. Foreclosures being delayed with “Extend and Pretend”
4. States defaulting
5. Congress keeps spending while the FED keeps printing money.
6. Weak Housing as high real estate taxes pressures any appreciation.
7. Over confident that FED will bail out any market sell off.
The day of reckoning of the government gone spending crazy is approaching in the next few years. The only difference between our budget shortfalls and Greece, Spain, Ireland is that we can print money. Our fiscal responsibility concerning the deficit of 13 trillion and counting is all talk. Congressmen blame it on the other side and claim they want to lower the deficits but their actions sharply differ from reality. When Senator Mitch McConnell came out and stated that his goal was to make sure President Obama has only one term this statement shows how Congressman really think about solving any problems like the deficit in the next few years. Hopefully all these bums get voted out during the next few elections. As long as the attitude in Washington remains in spend mode our country remains on the cusp of disaster.
The Fed’s liquefying the system has created “free money “for many companies. Companies that couldn’t raise a dime 2 years ago now raise millions with ease. The corporate bond offerings are at records. What will happen in 3-5 years when they have to payoff the bondholders? We have seen a 3 standard deviation move in the 10 yr. bond even with the government’s QE2. What will happen if 10 yr. rates move above 4.5%? This bond market crash would devastate not only bond holders but our government debt interest payments will surge killing off the current recovery. Corporate bonds would also get hit but big multi-nationals would be the safe haven away from government bonds and will out perform in the upcoming years.
As for the stock market DOW 11,550 -11.632 and SPX 1247-1260 are lines in the sand for changing my bearish stance. The above levels need to be breached for 3 days for me to change to a bull. The downside is ugly with a minimum 10% drop (more likely 30-40%) likely during the first half of 2011. The risk to the downside is scary more so now than in 2008. All the programs that our government has pursued like “cash for clunkers”, tax credits for buying a house or a refrigerator have done nothing but postponed the upcoming washout.
What will trigger the collapse? How about some of the scenarios taken below as loading the gun –
1. Bonds rates surge as our government cost of funding the deficit spins out of control
2. Current bullishness as measured by market sentiment is at 2007 levels
3. The US dollar drops 10-20% over a 2-3 month period.
4. European countries default.
5. China’s slowdown accelerates as property values fall (also in Hong Kong)
6. Banks need to mark to market
7. Massive foreclosures hit the market sending down prices.
8. Cities and states default
9. Congress fails to reach a long term budget that reduces the deficit in a meaningful way.
10. Interest rates for housing go to 6%
11. Riots in the street like in Europe spread worldwide.
Bottom line is one should keep close stops as a “mini crash” 8-12% in one day is possible. Also markets don’t crash at the highs rather a crash could occur after a pullback of 5-10%. The panic won’t happen until the DOW breaks 9850. The “extend and pretend “pattern is about to run into reality in 2011.
On a funny note it amazes me how stupid the government can look. The treasury made over 1 billion of the 100 dollar bill until they realized the error which can easily be seen. Excuse me but 1 billion NOT just a couple hundred bills until this flaw was realized? This error cost over 120 million. I’m sorry but you add the postal system, Amtrak, Fannie and Freddie to the equation you end up with one costly messed up system and that’s not even considering all the pensions problems. The economy needs a cleansing of the current system even if it does mean a double dip. It could take a few years to evolve and run the course but for the long run it would be a winner. The government’s “ponzi scheme” is about to be discovered by the average investor. Extreme caution is warranted. Stay in cash and short-term investments. The housing drop is in the latter innings but still has 15-30% to fall. Gold is due for some pullback and higher interest rates will cause a sharp pullback in gold to the $1150 area. Other commodities are also expected to correct from their recent surge. China’s cost of $5.50 for a gallon of milk on a $350 month salary adds up to rioting in the street. Believe it or not China’s stock market is down over 10% this year and over 25% from it peak while our market is up 10%. Something doesn’t add up here.
The November election fostered a wake up call to Washington. The markets which already had been rallying from the QE2 announcement in August have continued to climb to the current DOW 11,457. I’ve been wrong about the strength of the current rally. It seems all that QE2 has added fuel to stocks while doing the opposite to bonds. The 10 year bond was trading around 2.50% when QE2 was announced but has since fell to 3.52%. What would have happen if the FED wasn’t buying billions of dollars of bonds everyday?
There have been a few positives as the dollar has gotten stronger and it looks like tax rates will remain the same for the next 2 years. However in the passage of the bill they loaded it with billions of giveaways. On the negative side our budget deficit is increasing and interest rates are moving higher on that debt. States like Illinois are likely to default. Our government has successfully managed to sell out of some banks and GM but Fannie and Freddie remain dark clouds. The attitude of no one can fail as the government will bail you out hopefully end as the good government investments get repaid while the remaining ones struggle to pay or default causing a wave of negativism toward government bailouts.
What remain big concerns going forward into the coming years include-
1. Banks still marking to model
2. Special tax breaks
A. McDonalds doesn’t have to pay for the new health care plan. (Along with 100 others)
B. GM getting a 50 billion tax break from Congress (being able to use bankruptcy tax losses)
C. Giving Ford a 12 billion tax break after giving GM a break.
3. Foreclosures being delayed with “Extend and Pretend”
4. States defaulting
5. Congress keeps spending while the FED keeps printing money.
6. Weak Housing as high real estate taxes pressures any appreciation.
7. Over confident that FED will bail out any market sell off.
The day of reckoning of the government gone spending crazy is approaching in the next few years. The only difference between our budget shortfalls and Greece, Spain, Ireland is that we can print money. Our fiscal responsibility concerning the deficit of 13 trillion and counting is all talk. Congressmen blame it on the other side and claim they want to lower the deficits but their actions sharply differ from reality. When Senator Mitch McConnell came out and stated that his goal was to make sure President Obama has only one term this statement shows how Congressman really think about solving any problems like the deficit in the next few years. Hopefully all these bums get voted out during the next few elections. As long as the attitude in Washington remains in spend mode our country remains on the cusp of disaster.
The Fed’s liquefying the system has created “free money “for many companies. Companies that couldn’t raise a dime 2 years ago now raise millions with ease. The corporate bond offerings are at records. What will happen in 3-5 years when they have to payoff the bondholders? We have seen a 3 standard deviation move in the 10 yr. bond even with the government’s QE2. What will happen if 10 yr. rates move above 4.5%? This bond market crash would devastate not only bond holders but our government debt interest payments will surge killing off the current recovery. Corporate bonds would also get hit but big multi-nationals would be the safe haven away from government bonds and will out perform in the upcoming years.
As for the stock market DOW 11,550 -11.632 and SPX 1247-1260 are lines in the sand for changing my bearish stance. The above levels need to be breached for 3 days for me to change to a bull. The downside is ugly with a minimum 10% drop (more likely 30-40%) likely during the first half of 2011. The risk to the downside is scary more so now than in 2008. All the programs that our government has pursued like “cash for clunkers”, tax credits for buying a house or a refrigerator have done nothing but postponed the upcoming washout.
What will trigger the collapse? How about some of the scenarios taken below as loading the gun –
1. Bonds rates surge as our government cost of funding the deficit spins out of control
2. Current bullishness as measured by market sentiment is at 2007 levels
3. The US dollar drops 10-20% over a 2-3 month period.
4. European countries default.
5. China’s slowdown accelerates as property values fall (also in Hong Kong)
6. Banks need to mark to market
7. Massive foreclosures hit the market sending down prices.
8. Cities and states default
9. Congress fails to reach a long term budget that reduces the deficit in a meaningful way.
10. Interest rates for housing go to 6%
11. Riots in the street like in Europe spread worldwide.
Bottom line is one should keep close stops as a “mini crash” 8-12% in one day is possible. Also markets don’t crash at the highs rather a crash could occur after a pullback of 5-10%. The panic won’t happen until the DOW breaks 9850. The “extend and pretend “pattern is about to run into reality in 2011.
On a funny note it amazes me how stupid the government can look. The treasury made over 1 billion of the 100 dollar bill until they realized the error which can easily be seen. Excuse me but 1 billion NOT just a couple hundred bills until this flaw was realized? This error cost over 120 million. I’m sorry but you add the postal system, Amtrak, Fannie and Freddie to the equation you end up with one costly messed up system and that’s not even considering all the pensions problems. The economy needs a cleansing of the current system even if it does mean a double dip. It could take a few years to evolve and run the course but for the long run it would be a winner. The government’s “ponzi scheme” is about to be discovered by the average investor. Extreme caution is warranted. Stay in cash and short-term investments. The housing drop is in the latter innings but still has 15-30% to fall. Gold is due for some pullback and higher interest rates will cause a sharp pullback in gold to the $1150 area. Other commodities are also expected to correct from their recent surge. China’s cost of $5.50 for a gallon of milk on a $350 month salary adds up to rioting in the street. Believe it or not China’s stock market is down over 10% this year and over 25% from it peak while our market is up 10%. Something doesn’t add up here.
Tuesday, October 5, 2010
The House of Cards
The House of Cards
Today Japan came out with their own quantitative easing program which not only included buying their bonds but also stocks. Japan doesn’t like their strong currency as they are the biggest exporter to China. We are trying to increase our exports worldwide with our own quantitative easing and destruction of the dollar. There is a move around the world from Europe, Japan and the US to destroy their currency in an effort to export their way into growth.
Our FED came out a few weeks ago declaring the need for inflation. The FED has been desperately trying to prop up housing prices but instead have weakened the dollar and caused soft commodities- corn, wheat, etc to surge. In the next 6-12 months food prices will soar. What will happen when food and energy prices rise to 2008 levels while housing prices and activity stay soft?
The politicians are out trying to influence their vote. One of the biggest issues is the Bush tax cuts that will expire at the end of the year. Obama is on record stating he is for only middle tax cut while leaving the upper sector to pay the bill. He is also telling congressman he is for the extension of tax cuts for ALL. How can this be? Why doesn’t he publicly come out and just state for ALL. He is simply using Chicago style politics. His constitutes are out stating tax cuts remain for everyone just to get the vote. After the election if he doesn’t extend the cuts for everyone he can state he never stated it. The markets have already priced in a Republican congressional victory. If it doesn’t happen the house of cards will fall.
Class warfare is in full swing. The consumer which accounts for over 70% of overall consumption is in save and debt payoff mode and isn’t going to spend anytime soon. Our government has taken over spending and when they started in 2009 they have had no respect for a spending limit or the number of trees used. Don’t they realize someone eventually will have to pay?
The “extend and pretend “scenario is still alive. Many foreclosures that were going to happen have been delayed due to banks using a robotic signature. It will be a lawyer bonanza and will keep the influx of bankruptcies to stagnate. Some people who haven’t paid their mortgage and were due for eviction will be able to stay in their bank-owned house longer. Nothing like rewarding those who game the system putting a damper or delaying the inevitable.
Besides the personal tax rates, the capital gains and death tax rate will expire (and go up) at the end of the year. If they aren’t extended the incentive to “sell” will be huge. So far nothing has been stated about whether the tax will expire. Another concern that is in the health care bill is a new sales tax of 3.8% on house transactions. Many think once the republicans get the majority they will repeal the health care bill. Both democrats and republicans are to blame for the current economy doldrums and should be shown the door.
The printing presses are in full swing. We are racing with other countries to devalue our currency. We are going to pay back our IOU’s with cheaper dollars. The problem occurs when we issue debt what foreign country is going to invest in our paper when the dollar keeps going down? This will cause our interest rates to spike. In Greece their rates went from 6% to 24% in 2 weeks. I doubt this scenario will happen this quickly here but a move from 2.5% to 4% in the 10 yr. bond would spell trouble for our economy even if it happened over a 6 month period.
My last blog I was very concerned about the market and it has gone straight up. The move was boosted by the FED actions and the negative investor psychology. Mutual fund cash is very low meaning whatever cash they receive they are putting it to work. This also shows the bullishness by fund managers. They believe the market will rally because the FED will keep the market up. This “don’t fight the FED” has worked 90% of the time. I think this time it won’t work and the market is in a very critical juncture. Some of it is politically motivated to keep the market up through the election.
One positive result of this free money is companies are able to raise money through debt issuance (or is it?). Many companies are using proceeds to buy back stock or increase their dividend. Short term this keeps their stock propped up. Longer term the bond will have to be paid off reducing the company’s cash.
What makes me so bearish? The market is still in a cyclical bear market that started in 2000. The markets are rallying the past year on less volume on up days and higher volume on down days. Sentiment has gone from bearish to bullish over the past 6 weeks. Traders are taking on risk believing our government will bail them out by keeping rates low. It’s a win/win situation if rates get pushed toward zero stocks will rally and if the economy pick up stocks will also rally. There is only fear and greed never a win/win situation.
The new highs/lows list, advance/decline line and trin all are misleading the strength in the market. The expansion of EFT’s , preferred stock and interest sensitive issues currently mask these indicators to the upside. Many technical indicators that worked well in the past are worthless.
The upcoming decline will make 2008-9 look orderly. Some individual stocks will lose 20-30% in one day. No one will be able to claim the short seller was at fault since short interest is very low. The market goes down 2/3 faster than it rallies. DOW 6,000 could easily be seen by next March.
What will change the bearish outlook? The list is too long but below are a few-
1. Stronger dollar
2. Reduced government spending.
3. Stable tax rates
4. Keep capital gains rate the same.
5. Free trade
6. Stable consumer prices
7. Companies go bankrupt
8. No extend and pretend
9. Balance both state and federal budget
10. Fund state pensions to a realistic level.
Technically a move above 11,250 for a few months would be a good signal. There are some important long term cycles that are currently activated that indicate a long term trend (2-4 years) will be established over the coming months. If the markets don’t turn soon the trend will be higher.
Gold has kept its run intact. The July decline was very shallow keeping the naysayers running for cover. The FED wants to inflate and gold is a hedge against a weaker dollar and higher inflation. The trade is crowded and when it does drop the drop will be sharp. Play gold on the long side and use stops. Higher interest rates will cause the price of gold to fall if they ever rise. The rise in rates needs to be caused by a better economy not a failed debt auction otherwise gold goes higher. The 1980 top in gold when adjusting for inflation needs to trade for about $2300 an ounce in which people might be taking their gold fillings out.
The current environment in our financial markets is at a cross roads and will lead to a resumption of the bear market. Most people are leaning on one side of the boat that being long gold, long stocks and long bonds while being short dollars. It will end ugly. If the market acts well for the next 3-4 months then the trend mentioned earlier will leave plenty of time to make money. As for sectors which will under perform on the upside and lead the downside include- restaurants (margins squeezed), retailers, jewelers, housing, financials and some tech (competition creates oversupply of phones, TV’s and pads) .
The upcoming weeks bring a deluge of earnings. Earnings will be up sharply but REVENUE and future guidance will put pressure on the market. Many stocks will beat the bottom line, show no top line growth and guide down future quarters.
The house of cards is ready to fall so extreme caution is needed. Use stops for those in the market. Just as only a few can win the lottery one can’t count on the US government to keep both the bond and stock markets from falling. Just ask Japan. A 2-3 trillion dollar stimulus is cup of water in the ocean compared to bank derivative exposure of 223 TRILLION.(As of June 2010). Remember its return of capital not return on capital. Putting some capital overseas is a way to diversify against a weak dollar and inflation. Australia and Canada are countries in much better shape than the US.
Today Japan came out with their own quantitative easing program which not only included buying their bonds but also stocks. Japan doesn’t like their strong currency as they are the biggest exporter to China. We are trying to increase our exports worldwide with our own quantitative easing and destruction of the dollar. There is a move around the world from Europe, Japan and the US to destroy their currency in an effort to export their way into growth.
Our FED came out a few weeks ago declaring the need for inflation. The FED has been desperately trying to prop up housing prices but instead have weakened the dollar and caused soft commodities- corn, wheat, etc to surge. In the next 6-12 months food prices will soar. What will happen when food and energy prices rise to 2008 levels while housing prices and activity stay soft?
The politicians are out trying to influence their vote. One of the biggest issues is the Bush tax cuts that will expire at the end of the year. Obama is on record stating he is for only middle tax cut while leaving the upper sector to pay the bill. He is also telling congressman he is for the extension of tax cuts for ALL. How can this be? Why doesn’t he publicly come out and just state for ALL. He is simply using Chicago style politics. His constitutes are out stating tax cuts remain for everyone just to get the vote. After the election if he doesn’t extend the cuts for everyone he can state he never stated it. The markets have already priced in a Republican congressional victory. If it doesn’t happen the house of cards will fall.
Class warfare is in full swing. The consumer which accounts for over 70% of overall consumption is in save and debt payoff mode and isn’t going to spend anytime soon. Our government has taken over spending and when they started in 2009 they have had no respect for a spending limit or the number of trees used. Don’t they realize someone eventually will have to pay?
The “extend and pretend “scenario is still alive. Many foreclosures that were going to happen have been delayed due to banks using a robotic signature. It will be a lawyer bonanza and will keep the influx of bankruptcies to stagnate. Some people who haven’t paid their mortgage and were due for eviction will be able to stay in their bank-owned house longer. Nothing like rewarding those who game the system putting a damper or delaying the inevitable.
Besides the personal tax rates, the capital gains and death tax rate will expire (and go up) at the end of the year. If they aren’t extended the incentive to “sell” will be huge. So far nothing has been stated about whether the tax will expire. Another concern that is in the health care bill is a new sales tax of 3.8% on house transactions. Many think once the republicans get the majority they will repeal the health care bill. Both democrats and republicans are to blame for the current economy doldrums and should be shown the door.
The printing presses are in full swing. We are racing with other countries to devalue our currency. We are going to pay back our IOU’s with cheaper dollars. The problem occurs when we issue debt what foreign country is going to invest in our paper when the dollar keeps going down? This will cause our interest rates to spike. In Greece their rates went from 6% to 24% in 2 weeks. I doubt this scenario will happen this quickly here but a move from 2.5% to 4% in the 10 yr. bond would spell trouble for our economy even if it happened over a 6 month period.
My last blog I was very concerned about the market and it has gone straight up. The move was boosted by the FED actions and the negative investor psychology. Mutual fund cash is very low meaning whatever cash they receive they are putting it to work. This also shows the bullishness by fund managers. They believe the market will rally because the FED will keep the market up. This “don’t fight the FED” has worked 90% of the time. I think this time it won’t work and the market is in a very critical juncture. Some of it is politically motivated to keep the market up through the election.
One positive result of this free money is companies are able to raise money through debt issuance (or is it?). Many companies are using proceeds to buy back stock or increase their dividend. Short term this keeps their stock propped up. Longer term the bond will have to be paid off reducing the company’s cash.
What makes me so bearish? The market is still in a cyclical bear market that started in 2000. The markets are rallying the past year on less volume on up days and higher volume on down days. Sentiment has gone from bearish to bullish over the past 6 weeks. Traders are taking on risk believing our government will bail them out by keeping rates low. It’s a win/win situation if rates get pushed toward zero stocks will rally and if the economy pick up stocks will also rally. There is only fear and greed never a win/win situation.
The new highs/lows list, advance/decline line and trin all are misleading the strength in the market. The expansion of EFT’s , preferred stock and interest sensitive issues currently mask these indicators to the upside. Many technical indicators that worked well in the past are worthless.
The upcoming decline will make 2008-9 look orderly. Some individual stocks will lose 20-30% in one day. No one will be able to claim the short seller was at fault since short interest is very low. The market goes down 2/3 faster than it rallies. DOW 6,000 could easily be seen by next March.
What will change the bearish outlook? The list is too long but below are a few-
1. Stronger dollar
2. Reduced government spending.
3. Stable tax rates
4. Keep capital gains rate the same.
5. Free trade
6. Stable consumer prices
7. Companies go bankrupt
8. No extend and pretend
9. Balance both state and federal budget
10. Fund state pensions to a realistic level.
Technically a move above 11,250 for a few months would be a good signal. There are some important long term cycles that are currently activated that indicate a long term trend (2-4 years) will be established over the coming months. If the markets don’t turn soon the trend will be higher.
Gold has kept its run intact. The July decline was very shallow keeping the naysayers running for cover. The FED wants to inflate and gold is a hedge against a weaker dollar and higher inflation. The trade is crowded and when it does drop the drop will be sharp. Play gold on the long side and use stops. Higher interest rates will cause the price of gold to fall if they ever rise. The rise in rates needs to be caused by a better economy not a failed debt auction otherwise gold goes higher. The 1980 top in gold when adjusting for inflation needs to trade for about $2300 an ounce in which people might be taking their gold fillings out.
The current environment in our financial markets is at a cross roads and will lead to a resumption of the bear market. Most people are leaning on one side of the boat that being long gold, long stocks and long bonds while being short dollars. It will end ugly. If the market acts well for the next 3-4 months then the trend mentioned earlier will leave plenty of time to make money. As for sectors which will under perform on the upside and lead the downside include- restaurants (margins squeezed), retailers, jewelers, housing, financials and some tech (competition creates oversupply of phones, TV’s and pads) .
The upcoming weeks bring a deluge of earnings. Earnings will be up sharply but REVENUE and future guidance will put pressure on the market. Many stocks will beat the bottom line, show no top line growth and guide down future quarters.
The house of cards is ready to fall so extreme caution is needed. Use stops for those in the market. Just as only a few can win the lottery one can’t count on the US government to keep both the bond and stock markets from falling. Just ask Japan. A 2-3 trillion dollar stimulus is cup of water in the ocean compared to bank derivative exposure of 223 TRILLION.(As of June 2010). Remember its return of capital not return on capital. Putting some capital overseas is a way to diversify against a weak dollar and inflation. Australia and Canada are countries in much better shape than the US.
Tuesday, September 7, 2010
Its SHOWTIME !!!
It’s SHOWTIME!!!
With the elections just around the corner it’s time for the Illinois politicians in Washington to shine at their best. The Democrats are behind in the polls and there is a good chance they lose their majority in the house thus bringing a relapse of the mid-1990’s stalemate. Back then President Clinton moved toward the center and things got done in Washington. Currently the surprise in the markets won’t be a Republican victory. Their victory is already priced in the markets.
There is one thing which is highly probable – The stock market will establish a trend in the next month or so that could last for years. The question will be which direction? Is the rally off the March 2009 low a bear market rally or the beginning of a bull market which recent action being a small correction from the April highs?
The odds for a continuation of the cyclical bear market are higher than just a correction in a bull phase. The next month or so will give a better clue and IF the market can get above 10750 that tune would change. Conversely a drop below 9625 would bring out the bear in full force.
Historically September is a bad month for the markets although the last 4 of 5 years have been positive. August was a terrible month for stocks with some recovery this past week. Usually a long holiday weekend has a counter trend push followed by a resumption of the trend after the Holiday. If this is the case this week should mark the current rally top and the market should turn down from here.
Recent activity in August namely the death cross (50day MA crossing the 200day MA) and the Hindenburg omen point to an upcoming decline. The Hindenburg omen’s theory takes a few different variables namely percentages of new high/lows, McClellan Oscillator and 10 week MA. One problem with the omen indicator is with all the new ETF’s and interest rate related issues trading on the NYSE that are making new highs as our quantitative easing policy has dropped the 10 yr. back to 2.5%. Instead of looking at preferred stocks, trusts and ETF’s one should look at REAL stocks. The theory behind the omen shows instability in the market when there are a lot of new highs and lows at the same time. Currently there are signs of this unstable activity over the past month.
Another warning that has been occurring over the past 3-4 months is the way the S&P 500 stocks have moved in a high correlation to each other. Currently the ratio is over 80% with 44% being the long term average. This 80% reading is rare and very bearish. Its highest reading was just before the 1987 crash at the 88 level.
There are a lot of cycles namely the midterm presidential cycle. This year the cycle is not different as market weakness is expected during the 2nd and 3rd quarter of a mid-term election. The market usually bottoms in the 3rd quarter and moves higher for the following 2 years. When the market doesn’t follow this tune the decline is ugly.
Another cycle is the 8 year cycle. It’s more of a trend indicator that can last for years. It doesn’t show a trend reversal but rather shows the period when either an old or new trend will be established. If it’s a low it could last for 10-20 years (some lows still haven’t been touched) or if it’s a top it could last for years. The 1930 top took 24 years to break. This indicator is a long term trend and it occurred this past week however as with all long term indicators there is a month or so margin for error on both ends.
The DJIA has resistance at 10,490, then 10,590 then 10750. Support at 10,307 then 10,250 and 10,150. A move above 10,750 will take us back to 11,120 while a push through 10,150 would result in retesting 9660.
The May 6th “flash crash” was the beginning of the instability of our market. It was a warning shot which the average Joe has responded with mutual fund outflows of $50 billion. They are happy getting a return of their investment instead of a return on investment.
Getting back to the upcoming election there will be an increase in promises and more extent and pretend. All those tax increases slated for next year will be on the fence giving the voter a false sense of reality. In reality our government owns over 50% of ALL mortgages through Fannie and Freddie. The mortgage crisis is far from over with 23% of mortgages UNDER their current house value. Our FED is printing money like crazy while our deficits are out of control. How can our government expect to raise money in auctions to pay off the interest and principle (although very little going to the latter) while creating a weaker dollar? Foreigners will stay away from these auctions because of currency risk.
The current bond bubble will end in a crash but that could be years away. Just look at Japan. People thought in the 1990’s they were in a bubble. Their rates remain near zero.
The bottom line is our country is spiraling downward. What will get us out is fiscal responsibility and tighter money. It will be painful for a year or so but the outcome longer term will be worth it. Current policies now in place only drag out the process only making things worse. It will feel like depression but won’t statistically be considered one. The government wants the consumer to spend but the consumer is either paying off debt or saving. Maybe the other shoe should be on the government’s foot?
With the elections just around the corner it’s time for the Illinois politicians in Washington to shine at their best. The Democrats are behind in the polls and there is a good chance they lose their majority in the house thus bringing a relapse of the mid-1990’s stalemate. Back then President Clinton moved toward the center and things got done in Washington. Currently the surprise in the markets won’t be a Republican victory. Their victory is already priced in the markets.
There is one thing which is highly probable – The stock market will establish a trend in the next month or so that could last for years. The question will be which direction? Is the rally off the March 2009 low a bear market rally or the beginning of a bull market which recent action being a small correction from the April highs?
The odds for a continuation of the cyclical bear market are higher than just a correction in a bull phase. The next month or so will give a better clue and IF the market can get above 10750 that tune would change. Conversely a drop below 9625 would bring out the bear in full force.
Historically September is a bad month for the markets although the last 4 of 5 years have been positive. August was a terrible month for stocks with some recovery this past week. Usually a long holiday weekend has a counter trend push followed by a resumption of the trend after the Holiday. If this is the case this week should mark the current rally top and the market should turn down from here.
Recent activity in August namely the death cross (50day MA crossing the 200day MA) and the Hindenburg omen point to an upcoming decline. The Hindenburg omen’s theory takes a few different variables namely percentages of new high/lows, McClellan Oscillator and 10 week MA. One problem with the omen indicator is with all the new ETF’s and interest rate related issues trading on the NYSE that are making new highs as our quantitative easing policy has dropped the 10 yr. back to 2.5%. Instead of looking at preferred stocks, trusts and ETF’s one should look at REAL stocks. The theory behind the omen shows instability in the market when there are a lot of new highs and lows at the same time. Currently there are signs of this unstable activity over the past month.
Another warning that has been occurring over the past 3-4 months is the way the S&P 500 stocks have moved in a high correlation to each other. Currently the ratio is over 80% with 44% being the long term average. This 80% reading is rare and very bearish. Its highest reading was just before the 1987 crash at the 88 level.
There are a lot of cycles namely the midterm presidential cycle. This year the cycle is not different as market weakness is expected during the 2nd and 3rd quarter of a mid-term election. The market usually bottoms in the 3rd quarter and moves higher for the following 2 years. When the market doesn’t follow this tune the decline is ugly.
Another cycle is the 8 year cycle. It’s more of a trend indicator that can last for years. It doesn’t show a trend reversal but rather shows the period when either an old or new trend will be established. If it’s a low it could last for 10-20 years (some lows still haven’t been touched) or if it’s a top it could last for years. The 1930 top took 24 years to break. This indicator is a long term trend and it occurred this past week however as with all long term indicators there is a month or so margin for error on both ends.
The DJIA has resistance at 10,490, then 10,590 then 10750. Support at 10,307 then 10,250 and 10,150. A move above 10,750 will take us back to 11,120 while a push through 10,150 would result in retesting 9660.
The May 6th “flash crash” was the beginning of the instability of our market. It was a warning shot which the average Joe has responded with mutual fund outflows of $50 billion. They are happy getting a return of their investment instead of a return on investment.
Getting back to the upcoming election there will be an increase in promises and more extent and pretend. All those tax increases slated for next year will be on the fence giving the voter a false sense of reality. In reality our government owns over 50% of ALL mortgages through Fannie and Freddie. The mortgage crisis is far from over with 23% of mortgages UNDER their current house value. Our FED is printing money like crazy while our deficits are out of control. How can our government expect to raise money in auctions to pay off the interest and principle (although very little going to the latter) while creating a weaker dollar? Foreigners will stay away from these auctions because of currency risk.
The current bond bubble will end in a crash but that could be years away. Just look at Japan. People thought in the 1990’s they were in a bubble. Their rates remain near zero.
The bottom line is our country is spiraling downward. What will get us out is fiscal responsibility and tighter money. It will be painful for a year or so but the outcome longer term will be worth it. Current policies now in place only drag out the process only making things worse. It will feel like depression but won’t statistically be considered one. The government wants the consumer to spend but the consumer is either paying off debt or saving. Maybe the other shoe should be on the government’s foot?
Monday, August 9, 2010
Here Comes the Helicopters
Here Comes the Helicopters
Tomorrow the Federal Reserve will probably change its wording to include that they will do everything possible to avoid any deflation or slowing of the economy. With rates at almost zero it seems the FED has nothing left in the cards? No, they can print MORE money and buy everything in site with the money they print. They have been buying mortgages, treasuries and probably S&P’s futures (but this will never be confirmed) over the past few years as their balance sheet has swelled by just a trillion. Helicopter Ben is in his final panic mode that will send the markets reeling just like Japan did in the 1990’s. Our government is trying to artificially prop up the financial markets, housing while keeping interest rates too low. The move to keep the “no failure policy” alive any longer will just cause more problems down the road. Just as a forest fire rejuvenates the forest to grow stronger a recession does the same to the economy in the long run. Bankruptcies and restructuring of the balance sheets is the outcome from economic forest fires.
The question will be can the FED’s “free money” jump start the economy? Just look at the long term results for” cash for clunkers” and the “housing tax credit” for some answers as to whether these programs helped long term growth. The public sector is in save and pay back debt mode and doesn’t want to get extended anymore with credit assuming they can get credit as the banks already have enough loans under water. During the past 12-15 months our government took over the spending and now is looking at ways to pay for it. With the private sector tapped out and the government in spend mode and feeling the heat from doing another stimulus the next step will be an economic slow down and even double dip. Taxes at ALL incomes are going UP period in 2011. Everything will be done prior to the November elections to mask the economic weakness.
Since the last update July 5th the market has roared past the 10,250 level toward 10,720. Right now it’s the dog days of August with very thin markets. The DJIA could easily make a double top at the 11.200 level. However the next big move will be lower and will be a sharp wake up call. The time frame for this important top to occur is within the next month probably next 2-3 weeks. The bear will re-emerge in earnest in the fall. The “extend and pretend” era is still running strong. As for the government buying everything in sight and keep our stock and bond markets rallying just look at Japan and see what their results were in the 1990’s.
Let’s think about the current environment for savers. Savers aren’t getting any return but have returned into saving rather than spent. This is telling us something. Consumers aren’t spending like they have the past 20 years. Their trend of being net spenders has faded and this by itself is a big game changer. The problem with the equation is government. The public can be net savers but if government spends like they have causing trillions in deficits in essence sooner or later will be paid by the US taxpayer. On one hand the American people are doing the right thing in saving but on the other their savings will be destroyed by our government spending and the weakness in the dollar. The balance between the public and private sector is out of line. Today’s profits will be taxed away tomorrow.
What can be done on the bullish case for stocks? Basically change everything opposite of today’s current economic environment- Higher interest rates, lower taxes, privatize some government programs and address the immigration issues. As with most Chicago politicians the issue isn’t why they get caught but when. Hopefully November brings change on both ends. Get rid of them all without any party bias. Then the markets will rally like in1982 and a new bull market will begin.
Tomorrow the Federal Reserve will probably change its wording to include that they will do everything possible to avoid any deflation or slowing of the economy. With rates at almost zero it seems the FED has nothing left in the cards? No, they can print MORE money and buy everything in site with the money they print. They have been buying mortgages, treasuries and probably S&P’s futures (but this will never be confirmed) over the past few years as their balance sheet has swelled by just a trillion. Helicopter Ben is in his final panic mode that will send the markets reeling just like Japan did in the 1990’s. Our government is trying to artificially prop up the financial markets, housing while keeping interest rates too low. The move to keep the “no failure policy” alive any longer will just cause more problems down the road. Just as a forest fire rejuvenates the forest to grow stronger a recession does the same to the economy in the long run. Bankruptcies and restructuring of the balance sheets is the outcome from economic forest fires.
The question will be can the FED’s “free money” jump start the economy? Just look at the long term results for” cash for clunkers” and the “housing tax credit” for some answers as to whether these programs helped long term growth. The public sector is in save and pay back debt mode and doesn’t want to get extended anymore with credit assuming they can get credit as the banks already have enough loans under water. During the past 12-15 months our government took over the spending and now is looking at ways to pay for it. With the private sector tapped out and the government in spend mode and feeling the heat from doing another stimulus the next step will be an economic slow down and even double dip. Taxes at ALL incomes are going UP period in 2011. Everything will be done prior to the November elections to mask the economic weakness.
Since the last update July 5th the market has roared past the 10,250 level toward 10,720. Right now it’s the dog days of August with very thin markets. The DJIA could easily make a double top at the 11.200 level. However the next big move will be lower and will be a sharp wake up call. The time frame for this important top to occur is within the next month probably next 2-3 weeks. The bear will re-emerge in earnest in the fall. The “extend and pretend” era is still running strong. As for the government buying everything in sight and keep our stock and bond markets rallying just look at Japan and see what their results were in the 1990’s.
Let’s think about the current environment for savers. Savers aren’t getting any return but have returned into saving rather than spent. This is telling us something. Consumers aren’t spending like they have the past 20 years. Their trend of being net spenders has faded and this by itself is a big game changer. The problem with the equation is government. The public can be net savers but if government spends like they have causing trillions in deficits in essence sooner or later will be paid by the US taxpayer. On one hand the American people are doing the right thing in saving but on the other their savings will be destroyed by our government spending and the weakness in the dollar. The balance between the public and private sector is out of line. Today’s profits will be taxed away tomorrow.
What can be done on the bullish case for stocks? Basically change everything opposite of today’s current economic environment- Higher interest rates, lower taxes, privatize some government programs and address the immigration issues. As with most Chicago politicians the issue isn’t why they get caught but when. Hopefully November brings change on both ends. Get rid of them all without any party bias. Then the markets will rally like in1982 and a new bull market will begin.
Subscribe to:
Posts (Atom)