CAN “YES WE CAN CONTINUE “? PART 2

CAN “YES WE CAN CONTINUE “?  PART 2

Wow has time flown from Part 1 of “Yes we can”.  From the DJIA low of 6545 in March of 2009 to just over 17,000 this bull run has been full steam ahead.  There have been only 2 occurrences since 2012 of the DJIA being down for 4 consecutive weeks namely one in 2012 and one in 2013. But wait, the SPX being down for 4 consecutive weeks since 2012 HAS NOT HAPPENED!  The worst has been 3 consecutive down weeks.  The Russell 2000 index which is small-cap stocks closed down for 4th straight week.  This hasn’t happened since 2011.  This week’s debacle was across the board.  

The conference board reading on consumer confidence surge to over 90.  The last time it was above 90 was back in October of 2007 at the SPX peak.  Of course we know what followed for the next 1 ½ years as Mr. Bear showed up taking the market and confidence down to under 40.  Is there a correlation?  Not really as confidence during the latter part of the 1990’s was between 120-140 and even during the 2001 selloff the eight month average was just over 109. 

What has been very noticeable over the past 6 months is the sharp increase of consumers driving Mercedes, BMW’s and Lexus’s.  They are buying or leasing the cheaper models which are still very expensive.  My guess are these people are making 30-40K a year but with the low interest rates and the savings they are getting from OBAMACARE (if they qualified for a subsidy) are using that money to feel like a millionaire.  This is reminisce of the 2006-2007 period when using the housing ATM card with just a sign here mentality created a housing boom.  We all know that ending.

Now let’s get back to the good stuff of a trillion in student loans, the FED’s increasing balance sheet, the debt and the inflated market prices in bonds, stocks and the high leverage users.  The FED lets the air out of QE infinity as seen by the markets happening this Fall and interest rates start to rise too fast, that will sharply increase our nation’s interest expense.  The FED decides to drain liquidity and those with leverage get into deep, deep trouble nothing will stop the markets both bond and stocks to cascade into sharp decline.  At the beginning it will be deemed a buying opportunity as for the bond market the 10yr. has been held up by the Chinese buying every slight decline.  The Chinese banks are super charged with leverage.  As for the stock market, the same page is rewritten – Stocks Fall Sharply on Profit Taking.  This line only works for the first 10% down move, but what will happen when as I expect the market is down 35-45%?  Remember crashes don’t happen at the top!  Therefore, a 50-70% decline is very possible over the next 12-16 months.  Keep your stops close!!

The Yellen “put option” just like Greenspan and Bernanke’s put will become “in the money”.  Back in 1987 the crash was blamed on the futures market.  This decline will be caused by insurance companies and other retirement accounts that want to hedge annuities written that give the holder no downside risk and a partial portion of the upside.  Other products that give a set rate  7% return for example do not work very well for the seller of the product in a declining stock market and rising rates meaning falling bond prices(unless they have short duration).  It’s a house of cards waiting to happen.  Remember for every seller there is a buyer.  Everybody can’t be hedged!

Besides the technical reasons behind the upcoming decline there are numerous fundamental reasons.  Congress has little chance in passing anything over the next 6 months.   The only headlines we see are companies getting fined by the government namely McDonalds, Hewlett-Packard and Bank of America this week.  The President wants to raise not only wages but change laws through execute order rather than Congressional procedures.  The immigration reform that the President wants isn’t being dealt with so the president has decided to handle it the “Chicago Way”.  There are current immigration procedures but unfortunately just because there are laws are in place doesn’t mean they are being enforced.  The special treatment that certain firms get from the government is getting out of control. 

When it comes to foreign policy it’s non-existent until after the fact.  Over the past few years all the money spent on trying to get democratic policies to take shape in the Middle East to Africa to Asia are total failures.   The World has been moving toward a less civilized one and this alone is a major factor in the instability that’s expected to continue over the next few years.

In short, the free money policies and over leverage use will not end well.  It’s hard to believe a few years ago if one stated the future of 10 yr. bonds in the Euro-zone namely Spain, Greece and Italy in some cases would be lower than the U.S. 10 Yr. bond.   Germany’s 10yr bond is half the yield than the U.S.  Margin debt is at levels seen at previous tops and is a warning that over leverage could cause a sharper downside reaction once the momentum accelerates.  One worry is the carry trade between European low rates vs. the higher rates here.  This activity could last for a while longer and keep the bubble in bonds from bursting soon.   

This week’s sharp decline woke up all those thinking volatility was a thing of the past.  There is still a lot of money waiting to buy the dip.  There is a good chance that the highs are already in place.  Keep stops on a scaling degree.  Market breadth has been in decline while some of the indexes reach new highs.  The next big 20% move is down but the timing is the tricky part.  As the world’s stability weakens, the markets will get spooked.  People are realizing the U.S will not be aggressive in keeping world peace and therefore over the next few years, wars will be popping up creating a very unstable scenario.

  

 

 

 

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.

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%.

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.

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

9. OBAMACARE

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.

21. DEBT,DEBT,DEBT

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

23. Political predictions

24. War

25. New laws

26. Inflation

27. CRASH

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.

YES WE WILL

There is a new slogan in town replacing the “Yes we can” it’s “Yes we will”. Yes we will replace the idiots in office which have slowly but surely put a wrench into the economy and capitalist markets. One can see it in the schools especially the sports programs as equal time and keeping no score in the youth ages is norm. It’s in the marketplace where some companies receive tax breaks and free money while their competitors suffer. It’s in the work place where some thought 20 years ago there was no money in that career is now having a retirement bonanza. It’s in the attitudes of the under and unemployed seeking jobs. When will this end? How about next year -2012?

Next year could be the turning point. As discussed last year there will be rioting in the streets and we already saw it in Europe. In 2012 it will move across the pond into the great old USA. Our current government wants the majority to suffer so they can go out and print more money to give it away and in the long run put those people down even further. All they want is the vote. It’s both parties doing it and people are realizing that there isn’t one party that is better than the other. It’s not a punch one and done type of ballot.

The ballooning of the deficit is rather shocking over the past 5 years. There is no doubt that QE3 is coming in some type of form especially with elections next year. For once people will figure it out that free money (only to some) is not the answer. It turns free capitalism to all into free profits to the large companies. Let’s face it that America has prospered due to the small businessman. Now that small guy is getting run over by the big players which have all the chips on their side. They have access to free money, tax breaks and less regulatory expenses than the small guy. The small owner can’t compete.

The markets will anticipate the upcoming economic disaster. A sharp drop is expected and could take a few years or a few months to get to their bottom. With all this electronic trading it’s more likely to be a quick collapse followed by a sideways bottom. The move off this bottom could start in late 2012 or sometime in 2013 and lead to a booming economy and stock market for years to come. What the markets and the economy need first is a good old fashion washout in stocks and some policy change in Washington. Hopefully it starts sooner than latter.

Our economy has too much regulation. Everything is a process of having to be registered or licensed. In most cases regulation does stop fraud. There is more than one way to steal the candy out of the candy jar. Setting up a lemonade stand in your front yard in most areas is regulated which sounds a bit sour.


If government can stop the idea of them trying to fix the problems and let the private sector take over capitalism in America we would be better off. Government’s role is to keep the borders secure and criminals out of the country or in jail. Try going into another country illegally and see what happens.

The idea of trying to inflate our way out of the housing mess for banks hasn’t worked. Inflation will re-emerge but not for years although in some areas like food and energy inflation has picked up over the past few years. Farmland is also inflating and booming but again the result is helping the big guys as many farms aren’t owned by individuals.

Here we have the banks that received all the free money after taking on huge risk and leverage so the American dream can be had by all even if one has no income. The economy prospered until we overbuilt and owners stopped paying their mortgages. Our government pushed for housing for all then bailed the banks out and NOW wants to sue them for fraud. In reality the government is suing itself. This must have been dreamed up by lawyers so they could get both sides of the action.

Housing is in the final dropping phase maybe another 10-20% to the downside (inflation adjusted) and will enter into the bottoming phase which then could take years to develop into a bull phase. Those buying property in the next few years might not get rewarded in the short term of 2-4 years but down the road it will turn out to be a great investment. Just as getting into the teaching sector 20 years ago wasn’t thought as being a good paying career; builders will emerge as a good career down the road. There will be a huge need for replacement as houses deteriorate over time.

How low can the markets fall? Retesting the March 2009 lows or even breaking them is likely. This time unlike 2009 the rally won’t be a “V” pattern but rather a “U” shaped bottom. From the current 11240 the DOW dropping to under 10,000 should happen in the next 2-3 months. Dow support 1150 level then 10,700. A breach of those levels takes the market to 9634 although we could churn at the 10,000 level.

There already has been a lot of pain in the market in steel stocks for example as they have been shaved in half over the past few months. Of course the banks have been acting badly for most of the year. How is it that companies like Bank of America say they are sound and the next minute they are giving Warren Buffet a big chunk of the company for 5 billion? Is Warren Buffet’s money any greener or did they reconsidered their market to model accounting method and realized they are in trouble?


There is not much left in the hat to pull out over the next few years. Interest rates are zero, companies aren’t hiring and the dollar is weakening. Government spending has sharply grown the deficit with no positive response to the economy. Something has to give the next year and the markets are anticipating this economic earthquake. Right now there are tremors but down the road the big one kicks in.

Here’s a scenario from an old blog which the drunk keeps getting helped back to the stool and fed(no pun) more drinks only to stand up and thank everyone for their help(our government) then takes a slow step like everything is all right only to fall flat on his face and pass out. When the drunk wakes up sober only then did he realize what caused the bump was all the free drinks he received the night before but in this case when he feels into his pocket to find what money he has left he unfolds an IOU for 13 trillion and then precedes to bump the other side of his head when he realizes those drinks weren’t FREE.

The Big Picture

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.