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.

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.

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.

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 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.

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?

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.

The Economy and Market mid- Year 2010 – Insights

The Economy and Market mid- Year 2010 – Insights


As the 2nd quarter comes to a close in a horrific manner one wonders what’s next. The year started out rocky in the month of January after seeing 6 consecutive monthly positive closes on the Dow Industrials. This correction only lasted into early February when the market resumed its track upward for 8 consecutive weeks. It seemed that nothing could halt the upward march as the DOW moved up 28 out of 34 trading days. During this span there were 3 occasions of at least 6 consecutive up days in a row. Then on April 26th the DOW topped out at 11,258 without any fanfare. It just seemed to go higher everyday for 2 months until it didn’t. As stated in the March 30th blog “The current rally probably can make marginal new highs into April or May with DOW resistance as follows – 10,960 then 11,032, 11,080 then 11,131 being the top level. If we close above 11,150 then 11,500-11,600 come into play. On the downside support is 10,550 then 10,250 followed by 10,183 then 9850. The first drop from the areas mentioned above should stop around 10,200 level before a bounce that would take the market NOT to new highs. The failed rally would send the market down to below the previous lows. It is from this point where a crash would be highly probably. In short, a top within the next two months at the 11,100 level followed by a decline to 10,250 which then would rally maybe back to 10,550-10,800 and from here another decline to retest the previous lows. The lows fail to hold and a crash ensues.”

From the April top the market dropped to 10,241 (not counting the flash crash) and spear-headed back to the 10,900 level before taking out the 10,241 low and failing below our 9850 crash “ALERT” level. The market has had its first 7 consecutive down days this year (and counting) last week. Expect the current decline into the 20% correction level where the question would remain is it just a correction or resumption of the cyclical bear market? There could easily be a sharp rally from the 9000-9100 level which is expected to be the “summer rally” but 8200 and lower is expected as the market heads into the second half of the year. Under 8200 is an air pocket to DOW 7364. A close above 10,250 would take me back to the table, but all the ingredients for a continued move lower remains until all the excesses from all the credit expansion (free money) and company failures are rung out of the system. In short a cleansing process which the strong survive and the weak FINALLY go out of business. Our government has done a good job so far of avoiding the latter but it will finally happen over the next few years.

This process of weeding out the losers will accelerate once it starts. The markets will anticipate the process and will turn months before the bottom in closures. There have been weekly local bank closures that have accelerated over the past year. Problem is the Fannie and Freddie bailout will far outpace the community bank’s losses. The credit bubble took 20 years of free money where each step down rates made a lower low. Now with rates near zero there is no lower low left. We have already started to correct the excesses over the past few years but it will take a powerful whiff of inflation to reduce the credit impact. Our government has been trying like mad to get home prices to rise. It hasn’t happened nor will it until the credit bubble washes itself out.

Gold dropped $50 in one day this past week. Everyone loves gold and now with deflation accelerating gold will have a sharp 30-40% correction over the next 6-18 months. As with most commodities when they drop they drop fast meaning it could easily drop from $1200 to $900 in a matter of weeks. Most of the public is in gold from the $900 to 1,000 level. Gold will be in crash mode once it closes below $900. A move below $1050 would give way to $900 and eventually to the low $700’s. GLD is the 4th largest ETF with money pouring into it at an unsustainable pace. Experienced traders should short the GLD between $118-122 and use a $125.30 stop. As they say in the pits “it’s a crowded trade”. Just as oil dropped from $147 to $33 in seven months gold is now in the same boat. My $720 target might be too high as $500 is the more likely scenario.

Our economy had a 20 year credit boom followed by the bust in 2007 and is still correcting. The consumer is in frugal mode. In 2009 our government which has been expanding at a terrifying pace instilled a 700 billion dollar spending spree to pick up the slack. Most of the stimulus money will be spent by the end of the year. The upcoming rise in taxes for those that have a job along with the new taxes for the health care bill among others will keep a damper on our economic expansion. The biggest wild card in the next few years will be the deficit and how it will be handled. So far the bond auctions have been overall well received but this could change on a dime as both the public and private sector scramble for credit.

For now stay very nimble and gradually put money into the market as it falls over the next year. There are many indicators that put a high likelihood (75-80%) of 2010 being a down year.
The January indicator, years ending in zero and the presidential cycle are some of the indicators that portray a negative bias continuing. As long as the market is below 9850 a crash mode is in effect. Don’t forget it’s the return OF capital NOT the return ON capital that is the current golden rule. There are many stocks that went from $1 or $2 in March 2009 then rallied to $20-25 and now are cut in half over the past 2-3 months. They could easily retest $1-2 and the pain between here and there is tremendous. The markets are currently at a cusp of returning into its cyclical bear market which is in its 11th year. Some think it ended in March 2009 but once we break the 20% correction criteria the continuation of the cyclical bear market will be confirmed. It will be only a matter of time.

The next Step- Reality

The next Step- Reality


All the mirrors that were talked about in the past blogs are now taking form all over the world in ways that should cause major problems in the next 2-5 years but longer term will be deemed as a “best thing that ever happened” scenario. We don’t want to see the “pretend and extend” period last much longer. The protests in Greece will spread across Europe and eventually to the U.S. We see it now on the Arizona’s bill on immigration even though the AZ law is no different than the federal law. Arizonians see their state suffer from all the added costs associated with the free lunch that illegal’s get and want to enforce the federal law. Protests and lawlessness come from not only economic factors but also from social factors. As we have been stating in the past, “When your neighbor tells you he got a zero percent car loan, works 4 days weeks, got a home and student loan reduction as well as interest rate relief, a cost of living raise, free school lunches and health care that might send one over the edge”.

As for the market actions the past few weeks we have seen cracks starting to form. On April 14th the market dropped over 100 points then made a marginal high followed by a 200 drop April 27th. The following week volatility surged and the drop ensued. Then this past Thursday an earthquake in the financial markets sent the markets down over 950 points although the drop was NOT REAL. It was more like 550 points. There was a train wreck between computers and human actions.

There were a multiple set of events that contributed to the decline. First many traders had sell stops, second once certain technical levels were violated and selling intensified but the 3rd factor of program trading caused the air pocket. Most of the free fall were NYSE stocks that printed far below their previous trades on ECN’s that didn’t have any liquidity. NYSE specialists can hold their stocks for up to 90 seconds if they have a massive imbalance. Over 80% of NYSE stock’s volume traded on the NYSE exchange 10 years ago. Specialists would freeze a stock for up to 90 seconds then put a block up before resuming trading. If the specialists couldn't resume an orderly market they would halt the stock for 15 minutes. The problem is that the 80% market share has diminished to less than 30%. This left the other ECN’s to make markets but when they saw the NYSE hold some of their stocks, the other ECN’s either stopped making markets or dropped their bids. Program trades cancelled their NYSE orders and went to other ECN’s where there weren’t any bids near the previous trades. Over a 4 minute stretch the market moved down 500 DOW points thanks to some excessive stealing by some ECN’s. The biggest rip off was Accenture stock trading at a penny although that trade and many others were busted. The slower specialist system prevailed over computers gone wild.

The frenzy lasted only 4-5 minutes but the lawsuits will last for many years to come. It can happen again and will probably happen during the upcoming crash. Guess it proves that speed can hurt. Just as the 1998 Long Term Capital collapse caused markets all over the world to fall unless the current rules are changed the collapse of our stock market like 1987 where program trading was the main culprit will repeat itself. Long Term Capital thought they had all the correlations figured out and it worked for a while until it didn’t. And when it failed the professors were dumbfounded. They thought their system was infallible. Now we have more programs that not only work on speed but correlations that will work until they don’t.

There is a strong likelihood that the April highs will hold for the year and maybe many years to come. There are many stocks like the restaurant sector that have lost 20-30% in a matter of 2-3 weeks. Dow 10,250 level remains support even though it was broken because of bad “prints” this past Thursday followed by 10,183 then 9850. A crash will occur once 9850 is broken. After last weeks decline a bounce back to 10,750-10,823 is likely. If the DOW closes above 11,300 it would signal a move higher. With free money here and in Europe it could delay the crash from later this year to next year although this scenario is less likely as countries like China raise rates. China’s property values have risen ridiculously the past few years and their collapse could be the tsunami wave that hits the US. China has a glut of buildings and vacancies that make Dubai look good.

The market’s tide has changed from buy the dips to sell the rallies until the proof of closing above 11,300 occurs. The old saying of “sell in May and go away “should be valid this year especially in a second year of a president’s term. Technically the tremors have started and it’s only a matter of time before the bear train resumes. As we saw in the past week markets fall at a faster rate than they rise. Sectors leading the next wave down- restaurants, hotel, auto and auto parts, retail and housing along with banking and insurance sectors. The US consumer is done. Higher taxes and inflation are in Santa’s stocking. The bill is coming due and the manner which the government handles the payments will determine how far the shoe drops. DOW 5,000 in the next few years is not out of the question. Hopefully we stop the printing presses and save all the trees we need to pay our way out of debt. Currently it's difficult to see this scenario from becoming reality.

A Market for everyone: For Now

A Market for everyone: For Now


Where else on earth can one find so many mirrors that can reflect a perception that everything is alright. Besides the governments new venture into health care maybe they can reflect the disaster in their handling of Amtrak, Medicare, social security, Fannie and Freddie and the post office. Feel sick? Not to worry now as we have free health care for all. But one would state how about their venture into the TARP? Money is being paid back with interest? Yes, there are companies paying back but how about AIG, GM along with hundreds of small banks which will either pay back some or none of the money. The good companies already paid while the rest will struggle.


Banks has been liquefied by helicopter Ben. Our government’s goal of inflating houses so banks can recover their losses hasn’t shown up yet even with their market to model accounting method. This quarter should be interesting as banks must now put off balance sheet stuff onto their balance sheets. It will be interesting what junk they have been hiding but also the model they use to market these assets. There are so many extend and pretend offerings. How about 2% loan for 40 years? How about the 40,000 ex-Countrywide customers offered principal reduction? How about the government spending billions on programs for low interest rates and principal reduction? All these programs reward the deadbeat homeowner. Nothing like showing our youth that responsibility doesn’t matter in making choices because the government will bail you out doesn’t set a good example.


Our printing presses are in overtime mode creating one of the few jobs getting overtime. The velocity of money has slowed over the past few years to .79% from a 2-3% in the 1985-2000 era.. This means that for every dollar created it doesn’t turn over. If that changes inflation will explode as the turnover of money in the system accelerates. With the printing presses at full speed increases in money turnover would spell disaster. Our politicians want inflation back in the worst way. They think inflation will bring back housing and low budget deficits as a percentage of GDP. Inflation instead will devalue our dollar and erode our spending power.

Since the mid-1990’s the federal government has lowered federal taxes but on the state level taxes and budget shortfalls have increased to a level which in some states could cause a default. States have raised taxes from sales tax to real estate tax to the local level in fees. With an estimated 3.5 trillion dollar federal debt issue for 2010 states are left having a difficult time in competing with the federal government. Most of the raised debt is just to pay off the interest. This can t last long. Legacy costs are killing state budgets and show no sign of getting better anytime soon.





It’s been a year since the market lows. The sharp rally of over 75% has reflected the opposite in fear and greed and it has happened in such a short time period. Free money has been doing its job keeping the market afloat. When the debt bill arrives in the mail only then will this mirror game end and end badly. There is a high probably of a market crash sometime within the next 12-18 months. Meanwhile it seems that everyday is an up day. Earlier this month the DOW started a trend of being up 18-22 trading days. The market is in the 9th inning but it might go to extra innings.

A market top takes time to form. We need to see fewer stocks making new highs. We need to see the advance/ decline line turn over. Mutual fund money is at historical low levels which is a sentiment indicator. We already have high bullish sentiment among newsletter writers. Remember last year how lawmakers wanted to ban short selling blaming them for the market decline. A year later and market up 75% ends the debate for the need to change the current rules. There are few short sellers left standing. This is a bearish indicator as they will be very little short covering to stimulate a good old fashion short squeeze rally.

The current rally probably can make marginal new highs into April or May with DOW resistance as follows – 10,960 then 11,032, 11,080 then 11,131 being the top level. If we close above 11,150 then 11,500-11,600 come into play. On the downside support is 10,550 then 10,250 followed by 10,183 then 9850. The first drop from the areas mentioned above should stop around 10,200 level before a bounce that would take the market NOT to new highs. The failed rally would send the market down to below the previous lows. It is from this point where a crash would be highly probably. In short, a top within the next two months at the 11,100 level followed by a decline to 10,250 which then would rally maybe back to 10,550-10,800 and from here another decline to retest the previous lows. The lows fail to hold and a crash ensues.

What would cause this collapse? How about the realization of another Japan like era? Our banks haven’t written down enough bad mortgages both commercial and residential. The extend and pretend game is still on. US banks have stopped lending to the small guy. Instead they take the free money and buy treasuries or even put it into the stock market. Free money is not the answer. We need more bankruptcies and to stop rewarding failure.

End all the free money programs in autos, student loans and housing. Illinois is among many states that are looking into a 4 day school week as is the post office cutting out Saturday delivery. Work less and get out of the government subsidizing everything they can get their hands on and then tax it sounds like socialism. The individual has backed off their spending because the banks cut off their credit and free money. Now the government took over the credit card and upped the line and started to spend like crazy. Don’t we realize that the bill will eventually be paid by a lower standard of living for our kids?


As for sectors that should do bad in the next leg down expect –housing, retail, airlines, banks and autos. Gold will have another up leg but first could drop below $1,000. Longer term gold should double as our government put a torch on inflation only temporally. They wish for inflationary pressures to emerge but when you gas the fire it takes a while before the flame shoots up. When it does everyone’s hair will get singed.

My feelings on the politicians are that everyone should be voted out of office. What they have done in the past 10 years to our economy and future will only be realized as time moves on and it isn’t good. The 10 trillion dollar deficit is really a 40-50 trillion deficit when you look at all the entitlements.

As I finish this confusing report we are heading in a seasonal strong part of the year which is the first week in April and the Good Friday Easter weekend. I’m not that bullish nor am I that bearish near term although I would use a March 31st sell off to go long into the first week of April. Keep stops close. A blow off top next week over 11,100(or even up to 11,500) would be a perfect time to short the market. Remember that short term there are too many people wishing for a pullback. Once they chase the market and we get an up 150 open and close lower that would be a textbook top. It just might happen in the next week or two. The mirrors will either break or blind the public back into reality. A massive protest or two by year end is a high likelihood considering all the mirrors that were needed to fool the people in the first place. When your neighbor tells you he got a zero percent car loan, works 4 days weeks, got a home and student loan reduction as well as interest rate relief, a cost of living raise, free school lunches and health care that might send one over the edge.