Volatility is back with a vengeance. The market is witnessing extreme swings in both directions, but primarily the market has been going down – fast. Support is at 1040 on the S&P (Tuesday’s intraday low) and resistance is first at 1104, then 1110 – 1140. The NASDAQ has major support at 2140 (also Tuesday’s low) and resistance at 2370.
Whether or not the recent market lows hold is the key for the markets next primary move. If the S&P breaks down below 1040, the bulls better run for cover! The Dow had an 800 point swing last week and a 500 point swing this week. That type of volatility is not normal for a traditional market correction. Many are calling for the bull market to resume and that a new high for equities is in store. If that does happen, it will take a little time for the market to build a new base to launch from.
Now it’s about follow through. The market hasn't recorded back-to-back positive days since April 28-29. From the April 25th high to the May 24th low this year, the S&P 500 corrected 14.7%. If you look at any chart pattern for the major market indices and the most of the major subsectors you will easily notice that a pattern of lower highs and lower lows exits. That is called a downtrend and until that trend is broken to the upside investors need to be careful. Also of note is that the uptrend from last year’s lows has been broken to the downside.
Many of the overbought and sentiment conditions that I have been concerned about recently have abated. It also seems that much of the negative emotion surrounding Europe has subsided. Today, Fitch downgraded Spain's long-term foreign and local currency issuer default ratings to AA+ from AAA, while maintaining a stable outlook. While the market reacted negatively, Armageddon did not break out as it might have earlier in the week.
We could rally for a while but whether or not we go to new highs, given the current environment is yet to be determined. This week’s release of the AAII poll showed that bearishness rose dramatically to 50.9% from 33.7% the previous week. That is the highest level of bearishness seen this year. These sentiment polls are contrary indicators. Usually when the majority of investors feel one way about the markets, the opposite occurs. For now, bearishness abounds.
On Thursday the markets melted up 3%, albeit on lighter volume repeating the pattern the markets had all last year. Historically price action needed to be confirmed by volume for that direction to be sustainable. But like most MBA books, some forms of technical analysis are not holding long established truths either. Currently, it seems that price alone is truth! The market’s ability to get so much of a bounce on so little news Thursday was a classic sign of a market that was extremely oversold on a short-term basis and desperate to launch a technical rebound.
On the economic front we have both good and bad news available. First some bad news: Now that the homebuyers tax credit has expired mortgage applications for new purchases of homes has dropped to a 13 year low according to the Mortgage Bankers Association. That means mortgage applications are lower now than anytime during the credit crunch of the last three years!
The most recent Case Shiller Home Price Index showed another monthly price decline. That is the sixth decline in a row, and 70% of the cities monitored posted a falloff. Long term, housing remains the key to US economic stability. In the past couple weeks many austerity programs for European countries and US states were outlined. These cuts in government jobs and services will not help create a V shaped recovery for the economy. Instead they will act as a drag and lower GDP expectations and quite possibly corporate earnings.
Consumer confidence, measured by the Conference Board, improved 5.6 points in May to 63.3. That is the best tally since March 2008 and the third increase in as many months. It must be noted however, that during times of economic expansion normal confidence numbers stand at around 102. In past recessions, consumer confidence averages 71. In fact, right after 9/11 consumer confidence was at 85.3 and that was immediately after the terrorist attacks and an economy that was eight months into a recession. So before anyone uncorks the champagne over this improvement in confidence, it may be wise to put the current situation into historical perspective.
Now for some positive news: We have a holiday shortened week with Memorial Day on Monday. Several summer rallies have started soon after Memorial Day. We will also have many positive economic reports due next week. The jobs number on Friday is expected to show 500,000 new jobs created for the economy last month. That could act as a strong catalyst for an upward market move. The average workweek is expected to increase demonstrating demand and the ISM Manufacturing and Services numbers should also show continued economic expansion. Next week also marks the monthly strength period for the markets. This is the time that automatic flows of money to fund retirement accounts from workers around the country hit the markets. This can lend strength to the markets.
I was not surprised by the huge rally Thursday since many indicators were screaming oversold. We went short at the beginning of May and captured profits as the market declined. We still have our gold and silver ETFs. But mostly we are in cash even though that can seem unsatisfying and unrewarding to investors as the market swings about in both directions. Sometimes it’s better to be safe than sorry. We feel it appropriate to wait for the clues that will clearly define the next major market directional move.
I’ll close with this final note of caution supplied by Dave Rosenberg of Gluskin Sheff. There have only been two other times when the stock market ran as quickly up from a low in barely over a year, as was the case this time around (+80% from March 2009 to April 2010): the 112% surge from June 1, 1932 to September 7, 1932; and the 116% run up from March 2, 1933 to July 18, 1933. In the first case, there was a 40% correction and in the second, the correction was 34%. So, using history as your guide, we are talking about the prospect of a pretty significant reversal that could take the S&P 500 down to as low as 850.
The clues are the support and resistance levels. If support is broken it is imperative to raise cash as that would signal a breakdown of a triple bottom. If we break above overhead resistance (1150 on the S&P) positions could be added, but use tight stops as things can change very quickly in this volatile environment.
Friday, May 28, 2010
Monday, May 24, 2010
Fade the Rally
The market acted terrible last week and that was only seven days removed from a prior bad week that featured a mini crash! This is not your average correction that some are talking and writing about. The markets are broken and continue to break down.
The latest Investors Intelligence poll shows that the bull camp stayed positive, dropping only a small percentage, from 47.2% to 43.8%; while only 24.7% are bearish. Not many appear overly concerned, despite everything that has happened in the past few weeks from Greece, to flash crashes, to Euro breakdowns and possible government intervention.
As a money manager, I don't know if I am first and foremost supposed to be an economist, common sense bearer, political analyst, or realist, but there are many factors that are affecting the markets currently. Numerous investors are only focusing only on the recently better economic news and are forecasting that straight out into the future. Onward and upward.
It is the next market move that is important. Global governments are printing more fiat (fake) money to throw at every problem. For a while that has temporarily worked in the past, there is no certainty that it work again this time. If investors and everyone were to start to comprehend that more debt cannot solve a debt crisis, the house of cards will fall. It does appear that market participants perhaps are now starting to focus their attention to the growing debt predicament.
While I don't want our economy to fall off a cliff - I don't think printing more debt and moving it from the private sector (from the banks) to the public sector (the federal government) is a viable solution. Here in the US, we are at historically low interest rates; rates not seen since the Great Depression levels in the 1930's. Yet all these trillions of new debt dollars are being funded on the short end of the yield curve. The likely hood is that some time in the near future, interest rates will go up. The long term historical average yield on a 10 year US Treasury Note is around 7% - today that rate is 3.23%. So if interest rates just go to historical averages, the cost to finance our debt more than doubles and that is just to pay the interest. That money will do nothing productive like building roads, bridges, airports, etc., that will help our economy grow. This is a very bad idea. Everyone including global governments need to learn to live within their means. For now this credo is lost on the minds of the global decision makers.
Short term, markets are extremely oversold. There are many ways to gauge overbought and oversold conditions, but by almost every measure we are at extreme oversold levels. Therefore the market could stage some sort of rally this week. That would not surprise me, in fact last Friday, we covered all of our inverse ETF positions that we placed on the markets just a few weeks back for handsome profits.
If you are an average investor riding out this washout, don't. Use any rally as an opportunity to raise cash! Put your funds into money market funds or short term Treasuries. If the market takes out last Friday's low (May 21, 2010) without first rallying - I would suggest cashing out even quicker under that scenario.
Faith has been broken. I think we could see a rally back up to 1100 - 1135 on the S&P, but that may not happen. My first downside target is 940 - 950 on the S&P if we take out last week's low. I would reassess at that point so I do not suggest riding out the storm as it could get worse than that.
Here are some sobering statistics. In the past 130 years, whenever the Graham/ Dodd/ Shiller normalized P/E ratio goes above 20.6x (it's approximately 21x today), the market has experienced a correction of 31% on average over the next 16 months. It has never failed.
A couple of more stats courtesy of David Rosenberg of Gluskin Sheff:
-1 in every 10 American homeowners missed a mortgage payment in the first quarter (a record)
-1 in 6 Americans are either unemployed or underemployed
-Over 4 in 10 unemployed Americans have been out of work for at least six months.
-1 in 4 Americans with a mortgage have negative equity in their homes.
-There are 5 unemployed workers competing for every job opening (hence downward pressure on wage growth).
The markets are under pressure and could potentially crash. I don't want to sound like a gloom and doom sayer, but the markets dropped around 10% before it crashed in 1987. We just had a huge run-up in the markets since March 2009 and money managers will be much quicker exit this time. Most individuals, as well as many state, federal, and global governments owe more than they are worth. That is unsustainable. Debt to bailout prior bad debt and doesn't create anything, reminds me of the old saying, "Don't throw good money after bad!" Investing in today's stock market could be the same idea. Sell into any rally.
The latest Investors Intelligence poll shows that the bull camp stayed positive, dropping only a small percentage, from 47.2% to 43.8%; while only 24.7% are bearish. Not many appear overly concerned, despite everything that has happened in the past few weeks from Greece, to flash crashes, to Euro breakdowns and possible government intervention.
As a money manager, I don't know if I am first and foremost supposed to be an economist, common sense bearer, political analyst, or realist, but there are many factors that are affecting the markets currently. Numerous investors are only focusing only on the recently better economic news and are forecasting that straight out into the future. Onward and upward.
It is the next market move that is important. Global governments are printing more fiat (fake) money to throw at every problem. For a while that has temporarily worked in the past, there is no certainty that it work again this time. If investors and everyone were to start to comprehend that more debt cannot solve a debt crisis, the house of cards will fall. It does appear that market participants perhaps are now starting to focus their attention to the growing debt predicament.
While I don't want our economy to fall off a cliff - I don't think printing more debt and moving it from the private sector (from the banks) to the public sector (the federal government) is a viable solution. Here in the US, we are at historically low interest rates; rates not seen since the Great Depression levels in the 1930's. Yet all these trillions of new debt dollars are being funded on the short end of the yield curve. The likely hood is that some time in the near future, interest rates will go up. The long term historical average yield on a 10 year US Treasury Note is around 7% - today that rate is 3.23%. So if interest rates just go to historical averages, the cost to finance our debt more than doubles and that is just to pay the interest. That money will do nothing productive like building roads, bridges, airports, etc., that will help our economy grow. This is a very bad idea. Everyone including global governments need to learn to live within their means. For now this credo is lost on the minds of the global decision makers.
Short term, markets are extremely oversold. There are many ways to gauge overbought and oversold conditions, but by almost every measure we are at extreme oversold levels. Therefore the market could stage some sort of rally this week. That would not surprise me, in fact last Friday, we covered all of our inverse ETF positions that we placed on the markets just a few weeks back for handsome profits.
If you are an average investor riding out this washout, don't. Use any rally as an opportunity to raise cash! Put your funds into money market funds or short term Treasuries. If the market takes out last Friday's low (May 21, 2010) without first rallying - I would suggest cashing out even quicker under that scenario.
Faith has been broken. I think we could see a rally back up to 1100 - 1135 on the S&P, but that may not happen. My first downside target is 940 - 950 on the S&P if we take out last week's low. I would reassess at that point so I do not suggest riding out the storm as it could get worse than that.
Here are some sobering statistics. In the past 130 years, whenever the Graham/ Dodd/ Shiller normalized P/E ratio goes above 20.6x (it's approximately 21x today), the market has experienced a correction of 31% on average over the next 16 months. It has never failed.
A couple of more stats courtesy of David Rosenberg of Gluskin Sheff:
-1 in every 10 American homeowners missed a mortgage payment in the first quarter (a record)
-1 in 6 Americans are either unemployed or underemployed
-Over 4 in 10 unemployed Americans have been out of work for at least six months.
-1 in 4 Americans with a mortgage have negative equity in their homes.
-There are 5 unemployed workers competing for every job opening (hence downward pressure on wage growth).
The markets are under pressure and could potentially crash. I don't want to sound like a gloom and doom sayer, but the markets dropped around 10% before it crashed in 1987. We just had a huge run-up in the markets since March 2009 and money managers will be much quicker exit this time. Most individuals, as well as many state, federal, and global governments owe more than they are worth. That is unsustainable. Debt to bailout prior bad debt and doesn't create anything, reminds me of the old saying, "Don't throw good money after bad!" Investing in today's stock market could be the same idea. Sell into any rally.
Tuesday, May 18, 2010
Can You Fight City Hall?
I keep reminding myself of the old adage “you can’t fight City Hall” as I analyze current market conditions. I hear the pundits on major media talking about the economic recovery. Many go so far as to call it a V- shaped recovery, yet I don’t see it. I do think the US economy has stabilized. I would even go so far as to state that the economy has rebounded slightly from the bottom, but in most areas the economy is still at historically low levels.
Housing was the spark that started the whole economic calamity and as I have stated many times – the recovery will not be firm until the housing market is fixed. The government stimulus for first time and existing home buyers has now ended. What happens next will be very telling about our economic future. Major media was all fired up today about the 6% rise in housing starts to a seasonal adjusted annual rate of 672,000. For comparison, the April 2006 housing starts were annualizing over 2,000,000 – so I would suggest that we still have a ways to go.
However the bigger number that should be focused on was the drop for new housing permits by almost 12%. I think that homebuilders’ realize that without the tax credits going forward, housing is going to slow again from these extremely low levels. Another disturbing trend reveals that 12% of mortgage defaults are now “strategic” and that it is okay in our increasingly hedonistic society, to walk away from a mortgage that you could otherwise afford.
Further, banks that do foreclose upon a home are not required to carry that home on their books at current value. For example, a couple borrowed $500,000 from a bank a few years back to purchase a home with none of their own money down. The home is now worth $300,000 and the couple has stopped making their mortgage payment. After about a year they are forced out of their home. The bank is not required to put that asset on their books at the real market value ($300,000) until they sell that property. The bank still shows it as a $500,000 asset. This process is repeated all over the country by big banks and small, on commercial, residential, and industrial properties of all sizes. The banks are sitting on huge amounts of inventory unwilling to attempt to sell those properties for fear of having to actually realize the loss. Therefore banks are overstating their current value and apparently investors either aren’t aware or don’t care a lot about that.
The Euro was the hot trade in 2009. Talk was that the US dollar’s status as the world’s reserve currency was numbered. How times have quickly changed. The Euro has been plunging since November with the recognition of the debt crisis in parts of Europe. The Euro has given up all of its gains from the last five years, and is back to 2005 levels, with the potential to go even lower. Some, including European leaders and top Euro bankers, are projecting that the Euro will disappear altogether as a currency, with European countries returning to the days when each country had its own currency. That would be a global catastrophe if that happened quickly or at all.
The Chinese stock market is at an 11-month low, down 24% since its peak last July. If you think we had a housing bubble here at home – the rise for Chinese home prices in some areas, over the last decade, has gone twice as far and twice as fast as real estate did here in the once hot markets such as California. If or rather when that Chinese bubble bursts, it will have a global impact. China is the second largest economy in the world and their markets had actually acted like a leading indicator to our markets over the last two and a half years. Hopefully we have disconnected from their stock market trends, if not, the future doesn’t look good.
Things aren’t much better for our own federal government. The US posted only its third April deficit in the past 30 years, according to data recently released by the Treasury Department. We had an $82.7 billion shortfall for the month of April 2010, the most ever in the month that Americans file their tax returns. Historically, April has been a surplus month for the government because of the April 15 tax filing deadline. But spending is up rather dramatically. April recorded the 19th consecutive monthly deficit. Remember, we just recently gave $50 to $60 billion to Europe through the IMF so May won’t be much better– but who’s counting.
From a technical standpoint the stock market appears to be rolling over. We decline farther and on much higher volume on down days, than we go up on the positive days. This is called distribution and it appears to be widespread. The “flash crash” conditions have not been resolved; therefore it would be naïve to ignore the fact that it could happen again at any time. If our markets close below their respective 200 day moving averages and non flash crash inter day lows (S&P 1094), then we could see a fall all the way down to 880 - 900 on the S&P.
Now for the good news, City Hall in this case is much larger than the biggest of all cities vestibules. In this case, City Hall is represented by the Obama administration, the Federal Reserve Bank, European leaders, large global financial institutions, and many others who have a vested interest in making sure our global economy all works out. This consortium has at their disposal, printing presses and is offering to its member’s access to unlimited funds at almost zero interest rates. Their motto of “print you way to prosperity” has resonated with many investors who believe that live for today for tomorrow we may die, is the best way to solve all our global ills.
It remains to be seen whether or not investors have had enough of this foolishness of trying to solve a debt crisis with more debt or not. We are on the short side of the market but remain wary with tight stops in case we blow our markets a little bigger before it bursts. We are fighting City Hall! For the good of all we hope some semblance of restoring order to our society will prevail. Whether for an individual, household, corporation, or a government the following is imperative; each entity must all learn to live within its means. Where it all went wrong is too lengthy to detail, but where we need to go is clear. Unfortunately it will take some pain to reconcile and the markets will need to correct.
Housing was the spark that started the whole economic calamity and as I have stated many times – the recovery will not be firm until the housing market is fixed. The government stimulus for first time and existing home buyers has now ended. What happens next will be very telling about our economic future. Major media was all fired up today about the 6% rise in housing starts to a seasonal adjusted annual rate of 672,000. For comparison, the April 2006 housing starts were annualizing over 2,000,000 – so I would suggest that we still have a ways to go.
However the bigger number that should be focused on was the drop for new housing permits by almost 12%. I think that homebuilders’ realize that without the tax credits going forward, housing is going to slow again from these extremely low levels. Another disturbing trend reveals that 12% of mortgage defaults are now “strategic” and that it is okay in our increasingly hedonistic society, to walk away from a mortgage that you could otherwise afford.
Further, banks that do foreclose upon a home are not required to carry that home on their books at current value. For example, a couple borrowed $500,000 from a bank a few years back to purchase a home with none of their own money down. The home is now worth $300,000 and the couple has stopped making their mortgage payment. After about a year they are forced out of their home. The bank is not required to put that asset on their books at the real market value ($300,000) until they sell that property. The bank still shows it as a $500,000 asset. This process is repeated all over the country by big banks and small, on commercial, residential, and industrial properties of all sizes. The banks are sitting on huge amounts of inventory unwilling to attempt to sell those properties for fear of having to actually realize the loss. Therefore banks are overstating their current value and apparently investors either aren’t aware or don’t care a lot about that.
The Euro was the hot trade in 2009. Talk was that the US dollar’s status as the world’s reserve currency was numbered. How times have quickly changed. The Euro has been plunging since November with the recognition of the debt crisis in parts of Europe. The Euro has given up all of its gains from the last five years, and is back to 2005 levels, with the potential to go even lower. Some, including European leaders and top Euro bankers, are projecting that the Euro will disappear altogether as a currency, with European countries returning to the days when each country had its own currency. That would be a global catastrophe if that happened quickly or at all.
The Chinese stock market is at an 11-month low, down 24% since its peak last July. If you think we had a housing bubble here at home – the rise for Chinese home prices in some areas, over the last decade, has gone twice as far and twice as fast as real estate did here in the once hot markets such as California. If or rather when that Chinese bubble bursts, it will have a global impact. China is the second largest economy in the world and their markets had actually acted like a leading indicator to our markets over the last two and a half years. Hopefully we have disconnected from their stock market trends, if not, the future doesn’t look good.
Things aren’t much better for our own federal government. The US posted only its third April deficit in the past 30 years, according to data recently released by the Treasury Department. We had an $82.7 billion shortfall for the month of April 2010, the most ever in the month that Americans file their tax returns. Historically, April has been a surplus month for the government because of the April 15 tax filing deadline. But spending is up rather dramatically. April recorded the 19th consecutive monthly deficit. Remember, we just recently gave $50 to $60 billion to Europe through the IMF so May won’t be much better– but who’s counting.
From a technical standpoint the stock market appears to be rolling over. We decline farther and on much higher volume on down days, than we go up on the positive days. This is called distribution and it appears to be widespread. The “flash crash” conditions have not been resolved; therefore it would be naïve to ignore the fact that it could happen again at any time. If our markets close below their respective 200 day moving averages and non flash crash inter day lows (S&P 1094), then we could see a fall all the way down to 880 - 900 on the S&P.
Now for the good news, City Hall in this case is much larger than the biggest of all cities vestibules. In this case, City Hall is represented by the Obama administration, the Federal Reserve Bank, European leaders, large global financial institutions, and many others who have a vested interest in making sure our global economy all works out. This consortium has at their disposal, printing presses and is offering to its member’s access to unlimited funds at almost zero interest rates. Their motto of “print you way to prosperity” has resonated with many investors who believe that live for today for tomorrow we may die, is the best way to solve all our global ills.
It remains to be seen whether or not investors have had enough of this foolishness of trying to solve a debt crisis with more debt or not. We are on the short side of the market but remain wary with tight stops in case we blow our markets a little bigger before it bursts. We are fighting City Hall! For the good of all we hope some semblance of restoring order to our society will prevail. Whether for an individual, household, corporation, or a government the following is imperative; each entity must all learn to live within its means. Where it all went wrong is too lengthy to detail, but where we need to go is clear. Unfortunately it will take some pain to reconcile and the markets will need to correct.
Friday, May 14, 2010
What Does a Trillion Dollars Buy These Days?
What does a $1,000,000,000,000 buy these days? Apparently not a whole lot, maybe a couple of weeks. Last weekend the leaders of Europe got together and pledged that amount to the weaker members as they struggle to keep the European currency intact. The chiefs said that it needed to be big and had to get done before the Asian markets opened on Monday to avoid a crash. Mission accomplished – no Monday crash and instead a pretty strong rally. Was the rally due to the trillion dollar bailout or due to a bounce from oversold conditions? We will never know.
One thing we do know today is that the Euro is lower today than it was last week. Maybe investors have figured out that there really was no trillion dollars. There is no money! All countries around globe, including the US, are running at a negative deficit. So to give a trillion dollars is in reality just a pledge to create more money out of thin air. Remember that no one can print their way to prosperity. Just as we can’t solve a debt crisis with more debt.
And what about the Americans? What is our take what is going on in Europe? The United States taxpayers through the International Monetary Fund pledged over $50 Billion to bail out the Euro Zone Countries. Aren’t we a philanthropic group? Some economists have been saying that our economy is recovering after our own private sector bailout, so why not be generous and help those Socialists that are less fortunate than us.
I guess I don’t get it. Do Americans not understand what is happening here? Are we so immune to big numbers that $50 Billion US Dollars to reward bad behavior in other countries is a huge burden on the 50% of us who actually pay taxes? We should be outraged. We should take to the streets. We all want to maintain our current lifestyle. However some appear to have a better lifestyle than others – on our dime (or our $50 billion whatever the case may be).
The U.S. government debt now stands at 92.6% of projected 2010 gross domestic product, according to the International Monetary Fund. That means we have a heavier debt burden than several of the overleveraged countries that we are bailing out. Portugal’s debt, according to the IMF, is 85.9% of its GDP; Ireland’s, 78.8%; Italy, 118.6%; Greece, 124.1%; Spain, 66.9%.
Here is the well documented story. European Union members shocked markets Monday with the announcement of a one trillion dollar safety net, in an attempt to keep Greece and other heavily indebted countries from defaulting. It was assumed that a Euro sovereign country defaulting would cause the whole European Union to fall apart. This money won't create any jobs or build any roads or fix any bridges. It’s just the creation of additional debt to effectively dig a deeper hole.
Too big to fail not only applies to our big banks, but also now applies to outside nations and their debt. So everyone and everything is guaranteed everywhere. Has anyone looked at the balance sheets of the majority of states here in our own country? We need a good old fashion bailout right here at home. California and at least 20 other states need a bailout. I wouldn’t mind getting some bailout money – how about you? When will it end?
But before you start to feel good about this happy news, it is important to ask one simple question. Where do you suppose the trillion dollars is coming from exactly? Did it roll out from under the seat of their car? Did they collectively find some loose change in their pockets? Or perhaps they found a cool trillion in the jacket that they recently picked up from the Thrift store. Short term, they averted disaster, but someday investors will wake up to find that we bailed out a debt problem with more debt and that will have long term repercussions.
Their solution is akin to a consumer trying to solve their own debt problem by transferring debit balances from one credit card to another card with a higher credit limit. That tactic buys some time, but it does not change the fact that one still has a debt problem. The only way that a debt problem gets resolved is to cut spending and to allocate more income toward paying down the debt. If there is no real austerity imposed, moral hazard will soar. Why would anyone reform their spending patterns if Greece, the US bankers, and the like, keep getting their allowance even though they won’t clean their room?
The market reacted very positively to the bailout news on Monday and Wednesday. But by the end of the week the market started showing signs that it understands the unfortunate reality that printing more money is just not going to work. The market has other structural issues that are yet to be resolved. Experts still don’t have a solution to the mini crash that occurred last Thursday. Don’t kid yourself – without a fix this could happen again. The technical charts of the major indices look as though the market has broken. It is called a waterfall pattern or can be visualized as if prices fell of a cliff. Any fix for the market is like climbing up a waterfall, one can do it, but it won’t be easy. There have been 16 times that the Dow Industrials have rallied 400 or more points like it did last Monday. In every instance the markets went lower very shortly after. I just can’t rationalize how this time will be any different.
So what did the money buy us? The markets almost went on a full round trip this week. At one point this week the S&P 500 had rallied up 5.6% from last Friday’s close, only to finish the week only up 2 ¼%. We are still down almost 7% from the peak a few short weeks ago. Be careful! Nothing has been fixed – our problems have only gotten more costly. A trillion dollars more!
One thing we do know today is that the Euro is lower today than it was last week. Maybe investors have figured out that there really was no trillion dollars. There is no money! All countries around globe, including the US, are running at a negative deficit. So to give a trillion dollars is in reality just a pledge to create more money out of thin air. Remember that no one can print their way to prosperity. Just as we can’t solve a debt crisis with more debt.
And what about the Americans? What is our take what is going on in Europe? The United States taxpayers through the International Monetary Fund pledged over $50 Billion to bail out the Euro Zone Countries. Aren’t we a philanthropic group? Some economists have been saying that our economy is recovering after our own private sector bailout, so why not be generous and help those Socialists that are less fortunate than us.
I guess I don’t get it. Do Americans not understand what is happening here? Are we so immune to big numbers that $50 Billion US Dollars to reward bad behavior in other countries is a huge burden on the 50% of us who actually pay taxes? We should be outraged. We should take to the streets. We all want to maintain our current lifestyle. However some appear to have a better lifestyle than others – on our dime (or our $50 billion whatever the case may be).
The U.S. government debt now stands at 92.6% of projected 2010 gross domestic product, according to the International Monetary Fund. That means we have a heavier debt burden than several of the overleveraged countries that we are bailing out. Portugal’s debt, according to the IMF, is 85.9% of its GDP; Ireland’s, 78.8%; Italy, 118.6%; Greece, 124.1%; Spain, 66.9%.
Here is the well documented story. European Union members shocked markets Monday with the announcement of a one trillion dollar safety net, in an attempt to keep Greece and other heavily indebted countries from defaulting. It was assumed that a Euro sovereign country defaulting would cause the whole European Union to fall apart. This money won't create any jobs or build any roads or fix any bridges. It’s just the creation of additional debt to effectively dig a deeper hole.
Too big to fail not only applies to our big banks, but also now applies to outside nations and their debt. So everyone and everything is guaranteed everywhere. Has anyone looked at the balance sheets of the majority of states here in our own country? We need a good old fashion bailout right here at home. California and at least 20 other states need a bailout. I wouldn’t mind getting some bailout money – how about you? When will it end?
But before you start to feel good about this happy news, it is important to ask one simple question. Where do you suppose the trillion dollars is coming from exactly? Did it roll out from under the seat of their car? Did they collectively find some loose change in their pockets? Or perhaps they found a cool trillion in the jacket that they recently picked up from the Thrift store. Short term, they averted disaster, but someday investors will wake up to find that we bailed out a debt problem with more debt and that will have long term repercussions.
Their solution is akin to a consumer trying to solve their own debt problem by transferring debit balances from one credit card to another card with a higher credit limit. That tactic buys some time, but it does not change the fact that one still has a debt problem. The only way that a debt problem gets resolved is to cut spending and to allocate more income toward paying down the debt. If there is no real austerity imposed, moral hazard will soar. Why would anyone reform their spending patterns if Greece, the US bankers, and the like, keep getting their allowance even though they won’t clean their room?
The market reacted very positively to the bailout news on Monday and Wednesday. But by the end of the week the market started showing signs that it understands the unfortunate reality that printing more money is just not going to work. The market has other structural issues that are yet to be resolved. Experts still don’t have a solution to the mini crash that occurred last Thursday. Don’t kid yourself – without a fix this could happen again. The technical charts of the major indices look as though the market has broken. It is called a waterfall pattern or can be visualized as if prices fell of a cliff. Any fix for the market is like climbing up a waterfall, one can do it, but it won’t be easy. There have been 16 times that the Dow Industrials have rallied 400 or more points like it did last Monday. In every instance the markets went lower very shortly after. I just can’t rationalize how this time will be any different.
So what did the money buy us? The markets almost went on a full round trip this week. At one point this week the S&P 500 had rallied up 5.6% from last Friday’s close, only to finish the week only up 2 ¼%. We are still down almost 7% from the peak a few short weeks ago. Be careful! Nothing has been fixed – our problems have only gotten more costly. A trillion dollars more!
Friday, May 7, 2010
No Good Will Come From This
Apparently the market gave us all a big fat finger yesterday when a trader typed a billion when it should have been a million. For anyone who knows me, I don’t believe that explanation for a second, at least the part about the trader mistyping. As the market ticked down 900 plus points, my first thought was Israel finally bombed Iran. In hindsight that may have been a good time for them to carry out that mission, as it seemed things couldn’t get much worse for the markets.
When I realized an attack wasn’t the case, I commented to my assistant that a hedge fund probably blew up and we wouldn’t find out the details until sometime in the future. I then noted as the markets were crossing back up over the down 600 mark that very shortly the media will come out with reports that the precipitous drop was due to some rogue trading error – a fat finger by some low level entry clerk. I further stated that this would be portrayed as an isolated incident. Just as initial reports last week about the Times Square attempted bombing was by a lone, unhappy, deranged madman. Or the Christmas Day underpants bomber acted alone as he tried to blow up a plane as it flew into Detroit Metro. None of these are isolated incidents.
I am constantly amazed that people actually buy into these media spun reasons for events that don’t make us feel comfortable. I was actually smiling as the market tanked as I was net short (investing in a manner whereby my clients would profit if the market to were to decline) heading into the day. I’m not happy for those who lost 3.2% of their hard earned investment dollars in one day, but at some point, investors have to realize that markets move in two directions – up and down! How many lessons will investors need to participate in to understand that concept?
The market is now down for the year. The S&P is still down 30% since the market peaked 31 months ago, and is down 28% for the last 10 plus years! Buy and hold and hope is not working. The NASDAQ is still less than half its value from 10 years ago! Oh but that was a bubble – they can explain!
There really is no explanation necessary. The market was ridiculously overvalued recently as outlined in my previous articles. Whether there is any truth to the fat finger trading error or if I am correct and a hedge fund blew up doesn’t matter. What matters is that the market has issues! It’s going to be very difficult for Mr. & Mrs. Average Investor to get excited about putting their life savings or their retirement account into an investment vehicle that can fluctuate 10% down over the course of an afternoon, for any reason.
I believe there will be lawsuits that come out of this from investors who were stopped out of positions as the market swooned. If I held a stock and my stop loss was filled 40% below where it closed, due to someone else’s trading error, I would be looking to hold someone else liable too.
The media finally started to blame the going-ons in Greece as a possible reason the markets haven’t been acting well lately. You think? Here EU member countries such as Germany and France, and the IMF (which is 17.1% funded by US taxpayers) have made loans available to Greece in the amount of approximately $110 Billion. (Greece needs the money after years of allowing their citizenry to retire by age 55, get 14 months pay for 12 months of work, and take two hour lunches in the middle of each day.) And what do the Greeks do? Riot in the streets and say, ‘hell no – we won’t work past 55, and getting paid 12 months pay for 12 months work is unreasonable.’ Some thanks.
How do you think the hard working, efficient Germans feel about that? Our portion of the IMF contribution to Greece works out to be $6.7 billion of your money – How do you feel about their gratitude? Nice video footage of their warmth. The rock throwing and tear gas were especially touching. It would be different if the Greek situation was an isolated incident, but it’s not. Ireland, Portugal and Spain are not far behind. This could spread here once we recognize that many of our state governments are as broke as Greece.
Sovereign debt issues are the new subprime mortgage problems that got us here in the first place. Our government is complicit to this global and growing problem. The global plan to bail out debt with more debt is unworkable. It’s like the zombies feeding off the dead. We are dead (poor economy and growing debt issues) and the Greeks are the zombies (because they are rioting in the streets). The printing presses have been working overtime for so long here in the US that they are now making new $100 bills. I thought this was because the old presses broke, but I am told the bills were redesigned for a different reason.
I believe most will hope that this will be a one off event and we can go on with our lives and make money in the markets soon. Unfortunately, this is another in a series of warning shots across the bow that our debt problems are growing and getting worse. The market will most likely soon test the lows from yesterday. That means I think the Dow will drop another 656 points in the next month or so.
When the market crashed in 1987, it retested the crash lows within five weeks. After the retest we will reevaluate our next move. If our government and investors continue on in status quo mode between now and then don’t expect those lows to hold. Hopefully we can change course and get more fiscally responsible here and abroad. Somehow I have my doubts that will happen.
When I realized an attack wasn’t the case, I commented to my assistant that a hedge fund probably blew up and we wouldn’t find out the details until sometime in the future. I then noted as the markets were crossing back up over the down 600 mark that very shortly the media will come out with reports that the precipitous drop was due to some rogue trading error – a fat finger by some low level entry clerk. I further stated that this would be portrayed as an isolated incident. Just as initial reports last week about the Times Square attempted bombing was by a lone, unhappy, deranged madman. Or the Christmas Day underpants bomber acted alone as he tried to blow up a plane as it flew into Detroit Metro. None of these are isolated incidents.
I am constantly amazed that people actually buy into these media spun reasons for events that don’t make us feel comfortable. I was actually smiling as the market tanked as I was net short (investing in a manner whereby my clients would profit if the market to were to decline) heading into the day. I’m not happy for those who lost 3.2% of their hard earned investment dollars in one day, but at some point, investors have to realize that markets move in two directions – up and down! How many lessons will investors need to participate in to understand that concept?
The market is now down for the year. The S&P is still down 30% since the market peaked 31 months ago, and is down 28% for the last 10 plus years! Buy and hold and hope is not working. The NASDAQ is still less than half its value from 10 years ago! Oh but that was a bubble – they can explain!
There really is no explanation necessary. The market was ridiculously overvalued recently as outlined in my previous articles. Whether there is any truth to the fat finger trading error or if I am correct and a hedge fund blew up doesn’t matter. What matters is that the market has issues! It’s going to be very difficult for Mr. & Mrs. Average Investor to get excited about putting their life savings or their retirement account into an investment vehicle that can fluctuate 10% down over the course of an afternoon, for any reason.
I believe there will be lawsuits that come out of this from investors who were stopped out of positions as the market swooned. If I held a stock and my stop loss was filled 40% below where it closed, due to someone else’s trading error, I would be looking to hold someone else liable too.
The media finally started to blame the going-ons in Greece as a possible reason the markets haven’t been acting well lately. You think? Here EU member countries such as Germany and France, and the IMF (which is 17.1% funded by US taxpayers) have made loans available to Greece in the amount of approximately $110 Billion. (Greece needs the money after years of allowing their citizenry to retire by age 55, get 14 months pay for 12 months of work, and take two hour lunches in the middle of each day.) And what do the Greeks do? Riot in the streets and say, ‘hell no – we won’t work past 55, and getting paid 12 months pay for 12 months work is unreasonable.’ Some thanks.
How do you think the hard working, efficient Germans feel about that? Our portion of the IMF contribution to Greece works out to be $6.7 billion of your money – How do you feel about their gratitude? Nice video footage of their warmth. The rock throwing and tear gas were especially touching. It would be different if the Greek situation was an isolated incident, but it’s not. Ireland, Portugal and Spain are not far behind. This could spread here once we recognize that many of our state governments are as broke as Greece.
Sovereign debt issues are the new subprime mortgage problems that got us here in the first place. Our government is complicit to this global and growing problem. The global plan to bail out debt with more debt is unworkable. It’s like the zombies feeding off the dead. We are dead (poor economy and growing debt issues) and the Greeks are the zombies (because they are rioting in the streets). The printing presses have been working overtime for so long here in the US that they are now making new $100 bills. I thought this was because the old presses broke, but I am told the bills were redesigned for a different reason.
I believe most will hope that this will be a one off event and we can go on with our lives and make money in the markets soon. Unfortunately, this is another in a series of warning shots across the bow that our debt problems are growing and getting worse. The market will most likely soon test the lows from yesterday. That means I think the Dow will drop another 656 points in the next month or so.
When the market crashed in 1987, it retested the crash lows within five weeks. After the retest we will reevaluate our next move. If our government and investors continue on in status quo mode between now and then don’t expect those lows to hold. Hopefully we can change course and get more fiscally responsible here and abroad. Somehow I have my doubts that will happen.
Tuesday, May 4, 2010
More to Come?
I saw this ad for the Potomac Funds today so I’ll give credit where it is due, but I think this statement is really important to think about at this juncture. “What would you do if a fastball was flying towards your head? Buy and hold investors would do nothing and take the punishment!” Meanwhile, in spite of two cyclical bull markets in the last ten years, the stock market as measured by the S&P 500 is still 22% below levels seen at the market peak in 2000, and 26% lower than it was in 2007.
Dave Rosenberg, chief economist and strategist at Gluskin Sheff, warned this week that his ratio of trading volume on the New York Stock Exchange versus volume on the Nasdaq, is a sign of speculation. The current levels of risk taking are surging beyond levels seen during any period in the past 10 years.
The Hulbert Nasdaq Newsletter Sentiment Index, which measures the average exposure of newsletters to Nasdaq stocks, now stands at 80%, which Hulbert classifies as “dangerously high”. Hulbert says to find a higher reading you’d have to go back to July, 2000 [about 3 months after the Nasdaq had topped out into its severe 2000-2002 bear market, when newsletters were still bullish and saying it would only be a minor correction].
Carl Swenlin, editor of Decisionpoint reports that investor assets in Rydex money market funds and ‘inverse’ (bear-type) funds are at multi-year lows, while assets in Rydex bullish Index and sector funds are at their highest level since the October, 2007 market top. There is currently $7.50 in bullish funds for every $1 in bearish funds. Alan Newman, editor of Crosscurrents, says “It’s the most ridiculously one-sided investor sentiment we have seen since the high-tech mania [in 1999] convinced folks that no price for a stock was too high to pay.”
Last week the market had the highest weekly volume of the year. Unfortunately for the bulls, it was a down week. The small head and shoulders top formation was broken today and it appears that Europe is falling apart at the seams.
Today will be another, in a series of distribution days. Yes, the market has bounced back after the down days, but always on lower volume. Remember volume equals conviction.
The major averages are all trading above their respective 50 day moving averages which should provide some support. However should they fall through those averages, a bigger correction could be coming.
The biggest problem with the recovery is that it has been supported through the creation of more government debt, in an unprecedented fashion. Recall that the government needs tax money to support its various programs. However, in the last few years they have created even more, bigger government programs and spending, at a time when most Americans have been pinched by the double whammy of falling real estate prices and a drop in the value of their retirement accounts.
Imagine if you went out for drinks with a friend that asked if you could buy the rounds because they were short on cash. Then a while later you have lunch with the same friend who asks you cover the tab because things are tight. Soon after you see them pull up in a brand new Cadillac Escalade. You would wonder where they got the funds to make that purchase. That is my wonderment about our current global government bailout programs. Doesn’t anyone wonder where all this money for Greece and healthcare, etc., etc., etc. is coming from?
Our unborn children and grandchildren should very upset. To bail out our debt problem with more debt seems unfathomable. At some point the markets are going to consider the sustainability of that plan. Maybe that day is today.
Dave Rosenberg, chief economist and strategist at Gluskin Sheff, warned this week that his ratio of trading volume on the New York Stock Exchange versus volume on the Nasdaq, is a sign of speculation. The current levels of risk taking are surging beyond levels seen during any period in the past 10 years.
The Hulbert Nasdaq Newsletter Sentiment Index, which measures the average exposure of newsletters to Nasdaq stocks, now stands at 80%, which Hulbert classifies as “dangerously high”. Hulbert says to find a higher reading you’d have to go back to July, 2000 [about 3 months after the Nasdaq had topped out into its severe 2000-2002 bear market, when newsletters were still bullish and saying it would only be a minor correction].
Carl Swenlin, editor of Decisionpoint reports that investor assets in Rydex money market funds and ‘inverse’ (bear-type) funds are at multi-year lows, while assets in Rydex bullish Index and sector funds are at their highest level since the October, 2007 market top. There is currently $7.50 in bullish funds for every $1 in bearish funds. Alan Newman, editor of Crosscurrents, says “It’s the most ridiculously one-sided investor sentiment we have seen since the high-tech mania [in 1999] convinced folks that no price for a stock was too high to pay.”
Last week the market had the highest weekly volume of the year. Unfortunately for the bulls, it was a down week. The small head and shoulders top formation was broken today and it appears that Europe is falling apart at the seams.
Today will be another, in a series of distribution days. Yes, the market has bounced back after the down days, but always on lower volume. Remember volume equals conviction.
The major averages are all trading above their respective 50 day moving averages which should provide some support. However should they fall through those averages, a bigger correction could be coming.
The biggest problem with the recovery is that it has been supported through the creation of more government debt, in an unprecedented fashion. Recall that the government needs tax money to support its various programs. However, in the last few years they have created even more, bigger government programs and spending, at a time when most Americans have been pinched by the double whammy of falling real estate prices and a drop in the value of their retirement accounts.
Imagine if you went out for drinks with a friend that asked if you could buy the rounds because they were short on cash. Then a while later you have lunch with the same friend who asks you cover the tab because things are tight. Soon after you see them pull up in a brand new Cadillac Escalade. You would wonder where they got the funds to make that purchase. That is my wonderment about our current global government bailout programs. Doesn’t anyone wonder where all this money for Greece and healthcare, etc., etc., etc. is coming from?
Our unborn children and grandchildren should very upset. To bail out our debt problem with more debt seems unfathomable. At some point the markets are going to consider the sustainability of that plan. Maybe that day is today.
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