So let’s get this straight right from the beginning. The real world that we all live in has a lot of problems. Many economists say we are slipping back into a recession - a double dip. Others point out that the economy has never gained enough traction to come out of the original recession that started back in December of 2007. The most optimistic of economists state that the economy is actually growing, albeit at a very slow pace and that we are currently experiencing a “soft patch.”
Then there is another economy, one that my friend and writer Ron Coby refers to as the casino economy. That economy is comprised of the stock and bond markets. That economy is also heavily influenced by the Federal Reserve and their money printing machines. That economy is analogous to a professional athlete on steroids. How good would these markets really be if it weren’t under the constant injection of freshly printed money?
The S& P is down 4.6% year to date, not exactly setting the world on fire. There is talk of a bond bubble. The housing market looks to be imploding again. The job market is stagnant and maybe vulnerable. Congress is already getting into reelected mode. I understand the need to be optimistic, but it is essential to recognize the type economic backdrop we are in. After a period of unprecedented government bailouts and stimulus programs, existing home sales collapsed a record 27%, month over month, to an all time low of 3.83 million annualized units. New home sales fell 12% last month, to a rate of 276,000 units annually, which marked the lowest number since economists started tracking home sales back in 1963. Are you kidding me? In addition, the average price for a home dipped again and is now back to levels last seen in 2003.
This Housing data is telling us something valuable about the real world economy where mortgage rates have tumbled nearly 100 basis points in the last year to a record low of 4.36% for 30-year loans, and the government has implemented a plethora of programs to put a floor under the housing market, yet housing continues to decline in both prices and sales. Some will argue that things would be much worse without all this manipulation, but when is enough going to be enough?
In the casino stock market, droves of individual investors are pulling the cord and bailing out of any further participation as the real world data does not seem congruent with the stock markets action. The market is being supported in a very big way by the Federal Reserve’s commitment to keep the money printing presses on overdrive for an extended period of time. What does it mean when the US Federal Reserve is the second largest owner of US Treasury debt globally? How good would it be if you could go down to your tool shed and print your own money to buy back your own debt?
There is money out there. But try to get a loan if you’re an average American or a small struggling business – that money is hardly available to you. It is estimated that corporate America has over $1 trillion in excess reserves. We are witnessing a pickup in mergers and acquisitions, and many of these deals are for cash – not debt (like the 80’s) or equities (like the 90’s). Let the stock and housing markets find their own equilibrium. Stop wasting taxpayers’ money on trying to influence those markets. After more than ten trillion dollars of global government intervention, how much better off are we in the real world economy?
If the government stopped intervening on behalf of the business community, there would most likely be a sharp and painful reconciliation, but the economy and markets would bottom quicker and allow the healing process to begin sooner. They should focus on job creation, or the lack thereof. So far we have had the government expend huge resources to keep many failing industries afloat, but that has generated very little in the way of positive long lasting results as the economy is teetering back towards a recession. Hopefully the real world starts to recover soon but band aides only treat the symptoms, they don’t provide a cure.
As far as the casino economy is concerned, the stock market has become extremely oversold on a technical basis. Markets tend to back and fill in those instances. In addition sentiment has become overwhelmingly bearish. The recent AAII (American Association of Individual Investors – sometimes referred to by professionals in the industry as dumb money) numbers show only 20.7% bullish. There have been only 48 times in the history of this association that bullishness has dropped below 21% and in 47 of those 48 instances the market was higher three months later. Finally we had Fed Chair Ben Bernanke’s promise on Friday that he was ready, willing, and able to employ all his resources (read keep the money printing presses going 24 / 7) to keep the economy from falling off a cliff.
So we covered our short positions in anticipation of support holding at around 1040 on the S&P 500; 2100 holding on the NASDAQ; and 580 holding on the Russell 2000 small company index. The markets will most likely rally enough to work off the oversold conditions and lift the spirits of individual investors just enough to get crushed at a later date. Resistance for the above mentioned indices are probably in the ranges of 1100- 1130; 2220 – 2280; and 630 – 645 respectively before the market again pursues a lower path.
There is a tremendous amount of speculation in the bond market. Is it a bubble or not? Can bonds even have a bubble – or not? Are heavily debated topics of conversation. Let me clarify this right here – ALL INVESTMENTS CARRY RISK! If you put your money under a mattress you have inflation risk and risk of theft. If you buy treasuries, rates can go up and you can lose principal if you sell prior to maturity. If you hold individual treasury bonds for the full term, sure you get the full amount back, but inflation could decrease the purchasing power of your matured value.
Ten year treasury rates have dropped from over 4% in April to 2.5% Friday morning. That’s a 37.5% move in four months. That kind of move happened most recently at the end of 2008. Within seven months the entire move was retraced and many people lost a lot of money. Currently bonds carry a lot of risk! To lock in a rate of 3.7% for ten years, one would really have to believe that we are and will be in dire straits economically for a long, long time.
I believe patience will pay dividends. For those traders out there – money can be made buying stock and shorting bonds for an ultra short time frame. For more conservative long term investors sit this rally out, wait for better yields on the bonds and hopefully by the time the elections are over, the markets will start to normalize again. There are two worlds right now – the one we all live in and the stock and bond market world that is under the control of the Fed. Ensure you can separate the two before they separate you from your money.
* Pacific Financial Planners is not recommending any investments in this article as we do not know your timeframe and risk tolerance. Before investing in any ideas or taking any action you should first consult with your own financial advisor.
** Pacific Financial Planners holds positions in GLD, JJC, SINA, SLV, & TBT
Friday, August 27, 2010
Friday, August 20, 2010
From Green Shoots to Brown Shoots
Economic numbers are becoming less good. In some cases they are downright bad. Back in the spring of 2009 many analysts were commenting that the news was getting less bad, therefore “green shoots” were starting to demonstrate new life for the markets. That turned out to be true. Whatever the reasons were: trillions of dollars of government stimulus, ending the “mark to market” (real) accounting standards on bank held mortgage and asset backed securities, or just a very oversold market. The market retraced 61% (An amazing Fibonacci coincident for those technical gurus) of the downtrend that started in 2007.
Now we are seeing a mirror image of that positive news. Jobless claims are rising back to 500,000. GDP revisions are becoming lower, and most every other economic release is slowing or slipping back into negative growth. This is not good! Could those green shoots be turning brown? The markets and the economy here in the US have never gained enough strength to stand on its own.
It was reported by Fidelity Funds on Friday that a record number of people are raiding their 401(k) assets. Fidelity is the largest manager of 401(k) plans with 11,000,000 participants. They report that in the second quarter alone 62,000 individuals have applied for a hardship withdrawal. That figure is up almost 40% from last year number. To be eligible for a 401(k) hardship withdrawal, individuals must demonstrate an immediate and heavy financial need, according to IRS regulations. Certain medical expenses; payments to prevent eviction or foreclosure on a primary home; burial or funeral expenses, meet the IRS definition and are permitted by most 401(k) plans. A key concern is that these withdrawals are just that, they are not loans. This can have a significant impact on someone's overall retirement plan. It seems many individuals are more concerned about getting through today than they are worried about their retirement. What message does that send about the strength of this recovery?
Stimulus has run its course and the situation seems to be sliding downhill. There is talk of more stimulus – recently there has been a lot of chatter about lowering mortgage rates for everybody with a Fannie Mae or Freddie Mac held mortgage -which includes 90% of all loans. While that would definitely help put more money in a lot of people’s pockets, what would that do for everyone else? What about renters? How about people who already lost their homes in foreclosure? How do they benefit? The bigger question is how would this program be implemented? Would everybody have to requalify or would it blanket everybody with a mortgage? Finally, where would the staffing come from to complete this herculean task? An easier and more equitable method of putting money into everyone’s pocket would be to just give a rebate – send them all a check! However, with the government deficit as large as it is and still rising, how likely is that? Not very!
The markets are now trending down on the short (weeks), medium (months), and longer term (years) timeframes. There have been many different ominous technical patterns that have occurred such as black crosses, double tops, head and shoulder patterns, and most recently a confirmed Hindenburg Omen. What does all that mean? For starters all these technical patterns don’t guarantee anything. They just have historically demonstrated an above average possibility of negative future price performance for the markets.
It is important to examine the big picture. When there are several pessimistic technical patterns, combined with numerous gloomy fundamental economic reports the odds are higher that the future market direction could be down. Even the Fed is stressing caution about the next direction for the economy. We are not alone. Many other countries in Europe are also experiencing a financial crisis. This problem has not gone away and appears to be reversing directions- getting less green.
I hate being bearish with my commentary. It comes off as being unpatriotic and that is hardly the case. People who have not known me very long think that I am a perma-bear. That also is not the case. I became negative in mid 2007 and since then the markets (as measured by the S&P 500) are down 32%. The bulls argue that with real estate so tenuous and bond yields so low that stocks are the only game in town. I think they fail to realize that cash would outperform if stocks yield a negative rate of return (The S&P is down 4% YTD).
Another bullish claim is that the stock market has a low valuation based on historic PE ratios. On actual 12 month reported trailing earning, the S&P 500 is trading at a PE of 15. It is widely acknowledged that this past recession was the worst since the Great Depression in the 1930’s. Yet there have been a couple of instances where the markets PE ratio was in the single digits since that Depression, as the risk appetite for each dollar of earnings was diminished. It was as low as seven at the 1974 – 1975 market bottom. PE ratios can vary with the mood of investors. So while I think the market can be called fairly valued today, that can change very quickly as investor sentiment adjusts.
The levels to watch are 1040 and 1132 on the S&P 500, 580 and 678 on the Russell 2000, and 2140 and 2342 on the NASDAQ. The first number in each case would signal a potential further market decline, perhaps precipitously so. The latter number is where the market would need to go for me to become bullish. We are heading into the fall of the year (no pun intended). Historically the next two months are the most difficult for the markets. Both technical and fundamentals are flashing warning signs. It may be prudent to apply caution in the near term.
Now we are seeing a mirror image of that positive news. Jobless claims are rising back to 500,000. GDP revisions are becoming lower, and most every other economic release is slowing or slipping back into negative growth. This is not good! Could those green shoots be turning brown? The markets and the economy here in the US have never gained enough strength to stand on its own.
It was reported by Fidelity Funds on Friday that a record number of people are raiding their 401(k) assets. Fidelity is the largest manager of 401(k) plans with 11,000,000 participants. They report that in the second quarter alone 62,000 individuals have applied for a hardship withdrawal. That figure is up almost 40% from last year number. To be eligible for a 401(k) hardship withdrawal, individuals must demonstrate an immediate and heavy financial need, according to IRS regulations. Certain medical expenses; payments to prevent eviction or foreclosure on a primary home; burial or funeral expenses, meet the IRS definition and are permitted by most 401(k) plans. A key concern is that these withdrawals are just that, they are not loans. This can have a significant impact on someone's overall retirement plan. It seems many individuals are more concerned about getting through today than they are worried about their retirement. What message does that send about the strength of this recovery?
Stimulus has run its course and the situation seems to be sliding downhill. There is talk of more stimulus – recently there has been a lot of chatter about lowering mortgage rates for everybody with a Fannie Mae or Freddie Mac held mortgage -which includes 90% of all loans. While that would definitely help put more money in a lot of people’s pockets, what would that do for everyone else? What about renters? How about people who already lost their homes in foreclosure? How do they benefit? The bigger question is how would this program be implemented? Would everybody have to requalify or would it blanket everybody with a mortgage? Finally, where would the staffing come from to complete this herculean task? An easier and more equitable method of putting money into everyone’s pocket would be to just give a rebate – send them all a check! However, with the government deficit as large as it is and still rising, how likely is that? Not very!
The markets are now trending down on the short (weeks), medium (months), and longer term (years) timeframes. There have been many different ominous technical patterns that have occurred such as black crosses, double tops, head and shoulder patterns, and most recently a confirmed Hindenburg Omen. What does all that mean? For starters all these technical patterns don’t guarantee anything. They just have historically demonstrated an above average possibility of negative future price performance for the markets.
It is important to examine the big picture. When there are several pessimistic technical patterns, combined with numerous gloomy fundamental economic reports the odds are higher that the future market direction could be down. Even the Fed is stressing caution about the next direction for the economy. We are not alone. Many other countries in Europe are also experiencing a financial crisis. This problem has not gone away and appears to be reversing directions- getting less green.
I hate being bearish with my commentary. It comes off as being unpatriotic and that is hardly the case. People who have not known me very long think that I am a perma-bear. That also is not the case. I became negative in mid 2007 and since then the markets (as measured by the S&P 500) are down 32%. The bulls argue that with real estate so tenuous and bond yields so low that stocks are the only game in town. I think they fail to realize that cash would outperform if stocks yield a negative rate of return (The S&P is down 4% YTD).
Another bullish claim is that the stock market has a low valuation based on historic PE ratios. On actual 12 month reported trailing earning, the S&P 500 is trading at a PE of 15. It is widely acknowledged that this past recession was the worst since the Great Depression in the 1930’s. Yet there have been a couple of instances where the markets PE ratio was in the single digits since that Depression, as the risk appetite for each dollar of earnings was diminished. It was as low as seven at the 1974 – 1975 market bottom. PE ratios can vary with the mood of investors. So while I think the market can be called fairly valued today, that can change very quickly as investor sentiment adjusts.
The levels to watch are 1040 and 1132 on the S&P 500, 580 and 678 on the Russell 2000, and 2140 and 2342 on the NASDAQ. The first number in each case would signal a potential further market decline, perhaps precipitously so. The latter number is where the market would need to go for me to become bullish. We are heading into the fall of the year (no pun intended). Historically the next two months are the most difficult for the markets. Both technical and fundamentals are flashing warning signs. It may be prudent to apply caution in the near term.
Friday, August 13, 2010
Backed Into a Corner
The Federal Reserve Board has backed themselves into a corner for now, by not showing enough confidence that many investors desired this week. The Fed made clear that they will refrain from shrinking the Fed balance sheet. However, the bulls were looking for additional quantitative easing that just didn’t get announced. Don’t get me wrong – the Fed has the ability to act before their next meeting and if push comes to shove they probably will. So what would be the market’s reaction to some sort of new policy, if it were to be released mid-meeting? Would investors wonder if the Fed has lost control? Would the Fed appear desperate, thereby spooking investors into thinking that things are actually worse than what we already see on the surface (which is not very positive to begin with)?
Economic numbers being what they are (very poor); we should expect a downward revision of second quarter GDP to 1.5% from the originally disappointing number of 2.4%. As more data is being released it is apparent that we are witnessing even further deterioration here in the third quarter. Will we have a double dip or since it officially has never been declared that we have come out of the recession; is this just more of the same?
Globally governments have spent trillions of dollars to revive their economies. We are seeing mixed results from that largess, as some countries such as Germany and China are doing better than others, such as Greece, Ireland and the US. Will more government intervention help? I think not.
We may have reached a tipping point where many are tired of others being the benefactors of taxpayer money. Timing is now important. This week the markets broke their uptrend from early July. The rally from March 2009 was violated a few months back and has not recovered. The Fed will appear to be (once again) behind the curve ball if they make some kind of mid meeting announcement. It may cause more harm than good should the Fed take some action prior to their next meeting September 21st.
Volume has been pathetic, but it has been noticeably lighter on the up days than the down days. There are some technical patterns that have formed that are important to be aware of. Technical analysis DOES NOT predict the future. However, there are trends and formations that have been repeated on chart patterns over time, that indicate a higher than average probability of a predictable outcome. The beauty is, now is a perfect time for a low risk entry point on the short side of the market. Investors will know very quickly, without a large percentage loss, if theses patterns fail.
For example: There was a bearish wedge pattern forming on most of the major market indices. This resulted in a “double top” to be formed at 1132 on the S&P 500. That number is derived from the intraday high on June 21st and August 9th. The wedge pattern is drawn by connecting the lows from July 1st through the bottoms over the subsequent five weeks. The upper band was formed by drawing a line that connected the high on June 25th through the highs over the following several weeks. The technical rules state that if a “rising wedge” is broken to the downside, then prices should decline (at least) to the level at the start of that pattern. That would be 1010 on the S&P 500. 
So you could invest in an inverse S&P 500 ETF such as SH (single inverse) or SDS (double inverse for more aggressive investors), and stop yourself out if the S&P rises more than 5% from Friday’s close (above 1132 on the S&P). This is what I call a low risk trade.
Technically you have the double top and the rising wedge pattern suggestion downside risk for the market. We are seeing significantly lower than normal summer volume as well. Low volume usually is the results from a lack of conviction by investors. A possible reason that investors don’t have conviction is that they aren’t clear what action they should take next or possibly there is fear among traders. Generally bad things happen when investors are uncertain or fearful. A final negative technical pattern on the charts is the fact that the S&P 500, Russell 2000, and the NASDAQ Composite all dropped below their respective 21, 50, and 200 day moving averages. Some technicians feel that markets above those respective averages should be bought and markets trading below those averages should be sold.
Fundamentally, we have pretty bad news coming from most every economic report. We have the FOMC announcement itself, which cautioned about a potential slowdown. We have heard individual Fed Governors comparing our future economy to the last 20 years of Japanese styled deflation. Talk about quantitative easing, more government stimulus and state bailout packages usually don’t occur when we have a self sustaining economy. One look at bond prices and interest rates should also yield caution for those investors that think that the coast is clear for the stock market. Investors run for fear to the safety of government bonds in times of trouble. That seems to be the case today.
Both technically and fundamentally I feel we have problems that give a higher probability for lower market prices in the future. Next week is options expiration week and markets tend to go up. The markets are also near term oversold, so the potential for a small bounce exists. However, I think the next primary move for the markets is down. I will remain on the defensive until we go above 1132 on the S&P 500 and 2342 on the NASDAQ.
A couple of good things to close with: Now that interest rates are so low, it is a great time to refinance your mortgage if you can. Corporate America is refinancing their debt at much lower rates in this environment. In the long term that is a very good thing. Many times when fear is this high it actually works contrary to popular belief. Fear is rising, but it is not yet at extreme levels that would set off a rally. Caution remains the word of the day.
Economic numbers being what they are (very poor); we should expect a downward revision of second quarter GDP to 1.5% from the originally disappointing number of 2.4%. As more data is being released it is apparent that we are witnessing even further deterioration here in the third quarter. Will we have a double dip or since it officially has never been declared that we have come out of the recession; is this just more of the same?
Globally governments have spent trillions of dollars to revive their economies. We are seeing mixed results from that largess, as some countries such as Germany and China are doing better than others, such as Greece, Ireland and the US. Will more government intervention help? I think not.
We may have reached a tipping point where many are tired of others being the benefactors of taxpayer money. Timing is now important. This week the markets broke their uptrend from early July. The rally from March 2009 was violated a few months back and has not recovered. The Fed will appear to be (once again) behind the curve ball if they make some kind of mid meeting announcement. It may cause more harm than good should the Fed take some action prior to their next meeting September 21st.
Volume has been pathetic, but it has been noticeably lighter on the up days than the down days. There are some technical patterns that have formed that are important to be aware of. Technical analysis DOES NOT predict the future. However, there are trends and formations that have been repeated on chart patterns over time, that indicate a higher than average probability of a predictable outcome. The beauty is, now is a perfect time for a low risk entry point on the short side of the market. Investors will know very quickly, without a large percentage loss, if theses patterns fail.
For example: There was a bearish wedge pattern forming on most of the major market indices. This resulted in a “double top” to be formed at 1132 on the S&P 500. That number is derived from the intraday high on June 21st and August 9th. The wedge pattern is drawn by connecting the lows from July 1st through the bottoms over the subsequent five weeks. The upper band was formed by drawing a line that connected the high on June 25th through the highs over the following several weeks. The technical rules state that if a “rising wedge” is broken to the downside, then prices should decline (at least) to the level at the start of that pattern. That would be 1010 on the S&P 500.
So you could invest in an inverse S&P 500 ETF such as SH (single inverse) or SDS (double inverse for more aggressive investors), and stop yourself out if the S&P rises more than 5% from Friday’s close (above 1132 on the S&P). This is what I call a low risk trade.
Technically you have the double top and the rising wedge pattern suggestion downside risk for the market. We are seeing significantly lower than normal summer volume as well. Low volume usually is the results from a lack of conviction by investors. A possible reason that investors don’t have conviction is that they aren’t clear what action they should take next or possibly there is fear among traders. Generally bad things happen when investors are uncertain or fearful. A final negative technical pattern on the charts is the fact that the S&P 500, Russell 2000, and the NASDAQ Composite all dropped below their respective 21, 50, and 200 day moving averages. Some technicians feel that markets above those respective averages should be bought and markets trading below those averages should be sold.
Fundamentally, we have pretty bad news coming from most every economic report. We have the FOMC announcement itself, which cautioned about a potential slowdown. We have heard individual Fed Governors comparing our future economy to the last 20 years of Japanese styled deflation. Talk about quantitative easing, more government stimulus and state bailout packages usually don’t occur when we have a self sustaining economy. One look at bond prices and interest rates should also yield caution for those investors that think that the coast is clear for the stock market. Investors run for fear to the safety of government bonds in times of trouble. That seems to be the case today.
Both technically and fundamentally I feel we have problems that give a higher probability for lower market prices in the future. Next week is options expiration week and markets tend to go up. The markets are also near term oversold, so the potential for a small bounce exists. However, I think the next primary move for the markets is down. I will remain on the defensive until we go above 1132 on the S&P 500 and 2342 on the NASDAQ.
A couple of good things to close with: Now that interest rates are so low, it is a great time to refinance your mortgage if you can. Corporate America is refinancing their debt at much lower rates in this environment. In the long term that is a very good thing. Many times when fear is this high it actually works contrary to popular belief. Fear is rising, but it is not yet at extreme levels that would set off a rally. Caution remains the word of the day.
Friday, August 6, 2010
Is the Cup Half Full or Half Empty?
Everyone knows that being between a rock and a hard place is not a good place to be. That is where the market is right now. We continue to have terrible news in the housing sector. There is no general economic recovery as of yet. Jobless claims continue to mount, while net new jobs are not being created in a significant enough number to even sustain the population growth (approximately 150,000 net new jobs per month needed). By far the majority of economic reports for May, June, July, and now August, have been worse than forecast. That includes home starts, home sales, home-builder confidence, retail sales, auto sales, consumer confidence, durable goods orders, manufacturing, jobs, etc. Yet the market rallies or barely goes down on these bad reports. What gives?
It seems that bad news is good news right now. Market investors are hoping that all this bad news will lead to more government stimulus. Pundits talk about more stimuli as if it was a good thing. Our European partners are telling us to be more fiscally responsible or we will be the next Greece. But investors are hopeful that another round of quantitative easing will be announced by the Fed next Tuesday and there is hope for a mortgage bailout for those one in five households with a mortgage that is underwater by August 17th. Now if you have been prudent on your investments and spending the last decade or so and find yourself without any bailout potential (except to maybe write the check for these bailouts in the form of higher taxes) don’t worry because the government is telling us that you will benefit because this will stem the continuing downfall in home prices. Really?
After trillions of dollars of global government stimulus the markets are still down 30% from their highs three years ago. Housing is down by about the same percentage. Jobs are scarce and we continue to reward bad behavior or just plain bad luck in the name of ‘for the good of all.’ St. Louis Fed President James Bullard said recently that, the U.S. is closer to a Japanese-style deflation outcome today than at any time in recent history. That hit the head on the nail better than Fed Chair Ben Bernanke’s recent “unusually uncertain” assessment of the economic outlook. Japan has been performing various forms of government intervention for two decades and they are still in a troubled environment.
So what happened to capitalism? What happened to free enterprise? What happened to the concept that the markets will reward the winners and the companies that don’t manage well, or produce products that aren’t needed or overpriced, or did a heap of bad loans would perish. That worked for us for over 200 years. Now the markets appear to be cheering for more government intervention. I never thought I would see this day. I for one would like the markets to decide the winners and the losers. Free enterprise might be a short term more painful path – but it would be quicker and the economy would surely regroup much quicker. Don’t believe me – look at Japan! That is what we should not do – yet we are following their path.
Intervention is already here. These markets do not want to go down on every piece of bad news. Let the markets clear the air. Volume has traded at the lightest of the year recently. It is so light that it is lower than levels from not only this year but most every year’s light summer volume has not been this paltry. I think that the markets have become a controlled environment. It’s as if some major investors are saying. “Don’t worry about all the bad news; we’ll hold it up for now, because help is on the way (in the form of more intervention).”
Granted earnings season was pretty good, relative to expectations. But when those expectations are lowered dramatically, sometimes it becomes easy to beat those reduced levels. To be fair, some companies are actually doing better than before the recession began – but those companies are few and far between. Consumer credit is still shrinking and higher taxes starting in January is just around the corner. The consumer is needed to drive the economy. Savings is also up causing another crimp in spending.
I remember when the following old saying was a joke. Next week Tuesday could be very telling when we hear some variation of it: “Hi - we’re from the government – we’re here to help!” Let’s all hope it all works out – but I for one am not in favor of any more of this kind of assistance. I wish more people felt the way I do and believed we should just let the chips fall where they may and then let’s band together to pick up the pieces. But the likely hood is we’ll just add more scotch tape to the crumbling dam. I hope I am wrong for the good of us all!
It seems that bad news is good news right now. Market investors are hoping that all this bad news will lead to more government stimulus. Pundits talk about more stimuli as if it was a good thing. Our European partners are telling us to be more fiscally responsible or we will be the next Greece. But investors are hopeful that another round of quantitative easing will be announced by the Fed next Tuesday and there is hope for a mortgage bailout for those one in five households with a mortgage that is underwater by August 17th. Now if you have been prudent on your investments and spending the last decade or so and find yourself without any bailout potential (except to maybe write the check for these bailouts in the form of higher taxes) don’t worry because the government is telling us that you will benefit because this will stem the continuing downfall in home prices. Really?
After trillions of dollars of global government stimulus the markets are still down 30% from their highs three years ago. Housing is down by about the same percentage. Jobs are scarce and we continue to reward bad behavior or just plain bad luck in the name of ‘for the good of all.’ St. Louis Fed President James Bullard said recently that, the U.S. is closer to a Japanese-style deflation outcome today than at any time in recent history. That hit the head on the nail better than Fed Chair Ben Bernanke’s recent “unusually uncertain” assessment of the economic outlook. Japan has been performing various forms of government intervention for two decades and they are still in a troubled environment.
So what happened to capitalism? What happened to free enterprise? What happened to the concept that the markets will reward the winners and the companies that don’t manage well, or produce products that aren’t needed or overpriced, or did a heap of bad loans would perish. That worked for us for over 200 years. Now the markets appear to be cheering for more government intervention. I never thought I would see this day. I for one would like the markets to decide the winners and the losers. Free enterprise might be a short term more painful path – but it would be quicker and the economy would surely regroup much quicker. Don’t believe me – look at Japan! That is what we should not do – yet we are following their path.
Intervention is already here. These markets do not want to go down on every piece of bad news. Let the markets clear the air. Volume has traded at the lightest of the year recently. It is so light that it is lower than levels from not only this year but most every year’s light summer volume has not been this paltry. I think that the markets have become a controlled environment. It’s as if some major investors are saying. “Don’t worry about all the bad news; we’ll hold it up for now, because help is on the way (in the form of more intervention).”
Granted earnings season was pretty good, relative to expectations. But when those expectations are lowered dramatically, sometimes it becomes easy to beat those reduced levels. To be fair, some companies are actually doing better than before the recession began – but those companies are few and far between. Consumer credit is still shrinking and higher taxes starting in January is just around the corner. The consumer is needed to drive the economy. Savings is also up causing another crimp in spending.
I remember when the following old saying was a joke. Next week Tuesday could be very telling when we hear some variation of it: “Hi - we’re from the government – we’re here to help!” Let’s all hope it all works out – but I for one am not in favor of any more of this kind of assistance. I wish more people felt the way I do and believed we should just let the chips fall where they may and then let’s band together to pick up the pieces. But the likely hood is we’ll just add more scotch tape to the crumbling dam. I hope I am wrong for the good of us all!
Friday, July 23, 2010
Markets in the Mirror
Watching the markets recently has been like having midcourt seats at a professional tennis match – back and forth, back and forth. Since April 26th we have had two weeks down followed by one week up, one week down, one week up, one week down, followed by two weeks up, then two weeks down, only to be capped off with a week up, a week down, and this week we finished up. Whew! That is a back and forth market! After all the back and forth’s – the markets are down around 10% in that timeframe.
The economic and earnings news over that timeframe has been just as frenetic. Many of the economic reports are pointing to a second half slowdown, while some experts are calling for a double dip recession. The earnings releases thus far also paint a very mixed picture. Dozens of companies are back to all time record earnings. Many show vast improvement from their worst levels two years ago, yet others are still struggling to recover.
Fed Chair Ben Bernanke came out with some honest talk as he testified before the Senate Banking Committee and stated that current economic outlook is "unusually uncertain." The markets sold off on that news, but rallied the next two days when investors also took Mr. Bernanke’s comments to mean that interest rates would remain at zero for a much longer period of time. You and I can’t get at any of that free money – but bankers can and rather than lend it out to stimulate American business, they give it to their trading desks to drive up the markets. And that is where we stand today. A mixed to poor economy, with mixed earnings and free money for the banks to pump up the market.
How does that help us? The plan appears to be to print enough money to stimulate the stock market so investors make some money. They in turn will spend it to stimulate business profits. Which will eventually result in more business to create jobs which will allow other people to drive this circle effect further. Unfortunately investors are withdrawing money from the stock market in droves. Many have chosen to hide out in the bond market which is paying ridiculously low levels of income. The bond market does not seem to be acknowledging the rally in stocks. Whom would you rather believe? The bond market or notoriously bullish investment managers?
Markets are now breaking above their down trend channels and their respective 200 day moving averages. This could set the stage for a continuing rally. Could we possibly move in one direction more than two weeks in a row? Markets are overbought at this juncture so don’t pin your hopes for a straight line up just yet.
The European bank “stress test” results came in on Friday and not surprisingly they showed that for the most part, their banks are ok. It seemed quite humorous, the amount of attention given to these tests. The people doing the tests had a vested interest in ensuring that the majority of banks came through with flying colors, so they did. Last year the US markets started to rally in earnest after our own banking stress tests. I think the Europeans took this exercise from our playbook and are hoping for the same results.
Ironically, the markets are exactly at the same prices that they where they were one month ago. Maybe some investor’s perception has changed, but perceptions have had a way of changing very quickly lately. Since April 26th we have had nine days where 90% of the volume traded up and 11 days where 90% of the volume has traded down. If it were only 90% up days that might indicate a further rally to come. If it were all 90% down days – that might indicate a bottom and a rally to ensue. However, this mixed action indicates indecision and should the markets falter, there is tremendous risk to the downside. Ten of the last 22 trading days have produced moves of 1% or more. One usually has to go to an amusement park for rides like that. There is nothing fun about the current market environment. Only time will tell if this gambit by the Fed works, we will all be much better off if it does.
The economic and earnings news over that timeframe has been just as frenetic. Many of the economic reports are pointing to a second half slowdown, while some experts are calling for a double dip recession. The earnings releases thus far also paint a very mixed picture. Dozens of companies are back to all time record earnings. Many show vast improvement from their worst levels two years ago, yet others are still struggling to recover.
Fed Chair Ben Bernanke came out with some honest talk as he testified before the Senate Banking Committee and stated that current economic outlook is "unusually uncertain." The markets sold off on that news, but rallied the next two days when investors also took Mr. Bernanke’s comments to mean that interest rates would remain at zero for a much longer period of time. You and I can’t get at any of that free money – but bankers can and rather than lend it out to stimulate American business, they give it to their trading desks to drive up the markets. And that is where we stand today. A mixed to poor economy, with mixed earnings and free money for the banks to pump up the market.
How does that help us? The plan appears to be to print enough money to stimulate the stock market so investors make some money. They in turn will spend it to stimulate business profits. Which will eventually result in more business to create jobs which will allow other people to drive this circle effect further. Unfortunately investors are withdrawing money from the stock market in droves. Many have chosen to hide out in the bond market which is paying ridiculously low levels of income. The bond market does not seem to be acknowledging the rally in stocks. Whom would you rather believe? The bond market or notoriously bullish investment managers?
Markets are now breaking above their down trend channels and their respective 200 day moving averages. This could set the stage for a continuing rally. Could we possibly move in one direction more than two weeks in a row? Markets are overbought at this juncture so don’t pin your hopes for a straight line up just yet.
The European bank “stress test” results came in on Friday and not surprisingly they showed that for the most part, their banks are ok. It seemed quite humorous, the amount of attention given to these tests. The people doing the tests had a vested interest in ensuring that the majority of banks came through with flying colors, so they did. Last year the US markets started to rally in earnest after our own banking stress tests. I think the Europeans took this exercise from our playbook and are hoping for the same results.
Ironically, the markets are exactly at the same prices that they where they were one month ago. Maybe some investor’s perception has changed, but perceptions have had a way of changing very quickly lately. Since April 26th we have had nine days where 90% of the volume traded up and 11 days where 90% of the volume has traded down. If it were only 90% up days that might indicate a further rally to come. If it were all 90% down days – that might indicate a bottom and a rally to ensue. However, this mixed action indicates indecision and should the markets falter, there is tremendous risk to the downside. Ten of the last 22 trading days have produced moves of 1% or more. One usually has to go to an amusement park for rides like that. There is nothing fun about the current market environment. Only time will tell if this gambit by the Fed works, we will all be much better off if it does.
Friday, July 16, 2010
Unsustainable
I have said it before and I will say it again. If we continue on our current path, our economic recovery is unsustainable. Solving a debt problem with more debt is not a solution. Transferring bad debt from the private sector (banks and corporations) to the public sector (global governments and ultimately taxpayers), without any consequences for the perpetrators only rewards bad behavior. Fiscal constraint and stimulus for growth are necessary to turn this mess around.
I have had my doubts all along whether or not this has been a real recovery or just an illusion of one, artificially produced by government spending but unable to stand on its own. I hope and wish that I am wrong about all this, but unfortunately I doubt that I will be. There are many, many signs that the economy is slowing again now that much of the stimulus has been withdrawn. To add more stimulus would be adding to the future unpayable debt that our children and grandchildren will eventually have to deal with. Some entities must be allowed to fail and go bankrupt to allow others to remain solvent.
In spite of the impressive new bull market in stocks, investors continued to pull money out of stocks and equity mutual funds all last year. This year many investors started to regain their nerve and added $7.4 billion into equity mutual funds during the 2nd quarter 2010, only to be rewarded with negative returns. Now, the flow has reversed again, this time dramatically, with $11.6 billion pulled out of equity funds in the week ended July 7. (Yet somehow the market went up that week.)
Investor sentiment has whipsawed quickly as well, from overly bearish to neutral in a very short span. This week's AAII Sentiment Survey Results are as follows: Bullish: 39.4%, up 18.4 percentage points and Bearish: 37.8%, down 19.3 percentage points - in a WEEK. Sentiment can change like the wind.
According to the Mortgage Bankers Association mortgage applications index fell again despite the fact that mortgage rates remain at near record low levels. The main focus should be on the new purchase index, which extended its losing streak to nine of the past 10 weeks. This trend that can’t be ignored, it suggests that housing prices will likely continue to decline, and potentially bring the rest of the economy down with it.
The stock market is now in a downtrend that started at the end of April. The most likely target will be in the 875 – 950 range for the S&P 500. At that point we will reevaluate and come up with new targets – higher or lower. There will be some resistance along the way at 1040 and 1010. We are currently positioned to profit should the market continue this trend lower.
I have had my doubts all along whether or not this has been a real recovery or just an illusion of one, artificially produced by government spending but unable to stand on its own. I hope and wish that I am wrong about all this, but unfortunately I doubt that I will be. There are many, many signs that the economy is slowing again now that much of the stimulus has been withdrawn. To add more stimulus would be adding to the future unpayable debt that our children and grandchildren will eventually have to deal with. Some entities must be allowed to fail and go bankrupt to allow others to remain solvent.
In spite of the impressive new bull market in stocks, investors continued to pull money out of stocks and equity mutual funds all last year. This year many investors started to regain their nerve and added $7.4 billion into equity mutual funds during the 2nd quarter 2010, only to be rewarded with negative returns. Now, the flow has reversed again, this time dramatically, with $11.6 billion pulled out of equity funds in the week ended July 7. (Yet somehow the market went up that week.)
Investor sentiment has whipsawed quickly as well, from overly bearish to neutral in a very short span. This week's AAII Sentiment Survey Results are as follows: Bullish: 39.4%, up 18.4 percentage points and Bearish: 37.8%, down 19.3 percentage points - in a WEEK. Sentiment can change like the wind.
According to the Mortgage Bankers Association mortgage applications index fell again despite the fact that mortgage rates remain at near record low levels. The main focus should be on the new purchase index, which extended its losing streak to nine of the past 10 weeks. This trend that can’t be ignored, it suggests that housing prices will likely continue to decline, and potentially bring the rest of the economy down with it.
The stock market is now in a downtrend that started at the end of April. The most likely target will be in the 875 – 950 range for the S&P 500. At that point we will reevaluate and come up with new targets – higher or lower. There will be some resistance along the way at 1040 and 1010. We are currently positioned to profit should the market continue this trend lower.
Thursday, July 15, 2010
The Fear Index
Fear as measured by the VIX Index fell by nearly one third in less than two weeks as the markets marched higher for seven consecutive days. Investors went from panic to euphoria, quicker than you could say “it’s a new bull market.”
I don’t believe things are quite that simple. I still believe that we are mired in a long term secular bear market and the run up from March 2009 to April 2010 was a snap back rally. I also believe that rally has ended and we are going to take out the July 1st lows shortly.
The pathetic volume associated with the recent rally is significant. The poor economic news releases are flashing warning signs. The fact that markets are forward looking six to nine months coincides with the start of higher taxes that are to take effect on January 1, 2011.
Technically the market looks like it is stalling out right here. The fear that investors will come to understand that this rally has failed will be huge. We took a position on the VXX exchange traded fund in anticipation of fear (or in my opinion reality) coming back into the markets.
VXX can be bought here with a stop just below $24 with an 8% risk. A looser stop could be $23.60 for about 10.5% risk. There is a nice bottom of support formed by these lows as seen on the chart above, dating back to the beginning of May.
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