Commentary 09-12-10

One doesn’t stand in front of a moving train and that is what the stock indexes have been for the past week or two.  Let us look at what could be in the wind.  All of my indicators are in an overextended area of the charts.  That is just a technical thing and there has been no entry to a downside move at this time.  Now let us look at what is actually happening fundamentally and the effect that it could have upon the markets.  With about 450,000 people a week losing their jobs and adding over 2,000,000 people a month to the unemployment rolls is not a good thing.   I don’t think the government can replace those jobs any time soon, even with their new programs.  Individuals are in a state of flux as to their personal finances and paying down debt and only purchasing the necessities they need for everyday life.   Those that are employed are worried that they could join the rolls at any time and are trying to buy down their outstanding obligations.  Even the Federal government in its last report stated that the economy is anemic and the numbers show that the GDP is being reduce with each passing quarter.  The Fed is printing money like it is going out of style and it is having little if any effect on the markets.   The Fed has not run out of options, but there are very few left.  The banks are not lending.  Why lend on car loans, business loans or mortgages that could be shaky at this time when they can borrow from the Fed at zero cost and then buy treasuries and gain the yield with zero risk?  With interest rates where they are and the fear factor driving money into treasuries the pundits are saying that a huge rally is in the works when that money shifts from bonds into stocks.  My thoughts are that there will be a downdraft in this market before any rally of substance can appear.  Whether it is a violent move down that has blood running in the streets or whether it will be a long drawn out, and nerve-racking, move down, I can’t tell at this time.  There can even be another short squeeze that jolts prices higher that will give everyone a chance to sell their stocks at higher prices. 

 Just an old man’s opinion,

Ira.

Commentary 09-06-10

I have a real problem with the euphoria that has been going on in the markets of late.  I am not a fundamental trader, but one has to look at what is going on around them in order to analyze what one sees on the screen.  I will not fighting the flow of the market, but at times one must question what one is seeing.  The housing market is not about to come back soon.  The boom last year came on the heels of an $8000 or $6500 government tax credit.  Did it really help anyone other than those that were already going to buy a home?  To get a tax credit you have to be employed and earning money and have taxes to pay in excess of $8000.  Can the government do this again? I doubt it.   What does that mean?  It means, in my opinion, that housing prices have not reached the bottom yet and foreclosures just keep on coming at a rapid pace.

Let us take a look at the employment numbers.  They jumped for joy and tossed millions into the stock market because there was an increase of 67,000 jobs.  There was no mention that the unemployment rate went from 9.5% to 9.6%.  There was no mention that the actual rate for those unemployed as well as those no longer on the rolls runs between 16% and 22%.  No one that I have seen has an actual number for that. Not to mention the underemployed.   In July and August there were about 54,000 jobs lost and in June 175,000.  To top that off, it is my understanding that there were an additional 3 million new people entering the job market.  Let us look at the other side and note that we added 650,000 jobs since the start of 2010, but that we have lost over 8 million jobs since December of 2007.

Europe is now going to add controls on their financial markets with a Systemic Risk Board.  This board will control banks, hedge funds, short selling, various financial instruments and derivatives and they are talking about establishing their own rating agencies.   They will even issue warnings on shady insurance policies.   This does nothing to solve the current sovereign debt crisis.  By drawing in their spending and trying to reduce their debt, they are taking funds out of the market place which in the long run should be good, but in the short run will have a negative impact upon growth. 

Now to the U.S.  So far this year Bernanke and the Fed have printed $1.5 trillion dollars to buy mortgage bonds, treasury bonds and government agency bonds.   While the government has been buying a lot of worthless paper the rest of the economy has been on a debt reduction binge.   Corporations are flush with cash and are cutting back upon their borrowing, banks have cut back on their lending and with the lowest mortgage rates in a generation there has been a mortgage reduction phenomena going on.  In spite of all the money printing and hoopla over 110 banks have failed this year. 

There is supposed to be no inflation.  That may be the case in the housing market and the electronic gadget market, but in the things that everyone uses on a daily basis prices are going higher.  Gasoline is at $3.19 here, health insurance costs are going up from 18% to 50% depending on your status, a peach in the market costs $1.00 and almost everything I look at is up in price.  Yes, many stores are having 50% off sales, but who is buying other than back to school items.  Parents are buying because their children have grown out of last years cloths.  How many people are there buying to expand their wardrobe?  Buying that new set of golf clubs?  And with the variation in the Yuan imports will become more expensive.  You are now just starting to see labor unions refusing to take any further cuts in benefits and asking for higher wages. 

Hate to rain on your Labor Day holiday, but I felt that someone had to say something.  Just the ramblings from an old man.

Ira

Comment 08-25-10 Morning

With all the downside pressure being applied to the indexes price has not been able to even come close to the July lows.  There seems to be an underlying strength to the markets at this time.  With all of the bad news this morning there has been little follow through at this time.  In fact the market has rallied to almost even.  Price has hit targets and price objectives for this move down.  You can check the charts from past posts.  Now the question remains as to whether we can get a rally into Labor Day. 

God trading, Ira.

Comments for 08-15-10

Here is a list of earnings reports due this week.  The other thing to keep in mind is that this is expiration week.  I haven’t done my homework on this yet,  but I would expect that there is a huge open interest in put options.  This would normally be bullish for the markets.  So if you are a big bear I would look to hedge part of that position.

Commentary for 08-10-14

This coming week should be interesting.   The large retailers are reporting their earnings this coming week.  The prognosticators are calling for weak earnings and depressing forecasts for future earnings into the fourth quarter.  The only bright spot these gurus seem to see is with home Depot (HD) and Lowes (LOW).  Their reasoning is that as foreclosures continue to be bought there will be a demand for their products.  The estimates to refurbish a foreclosed home runs between $4000 and $15000.  It is felt that most of that money will be spent at one of those two outlets.  Any positive surprise could cause a relief rally and another short covering frenzy.   The VIX, the CBOE volatility index,  hasn’t hit the entry price for a move higher which is 30.10, so there is still a bit of complacency in the markets.

There is another interesting relationship that parted ways last week.  Both the  US Dollar and gold rallied.  Both hit entry prices for a move higher.  I read where Goldman Sachs (GS) put out a buy recommendation to buy gold.  Some posted that they thought that this was a way for Goldman Sachs to unload their gold position.  An interesting concept.  All I can go by is the fact that price has given the indication that it wants to move higher.  If the US Dollar isn’t the driver for gold than there has to be something else that is driving the metal higher.  Could it be that traditionally there is a rally in gold during the month of September?  Could it be that India, China and other countries are trying to hedge their currency devaluation?  Could it be an increased demand and a limited supply?   Or could be the realization that the rapid printing of money by almost every country will create inflationary pressure that will devastate their currencies buying power?  There are many implications and the only thing we really know is that the price keeps rising. 

I do not update the website on a daily basis.  I post when I believe that conditions have changed so there might be 5 posts in a week or only one or two.  

Have a good week trading.

Inflation, Deflation or Slow Growth 07-27-10

There is something going on here that doesn’t really ring true.  One has to look at all sides and try to make some sense of the current situation.  The country has a published unemployment rate of over 9%.  The unpublished amount is probably closer to 18% if you include those that are no longer receiving unemployment benefits.  The number of families on food stamps has increased dramatically. We have a housing market that is still in disarray.  We are getting great earnings reports based upon extremely low expectations.  The majority of those earnings are not due to increased business, but due to plant closings, labor reductions and cutting overhead expenses.  48 of the states are technically bankrupt and raising taxes in order to overcome huge deficits.  In my area the cities are raising sales tax to 9.75% or 10% in order to meet current reduced budgets.  My county already has a 9.75% sales tax and they will be laying off police and closing fire stations.  The school year has been cut and many schools have cut sports and after hour activities.  With an economy that is 70% consumer driven where will the impetus come from to drive growth? 

The inflation story reads like an open book.  The government is printing money like it going out of style.  The question is whether they will run out of ink or paper first.  There is a national debt that is over $1.4 trillion dollars and that amount  is what is listed on the books.  What is off the books could be triple that amount.  How will the government be able to pay off that debt or even pay the interest on that debt?  They can raise taxes because their income has been substantially reduced.  Or they can print more money to pay that debt.  How much of the debt has been monetized?  The government printing money to buy the bonds.  The TARP funds, housing tax credits and all the other stimulus packages along with extended employment benefits do nothing but increase the deficit and reduce the government’s income.  So to pay off the debt they must devalue the dollar to the point where they are paying about ten cents on today’s dollars.  You saw what happened to Germany in the 1930s when they did exactly the same thing to pay their WWI reparations.   Along with that, almost everything you buy in the stores and in the market is produced somewhere else.  The upward revaluation of the Yuan will increase the cost of all goods from China and the devaluation of the dollar will add to the cost of all other imported goods. 

Now let us look at the deflationary side of the coin.  Everyone is aware what happened to Japan.  Their stock market went from a 35,000 high to about an 6000 low and then came back to its present level of around 9000.  So deflation can be as devastating as inflation in a different way.  During a deflationary spiral prices fall.  That seems good for the consumer, but it devastating for business profits and then come the cuts in labor and payrolls.  That once again hurts the consumer who is the one thing that is driving this economy. So what happens?  Consumer buying power is eroded which leads to more pressure on prices, wages and the labor market.   The spiral then continues to erode profits and that is what drives stock prices. 

Where we will eventually end up no one really knows.  The question becomes how do you protect yourself  no matter which senario takes place.

Didn’t mean to get so wordy.  the Dow and SPY analysis follows.

Where would the inflationary pressure come from.  I have heard and read about crude oil going to $300 a barrel and gold anywhere from $2000 an ounce to $8000 an ounce.

The Markets 07-26-10

Nothing much has really changed from this weekends posts.  There is still upside pressure being applied to both the SPY and the INDU.  The indicator is entering the over extended area of the chart.  Any bad news or perceived less that good news could cause a sharp drop in the markets.  We are still  in the middle of earnings season so anything can happen.  The fundamentals don’t justify this run in the market.  So far this year over 100 banks have failed.  The rise in the valuation of the Yuan will do nothing but increase prices here.  The employment numbers don’t look good and companies aren’t spending the stockpiles of cash they are supposed to have.   For all the upside pressure being applied price has really not risen that amount.  One thing for sure,  don’t fight the tape.  It could get very costly.

The Sovereign Debt Problems 07-09-10

Everyone is looking at the sovereign debt problem of the PIIGS ( Portugal, Ireland, Italy, Greece and Spain).  They are running tests on 91 European banks to test their solvency.  I expect all but one or two will get a clean bill of health.  We will know on the 23rd of July.  Just how much debt can these banks hold from these countries?  Probably in the billions of dollars or Euros.  Is that the real problem or just a symptom of what really is going on here and abroad?  How many states in the US are technically bankrupt?  From what I have read and heard there are only two states out of 50 that are solvent.  The majority of the balance have debt that far exceed their income or ability to pay and California and Illinois are bankrupt.  The difference between the states and the Fed is that the Fed can print money like it is going out of style and some states can’t even pass a budget.  Things will get worse before they get better.  The income for these states is less and less as time goes by.  As people are out of work and companies are making less money the state’s income is reduced.  Where I live sales tax has gone from 5 1/2 percent a couple of years ago to over 9 1/2 percent today.   Those receiving unemployment insurance dropped and everyone rejoiced because things look better on paper.  Did anyone think about those that ran out of unemployment insurance and were dropped from the rolls because that insurance was not extended?  From what I read there a 3,000,000 new people entering the work force and they jump for joy that 100,000 new jobs were created.  How many of those jobs were minimum wage?  Pretty soon all of California’s government workers will be on minimum wage.  There are a couple of exceptions to that.  I am not worried about Europe as much as I am worried about the good all USA.  These excessive debts used to be overcome by an ever-expanding economy and expanding tax base.  Now that the majority of our economy is a service economy, where is that expansion going to come from?  How many more McDs, Burger Kings, and Starbucks will have to be added to absorb those looking for work.  If Airbus gets the Tanker contract there will be more jobs in Mississippi.  No matter who gets the job the majority of the components will come from overseas.  The bills keep climbing and the income is being reduced.   So you can see why I worry about the US and not Europe.

Is This The Start of a New Bull Market?

We have had two very impressive moves up over the past three days.   The VIX has moved back down below the 30 level and there is a sort of peace among investors and traders.  The talking heads are saying that the move down and bear market are over because with this move higher in the Industrial Average is now only 9% below its high.  Let me quote the great philosopher Yogi Berra. ” I ain’t over till it’s over”.  As long as we have lower lows and lower highs we will continue to move down and that is the current condition on the daily chart.   This rally has been impressive and most bear market rallies are impressive.  How much of this rally was new buying by investors and funds and how much of this buying was short covering?  If you look at a long-term chart we are in a bull market that started in the 1960s and hasn’t stopped yet.   Even the 1987 debacle appears as only a blip in the movement higher.   If you want to look at the terror side of things I have a projection on a monthly chart with a target price of 3459.   What would have to happen for the market to move down there and how long would it take?  Is it a possibility?  Everything is a possibility.  Is it probable?  I don’t think so.   If 9243 is hit on the monthly chart the first price objective for the move down would be 7307.  Now there would be your double dip and could that happen?  Yes, that could happen.   I try not to be either bearish or bullish, but that is very hard to do.  Right now my positions are slightly bearish and I have paid for it over the past couple of days.   Of course the next higher price objective on the monthly chart is 11,729.  There is currently downside pressure being applied to this chart.   So until a previous high is taken out and a previous low holds the bear will growl.

Inflation, Deflation or Stagflation? 07-07-10

The question really is where are we right now with these economic conditions.  It all depends on what you are paying for.  I just bought a new laptop computer.  It cost less that $1000.  I ran across a bill for a computer I bought in 1998 and its cost was $3200.  The new one is 5 times faster with about 7 times the storage space.   Last week I went in to have my teeth cleaned.  6 months ago the procedure cost me $125.  Last week it cost me $225.   Housing prices are up 2% this year for new homes and resales in this area.  Houses sold in foreclosure sales are 27% below the cost of a regular purchase with an average of $14,000 in costs for repairs and restoration.   In my area new homes start as low as $650,000 and a $10,000 state tax credit.   These are not luxury homes in this area.   Last year gold was selling between $800 and $1000 per ounce and today it is selling for $1200 +/- per ounce.   This is a reflection of your loss in buying power.  In certain instances you have deflation and in others there is inflation.

The question is what does the future hold.  I don’t pretend to be able to read Tarot cards, a crystal ball or tea leaves, but there are some very disturbing things going on in the world today.  Countries all have fiat currencies.  The last I heard there is one exception and that would be Switzerland where it is my understanding that 25% of their currency is backed by gold.   The world is flooded with debt and the worlds greatest debtor is probably the United States.  There is only one way to pay off the trillions in debt and that is to debase the currency and pay off borrowed dollars with cheap dollars.  The government in monetizing the debt by printing money and buying their own debt.  Germany tried that in the 1930s and the world knows what happened there.  Can we learn from our past mistakes?  At this time it doesn’t appear to be in the cards.   If there is rampant inflation than the stock market should rally because earnings will increase as it takes more dollars to buy the same products.   The stock market is at 10,000 +/- right now.  Where is it adjusted for inflation?  My guess would be under 1000 in 1970 dollars.   If there is inflation and prices start to skyrocket than bonds will fall because the only way to stop inflation is to raise interest rates.  Look at what Volcker did.  We saw interest rates over 20% before they stopped inflation the last time.   I don’t know what the future holds, but by looking at history it doesn’t look good.