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Archive for April, 2009

Well, yesterday continues a strong performance for the stock market.  Remember we are still focusing on one question.  Was the low in the stock market in March the bottom of the bear market and the start of a new bull market or was the stock market rally that started in March nothing more than a bear market rally?  This is one of the most important questions to continue exploring at this juncture. There are huge risks for either answer. 

If you are not properly invested and this is the new bull market, then you are really missing out on recouping your losses.  If this is nothing more than a bear market rally, then the potential for extreme losses for stock market investors still lie ahead. 

For those of you who read my daily outlook blog, you know that I believe this is a bear market rally and a great opportunity for those who are heavily invested in stock to take advantage of this big move in the market and reduce your risk by selling stocks or stock mutual funds. 

As I started writing last week, my indicators are flashing caution right now and suggest that the risk continues to climb for anyone invested in stocks.  The market is truly ignoring some negative items.  Growth for the economy was announced yesterday much worse than expected.  We had -6.1% growth last quarter and the growth numbers for the first quarter were revised and reflect a worse first quarter than originally reported.  The last 6 months were the worst since 1958.

Foreclosures are climbing.  Swine flu should now be on every investor’s radar as this is just about to be classified as a pandemic.  The first of what I believe will be two automakers declared bankruptcy this morning.  The Government is going to be selling 71 billion dollars worth of government securities next week (read: printing money).  Finally, unemployment continues to weaken as evidenced in this morning’s new weekly jobless claim numbers (another record). 

All of this is occurring, and the consumer confidence number increased by 50% with the highest read since November 2005?  Are you kidding me?  As I have written many times, there is a great deal of evidence that exists that economic numbers are doctored.  There is just no plausible explanation for a rise by that much during a time with this much negativity.  However, keep in mind, we just “celebrated” (it certainly seems that way) President Obama’s 100th day in office.  It sure would be fitting for the stock market to have made money in his first 100 days as well as a huge rise in consumer confidence due to everything he has done in office.  HMMMMM…I follow this data very closely and it doesn’t add up.  It looks more and more like an organized PR campaign.  Let’s just all hold hands and believe there is no risk and the government will take care of everything.  If you are not paying attention to what is occurring out in front and behind the scenes please start doing so. 

Agree or disagree and think I am a conspiracy nut, things don’t add up.  I am just writing what I am seeing and staying away from the kool-aid that is being consumed in mass quantities.  For now, be careful with your risk.

with your risk.

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The bottom line is that we are in the eye of the storm right now and the foreclosure situation could potentially fall back into crisis mode.  Now, I think that we can handle it a little better this time around, however, this is a risk that no one is anticipating.  I guess the thought is that the Obama administration has this handled.  The truth is that we don’t have solutions for this problem. We only have ways to make the situation more tolerable. 

 

 

 

 

I have been writing over the past few days about what Wall Street is not really paying attention to right now.  I made the same argument back in late 2006 and early 2007 that there was a category 5 financial storm brewing and Wall Street is ignoring the risk.  Well, there is still yet another category 5 storm brewing. 

The storm consists of many components.  Yesterday, I wrote about unemployment.  Today, the root of the whole financial crisis could potentially be raising its ugly head again.  Now, I want to keep this very general so that you can see the risk. This is a discussion that can even get over my head at times. 

Let’s start at the beginning, where all of this started.  The mortgage industry became greedy and gave mortgages to millions of people who could not really afford them.  Upfront, these mortgages seemed affordable.  However, something very horrible happened and the interest rate and the payments changed.  The mortgage “re-set.” It changed in such a way that people could not afford to keep their homes.  They couldn’t refinance and the home went into foreclosure.

The foreclosure crisis is causing all of the problems.  So, in order to get past the credit crisis, we need to get past the foreclosure problem.  Well, unfortunately, between the second half of 2007 and 2008, hundreds of billions of dollars worth of these mortgages were re-set, causing countless numbers of people to lose their homes.  Then we had a slowdown in the number of re-sets. At this time, the re-sets are starting back up again.  Take a look at this chart:

mortgage-re-sets

You can see all of the green at the beginning of the chart.  That is the escalating number of mortgages that re-set.  Then you can see it died down again.  Well, different types of mortgages are facing re-sets.  Unfortunately, it appears to be a larger problem.  Look at how high that graph spikes!

The bottom line is that we are in the eye of the storm right now and the foreclosure situation could potentially fall back into crisis mode.  Now, I think that we can handle it a little better this time around, however, this is a risk that no one is anticipating.  I guess the thought is that the Obama administration has this handled.  The truth is that we don’t have solutions for this problem. We only have ways to make the situation more tolerable.

I don’t think we are out of the woods yet.  The determining factor is the foreclosure situation and it appears that we still have a ways to go. The good news is that we might get a fairly long period of time where things start to look better.  For those mortgages that go into foreclosure, it will take 6 months or so to work themselves into the system.

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The bottom line:  As long as the ranks of the unemployed continue to increase, the damage to the economy will worsen.  As a result, risk for a continuing bear market remains high. 

Yesterday, I wrote about a discussion that I had with a friend of mine that manages money. 

My friend completely disagrees with me regarding my cautious outlook.  His argument is that there are a lot of risks in the stock market.  However, the market is comfortable with that risk.  In other words, we have seen the full extent of the risk.  If you think about it, it is the big surprises that cause the large declines in the market.

Although I agree with that opinion, I don’t agree that the worst is behind us.  We have to consider the problems that are brewing on the horizon that have yet to become a full blown problem. 

I wrote that the stock market can get comfortable with the risk that can be seen.  However, at the same time, there can be a category 5 financial storm brewing out in the distance that has yet to arrive.  So, I wanted to write about what I feel makes up that category 5 financial storm.  Today, I will talk about unemployment.

I really do feel that this is the biggest symptom of the financial crisis that can cause the greatest problem.  There are a few ways to look at unemployment.  We can look at the monthly report which shows us the unemployment report for the past month.   You have to be careful deriving to much from this report.  The monthly unemployment report is really telling you old news.  Those unemployment numbers are a result of weak economic conditions that have already occurred. In fact, an economy will start to recover well before the employment situation gets any better.

Then we can look at the weekly jobless claims.  This gives you real-time information showing how many people are receiving unemployment benefits from the Government as well as how many filed first time claims the week before.  This weekly number continues to climb and it seems that we continue to see weekly records.  Currently, over 6 million people are claiming unemployment benefits.

The Government gives their “version” of the unemployment number each month.  It is grossly understated.  It doesn’t give you an accurate look at unemployment.  It doesn’t account for so many people who have fallen out of the system.  Plus, they include an estimate of how many people that they think received jobs that the report didn’t cover. 

The real number according to the analysts who really follow the real statistics is closer to 19%.  Keep in mind that during the Great Depression the number was 25%. 

I believe that the unemployment situation in America has gone past the point that it can be easily fixed.  Thus this unemployment problem could be around a lot longer than anyone expects.  It is like cancer.  The longer the cancer is allowed to be a problem the more damage is done.  The bigger problem is that the Government is doing very little to fix the unemployment problem which just exacerbates the problem. 

The bottom line:  As long as the ranks of the unemployed continue to increase, the damage to the economy will worsen.  As a result, risk for a continuing bear market remains high.  Tomorrow, I will go over the second reason.

Market update – The stock market is grappling over the potential of a real problem with the swine flu.  It is way too early to determine how big of a problem this will become. However, experts say that timing-wise we are due to experience a pandemic.  It warrants keeping a close eye on this one.

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I had a debate with a fellow investment manager about his take on the market. He completely disagrees with me regarding my outlook.  His argument is that there are a lot of risks in the market.  However, the market is comfortable with that risk.  In other words, we have seen the full extent of the risk.  If you think about it, it is the big surprises that cause the large declines in the market.

Although I agree with that opinion, I don’t agree that the worst is behind us.  We have to consider the problems that are brewing on the horizon that have yet to become a full blown problem.  I remember writing in my client newsletters a few years ago about the category 5 financial hurricane that is sitting out in the distance.   I wrote that the market sees the risk of the housing bubble.  However, there is nothing that is ruining the party – so why worry?

Then the Bear Sterns collapse occurred and the market woke up to that category 5 financial hurricane that was heading for the United States financial markets.  Of course, Swine Flu was never on my radar of financial risks.  In fact, up until Saturday, I had never even heard of it.  So is a global epidemic of Swine Flu the new worry?  

Well, it is always tough to tell what is really going on and if this is a real problem.  The health “experts”, much like economists, are positively optimistic and downplaying the possibility of an epidemic forming.  President Obama addressed the scare this morning.  “This is obviously a cause for concern and requires a heightened state of alert,” Obama said, “but it’s not a cause for alarm.”   We are on a heightened state of alert and there is no cause for alarm?  What did he say?

Typically, these types of stories cause a negative reaction in the market.  However, it doesn’t develop into a full blown risk for investors.  However, if this were to become something much greater, then it would probably become a problem for investors.  For now, it is too early to tell.

Price Levels – Remember we always watch price levels in the S&P 500 to determine how much risk is out there for investors.  Friday, although a good ending to the week, the stock market was having a tough time getting above 875.  I would dare to say in the short-term it would be tough to be to optimistic until the S&P 500 can close a market day above 875.  This is a new week and let’s see what clues the market brings. 

TOMORROW:   What does my current Category 5 financial hurricane look like?  We will talk about it.

 

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Mr. Market does as much as possible to frustrate the masses who manage money.  Wednesday was a very bearish day on the stock market.  The market was initially down, then it had a strong rally and was up, and then declined into the close of the market putting in a loss for the day.  Yesterday, it did just the opposite.  Well, go figure! 

We don’t have much in the way of information to go on and are somewhat stuck in neutral.  One indicator you can look at is the volume of buying and the volume of selling.  When you see a strong move in the stock market like you did today, you want to see some strong volume.  Volume was pretty weak today.  Then again the volume during this entire stock market rally has not been very impressive. 

There are some pretty interesting pieces of information to look at regarding the overall market.  The earnings news has been decent and the market hasn’t really responded as positively as I would have thought.  There was one other note to make today.  News came out after the bell that Chrysler could file for bankruptcy protection.  If things don’t go right for the automaker, there would be a good chance that Chrysler could be liquidated.  That would be a loss of 66,000 jobs and the loss of an American institution.  I would think that would be a negative on the market.

For me, I will stick with my original analysis.  I think we are ending a bear market rally.  I could be incredibly wrong.  If that analysis is correct, then the bear market would come back with a vengeance.

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I know many people who have an extremely positive outlook on things.  Believe it or not, I would consider myself one of those people even though just about everything that I write is negative.   Lately, those positive outlook friends of mine have made the comment that it has been tough to be positive lately.  I would now say they are realistically trying to be optimistic.

The economic news that came out this morning is the problem.  The number of people who filed for unemployment benefits last week rose to 640,000.  Currently there are 6.13 million people receiving claims and those are the only ones that we know are unemployed.   I would argue that there are millions of people who have simply dropped out of the system and are not being counted.

According to Shadow Stats who calculates the real percentage of people unemployed, it is not this bogus number that the government reports.  The number is more like 19% unemployed.  The biggest risk that investors and this economy face is that the politicians are doing nothing to fix the unemployment problem.  Sure, they passed a stimulus package that will create construction jobs (for the most part) in the future.  However, there is nothing today.  If you had cancer, you would treat it immediately and not wait a year or so to give the cancer chemo.  This economy has cancer and there is no chemo being applied.

Yesterday, the market had a bearish day.  It started off negative, then put in a very solid advance and was positive by almost 1.5%, and then declined during the last hour and ended with a negative return.  That is what weak markets will do.   I do believe that it supports the notion that a change of character is taking place. As I write, the S&P 500 is sitting a little low around that important 841 price level.  So, the market results could be very telling as we see how the market reacts to the selling pressure.

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The stock market rebounded nicely this morning and is back over 841.  This could potentially be a tough 2 to 3 weeks for the stock market.  We really need to watch closely so that we can stay on top of the main question concerning the market right now. Was the end of the bear market in March and this is the start of a good time to be in stocks or is this stock market rally that started 6 weeks ago nothing more than a typical “bear market” rally?  If it is the latter, you really need to consider reducing risk if you have not already done so.

It always comes back to the banks.  The tech stocks were the poster children of the last bear market and the banks and financial services companies are the poster children for this bear market.  As I wrote this morning in my Prudent Money Blog, the Government actions of wanting to assume more and more ownership in the banks is making the markets nervous.

The upcoming release of the stress test for the banking system really has the markets on edge.  Hal Turner wrote over the weekend that the stress test has been leaked and the results are horrible.  Who knows if that is a rumor or not?  The bottom line risk is getting high and we need to watch those price levels of the market. 

So we have had one very bad day on Monday followed by a good day on Tuesday.  Today will probably tell us in the short-run what the next few weeks will look like.

 

 

 

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