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Archive for May, 2009

It really is amazing to me as I look over the latest consumer confidence numbers.  The prior month’s reading showed a better than 50% surge in confidence. This last month reported a 34% higher than expected surge again in consumer confidence.   The reason for the optimism, reports the conference board, is the “recent jumps in the stock market, low mortgage rates and smaller job losses.” 

Following the report of the confidence numbers, we see that home values fell 18% last month as foreclosures surged.  This sure doesn’t inspire confidence.   My favorite part of that report is the optimism over “smaller job losses.”  Remember that the stock market had a very good day once the May unemployment numbers came out showing a much better than expected number.   The loss of jobs was nothing like everyone feared. Of course, the Government estimated that 226,000 jobs were created that month.  That goes a long way to make the end result “look” as if the unemployment numbers are turning around.

So, here we go once again.  Although the consumer is facing enormous debt problems, the country’s future has been a mortgage away, foreclosures are in crisis mode, real estate is nowhere near the bottom, unemployment is not getting any better, etc., the consumer is confident.  Once those numbers were released today the market took off.  Investors were simply giddy over the new found confidence.   I realize that some of you might wonder when I might get some confidence back in these numbers and the system.  It will be tough for me to get overly excited when the system is broken and the numbers are highly suspicious.  Do you really believe that there is that much confidence?  Well, the stock market is making a big bet that those numbers reflect reality. 

There is a huge confidence bubble being created.  I wouldn’t want to be heavily invested when that bubble bursts.

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Since we changed the daily stock market outlook to a stock market alert format, there really hasn’t been much to “alert” you about concerning the markets.  So, I thought I would just start off this Monday with a quick update.  This should be a relatively quiet week with very little breaking economic reports being released.  Since May 8, the S&P 500 has dropped about 50 points.  From the standpoint of what the S&P 500 has been doing over the past 9 weeks, that really wasn’t that big of a deal.  I want to circle back around to the one question that every investor should have in the forefront of their minds.

Is this the start of a new bull market or just a bear market rally that precedes another bear market route?   The answer to that question would determine every decision you make concerning your investments.  The best way to start answering that question is by looking at price levels.  If you are new to this market commentary, price levels are very easy to understand.  First, I always focus just on the S&P 500 and we always look at what price level the S&P 500 closes at each market day.  The S&P 500 closed on Friday at a price level of 882. 

Price levels are road markers that tell us where we are on the journey of investing.  If we successfully pass the right price levels, then we know we are on our way to our destination.  However, if we start passing road markers or price levels going backwards (losing money), we need to assess if we are lost and off of the correct road.  So, we look at the price levels that represent caution, a positive outlook for our journey, or a negative outlook. If our road markers are showing that we are on a good road, then we stay the course.  If the road markers (price levels) are starting to show yellow signs or caution, then that means we might need to change the course of our journey.  We do that simply by changing our investments.  If the road markers or price levels show we are lost, we want to change directions.

So, the road marker or price level that would warrant caution for investors is anything below 875.  Last week, the decline did not go that far.  A positive for the stock market would be anything over the price level of 950.  So, let’s see where a week of mild economic reports takes us.

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Since the day to day market doesn’t always bring something of interest to write about, I am changing this to a stock market alert.  Starting next week, we will be alerting you when you need to know about something of significance.  If you are on twitter, you can know immediately when we post.  Just search for Prudent Money and follow the show.  If you are on Facebook, you can go to the Prudent Money Fan Page.  That will alert you as well.

Finally, when we post updates on the blog, we put the title in the upper right hand corner of www.prudentmoney.com.

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Today offers us a good example of what happens when the illusion of confidence is broken.  Let’s start with the headlines this morning:

Stocks Sink as Retail Sales Slide

You mean to tell me that people aren’t buying things?  I am shocked!!  I thought that everything was recovering and OK.  

Then there was this headline –  U.S. Foreclosure Filings Hit Record for Second Straight Month

You mean that President Obama’s programs aren’t fixing the foreclosure problem?

Of course, as I write the stock market has a decline of -1.78% for the early morning.  Investors act surprised because of the creation of false hope that is propagated by Wall Street, the media, and the politicians.  This is also why I believe that we will continue to see this bear market for a longer timeframe than most expect.  This is a game of confidence.  The establishment wants everyone to think that there is no risk and we are on our way to recovery.  Call me skeptical – I just cannot imagine that a country that is still stuck in a financial crisis is all of the sudden recovering from problems that were created over decades. 

The real danger occurs when the establishment cannot even build false hope anymore. 

As far as price levels go, watch the S&P 500 today if we decline down to 875.  That will be a key price level for the stock market to stay above if there are any hopes of this current bear market rally staying alive.

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Brand New Prudent Money Blog – May 12 -Could the Government be Under-reporting the Jobless by 50%?

There is an old saying in the stock market that you should sell (stocks) in May. It is based on the notion that stocks perform better the 6 months leading up to May (November to April) than the 6 months following May.  There are some interesting statistics that support that notion.

John Mauldin’s newsletter is something every investor should be reading.  He writes a weekly newsletter that he publishes for free.  The content is excellent and he should be charging for this newsletter.  For more information, go to www.frontlinethoughts.com.   He had an excellent newsletter that highlighted this same notion but looked at it when the stock market was in a bear market.  First he took a look at the average returns since 1950 in the S&P 500.

You can see the big difference in returns when looking at separate 6 month periods.

Now take a look at these same numbers but looking at it when the stock market was in a bear market.

The numbers on average are much lower.  It illustrates to me that we could be heading for a rough period, for the market, if historical norms hold up.  If you see what history has to say, you look at the warning signs, the indicators are flashing and considering that we are in the worst bear market since the Great Depression, the risk level is getting higher

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Well, the results of the stress tests were revealed this past week.  It turned out to be much ado about nothing.  In fact, most of the banking stocks went up on the news.  It does leave the question as to what the Obama Administration is really trying to accomplish through a process that didn’t make much sense.  For now, we will leave speculation for speculation’s sake.

I found it interesting as to the criteria that was used in stress testing the banks.  They were looking for how the banks would react to the worst case economic situation.  Over the weekend, Alan Abelson wrote about the criteria in his article in Barrons:

“The “worst-case scenario,” as the cliché goes, that the Fed crew was able to dream up was one in which the unemployment rate, already a hair under 9%, would rise to 10.3% next year, housing prices would fall another 22%, and the economy — which has been shrinking at more than a 6% annual rate the past two quarters — would contract at a 3.3% pace.”

Well, I think that we could easily see 10.3% in unemployment.  Of course, that is dependent on how aggressive the Government gets with their monthly job “estimate.”  A decline in growth of 3.3% is also not unlikely.  That scenario would produce 599 billion dollars of loss for the banking system.  Now can you imagine the armageddon outlook if you were to come up with a realistic worst case scenario?  

Then there were the unemployment numbers.  I wrote about the numbers in detail on the Prudent Money Blog this morning.  It is funny that no one is writing about the creation of the 226,000 jobs out of thin air estimated by the Government in the jobs report.  Can the Obama Administration really pull off this illusion making everyone think that everything really isn’t that bad?

Well, the stock market certainly thinks so.  The market continued the rally this past week.  Thus far, the S&P 500 is up 40% from the price level of 666.  This falls right in line with what happened in the 1929 bear market.  The major stock market rally in that bear market was up 46%.  Keep in mind that even with this stock market rally, we are still a little bit over -40% from the highs in October 2007. 

I put together a very detailed analysis in my recent letter to my clients.  After going through that process, I have some very strong technical evidence that this is nothing more than a bear market rally and its days are numbered. 

Keep in mind that everything gets exaggerated in this type of bear market.  The moves both up and down are much bigger.  Guard your risk very closely!

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Bob is out of the office today, but Monday May 11, 2009 he will cover in full detail the results of the stress test and the unemployment numbers.

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