Archive for July, 2010

If you take a look at historical statistics, they can become good predictors of probability. I like to look at the stock market in terms of probabilities rather than mask of certainty that a prediction yields. S&P equity research came out with an interesting statistic that signals a high probability that the second half of the year is going to be a rough one for the stock market.

Before diving into the data, let's take a look at one statistic first. January carries significance to it as far as performance. In my April 12th report, I wrote this about the January indicator.

The old saying goes “so goes January so goes the rest of the year.” During the last 59 years, January has had a negative return 23 times. If you will recall, we had a negative January this year. Of those years where there was a negative January, 56% of the time the stock market produced a negative result for the year.

What happens when you get a negative January and a negative result for the first half of the year? Well, from 1900 to 2009 this has occurred 26 times. Of those 26 times, the stock market ended negative the year with a lost 77% of the time or 20 our of 26 years. The average loss was -11.7%.

We have had a good July thus far in the stock market. Be careful not to get to comfortable again with risk. Remember that markets don’t decline in a straight line. The talking heads at CNBC and other media outlets are as bullish as ever on the stock market. Of course, they were that way through most of the bear market between 2007 and 2009 as well.

Here is a look at the stats:

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OK, call me a conspiracy theorist. It is tough not to be one these days. In fact, the Obama administration is a conspiracy theorist”s dream. These days it doesn’t take much digging to come up with a theory. The politicians are blatantly doing everything out in the open.

On March 16th, I had the opportunity to speak at a conference at Christ for the Nations. I spoke about God’s provision during a financial crisis, where we are now, and how we got here. During that talk, I made the statement that Goldman Sachs was so intertwined with the Federal Government that nothing would ever happen to them (as a reference to companies that might fail). I said that they would always be protected by the government because of all of their ties.

I got in the car after the presentation and the breaking news on CNBC was that the Federal Government was filing charges against Goldman Sachs for securities violations. Wow, I didn’t see that coming. Initially, it didn’t make sense to me at all. Why would the Government go after its own partner in crime? It didn’t take long to figure it out. Within hours, Barack Obama was telling the American people that this is why we need financial reform and this is why the politicians need to pass his financial reform regulatory bill (aka huge Washington power grab/control bill).

In a May 3rd client newsletter, I wrote the following:

The timing of this is very convenient for the politicians. They are trying to pass financial regulation and reform legislation (read: power grab for the politicians). So vilifying Wall Street helps create the reasons why we need financial reform. The Republicans will get a lot of backlash for not supporting financial reform when Goldman Sachs looks so bad. Once again, this is most likely a PR nightmare for Goldman Sachs and probably nothing else.

Last week the politicians passed the financial reform package. Within hours, the SEC and Goldman Sachs reached a settlement with Goldman Sachs not admitting any wrongdoing. What’s even better, they had to pay a settlement of 550 million dollars. In 2009, they had over 13 billion dollars in earnings. Do you think that they are going to miss a measly little $550 million?

Vilify the biggest investment house/bank on Wall Street. However, make sure that you don’t hurt them too much. Make the acquisitions strong. Push the need for financial reform using that bank as the reason we need it. Pass financial regulation. Then let them off of the hook with a slap on the wrist. You scratch my back and I continue to scratch yours.

There are tons of ties between Goldman Sachs and the Government. Just read this article and you will get the idea.

What no confidence?

The market took a tumble at the end of last week the consumer sentiment numbers released. Personally I think that these surveys are somewhat of a joke. However, Wall Street pays attention to them. I don’t think that we need a survey to tell us the consumer isn’t really positive. The indexed showed a decline to an 11 month low. Barrons reported over the weekend that this type of drop has only occurred 6 times in the last 32 years that this survey has been around. Risk is still high in this market. Check your risk levels!

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Over the past few months the economic data has fallen off a cliff.  Personally, I think that we are seeing deflation really start to settle into the economy.  Over the past few years, it has slowly infiltrated everything.  Deflation occurs when the prices of everything decline.  Inflation occurs when the prices of everything rise.

When I say the prices of everything I mean the prices of investments, real estate, etc.  I also think that gold will be a good indicator to watch for deflation. Gold should not do well in a deflationary environment.  Gold may have seen its high. 

A debt crisis is also one of the primary contributors to a deflationary environment.  Think of deflation as the process of wiping out excess debt. 

It seems like the media is slowly catching on to the deflation theme that has been in then numbers for a long time now. I happened to catch a series of articles in the Wall Street Journal’s Ahead of the Tape column that I felt served as a great example.

June 10, 2010
Deflation is Worrisome but not a certainty.
“Yet investors shouldn’t confuse current conditions with outright deflation.”

June 17, 2010
Deflation isn’t a concern, at the moment.
“But it is only if the recovery stumbles that outright deflation becomes a real concern.”

June 30, 2010
Deflationary Mindset Makes Itself at Home
“The bigger worry is that a deflationary mindset has taken hold in the housing market.”

What we have been seeing in the housing markets for 3 years now is classic deflation.  It was the first part of the economy to get hit.  Deflation should be a real concern and should be here in full force in the event that we do fall back into a recession.  The media and most of Wall Street will not recognize it as a problem because of one huge issue.  There is no cure for the cancer of deflation except time.  The Fed has no weapons against deflation.

Stock Market

We are coming up to one of those “line in the sand” periods.  Over the next few weeks, we should quickly figure out whether this decline since April was nothing more than a correction or the start of a new bear market phase.  Stay tuned…

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I feel like I have been writing about the jobs problem now for a long time.  I keep coming back to the same question.   What are the politicians doing to solve the unemployment problem in America?  I always come up with the same answer – very little. 

To be at this stage of a so-called recovery and to have pumped into the economy 100’s of billions of dollars, we shouldn’t have jobs numbers like we received last Friday. 

All of those jobs that Joe Biden said were going to be created before last month’s job report are now quickly going away as quickly as they were created.  This past month the government gave the pink slip to 225,000 census workers.  What we are the most concerned about is private sector jobs.  How many people are being hired by small business or corporate America?  There is where you want to see your strength.

Unfortunately, only 83,000 jobs were added.  I guess that is a positive.  However, were they really added?  You also have to look at the mystical estimate the Government throws in there of how many jobs they estimate are being created each month. Yes, they are at it again with their government accounting of jobs that were made up out of thin air.  It is the birth/death ratio or the jobs that the Government said were created or lost in a given month that the jobs report missed.

For this month – Poof! 147,000 jobs were added.  I wish that I could add $1,000,000 to my bank account due to a bank error that I assumed happen and be able to spend it.  I know – each month I get on my soapbox about these numbers.  It is just ridiculous. 

Remove the government estimates and you have a net loss of -67,000 jobs.  So where do you think the bulk of those estimated jobs were created?  54% of those jobs were said to be added in the Leisure and Hospitality industry.  Of course, that makes sense to me.  The tourist business is booming on the Gulf coast and the American Consumer has a ton of money to spend traveling. 

How about the unemployment rate?  It went down.  Isn’t that a good thing?  It would be good if it went down for the right reasons.  Unfortunately, 625,000 people feel out of the system and are not being counted. The unemployment rate will remain pretty useless data sense it doesn’t count everyone.

I wrote a blog about the possibilities of a double dip recession this morning.  I just don’t see how we are going to avoid it.  The question is going to be how bad and low will the stock market go?  Sorry to paint the best picture.  However, the vast majority of the media doesn’t get that we have a problem. I just want you to see the other side.

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