Posts Tagged ‘financial crisis’

Every intervention into our life by this government creates a new and uncharted course.  Big government and an ever increasing debt load on our country.  The absolute arrogance of this government to think that they can tinker with the future of our country in this manner and that everything will be just fine.  In the good old days, you really couldn’t see through the charades.  Politics were played behind closed doors.  Today, they are going to rob you blind right in front of your face.

It is a joke to think that these politicians are going to take the numbers from the Congressional Budget Office as reality.  Once these numbers came out last week declaring that this healthcare reform bill will reduce the deficit, there was a swing in the NO votes to YES.  Something that you need to know is that these estimates are based on fairy tale assumptions and in no way reflect reality.  It is the ultimate insult to intelligence that these politicians will use the CBO numbers as validation for voting on this healthcare reform bill.  One politician referred to being “giddy” in reference to them. 

OK, I will refrain from ranting about this abduction of our future and address the ultimate question.  How will this affect the markets?  It is so tough to say.   We have never lived in a time where there is so much agenda attempting to control.  You really have to look at the price levels of the stock market, separate yourself from the news, and see how investors feel. 

We haven’t talked about price levels in a while.  Price levels are important to watch because they tell you how the market is reacting to risk.  So, the current price level on the S&P 500 to watch is 1150.  This is the line in the sand.  As long as the stock market stays above 1150, then that signifies that the markets are OK with our debt-laden world.  However, the inability for the S&P 500 to stay above that price level indicates problems on the horizon. 

Last week, the S&P 500 confidently climbed over that level.  This week will test that confidence level.  I have learned (the hard way) one simple fact.  You can read the news and look at the world around us and draw conclusions as to what should be happening in the stock market.  You can look at all of the debt accumulating and the debt that we have yet to take on (see healthcare reform) and come to the conclusion that this is not sustainable and not good for the stock market.  However, the market might or might agree with that conclusion today.  Tomorrow might be another story. However, today the markets are focusing on other things.

 So, we have reached the line in the sand, which is 1150 on the S&P 500, and will watch to see how the stock market reacts in this environment.  Today is a new day in America as we continue to go through uncharted waters.  It started a few years ago as the Government hijacked capitalism using the financial crisis as the ultimate excuse.  Today, this agenda filled Government has just taken one more huge step.  This continues to create enormous risk in the markets.  However, it will not matter until the moment that the markets wake up to reality.

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To listen to the politicians in Washington, the unemployment problem is well on its way to getting solved.  Just like that, the unemployment rate fell to 9.7% from 10% and we only lost 20,000 jobs.  As a rule of thumb you never want to fully trust the sound bite that leaves the mouth of a politician.  As another rule of thumb, you don’t want to fully believe the headline number that the government is reporting either.

Politicians don’t care how you get to the more positive numbers; they are just going to run with it and call it reality.  January’s unemployment numbers are far from reality.


The Drop in the Unemployment Rate

How can you get to a lower unemployment rate with so many people unemployed?  It is pretty easy.  You just don’t count them.  Hundreds of thousands of people have fallen out of the system since they have been unemployed for so long.  Then there are the ones who have given up.  They are just not being counted.  As a result, you get a lower rate.

Seasonality also plays a part.  There are a lot of part-time employed workers that are hired depending on the time of the year.  For this report, seasonality gave the report a positive bias. 

The lower drop in jobs

As we have discussed throughout the year, the government estimates how many jobs were created through the “birth/death” formula.  Typically, this adds hundreds of thousands of jobs throughout the year.  These aren’t verifiable jobs.  These are jobs that the government “assumes” are created from small business.   In January they typically revise that number and subtract jobs from the system.  These are pretty large revisions.  This revision was a job loss of 427,000 jobs for the month.  Yet, we only lost 20,000 jobs?  Really??

That is the magic of revision.  They wait until time has passed and then subtract jobs from past months and even years well after the fact.  They will get that figure in there some way.  Getting it into the system can happen well after the fact when it will not affect the market.  Can you imagine the carnage on Wall Street had they really reported the truth?  They will report it when it matters the least.

I am currently reading a very detailed account of all of the financial crises that this country and other countries have faced through the decades.  The premise of the book is that it is not different this time and this is not unprecedented.  As I get through the book, I will write about it.  The authors write that a common thread exists amongst all financial crises.  It is the crisis of confidence.  Confidence can quickly escalate to crisis levels. 

My greatest concern is that this Government continues to sell the American people on a story that does not jive with reality.  Confidence could be severely damaged when reality come into full view. 

For a good example of this in real time, just watch the implosion of Toyota.  You are looking at a car company that has been hiding problems for years.  Now that the truth is coming out, there might not be enough confidence left for consumers to want to buy a car that has had a bad sudden acceleration problem.  It looks like they really don’t have an answer for it and they are buying time. Well, more on that story at a later date!

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Every Friday, all across the country, bankers hold their breath.  This is the day that the FDIC chooses to show up and take over banks that are on the verge of failure.  This past Friday, FDIC employees were especially busy when they showed up at 9 different banks.   The banks had combined assets of 19.4 billion dollars. 

On Sunday one of the largest bankruptcies in corporate history occurred.  CIT who lends money to hundreds of thousands small to medium business filed for bankruptcy protection.  This could have some pretty large ripple effects.

The problem is the lack of capital to those lenders and banks who focus on the small business owner.  The Obama and Bush Administrations failed miserably in taking care of  the heartbeat of America, the small business owner.   Take that capital they are dealing out like candy and give it to those banks that service the small business owner.  Further, if you want to solve the unemployment problem in this country, help the small and medium sized businesses.  Of course, that would be the promotion of capitalism which is something none of the politicians seem to understand.

The Obama Administration stated that they might infuse money to small banks if they will agree to lend to small businesses.  The Obama Administration needs to get a backbone.  If they are going to give money to the big banks,  put stipulations on the money and stop requesting what they want the banks to do in return of receiving the bail-out money.  They are dealing all of this money out to the big banks and at the same time wanting these big banks to stop abusing credit card customers and start lending it.   Here is an idea – STOP GIVING MONEY WITHOUT STIPULATIONS!!  Go ahead and give money to the small banks without stipulations and they still will not lend it out.  It is all about survival.

You got to love bank nationalization and the march to socialism.

Levels to Watch

Let’s take a look at the price levels on the S&P 500 because some damage was done last week.   We have broken through some pretty significant price levels.  However, the BIG ones are in front of us.  The range to watch on the S&P 500 is 989 to 918.  It will be interesting to see what happens around those levels.  Yes, this is a wide range.  However, it does give you a good range in which to monitor risk if you are heavily invested in stocks.   Remember, the question is always,  “Is the rise in the stock market from March a new bull market or just a bear market rally?”  The answer to that question is crucial to the future of your invested money.

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I just got back in town yesterday from a trip with my wife Cheri.  We were celebrating 10 great years together.  So, I am a little out of touch with the economic data that has come out last week.  Plus, this is a slow time of the year.  The real action in the stock market should kick into gear following Labor Day.  I wanted to share with you something that I wrote in my letter to my clients this morning.

It wasn’t until last night that I realized how fortunate we were in going to Cabo last week versus this week.  I discovered that a monster hurricane, Hurricane Jimena, is barreling towards Cabo. This could actually be a Category 5 hurricane by the time that it makes landfall. 

While in Cabo we took an excursion into the city.  People were having a great time in Cabo.  In fact, there was not even a mention of the Category 4 hurricane heading their way.  Residents acted as if there was not a care in the world.  One tourist commented to a reporter, “Are you saying it would be a good idea to stock up?  No fear. I’ve been through tornados and earthquakes and everything else, but never a hurricane.”  There was almost an arrogance that came with that reply.  I don’t believe that there is anything to joke about when it comes to Category 4 or 5 hurricanes. 

It is a common attitude with people who are facing the arrival of a hurricane.  There is the notion that it will miss us or it will not be a big deal.  It is almost as if it could never happen.  These things are always forecasted as potentially being bad and they never turn out to be.

I think that the general attitude about the stock market is the same right now.  The attitude is that there is no way we are going to see a steep decline in the stock market.  There is no way that we are going to decline back down to where we were in March of this year.  There is no way that the worst is yet to come.  Don’t you look at history?  Plus, all of the financial press says that the worst is behind us.  These are the types of things that you hear these days.

This is a big bet to make against this financial crisis.  Just like a Category 5 hurricane, there are enormous penalties for those who blow this off and don’t take precautions.  As an investor, I think that it is prudent to face the upcoming months as if a Category 5 financial hurricane were brewing and potentially heading our way.  After all, we are heading into the particularly dangerous months of September and October.  These are two months that have not historically been kind to investors.

I think that Proverbs 22:3 says it best:

 A prudent person foresees danger and takes precautions.  The simpleton goes blindly on and suffers the consequences.

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Those of you who have been reading my analysis are probably wondering when I am going to throw in the towel and just admit that the bear market is over and start talking about buying stocks again.  Well, I hate to disappoint you.  It is not going to happen yet.  Let’s take a much bigger picture look at what is occurring.  First, we are in a financial crisis produced by the bear market and those don’t just go away without a strong fight. 

Second, how could a 40% plus rise in stocks not mean the bear market is over?  Well, let’s take a look at history for that answer.  In 1929, a bear market started as a result of a credit/debt crisis.  There are many similarities between that period and today.  The big difference is the type of debt crisis.  The bear market eventually bottomed in 1932 after an 86% decline.  The first “crisis” decline in 1929 saw the market drop -44%.  Following that -44% decline, the stock market went up 46% over the next 147 days.  If you compare that to today, we are going through a similar experience.  The crisis of last year resulted in a -48% decline.  Thus far we are a little over a 40% increase in the stock market over 137 days.   This is not in any way unprecedented.  The problem for stock market investors in 1929 was what followed the 46% increase.  Following that incredible stock market rally was an -82% loss over the next 3 years. 

Third, the market has been rising over the past two weeks as a result of earnings season reports.  Over 70% of the companies of the S&P 500 have reported better than expected profits.  However, a closer look would reveal that the vast majority of these “profits” were due to cost cutting and not real growth.  These are clearly not sustainable. 

Fourth, Wall Street is beating the drum that the recession is just about over.  The index of leading indicators came out last week “and is rising at a rate that has accurately indicated the end of every other recession since the index began being compiled in 1959” (Dallas Morning News).  Is that really valid when we are dealing with the worst recession since 1929 when no leading indicator index was even around? It is important to compare apples to apples.  Wall Street has a history of claiming the recession over prematurely many times before.

Finally, unemployment is a major crisis and there is nothing in the works to fix it.  Of course, you can always get a job working an Obama induced construction job. 

Let’s not get to ahead of ourselves.  I was premature to write that the stock market rally was nearing the end.  Obviously it still has more to go.  I don’t think that I am wrong to suggest the bear market is over.

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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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In the book Manias, Panics, and Crashes:  A History of Financial Crises, Charles Kindleberger writes about the various financial panics that have occurred throughout the world over time.  There is one consistency that exists amongst all of the examples written about in the book.  There was always a lender of last resort.  The lender of last resort is the country that steps in and saves the country in crisis.  We have been the lender of last resort and we have needed a lender of last resort before.


Well, guess who the lender of last resort is in this financial crisis?  We are the lender of last resort for ourselves.  Yes, the Federal Reserve made it clear in their announcement last week that they were going to make available another trillion dollars or so to save the system.  That is just another trillion dollars on top of an estimated $14 trillion already committed.  We don’t talk in billions anymore.  Trillion is new billion.    


If no one else will step in to save us, we will just print our way out of this mess.  Bernanke is running a huge Ponzi scheme.


The Fed has just assured us that this problem will get even bigger.  Never in the history of mankind has this type of self prescribed bail-out EVER worked. Washington talks as if the economy will bottom out sometime early next year and we are off to the road to recovery.  Just like that – POOF – and the financial crisis and all of its trillions of dollars left in its wake will be just that OK.


For this reason, it is going to be dangerous being a buy and hold investor.  Although I do think that we have a very strong bear market rally that we may have already started or is on the horizon.  The primary market is a bear market where buy and hold investors will just give back anything that they made during the bear market rally.


You have 3 choices over the next however many years that we face this mess.  First, you can just go along with the ride and buy and hold.  This strategy will put you in harms way every time an irresponsible decision is made in Washington.  Second, you can just go to safety by placing the majority of your investments in safe investments.  I think that strategy is better than the first.  Third, you can learn to identify risk and develop a game plan for when to invest and when to be safe. 


Of course, that is the purpose of understanding price levels (which is the focus of the Prudent Money Outlook).  Last week the market failed to make it above a crucial price level and is obviously very leery of the politician’s game plan to be the lender of last resort.  I believe that the market is leery when President Obama goes on the tonight show where he just jokes and laughs while people are losing their jobs and homes.  Of course, he also has those weekly cocktail parties (Wednesday night Happy Hour) at the White House every week.  It is nice to throw weekly parties while the rest of the country is hurting.  Have you ever stopped to think that we are paying for those Wednesday night cocktail parties?


This morning, the market is opening up very favorably to the latest bail-out attempt announced by the US Treasury.  It will be important to see how the market holds up from here.   


So here we find ourselves watching these price levels again.  We are trying to figure out the following question – Is this the start of a meaningful bear market rally or is it a break in the selling and we are about to decline down to the S&P 500 price level of 600? 


The price levels to watch are 741 and 800 to 825.  Any price level below 741 is extremely bearish and would suggest a decline down to 600 and anything above 800 to 825 would indicate that we are in a very strong bear market rally that could stick around for a while. 

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