A Deeper Look into Stress Testing Reveals March towards Socialism

As the news and analysis continues to flow from this stress testing of the banking system, I become more and more disturbed.  The Government decided it would be a good idea to run a simulated stress test on 19 of the largest banks in the  United States.  They want to make sure that they banking system can handle the worst situation.  The Government has the results of the test and have told the banking system.

The Government is basically telling the banking system whether or not the individual banks are weak or strong.  They are doing this based on their own system.  In other words, career politicians and in some cases, individuals who have never run a bank before, are telling bankers about their health based on a simulated experiment.  Those results were due to be released tomorrow.  Then it was changed to Thursday.  Now it has been changed to Friday.  Banks are up in arms about the results and don’t necessarily agree with the Government’s assessment.

The Government is now giving banks mandates and telling them that they have to raise capital.  Citibank is rumored to need 10 billion dollars in extra capital to meet the Government mandate.  For the weaker banks, they will be forced to give the Government more and more ownership through the use of common stock. 

So, go with this scenario with me for a while. There was a king who wanted to take over the entire country.  The king  knew that he had to control most of the country’s businesses in order to have complete control over the system.   So, the king had his servents assess the local businesses.  The servents reported back to the king that the businesses were weak.  The king said that they had to triple their sales in a week or he was going to take ownership.  The businesses knowing that this would be impossible had to give up control.  As a result the king controls the country.

The red flags are flying and the Government is taking a step-by-step approach to get ownership of the banking system and this seems to disturb only a small percentage of Americans.  For that, I have no answer.  Maybe I am completely off base and paraniod.  It woulnd’t be the first time.  I just know two things.  First, politicians have never proven that they can be trusted.  Second, the Government is seeking to control alot of our once capitalistic system and doing so at an alarming rate of speed.  Paranoid?  I don’t think so.

With stress testing and swine flu outbreaks (probably a little overrated) as the backdrop, the market continues to march higher.  At this point it looks like the S&P 500 has a date with destiny at the price level of 900.   Analyst Jeff Saut posted his weekly commentary this morning and wrote that he characterized the last 9 weeks as a buying stampede.  It is a period where investors stampede into the market and buy as much stock as possible.   His analysis shows that the longest buying stampede that he has on record is 41 days.  Currently, we are on day 39 of the buying stampede.  We are also at a point where the stock market (S&P 500) is almost positive for the year.  That would occur at a close above 903. 

If you are wanting to reduce risk by selling stock, there might not be a better time to do so. As this rally continues, the risk grows greater and greater.  If you were going to stay fully invested you would do so based on the notion that all of the worst is behind us.

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How Bad Could Swine Flu Get? What other risks are we not seeing?

I was talking to a buddy of mine in the money management business.  He was much more bullish shorter-term than me.  So, as usual, we debated the markets.  He said that he doesn’t see anything on the horizon that could be a big stumbling block.  My reply was it is the problem that you don’t see that is the problem. 

The challenge is that we are in an environment that is ripe with major risk that we don’t see.  Just a week ago, who had ever heard of swine flu?  Can that be a big problem?  I heard that this could get bad enough to wipe -5% of growth from the economy.  I am still undecided if this is the big pandemic that they have predicted.  It just doesn’t have that feel to it.  I think that the bigger risk lurks within the stress tests of the banking system that we will see next week.

The stress tests are worrisome.  I am extremely distrustful of the government and their agenda.  As I have stated before, there is no good reason to stress test the banks and then release the results.  There must be another reason why they are going this direction.  So, I guess we will see next week. 

As for this current market, the S&P 500 must finish the day over 875 and stay there for this current rally to stay bullish.  It is having a great deal of trouble with that price level.  Today didn’t tell us much.  Now that Obama’s first 100 days are out of the way and the end of the month is over (there are many things that occur to push the markets up so that month end investment statements will look good) we will see how the market act without any interference.

As for this current market, the S&P 500 must finish the day over 875 and stay there for this current rally to stay bullish.  It is having a great deal of trouble with that price level.  Today didn’t tell us much.  Now that Obama’s first 100 days are out of the way and the end of the month is over (there are many things that occur to push the markets up so that month end investment statements will look good) we will see how the market acts without any interference.

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Conflicting Data

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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Reasons Why the Bear Market is not Over: Part I

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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Will the Market Catch the Flu?

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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