The Bear Snores On

My two sons love this book that I would read to them called The Bear Snores On. The story starts out with all of the bear’s friends sneaking into his cave and throwing a party while the bear “snores on.” They would do something outrageous and the author would note and the bear snores on. They would pop popcorn and sing and dance and the bear snores on. Everything is great until the angry bear wakes up.

Well, our bear on Wall Street took a nap back in March 2009. He briefly started to wake up April of this year. Since then, our bear has been in and out of sleep as everyone has been partying in the bear cave.

The unemployment numbers showed continued losses of 95,000 jobs last month…and the bear snores on.

Countries are saber rattling about a currency war…and the bear snores on.

The foreclosure process is in crisis as it has been halted in states all over the country…and the bear snores on.

Middle and lower America continue to face personal financial crisis…and the bear snores on.

The politicians have an agenda so big and it doesn’t include real recovery…and the bear snores on.

The Fed prints money, continues to accumulate at alarming levels, and there is talk about a second stimulus package…and the bear snores on.

Healthcare…and the bear snores on.

Higher tax rates next year…and the bear snores on.

An investor community oblivious to the risks in the structure of our economy system…and the bear snores on.

The problem is that the bear will not hibernate forever. My guess is that he will wake up in a very bad mood considering everything that has happened in his cave. You see, I don’t think that we ever left his bear cave as investors. He has just been asleep. Yes, I know, I have been talking about this risk with nothing materializing and the market continuing to go up. However, keep one thing in mind:

In the book The Bear Snores On, it was a small spark from a fire that woke him up. It wasn’t the big events happening all around him. It wasn’t the loud music or the dancing that woke him up. All it takes is the smallest problem to surface and the house of cards will come tumbling down. As an investor, what is your Plan B?

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Politics Might Just be the Catalyst

What is the most difficult thing about managing money in this environment?  This is a question I get from time to time.  What separates this time period from any other is politics.  It is the most unpredictable risk out there.  The politicians are going to do whatever they need to pass their agenda.  Unfortunately, there is a great deal of agenda.  That agenda means that politics will influence the market positively or negatively.  Thus, you never know what actions Washington will take – either market friendly or unfriendly. 

Let me just get the obvious out of the way.  Wall Street needs to be reformed.  There is no question.  However, they don’t need to be reformed like the politicians want to reform.  There is reform and then there is control.  The financial regulation is all about giving the government more control.  That is the last thing that you want to do.

The politicians are having a tough time getting financial regulation and reform done because the Republicans see the power grab this legislation represents.  So, how do you fix that problem?  You shape public opinion by vilifying Wall Street.  Don’t even begin to think that Goldman Sachs is the only financial institution that the government pursues.  I will bet it is only the beginning. 

I was having a conversation with a close friend of mine who has been managing money for 20 plus years and made the comment that I don’t like the market at these levels as well in an environment with all of the indicators firing warning signs.  He replied that there is no catalyst.  Well, the catalyst is one thing that you don’t see in advance.  Politics has a great way of creating the catalyst. 

This does raise the stakes here at this level in the stock market.  It is too early to see if this is the start of a series of events that stops the bull market rally.  If anything, it welcomes a much needed correction.  For long-term investors, anything below 1081 on the S&P 500 creates a very large risk.  For the Dow, that level to watch is 9,234.  Those levels are a long way off.  Thus, the market could correct (which would be healthy) down to those levels.  That is roughly a 17% correction.  However, if the markets cannot rebound from that type of correction, this party might be over.

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Red Flags for the Stock Market

You might want to put that Dow 11,000 party hat away for the time being.  Evidence of trouble ahead is getting much louder.   There are predictive indicators that would suggest that trouble is on the horizon.  These indicators simply suggest that risk levels are escalating.  They aren’t necessarily a great timing mechanism.   At the same time, as a stock market investor, you don’t want to ignore them.

They have been appearing throughout the first quarter. 

(1)               Percentage of Mutual Fund Managers in Cash Holdings

This has always been a great indicator.  When mutual fund managers hold low levels of cash, it has always been a sign that the market is headed for trouble. 

We are currently at the record level of low cash reserves held as in 2007 when the market turned into a bear market and in 1987 when we experienced the second greatest stock market crash of all time.

 (2)               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%  the stock market produced a negative result for the year.  

 (3)        P/E Ratios

I will resist getting into the mechanics of how a Price to Earnings Ratio works and its relation to the stock market.  You don’t need to understand how all of that works to get the point.   The bottom line is that new bull markets start when P/E ratios are low.  Bull markets end when the P/E ratio gets too high.

 The top of the bull market in 2007         P/E was 25.5

The top of the bull market in 2000         P/E was 44.2 (due to internet bubble)

The top of the bull market in 1966         P/E was 24.1

The top of the bull market in 1937         P/E was 22.2

The top of the bull market in 1929         P/E was 32.5

The top of the bull market in 1902         P/E was 25.1

 According to Robert Schuller’s valuation model, which looks at reality and makes no assumptions about the future, the current P/E ratio is 25! 

(4)               The December Low Indicator

 Lucien Hooper, a Forbes columnist and analyst, coined a stock market warning sign called the December Low Indicator.  If the stock market anytime during the first quarter goes below the lowest price level of the preceding December, a sell signal takes place.  This occurred during the first quarter. 

 The Stock Market Almanac further researched this sign and found that this has occurred 30 times since 1952.  If you get the combination of a negative January along with the December low indicator, the stock market has ended negative for the year 75% of the time. 

(5)               Decennial Cycle – 10^th year of the decade

The 10^th year of a decade has carried some significance.  Tenth years have the worst record within the Decennial Cycle and 2010 is a midterm election year, which has the second worst record of the 4 year presidential election cycle.  Of the last 12 occurrences dating back to 1890, the stock market lost money 8 out of the 12 times during the 10^th year.  The average loss has been -7.2%.  

 Year                 % gain or loss

 1890                       -14.10

1900                       + 7.00

1910                       -17.09

1920                       -32.90

1930                       -33.80

1940                       -12.70

1950                      +17.60

1960                         -9.30

1970                          4.80

1980                        14.90

1990                         -4.30

2000                         -6.20

2010                        ?????

(6)  Low Volume

This is one thing that really perplexes the market pros.  If you have a strong rally, typically you have strong buying volume.  There are a lot of buyers stepping up to the plate.    A hallmark of market tops is a rising stock market on low rally.  If anything, it is a warning sign.  Today, we have very low volume on the way up. 

The number one job of Wall Street is to convince the world that risk doesn’t exist.  They would prefer if investors just go back to sleep and not pay attention.  The signs of risk are building.

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Over Reporting of Unemployment Numbers

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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Wake Up and Smell the Risk

Cracks in the foundation are starting to rear their ugly heads and investors need to wake up smell the risk.  In my latest client newsletter, I wrote about the great disconnect that exists between Wall Street and Main Street.  On the one hand, you have Wall Street who just assumes that this is a normal cycle and the worst is behind us.  Then you have Main Street that is really suffering.  We all know several people who are facing tough financial times or at least have heard the stories. 

The Wall Street Journal reported last week that 1 out of 4 homes are underwater.  That means these homeowners owe more than the worth of the home.  If you look into the stats even more closely, you get a real disturbing picture.  The numbers show that 65% of the homes in Nevada, 48% of the homes in Arizona, and 45% of the homes in Florida all have values of the home less than what is owed on the home. 

This translates into a large number of potential foreclosures.  The real estate markets cannot even get close to starting the recovery process until the foreclosure crisis starts a recovery.  I think that we are a long way away from that starting.  Overall, I don’t think that we can get a healthy recovery until you fix the real estate and foreclosure problem.  All of these problems tie together spelling risk for the economy and risk for the markets. 

There is no question that these risks are known by the market.  However, the market expects that this recovery will take place much sooner.  Therein lies the problem.  I don’t think that Wall Street’s time table is even close to reality. 

Wall Street also thinks that most of the debt crisis is behind us…well maybe until last week when Dubai revealed they are going to stop making the interest payments on 60 billion dollars worth of debt.  Dubai is on the verge of defaulting on 60 billion dollars worth of debt.  That would have some serious implications for a global economy that is already walking a tightrope. 

Todd Harrison, president of Minyanville.com, described how the crisis would unfold. 

Dubai defaults.
European banks (such as HSBC (HBC) and Royal Bank of Scotland Group (RBS)) are counter-party on much of that risk.

The virus spreads through the fragile region (debt insurance has now spiked in Bahrain, Qatar, Turkey, Russian, Ireland and in particular, Greece).

The strain migrates to stateside financial institutions, as you would expect with $500 trillion in derivatives tying the world together.  We see a “flight to quality” with a sustained rally in the US dollar.

Santa has a grumpy Christmas

It was announced on Sunday that their central bank would bail them out.  Oh good, another bail-out.  It might be a little early to see how this plays out. 

How many more Dubai’s are out there that the market doesn’t know about?  We are talking a debt crisis of epic proportion.  I still don’t think that we have seen the end of the debt crisis. 

We are also seeing the reality of the condition of the consumer.  Consumer sales were not that great this Black Friday  and don’t look to translate into a strong Christmas buying season.  Be careful if you are drinking the kool-aid.  These markets can go down as fast as they went up.

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Unemployment Reports Better than Expected – Are we in the clear?

 

The recession is declared to be over or over soon states many media outlets on Friday.  Unemployment was not as bad as expected and it appears that we are starting to lose less jobs. All of that is good news and it took the media and Wall Street no time at all to react positively. 

 

I really do regret taking the opposing view on this one.  I would like for it to be true.  There are just a few problems.  We have 14.462 million people unemployed.  The number is likely higher. This is the estimate from the Department of Labor.  Where are these people going to get jobs?  Unless you are ready to pick up a shovel and get on the Obama job creation bus, you might just be out of luck.  Once again, the Obama administration does not have a plan in place to fix the job situation. 

 

Looking back to 1948 (as far back as records take us), there has never been as big of a spike in the number of those unemployed.  The closest spike that you can find was between 1979 and 1982.  In 43 months, the unemployment numbers jumped 106% to a high of 12.051 million people. Today, in just 33 months the unemployment numbers jumped 125% to 14.462 million.  The following is a chart from www.freelunch.com that illustrates this dramatic rise.

I think that the monthly unemployment numbers could continue to look better.  However, that doesn’t mean that companies are hiring. I think that it means that companies have cut as far as they can cut.  Those lay-offs might start to slow.  Until there is a solution to the problem that over 14 million people are facing, we will continue to have this crisis. 

 

Regarding the market…the 1929 comparison that I wrote about still tracks very closely.  I would still suggest that there is extreme risk on the table.  As long as we stay below 1020 on the S&P 500, that will remain the case.

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The Bear Market has to be over…Right?

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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Summer Time Blues

Well, I took the wrong time to take a vacation. A great deal of very important things occurred last week in the stock market and investors should be extremely cautious.  This morning I will take some time to get you caught up on what is occurring with price levels as well as what I believe to be a fundamental shift in the stock market. The stock market has been in a stock market rally from the middle of March at least until June 11. Since June 11, the S&P 500 has declined -7 %.

One of the themes that I have written about since the low in the stock market in March is the overall future direction of the stock market. If you ask most people on Wall Street, they will say the worst is behind us and we have started a period of recovery. I have argued the opposite. I feel that we are in a long-term bear market that started in 2000 and could last as long as 18 to 20 years (based on history).  Concerning out current situation, my analysis would suggest we have been in a bear market rally. This is a period of time where the stock market stops declining and starts what looks like a period of prosperity and recovery for investors.

These are mean periods of time for investors because they fool the vast majority of people into believing that the worst is behind us. When you look at how far up the stock market went in a small amount of time, it certainly would appear that the worst is behind us. At the same time, it also looks just like a typical bear market rally and not the start of a period of recovery.

Since the March low in the stock market, the question has been how long and how far the stock market will go up. It is a little too early to declare that the stock market rally is over. However, the evidence is building. The problems are becoming much too loud to ignore. So, let’s start with the evidence. We always want to look at price levels of the stock market. Price levels are determined by where the stock market closes at the end of each day. They can tell us a great deal about the level of risk that we are facing.

If we manage to stay above certain price levels, then stock market investors should feel comfortable with taking risk by investing in stocks. However, if the market closes below certain price levels, then the probability increases that stock investors will lose substantial amounts of money. On June 11th, the S&P 500 reached its highest price level since the March low. That closing price level for June 11th was 944 on the S&P 500.

As of last Friday, we were at a price level of 879. The price level of 878 is the first level of risk for the stock market. Last week the S&P 500 fell below that level but has not closed below that level. Remember that the closing level is the most important one to watch. Once that level is broken, the next danger zone lies between 814 and 779. If you are heavily invested in stock, you do not want to see the S&P 500 fall below 779. In that event, I would think that the next price level down could be as low as 719 all the way down to 666.

The price level of 666 is extremely important because that was the March low of the stock market. In the event that would happen, that would be a considerable low and loss to stock market investors. For now, let’s not get ahead of ourselves. Keep in mind that investing in stocks is all about monitoring your risk. One of the best ways to do so is by monitoring price levels.

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Markets on Shaky Ground

Wall Street (which drives me crazy) calls even the smallest bit of good news “green shoots.”  The analogy is that grass starts to grow in the form of a “green shoot.”  Well, I have many “green shoots” in my yard right now.  Unfortunately, these green shoots are weeds more than anything.  John Mauldin made a very good observation in his latest writing.  He said:

“My premise for uttering the heresy “This Time It’s Different*” is that the fundamental nature of the economic landscape has so changed that comparisons with post-WWII recoveries is at best problematical and at worst misleading.”

His point is that Wall Street is looking at this recession through the lens of past recessions since WWII.  It is like comparing apples to oranges when you think of what makes up the problems that we face today.  Last week, the S&P cut their investment ratings on 22 banks.  Banks depend on strong investment ratings so that they can attract investor money.  The Consumer Price Index saw its largest drop since 1950.  Once again, it looks a lot like deflation more than inflation.  The reality is that there is a higher probability that we are in the throws of a deflationary problem which is something that only time can solve.  The problem with the weeds in my yard is that I cannot do anything about them unless I want brown spots all over my yard.  I will have to wait until next year and make sure that they don’t come back.  This is unlike any recession since the 1930’s. 

This week will have some interesting events.  The Federal Reserve Board meeting, that always makes for an interesting day.  The Treasury is set to sell billions of dollars of Government Bonds on the open market.  It will be interesting to see how interest rates hold up.  Once again, a rising interest rate environment is the last thing that a debt laden economy can handle.

As I write, the S&P 500 is below a critical price level of 900.  If the market were to close below that level, we would want to watch the next couple of days very carefully.  Once again, we want to evaluate whether this stock market rally is the beginning of a new bull market or nothing more than a bear market rally.  It is my view that this is nothing more than a bear market rally.  Thus, you want to be monitoring your risk very closely right now.  I will update more frequently this week as it warrants.

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Corporate Insiders Are Very Bearish

Forget about what the Government, Wall Street, or the economists say about the probabilities for the stock market and the economy.  Instead, look at what the people in the day to day trenches are doing with their money.  A key indicator is the actions of the corporate insiders and whether they are buying or selling their company stock.  Think about it for a moment.  If the corporate insiders, the individuals who are seeing the actual numbers and projections for the future, are selling their company stock, then there is obviously something that concerns them. 

According to Wall Street, this is intended to be the buying opportunity of a lifetime.  If so, then why would you sell?  Let’s take a look at the latest statistics that show whether corporate insiders are positive or negative about the future.

In the last few weeks, corporate insiders sold over $335 million in stock versus the buying of only $12 million  (www.financialarmageddon.com).  This begs another question. Is it more concerning that insiders are selling or that insiders are just not buying?

The reality is that the economy is not in good shape and the fundamentals do not suggest that we are remotely close to being out of the woods.  Let’s take a look at a few other variables.

Unemployment

I wrote last Friday about the huge discrepancy in the unemployment report that the Government gives and the unemployment problem that is really facing America.  However, the numbers get even more distorted when you consider other variables.  The temporary workers distort those numbers.  This is the classification of workers who are jumping from temp job to temp job just to make ends meet.  They will count as employed.  The latest shadowstats.com repoprt shows the unemployment number around 20.5%.  That is a far cry from the reported 9.4% unemployment and suggests that a huge headwind faces this economy.

Interest rates

The Government is going to have a tough time getting this economy jump-started if interest rates continue to increase.  This is going to be a key risk factor for the stock market.  This week the Government will be holding another significant bond auction in order to raise money to fund our enormous spending appetite and deficits.  Buyers are demanding higher rates of interest for the bonds thus increasing the interest rates of the government bond markets.  Interest rates were up again last week.  Of course, this affects the interest rates of the consumer markets.  The last thing that a debt crisis needs is rising interest rates.

Price Levels

Let’s not forget the price levels that we watch to determine if the market is making headway and still a good investment or if the risk level has become too high.  The price level of 943 is a huge price level that the S&P 500 has had a tough time getting over.  The longer that the S&P 500 stays below that price level, the larger the chance that the bear market declines will return.  Thus far, this has been a real challenge for the market.

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When Reality Sinks In – Illusive Confidence Snaps

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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Everything is not Always What it Seems!

Hello, my name is Bob Brooks, and I am a gloom and doomer. 

Well, sometimes I feel like I need to go to a 12 step group.  While everyone is popping the champagne bottles on Wall Street and the market puts in yet another strong day, I still stick to my guns about what is occurring.  So, let me give you a few possibilities in the near-term.

1)  The market falls apart on some pretty bad news and heads back down to the March lows. 

2)  The market declines for a period of time.  However, it does so constructively and then continues the bear market rally to new highs.  This could end up taking a few months, but it would ultimately return back to the bear market.  Of course, no one will even entertain that notion.  However, that is what a bear market does.

3)  We are in a new bull market, never to return to the bear market decline.  The worst is behind us. 

The market is not only at a dangerous spot right now but it faces some very big news.  We have an unemployment report this Friday and then we have the results of the stress test.  I am going to make an off the wall prediction.  I think that the Government will tinker with the unemployment numbers to actually make them look very good in order to offset the bombshell that they will drop with the stress results.  They keep changing the date of the release of this information which makes one wonder what is actually occurring.  Why in the world would they release this information the same day as the unemployment report?  Once again, it doesn’t make sense.

This morning pending home sales came out pretty strong and all of the sudden the real estate crisis is over with.  I wouldn’t jump on that party wagon just yet.  Bryan Rogers, who does all of the wonderful graphics and artwork for Prudent Money, made an interesting statement to me.  He said you have to take all of the technical analysis that you follow and add in the deceptive media element. 

I might turn out looking pretty foolish with my negative outlook.   However, I did not feel different in August and September of 2007.  Everything is not always what it seems!

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Reasons Why the Bear Market is not over – Part II

 

 

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:

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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Quick Update

I typically post in the morning and write about the prior day’s market action in addition to the morning economic news.  I am writing this Tuesday night because I am speaking at a conference in Fort Worth Wednesday morning, which will fill most of my morning.

 

So, Wednesday we will get another look at inflation numbers with the Consumer Price Index report.  Tuesday we saw the Producer Price Report numbers.  I wrote about them in my blog.  The Consumer Price Index tells what is happening to prices (rising or falling) at the consumer level.  It will be interesting to see if the CPI numbers look as deflationary as the Producers Price Report.

 

Tuesday, it wasn’t a very pretty day on Wall Street.  The big questions are:

 

–  Is this the start of a new bull market and the bear market is over? 

–  Is this just a bear market rally?

–  If it is a bear market rally, when will it be done and how bad will the next part of the bear market be for investors?

 

Daily price levels give us clues about the future direction of the market.  Remember price levels are like road markers.  They tell us if we are headed in the right direction or not.   My opinion is that we are in a bear market rally and this bear market rally is nearing the end.

  

We are always looking at the CLOSING price level of the S&P 500.  Tuesday the S&P 500 closed on an important price level of 841.  It will be interesting to see what happens from here.  We might be getting ready to go down to 800 and “test” that price level.  If the market can stay above that level, that would be a positive sign.  If not, look out below.  We will have to wait to see what Wednesday brings.

 

 

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Agenda is Dangerous for your Investments

News that came out over the weekend underscores why you cannot trust anything that comes from companies or the Government.  Wasn’t it just a few weeks ago that everyone was getting giddy over GM’s then-CEO Rick Wagoner’s comments about not needing any money from the Government and that everything is going just fine? 

In a recent client newsletter, I wrote the following:

Then GM made a bold announcement that they didn’t need any taxpayer money.  The market loved that news.  I think that they should have added one little tagline to that statement…”at least not this week.” 

Can you imagine the conversation between Tim Geithner and GM’s CEO Rick Wagner?  Hey Rick, how are you doing on funds this week?  Tim, we are looking good.  Taxpayer money is holding up.  Check back with me next week.  After all, we have some big corporate events and parties that need funding.

The audacity of a CEO making a statement like that when there is no way that everything was OK.  Well, big brother has spoken.

Then there is this string of “encouraging” economic news over the past few weeks. Economic numbers have surprisingly come out better than expected.  How could that be when Rome appears to be burning?  Well, thanks to the economic funny number crunching group, good economic numbers can be manufactured at the drop of a hat.  Barron’s Alan Abelson wrote this over the weekend:

“The misleading figures cut across a wide swath of the economy, encompassing housing, manufacturing, employment — you name it. The leading agent of deception, unintentional or otherwise, has been that old sly villain, seasonal adjustment. As it turns out, the seasons don’t need adjustment as much as the adjustors need seasoning.

As Merrill Lynch’s David Rosenberg (who, incidentally, is planning to do a bit of adjusting himself and moving back to his native Canada; our loss, Canada’s gain) points out in a recent commentary, the official keepers of the books have been unusually aggressive in constructing seasonal adjustments for February’s economic data.

To illustrate, the seasonal adjustment for new-home sales was the strongest since 1982; for durable-goods orders, the strongest since they were first released in 1992; the retail-sales figures for February were flat (or, as David says, flattering) after such adjustment, but unadjusted fell 3%, the biggest drop on record. He also notes dryly that the 40,000 raw non-seasonally adjusted housing-start total for February “all of a sudden becomes a headline-adjusted annual rate figure of 583,000.”

Which makes David think that come the inevitably sharp downward revisions of such distorted data, first-quarter real GDP is likely to suffer a 7.2% drop. Which, together with the 6.3% skid in the fourth quarter of 2008, would be the worst back-to-back contraction in the economy in 50 years.”

This is why Wall Street has been bullish in recent weeks.  I think that this underscores that this bear market is far from over and Wall Street/Government (the irony is that they might be one in the same before it is all over with) want you to think everything is just OK.

So, how long will this stock market rally last?

I have been getting questions about this recent bear market rally and how long I think that it will last.  Let’s take a look at what happened in 2000.  The best bear market rally was 21%.  There was another that was 18%.  Basically, those were the two biggest bear market rallies from the bear market.  It is way too tough to speculate number of days.  This bear market is much different and more like the 1929 bear market.  I would rather focus on total gain of the bear market rally rather than how long it has lasted.  The reality is that this bear market rally could already be over. 

Thus far, we had a 24% bear market rally that lasted from November 20, 2008 to January 6, 2009.  The current bear market rally has gone up as much as 23% before last Friday. This GM news is very significant.  There had to come a time where the Government allowed for nature to take its course. Unfortunately, they have waited too long to allow the process to occur.

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