Market Update: 7/12/13

Even with well thought out research and analysis there is no way to determine what the Federal Reserve Bank and Ben Bernanke are going to do next. Their plan to “Taper” Bond purchases was reversed in a matter of days and the stock market was sent higher. Unfortunately for us very few people are able to get Ben’s information before he goes public. In my opinion the Federal Reserve originally had a thoughtful plan to taper off their $85billion per month of bond purchases. Yes this did raise rates, but like I stated in last week’s email it wasn’t necessary a bad thing. The normalizing of rates higher would relieve the massive speculation that was going on in markets like housing. Short term pain for longer term benefits. For the stock market I fundamentally and technically feel the same in that we should use caution. Especially if Ben Bernanke and the Federal Reserve are not able to get rates to fall. Plus there is a new headwind with the rise in oil prices as a result of Egypt and market speculation fed by Ben Bernanke (pun intended!). That will act as a tax against the economies of the world and slow growth. If the S&P 500 index passes 1687 then it might have some more upside, but I feel its limited compared to the downside. Sometimes exercising caution when crowds are at a frenzy is one of the toughest things to do!

S&P 500:

10 Year Treasury Bond:

Oil:

2013 Summer Market Update

Here is a new update on recent market actions to give you a clue on what we are looking at when managing your money. I have started to incorporate new trading skills by using Technical Analysis. “Timing can be everything”. And with technical analysis I hope to help fine tune those transition points and improve results. Obviously in the investment world nobody has the crystal ball, but the combination of my fundamental analysis & new technical analysis should help. Hopefully my analysis below helps you conclude the same. So without further ado here is my take on the state of things as we continue into July.

From the beginning of the year until the 2^nd half of May the market was on a tear. Since May 22^nd the market has slowed and languished a bit. I see this continuing until the S&P 500 drops to around 1500. If we look at the short term chart below it seems to confirm that the next move is more likely to head lower to 1500 versus back up to the peak of 1687. The short term trend has been broken and is struggling to recover. 

Next is a medium term chart showing a positive ascending channel since the summer of 2011 US debt downgrade. It has not been broken. You can clearly see that by April/May stocks really got ahead of themselves and broke above the trend only to correct below it. Based on technical analysis the S&P 500 could fall to about 1500 as it reverts back to the mean. 1500 is only about 11% off the peak of 1687 and would not break the channel. See below for the medium term chart which I feel is the most convincing one.

The S&P 500 has been following an establish ascending channel which has been positive for the long-term health of the market is since 2009. Currently I don’t see anything on the horizon that will break such strong long term upward momentum.

 Now let’s use some Fundamental Analysis to determine if these moves make sense. Again I see short term correction to possibly 1500pts for the S&P 500 before making a move back up. In the short term the reason for the drop is a result of 3 catalysts. The 1^st and most significant is a potential change in Federal Reserve Bank stimulus policy. The “Fed” has really been the greatest driver of stocks, bonds, and commodity prices over the last 5+ years. The Fed came out in May and then June before backtracking that it would taper then stop it’s bond purchasing program of Quantitative Easing. Which currently has a run rate of $85billion in Treasury/Mortgage bond purchases per month! World markets have become increasingly dependent on this massive stimulus from central banks around the world. So the thought of stopping the “free money train” creates a lot of unknowns. This has had a big effect on the bond market as well. Which leads to the other catalyst for my short term bearishness. A sudden increase of interest rates across the board. In an economy that is indebted as ours that can be troublesome. Here is the 10 year Treasury Bond Yield chart showing just how big a move this is:  

The third catalyst is the global economy is showing signs of slowing with China & Europe leading the way in that department. To save ink I will leave that for another time.

The verdict is however not all bad and should keep the medium and long term trends intact. Here are the bullish factors that should keep those inline. There are no signs of an impending recession within the US. We continue to muddle through as an economy. In fact the reason the Federal Reserve is looking to slow its stimulus is because economic factors have shown improvement. They want the economy to grow organically and without stimulus. That’s a good thing, but it must still prove it to the markets. I am not worried about interest rates going much higher in the short term after their big move. Rates act to slow an economy that has been very speculative. Rates have been manipulated well below real interest over the last 5+ years. That causes speculation. The example of course is the housing market frenzy over the last 18 months. It isn’t healthy for housing to be so one-sided and going up as quick as it has during that time frame. Housing believe it or not historically only goes up at about the same rate as inflation, 3%/yr. Obviously in the last 10 years it has been a lot more volatile. Corporations are in great shape with healthy balance sheets and profits. Today’s reported number of 194,000 new jobs confirms that health. All of these factors again should keep the medium & long term trends in tact even though there is likely short term market pain headed our way.

So the next week to the next month or two I will be monitoring the charts and fundamentals as they change. There should be some volatility as things get sorted out. We will see how it all plays out soon enough! 

Welcome to the Gold Standard Steve Forbes!!

Love Zerohedge and their reporting: Steve Forbes How to Bring Back America

More and more people are coming to the realization that a true free market on a gold standard does in fact work. It is a vastly better alternative then putting politicians in charge of "stable money" and the enconomy! Welcome to the fold Steve Forbes!

Deja Vu All over Again and Again??

It has been awhile since my last email commentary on the markets, but there are some important developments playing out. For those of you I have had the opportunity to meet with in 2012 I’ve shared my theme of “Policy Driving”. Policy being driven by Governments and Central Bank actions are continuing to have a substantial effect on the markets. You turn on CNBC or Bloomberg there is constant talk of “QE”, “LTRO”, “Stimulus”, etc. The latest iteration of that was the European Central Bank (ECB) Long Term Refinancing Operations (LTRO) that was in effect from December 2011 until February 2012. The market responded extremely well. So I must have a Mae Culpa for not predicting the effect this would have on the markets as a lot of our positioning was defensive. However a lot of the funds in the portfolios by design did take advantage of the rally. 

Going forward the market since March and really April has been hitting some resistance. This seems to be playing out similarly to 2010 & 2011 where the US stock market tops around April then runs into trouble during the summer followed by stimulus from governments/central banks making the markets take off. So I think remaining in the defensive positioning going into summer is very prudent. Especially when one of my main concerns is that the US Debt Ceiling is projected to be breached after August in an election season no less! When the debt ceiling was extended it was suppose to be good until 2013, but the government deficits so far have been larger than projected. I will be monitoring this extensively as we get closer to the date. So for the time being let's hunker down and wait for intervention. Hopefully the market takes to the "medicine" like in 2010 and 2011. What I fear and what keeps me up at night is when the "medicine" doesn't take. But that's another post in the future because it's not a question of if, but when....

World Collapse Explained in 3 Minutes

An oldie but a goodie video on the craziness of the European banking system and the whole financial system for that matter.

David Rosenberg on Wealthtrack using the D word

Consuelo Mack of Wealthtrack does some great in depth interviews with the leading financial minds out there. David Rosenberg former Merrill Lynch economist and now economist of Gluskin Sheff is one of those great leading minds. I have followed him for some time now and his analysis is top notch. He called the financial crisis and the recession of 2008. Many detractors will point to him not seeing the 2009-11 rebound in stocks. However his strategy of bonds, income producing stocks, and precious metals has been very successful with incrementally less risk. Now he is using the D-word, Depression, to describe the times we are in. I tend to agree with him believe it or not. I don't think it's as visible as it was in the 1930s. We have social safety nets that have been hiding the stress. Food stamps being an example of this stress. They have increased in usage since the start of the financial crisis and are up to 15% of the population using them. The Huffington Post has further details on this. Whether we call it a Great Depression or not remains to be seen and will be determined in large part by governmental policy snafus. At the very least we are in a balance sheet recession. Which are financial in nature and are long drawn out affairs. I think the label of "depression" will come well after the fact so don't expect it to become mainstream anytime soon.

Luckily for us David Rosenberg does take an optimistic twist at the end. Which I feel is very important as we go through tougher times. We will get through this and political/leadership change in the developed world will eventually occur and help. In addition deleveraging and time will be the most helpful. Watch it all and enjoy:

Ray Dalio's Latest Interview with Chralie Rose

Anytime you have the opportunity to listen/watch Ray Dalio of Bridgewater Associates talk than you are better off having done so. His approach to global economics and assessment of the "machine" is truly revealing to his success as an investor. Whether you agree with him or not on the various subjects how he comes to his conclusions is what fellow mercenaries should study and emulate. Follow the link to Charlie Rose's website and enjoy!

August... What a month! Now what?

Today was the last market day of the bumpy month of August. We saw a ton of volatility in the beginning and a market rebound off the lows at the end of the month. Many have asked what are the reasons for the rebound and what is the near future outlook? Besides the traditional oversold bounce from such a violent move downward the market has been helped in my opinion by Ben Bernanke and the central bank signaling/hinting at major monetary stimulus. The minutes that came out recently and the debate during the meeting makes this more of a certainty.

Back in March I discussed my Thoughts on the End of QE2 and what would likely occur in the aftermath. It appears that my forecast has been accurate... so far. It certainly looks like there is high probability of a “QE3” or other major intervention into the markets. With those hints the markets have responded and are up 8% since Bernanke and the Fed met on August 9th. This is playing out eerily similar to what happened last year and could be beneficial to the stock markets believe it or not. However there are some factors out there that may not lead to the same repeat. Three factors that prevent me from getting out of defensive positioning at this point are: 1. that the economic numbers & 2. the European crisis are worse than this time last year. 3. The last monetary stimulus “medicine” was beginning to show some troubling side effects. Side effects like a run up on commodity prices and risky assets. The medicine didn’t prevent the weak economic numbers discussed in factor 1 that were showing up before the stimulus had been withdrawn (6/30/11). In addition I would like to see some technical breakout on the S&P 500 index to show that this August has been put behind us. Until then be careful out there because the bear doesn't look like its hibernated just yet.

Continued Keynesian Policy Failure Undressed!

A Guest Post (Keynesian Solutions- After Total Failure- try, try again) over at Zerohedge does us all a great service with their undressing our "current" government policy wonks. Current is kinda a misnomer when you consider Keynesian economics have been of every major institution and taught in schools across America since the 1930s! The post is thorough and a must read in its entirety. These paragraphs some it up perfectly:

The Keynesians had their chance. They controlled the Presidency and both houses of Congress. A Keynesian runs the Federal Reserve. They implemented everything they proposed. The $862 billion porkulus program, the $700 billion TARP program, home buyer tax credits, energy efficiency credits, loan modification programs, zero interest rates, QE1 and QE2. They increased social welfare transfers for Social Security, Unemployment Compensation, food stamps, Medicare, Medicaid, and Veterans by $600 billion since 2007, a 35% increase in four years. No one has foiled their plans. The Tea Party didn’t really exist until 2010. They didn’t lose the House until November 2010. They cannot blame the Tea Party extremists, but they do.

The Keynesians have successfully increased Federal spending by $1.1 trillion, or 41% since 2007, and are running deficits exceeding 10% of GDP, but they call the Tea Party extremists. Domestic investment is still 9% below 2008 levels as the Federal government has crowded out the small businesses that create the jobs in this country. And now the Keynesians declare we need more stimulus, more programs, more debt, more quantitative easing and lower interest rates. It just wasn’t enough the first time. You have to give the Keynesians credit. Despite the utter absolute failure of every scheme they have implemented, they will worship their models and theories until they successfully collapse our economic system. Then they’ll blame the Tea Party terrorists who foiled their plans.

None of the Keynesian solutions worked during this crisis, just as they didn’t work during the Great Depression. The solution was simple, yet painful. The banking system needed to be saved, not the banks. The bad debt needed to be purged from the system. Wall Street criminals needed to be prosecuted. Bondholders and stockholders needed bear the losses from their foolish investments. Saving and investment in the country needed to be encouraged, while borrowing and consuming needed to be discouraged. Our leaders have failed to lead. The American people have failed to accept the consequences of their actions. And now we are going to pay a heavy price as Ludwig von Mises predicted:

“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”

Please spread these posts around as hopefully more and more will demand a stop to this madness. It must be stopped.

Arnott: Market Hyped Up on Stimulus

Another great Mercenary is Rob Arnott of Research Affiliates. His viewpoints are always welcomed and this Morningstar video is no exception. A key part in the interview is at minute 2 as he expresses his caution and thoughts on the Stimulus. Where he explains his concerns of $4 Trillion of borrowed stimulus getting a measly 1/2 Trillion in economic output. Well put Rob!

Arnott: Market Hyped Up on Stimulus

Quantitative Easing Explained

Thoughts on the End of QE 2

Merrill Lynch's Jeffery Rosenburg came out with a fantastic research report on February 16th titled "Double Rainbow". It was an excellent report plus it made me laugh. Unfortunately I can not post it here, but it inspired me to jot some thoughts down of how my best guest of the end of QE2 will play out. Here are those thoughts:

It’s going to get real interesting this summer as QE 2 is schedule to stop. The markets more than ever are being driven by government policy. As a market purist I am not too comfortable with that, but it is what it is. The $100+ billion/mo of “jet fuel” being added to the system through QE 2/POMO is a potent medicine and it has worked thus far. Asset prices are up and company balance sheets are better than they have been in awhile. The wealth effect is beginning to work as “retail” has started the inflows into Equity Mutual Funds. This could carry the market beyond June, but any speed bump (like the Greece crisis after QE 1 or the current middle east turmoil) could scare retail out again. Some research speculate that with the state of the current US deficits it is impossible for the Fed not to start up QE 3. All of these factors can be viewed as positive.

The flip-side is that there is more and more political/international pressure against continuing that policy. The Fed is not getting the desired “good inflation” in housing. Plus the side effects of the medicine are starting to show up in spots that the Fed can’t be too happy with (food, energy, precious metals, etc.). This should have a detrimental effect on an already over levered consumer. Will companies be able to push that commodity inflation on to the consumer without any ill effects? Pricing power has been weak thus far and that has to be concerning to margins. Leverage is still prevalent in the system and deleveraging hasn’t or (better yet) allowed to take its course. I see more cons than pros.

Right now I am bubblish and will hunker down May/June to see how things play out. For fun… my “crystal ball” says that June/July we see the S&P 500 meet a lot of the economist 2011 year end predictions. However by late summer we should see a correction of about 15% and the bearded one institutes QE 3 with an initial market reversal to the positive side. (I don’t think Bernanke will institute QE 3 without a little pain to back him up.) My grand fear is this time it doesn’t work because of the previously outlined bad inflation, margin collapse, higher rates, asset price exhaustion, etc. Plus most of stimulus 2.0 will wear off in 2012 and then we are back to the feared potential tax hikes in 2013. I don’t see what bullets the Fed has to use at that point and we see another bear market with downside of around 30%. 2012 will be a tough year indeed.

Inflation & Ski Resorts

Has anyone noticed the recent proliferation of higher and higher ski pass prices. Within in the last five years I have seen prices in Tahoe go from the high $40's to around $70 a ticket. The worst in my opinion has been the escalation at Mammoth Mountain. In little over 4 years their tickets have gone from $61/day to $80/day. That is an inflation rate of 7% and who knows what the increase in price will be with the new renovations they're doing. I have one of their discount season passes that has gone from $499 to $550 this year alone!

Yes this anecdotal evidence, but this inflation problem is starting to rear it's ugly head in more places. Even more worrisome with inflation is it's a lagging indicator meaning we are getting the hangover from the easy money over the last 5 years. Too much money following too few goods. Now that our economy has slowed down we are left to play in the mess Greenspan made (http://themessthatgreenspanmade.blogspot.com) at the turn of the century. Welcome to Stagflation! Stagnate growth + inflation of the 1970's.

Before you go play hopscotch on the freeway, remember domestic company balance sheets are in great position and are economy is more efficient then ever. The effects of the past monetary binge and now the housing crash are going to test our economy. So far the economy is with standing the onslaught....