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! 

"Too Big to Fail has become Too Big for Trial"

Everyone should support Senator Elizabeth Warren in the quest of cleaning up our financial system of the rampant corruption and fraud. Finally 5 years later somebody in congress is trying to do something. The "Too Big to Jail" status that financial mafia of the major Wall Street banks have enjoyed has gone on long enough. Those in the industry that do it right and the general public have suffered the most out of this long developing problem. Please share and get the word out!

Simpsons - Monorail or Governor Brown's California High speed train??

Only the stupid government of California that is currently going broke would think the "mono-rail" from San Francisco to LA would be a good idea. Waring if you are mathmatically inclined don't click on the link that mocks this outrageous project.

http://www.zerohedge.com/news/cash-strapped-california-votes-68-billion-monorail-get-federal-bailout

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....

Truth can also be Scarier than Fiction: Fukushima Meltdown

I guess Friday the 13th got me looking at horror stories. And a murdering deranged man in hockey mask at my age doesn't frighten me as it did in my youth. Since March of 2011 something far more sinister and terrifying to humanity occurred in Fukushima Japan in aftermath of a massive earthquake and tsunami. The Fukushima Nuclear meltdown.

The BBC does a great job reporting this scary moments over the last decade if not longer. The Fukushima Meltdown that the video documents is eerie, what is even more frightening is that it hasn't been solved. After doing more research as a result of this catastrophe I have gone 180 on nuclear energy. The risks are just not worth the benefit. What continues to concern me is that the US and many other nations has these older model reactors that are obviously inadequate against the risks.



If you would like to continue to scare yourself then I recommend following these links:
http://ajw.asahi.com/category/0311disaster/fukushima/

http://fukushima-diary.com/

Happy belated Friday the 13th!

Rick Santelli Exposes the Buffet Rule

He loses it on the air, but really why is Santelli one of the few that are outraged at our predicament.

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.

The Debt Star is Moving on to Another Target!

WHAT IF "STAR WARS: EPISODE I" WAS GOOD? (Belated Media)

Star Wars Episode I... One of the worst movies I have unfortunately witnessed. Now yes this is true as a result of my expectations and the potential of it being good. This movie review shows the potential and really makes you hate George Lucas. As do the always funny and spot on South Park creators Matt Stone and Trey Parker:

Seth Klarman's Rare Interview

A fabulous interview with an investment heavy weight, Seth Klarman:

An Interview with Seth Klarman and Charlie Rose from Facing History and Ourselves on Vimeo.

Great Interactive Piece from the BBC on the Eurozone Debt Issue

A really interesting piece from the BBC showing the extent of the interconnectedness of the debt web that has been spun over the years. This epitomizes the debt problems of the Eurozone. Have fun playing it with it all. Click the link above or copy and paste this one: http://www.bbc.co.uk/news/business-15748696

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:

The Debt Star

Funny, but true... unfortunately:

Hugh Hendry Latest at London School of Economics

This series is by far the best of Hugh Hendry out there that I have seen. Not only does it go over his various trades, but also his thought process on them. What I like as well is you really learn about Hugh and get a feeling for his process and who he is as an individual. It's almost like you were at the conference and having a personal conversation with him. They're great videos and a treasure for all of us to review and reflect on:

Part 1:


Part 2:


Part 3:


Part 4:


Part 5:

Europe's Treaty of Debt

A great video clip on some of the problems with Europe's latest treaty to solve their debt crisis. Mainly the problem of giving a lot of power and immunity to an unelected political body.

The “Tug-a-war” of 2011 Continues between Market Bulls vs. Bears!

The Bulls have regained the momentum! Anticipation & initial good news from the European Debt crisis had markets rebounding from 5 straight months of losses in one of the better months on record. Europe’s take on its heavily indebted nations for the last 18 months has been really a policy of “kicking the can down the road”. The best analogy I heard was they were not only kicking the can down the road but when they ran out of road they began paving more road to continue the kicking! As is all too clear with our own politicians nothing ever seems to get done until there is a major crisis at hand. This is truly a step in the right direction for Europe as they are actually trying to restructure Greek debt with the “voluntary” 50% reduction. Coupled with other bullish winds of healthy corporate balance sheets, low interest rates, accommodative Central Banks, and Government intervention has given strength to the rally.

 

However one still has to be cautious in a market environment where a lot of the factors that gave us the summer downturn are still real & present. Sovereign nation debt is still growing at alarming rates in the Developed world as Economic Growth sputters behind. The little economic growth we have had has in fact been showing signs of slowing since summer. The recession threat might be greater then what most experts think. The stock & commodity markets have also shown an amazing amount of correlation to government and central bank intervention. It was relatively easy to predict this summer’s market downturn when the market was no longer supported by Federal Reserve Bank’s QE2 (Quantitative Easing). Lastly the lack of political leadership to make difficult/unpopular decisions from the developed world has been troubling. A lot of the structural imbalances built up over the years in our economy still have not been addressed.

 

Predictions of the future however are always difficult and unpredictable. A balanced approach with emphasis on “playing defense” during the next 6-18 months in my opinion is still the prudent move. I am happy to see the European leaders finally coming to the realization of needing to restructure Greek debts. This is a big start to dealing with the world’s debt problem but the details of the EU summit still need to be ironed out. In addition the Europeans will have to deal with the much larger debt problems of Ireland, Portugal, Spain, and Italy.Time will tell.

Rob Arnott's latest: We're in a Recession

Rob Arnott talks with Market Watch about his views that the US is already in a recession, China's soft landing, and taking incremental risk. 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!