Saturday, September 12, 2009

Times are a Changing

Hello All

I wanted to go back in time today and look at the S&P since 1960:

My Take:

I just wanted to highlight the insanity of the markets since 1982. There are a few things to take notice of here.

First of all, investing in stocks since 1999 has been a disastrous investment strategy. The S&P sat at 1500 back then. It sits at 1042 today.

If you had simply placed your money in a CD you would have killed Wall St's bubble machine in terms of ROI.

I find the US's obsession with the stock market to be very fascinating. I mean for the last 10 years this country has gotten it's ass kicked by the thieves on Wall St and yet we keep coming back for more.

The bounce since March proves that we have not learned out lesson. I can't help but ask why we haven't? What has Wall St really done for you and your nest egg over the past 10 years other than send you to the poor house?

The 25 year bull run has hypnotized this nation into thinking the stock market will lead to riches when you retire. Historically, this simply hasn't been the case. Take a look above at the 20 years preceding 1982 bull run. Stocks went nowhere!

It's time for this nation to wake up and realize that bubble making machine on Wall St does not lead to riches. After such an enourmous rise, it's easy to see how this nation was mesmerized by the bull run since 1982.

However, history has shown us that secular bull markets are almost always followed by secular bear markets. These bear markets are needed in order to wipout the excesses of the previous bull. What the government is doing right now is preventing the bear from doing its work of "cleansing" the markets.

Once this cleansing is completed, the recovery can begin. The government's approach of "bailing out America" is doing nothing but preventing this process from occuring.

There will be no recovery as long as the Feds take this approach. The only only growth we will see as a result of this stupity will be in the form of taxpayer debt.

The reality here is this bull run was fueled by nothing other than cheap money. The easy money game is now over because we have borrowed as much easy many as humanly possible. It's now time to pay the piper and pay off the massive debts that we have run up over the past 30 years.

Take a serious look at the chart above. The S&P rose 15 fold until the collapse in 2008. The meteoric rise looks almost ridiculous.

I mean come on folks. Fundamentally did the economy really grow that much from 1982-2008? Consumption is what drives 70% of our economy. Did incomes rise 15 fold since 1982? Hell no! I can remember union steel workers in Pittsburgh making 70k a year back in the 1970's and the S&P was only at 100 back then! Remember folks, without rising wages in a consumption economy, its pretty tough to have continued growth.

Let me also note that a lot of the growth that was seen in the economy over the past couple decades was in the financial markets where debt was traded back and forth. This game is now gone too. The securitization markets have been essentially shut down except for government backed paper.

Now should we see some growth as the population of this country increases? Of course, but stocks have more than priced this in.

So how did we get here? It's pretty simple:

Our increased consumption via easy access to cheap money, greed, and an obsession with stocks are what pushed the stock market to such insane values. We have basically borrowed ourselves into oblivion and consumed as much as humanly possible. Stocks rose to unsustainable values as a result.

The Bottom Line

The days of easy money are gone folks. Banks are reducing the availability to credit. The word RISK actually means something on Wall St these days.

As a result, money will get much more expensive and I predict interest rates will rise as the world begins to walk away from our treasuries. Like Bill Gross from PIMCO explained: This is a new world and we need to adjust to this new reality.

Now am I saying you should avoid the stock market over the long term? Of course not. However, I think it should be a much smaller piece of your portfolio moving forward.

Diversification is a must as we all adjust to this new world.

Thursday, September 10, 2009

Something doesn't add up

I am starting to see some very strange divergences as stocks continue their daily climb.

Let's take a took at some weekly charts.

Stocks have been soaring as seen here on the SPY(S&P 500):

Treasuries have remained relatively flat despite a large rise today. Here is the TNX(10 year) and its sharp drop in yields:

Gold has also steadily risen throughout the week as seen here via GLD:

While the dollar has sold off severely:

Some Questions:

These are the big 4 that I follow each day, and I think the price action here over the past week is very interesting.

My first question is why are flight to safety assets performing so well after such a huge move in equities?

Bonds should be selling off hard as stocks rise and yet yields have stayed relatively flat. There was a strong BTC of about 2.9 on a 30 year bond auction today which is why yields dropped so sharply today.

This leads me to my second question: Why did a 30 year bond auction see such huge demand with a yield of only 4.2%? This is telling you the bond market is not worried about inflation. In fact, if anything, this is a signal that the market is scared to death about deflation.

This leads to my next question. Why is gold soaring in price if the bond market is worried about deflation? Gold typically trades higher when inflation fears are present although this is disputed by some economists.

My next question. Why is the market acting so afraid as stocks soar to new highs? Strong inflows into bonds and gold are fear indicators. Could there be a lack of confidence among the bulls regarding this recent rally?

Finally, my last question.

How far does the dollar have to freefall before the stock market takes notice? Folks, this crashing dollar is extremely worrisome for me. A strong economy is almost always is accompanied with a strong currency.

There will come a time when the dropping dollar turns into a serious headwind for the bulls. At what level? Who knows the way this wacky market is trading.

What I do know is energy prices are creeping up along with other commodity prices as the dollar drops. Meanwhile, here in the US, wages are flat and we are losing jobs by the hundreds of thousands each month.

This has the potential to stop the consumer dead in its tracks. Just go back to the days of $147 oil if you need to refresh your memory.

The Bottom Line:

None of these correlations add up folks. The market is trading like it has 5 different personalities. You might as well just call it Sybil these days.

Today alone: Sybil acted bullish, feared deflation, feared inflation, and traded the US currency like its not worth the paper its printed on(which it probably isn't).

Sybil's price action is extremely unstable and inconsistent folks.

This should concern all investors regardless if you are bullish or bearish.

Wednesday, September 9, 2009

Tuesday, September 8, 2009

Americans are Running out of Options

I wanted to throw a quick post up. Things are super busy so I don't have a lot of time tonight.

I did want to say a few things about the horrific consumer credit numbers today:

"By Greg Robb WASHINGTON (MarketWatch)-

U.S. consumers reduced their credit burden by a record amount in July, the Federal Reserve reported Tuesday. Total seasonally adjusted consumer debt fell $21.55 billion, or at a 10.4% annual rate, in July to $2.47 trillion. This is the sixth straight monthly drop in consumer credit.

Consumers have retrenched since the financial crisis hit the economy in full force last September. Credit has fallen in every month since then except January.

Economists surveyed by Market Watch expected consumer credit to decline by $4.3 billion. This is the longest consecutive string of declines in credit since the second half of 1991. In the subcategories, credit-card debt fell $6.11 billion, or 8.5%, to $905.58 billion. This is the record 11th straight monthly drop in credit card debt. Non-revolving credit, such as auto loans, personal loans and student loans fell a record $15.44 billion or 11.7% to $1.57 trillion"

My Take:

Translation? The consumer is tapped out on credit and has no ability to borrow anymore. You gotta love our brilliant Wall St economists. they were only off 500% on their forecast of a $4 billion in credit availability versus the $21 billion reported.

Where on earth is this "recovery" going to come from when we have consumers that can't consume in an economy that is 70% driven by consumer spending?

How is J6P going to buy those next generation I-phones when their credit card is tapped out?

How are homeowners that have been living off of their credit cards in order to pay the mortgage going to survive and continue to make their payments as their availability to credit evaporates?

The way the market is acting right now is pure lunacy IMO. The fact that stocks continue to rise in the face of such news is unbelievable. The dollar was down hard again as the world continues to rapidly lose confidence in our ability to pay back our debts.

The risk of the US bankruptcy rises each day as we continue to write checks for money we don't have.

I mean look at the dollar over the past few days. Can the investment world be anymore clear in terms of sending a message about what they think about our fiscal strength as a result of our insane deficit spending? :

My Take:

A strong currency is the symbol of a strong economy. We are coming dangerously close to breaking levels in the dollar that could could trigger another deeper sell off.

We cannot handle inflation via a collapsing currency right now people. Wages are dropping and unemployment is through the roof! You will start to see catastrophic consequences here in the US if we continue down this path.

We already have over 35 million on food stamps in this nation. The dollar MUST be protected shortly or we are in deep trouble.

And if we decide to continue down this path?

Social chaos will become a serious threat because no one will be able to afford to live in this country. Our bloated mortgage payments, rising oil/commodity prices(oil was up over $3 today) thanks to a crashing dollar , and shrinking credit card limits are forcing many Americans to run out of options when it comes to putting food on the table.

I am seriously concerned about the dollar and Obama's obsession around deficit spending.

Its time for America to stop the bailouts and start paying off some bills!