Market Pauses as the Stress Tests Loom

I must admit I did a lot of reading before starting tonight. Things are absolutely crazy out there and its hard to make sense of it all sometimes.

The market traded in a pretty tight range as it awaits the results of the banking stress tests. One thing that was interesting today was the huge volume. There were over 11 billion shares traded on the NYSE.

This action combined with the tight range tells you that the bears and the bulls are in quite a tussle right now as we head into the test results.

There are many rumors out there regarding the stress tests. SNL Financial is claiming that BofA and Citi need $54.8 billion and $71.8 billion of capital respectively. The Treasury supposedly has this figure at around $10 billion for each. Credit analyst Egan Jones reportedly believes that BofA may need $100 billion in new capital! Yikes!

The bottom line here folks is these estimates are a crapshoot. Trying to front run this news is a risky play if you are trading here.

Inflation or Deflation?

I am seeing so many conflicting signals around each of these in the market. I still believe deflation is the biggest risk.

The ISM number for April was much better than expected. However, this increase in demand has done nothing for pricing power:




My Take:

As you can see, prices continue to stay at very depressed levels which of course screams deflation. This is to be expected as the American consumer continues to recover from their massive credit binge.

At the same time, when I look at the markets I see lots of worries around inflation. China continues to buy massive amounts of gold. They now hold the worlds 5th largest stockpile. Could it be they are losing confidence in our treasuries and the US dollar?

I am also beginning to wonder if equities are also becoming a hedge for inflation. Are investors deciding that owning stocks is safer than piling up US dollars? This may turn out to be a wise move if the government continues to pillage our currency by spending like Paris Hilton on a shopping spree after a cocaine binge.

I have not come to any firm conclusions yet. Yale's Robert Shiller(whom I deeply respect) was on Bloomberg TV yesterday telling investors that they need to spread out their risks by buying stocks and real estate! This was an eye opener for me. When the man who helped create the famed Case/Shiller housing index makes this type of call on real estate you need to take notice of it.

BTW, the print article link that I included to Shiller's comments makes him sound much more bullish than his tone was on TV. He is still extremely skeptical about the economy and the market and believes this is just a bear market bounce.

Bottom Line

I guess my point here is the world of investing has dramatically changed. There are serious risks involved with anywhere you put your money in today's crazy world that we live in. This includes even cold hard cash! We are in unprecedented times.

Perhaps diversification into some hard assets with a short on the S&P 500 as a hedge makes some sense here. I am rapidly losing confidence that our government will defend its currency. The bailouts continue to roll and Ben seems hell bent on creating inflation.

The price action in the market recently tells me that everyone including the pro's are confused.

As a result, they are spreading out their risk and diversifying into many different areas. All you need to do is follow the money in the markets to see how this is all developing: At one point today everything was up! Gold, stocks, and treasury sales were all strong! The market is clearly dominated by two emotions right now: FEAR and CONFUSION.

The bottom line here is it might not be a bad idea to spread out some risk. Cash is still king in my book. However, going long a little gold and a few commodities like natural gas makes some sense as we watch the hit video "Government Spending Gone Wild". A small short on the S&P would be a nice way to hedge this bet.

Remember: Cash is king in deflation. Hard assets protect you from inflation. Protect yourself by owning both.

USA's Obsession with Speculation Continues

Whoa!

Another day another bullfest!

Stocks roared higher today as the high octane stock market continued to climb a massive wall of worry. Many of us have been wondering where the next bubble might form. I think we are seeing it right now in plain old equities.

Lets state the obvious here. We all know none of this move higher makes sense given the news. When you think about it over the past few years: When has the market ever made sense? The two biggest rallies(Bear Stearns and the current March rally) have hit at a time when the news was most dire. The one conclusion I can make here is investors continue to be play follow the money and speculate.

The speculative nature of investors in America continues to amaze me because the bubbles that are created as a result of their speculation always collapse. Yet, despite pounding after pounding, they continue to come back for more. It kind of reminds me of an abused wife that constantly continues to reconcile with their ex believing that "He has changed this time!".

Lets take a quick look at some of the bubbles of recent history and see how they all worked out:

- The tech bubble. Need I explain more...NASDAQ 5000 down to 1500
- The housing bubble. Again....No explanation needed. Prices down 30%-50% from the highs.
- The OIL run from $50/barrel up to $147 and then back to $50.
- The speculative explosion in commodities like copper which tripled in price before collapsing.
- The natural gas run up to $21. Today's price? $3 and change.

I could go on and on but you get the point. The one common result here is obvious: Speculation ends in tears!

Welcome to the new world of investing folks. Investors now prefer a "speculate and gamble" investment strategy as opposed to the old school version of "buy and hold" investing.

Speculative investing of course is the fastest way to the poor house because there are no basis or fundamentals that support what or why you are buying. Speculators simply become one of the herd and jump into whatever bubble that is blowing up. They then pray that they aren't the last sucker in who proceeds to get pummeled with an 80% loss as the first ones in begin to sell.

The examples I gave you above all collapsed because of one simple fact: THE FUNDAMENTALS ALWAYS MATTER! The prices were unsustainable because the valuations did not justify the prices. Valuations are completely ignored when bubbles start to form because the investor is too infatuated with the millions he/she is going to make on his/her investment.

Remember Amazon at $300 a share in 1999? $150 oil? How about that one bedroom house in the ghetto that sold for $350,000 back in 2005? You look back today and think about how insane people were for paying such prices. This is the effect that bubbles and greed have on investors. They can make the sane go insane!

I see a lot of similarities when I look at the current 30+% bounce in equities. The fundamentals continue to deteriorate and yet we continue to see the same trend: The bad news continues to get ignored while the good news is amplified.

S&P downgraded many of the banks today and equities didn't even blink following the news.

Bottom Line:

We are seeing a full blown speculative feeding frenzy in the S&P right now. Trying to get in front of this freight train and shorting this move is not a very good idea in my view. The close was pretty bullish. I will be placing a few small short plays if we move into the 950-1000 area.

Cash is still my number one recommendation. Bubbles never end well and they seem to be almost impossible to avoid at this point if you are in the market. Treasuries even look like a bubble today as we try to sell $2.5 trillion worth of them this year to the rest of the world.

Its a pretty sad day when it appears that no investment option is safe.

I am starting to think that the mattress may be the only place left to protect yourself from losses.




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You Better Duck!

Check This out:

This was some video from a recent Fortis shareholder meeting. This is one of the larger banks in Europe that basically was nationalized when the financial system collapsed last year. The stock price now sits under $2.

The sheeple are getting restless across the pond. I wish we had the same spunk over here. Apparently, most of America would rather watch American Idol while their country collapses right in front of them.





A Must Read

I highly recommend that everyone reads this excellent commentary from hedge fund manager Bill Fleckenstein. Bill is one of the smartest guys on the street and was one of the few that accurately predicted the financial collapse last year.

The two paragraphs below from the piece are what caught my eye:

"Though I hesitate to make too much out of one report on the gross domestic product (or government statistics in general), Wednesday's first-quarter GDP data -- which showed a contraction of 6.1%, versus expectations of 4.7% -- make for a wonderful example of what the future holds: essentially a replay of the 1970s, only far worse.

It's not that I find the results terribly surprising or especially alarming. I do not. What's more interesting is that the GDP price index, which measures the prices of goods and services included in GDP calculations, was expected to be 1.8% but registered 2.9%, and that the and that prices of core personal consumption expenditures (a measure of inflation that master of disaster Alan Greenspan particularly focused on) rose 1.5% quarter to quarter, versus expectations of just 1%."

My Take:

There has been a lot of discussion in the news around deflation and inflation over the past few weeks. I strongly continue to believe that we will see massive asset deflation. However, its extremely disturbing to see such a huge spike in price inflation on goods in the GDP report. These numbers are frightening folks.

My worst case scenario for the economy is a combination of asset deflation and price inflation. Many try to argue that we will see either inflation or deflation. In my view you can have both. It won't take long for the torches and pitchforks to come out if wages continue to stay flat or decline while the cost to live rapidly rises as a result of price inflation.

It would make sense to see inflation in areas of the economy right now as we continue to print trillions of dollars in an attempt to keep the debt bubble inflated. However, this phenomenon does not cross over into housing prices.

The deflation in housing and other assets will continue because people can't borrow as much money as they could in the past due to tighter lending standards. Exacerbating this problem is the fact that people are also losing their jobs at an historic pace. The fear that's created by massive unemployment or the fear of getting laid off also lowers the desire for consumers to lend which of course makes the problem even worse! Death spiral anyone?

My question here is how in the hell is the average person going to survive if the cost to live rises rapidly at a time in which everyone is watching their wages stay flat(that is if they had have a job)? Oh wait a second, I have the answer. They have all of that home equity that they can fall back!(Scarcasm off)

I predict you will see consumer confidence plummet if we continue to see price inflation.

I wish I had the answer as to how do get out of this mess folks. I know one thing: Its going to involve a lot of pain.

Raise cash. You are going to need it when a happy meal at McDonald's costs you $15.

One last question:

Anyone have a shoe I can borrow?