WHY THE RALLY CAN’T BE SUSTAINED
In our view the strong rally off last year’s March low is a contra-cyclical move within a secular bear market that started in March 2000. We have been undergoing a major credit crisis, followed by severe decline in income, a collapse in asset prices and record debt. A number of detailed studies have shown that economic recoveries following such events are of short duration and extremely weak at best. Despite massive efforts at stimulation, we see no reason why the outcome this time will be any different, and the evidence so far supports this view. The economy is going through a process of deleveraging debt that is creating strong headwinds against a self-sustaining recovery.
The major drivers of previous economic recoveries in the post-war period have been housing and consumer spending that was spurred by easy credit conditions. Those drivers are just not working this time around. Despite the herculean efforts of the Fed and the White House, credit still remains tight. Bank loans are down 27% from a year earlier while consumer credit is down 4%, the most since World War II. Although the monetary base has soared over the last 15 months, M2 money supply is down 0.3% and MZM money supply is down 4.2% annualized over the last three months. The strong growth of GDP in the 4th quarter was mostly due to a return to more normal inventory levels while real final sales remained weak. Consumer spending has picked up a bit, but only in comparison to the extremely low level of a year earlier. In the period ahead consumers will continue to be restricted by high unemployment, tight credit conditions, sub-par wage increases, lower net worth and the need to raise savings rates and pay off debt.
A number of factors that helped growth in the past year will no longer be operative in the year ahead. The cash for clunkers program temporarily spurred auto sales, which have reverted back to sluggish sales levels. The housing credit for first-time home buyers goosed housing demand for a while, but the extension of the program does not seem to be having the same effect, and, in any event, ends on April 30th. Furthermore the Fed’s $1.25 trillion program to purchase mortgages ends on March 31st. As we pointed out in our comment two weeks ago economic momentum already seems to have peaked in the 4th quarter as a number of recent indicators have come in under expectations.
In addition we don’t think the sovereign debt problems have ended with Greece any more than we thought the subprime loan problems ended with Bear Stearns. It remains to be seen whether Greece can carry out its promises of austerity and there is no need for us to dwell on the now well-publicized budding financial crises in the rest of the EU’s Southern tier. As we previously pointed out the debt problems have not gone away, but have been in the process of being shifted from private to public entities.
Some may wonder why we continue to emphasize the global financial and economic problems and what this has to do with the stock market. In our view this has everything to do with the stock market. The entire rally has been based on the belief that we can undergo a V-shaped recovery and that modern governments just will not allow the kind of unraveling that has followed all other major credit crises. However, governments can only try to halt the malaise by increasing their own debt and running up huge budget deficits that cannot be sustained. In the U.S. we are already seeing the backlash as the public, while still demanding that the government somehow create more jobs, is also rebelling against the prospect of ever-increasing deficits.
Therefore if the market, as we believe, is discounting events that will not happen, the disappointment will be severe-and in a market increasingly dominated by trend players, the rush for the exits can be something to behold. The market peaked on January 19th at 1150 intraday on the S&P 500, declined to 1044 and now has bounced back to 1122. In our view this is all part of a topping formation that will be followed by a substantial decline in the period ahead.
Source: Comstock
I dont think u can any longer predict anything in this market and talking about cycles is meaningless when u have a rigged system where the government and certain privileged like GS can manipulatte the market at will
Amen! The stock market indexes are no longer reflective of the state of the economy. Index manipulation to the upside, by the Fed and the Plunge Protection Team have uncoupled that link. Cycles and traditional ways of explaining the rise and fall in the indexes no longer apply. One finiancial writer put it this way; “There are no longer markets, only manipulation.” A great book for reading and understanding the manipulations and controls behind the scenes is; The Creature From Jekll Island by Edward Griffin. This book contains all one needs to know about central banking and its associated manipulations.
I dont think u can any longer predict anything in this market and talking about cycles is meaningless when u have a rigged system where the government and certain privileged like GS can manipulatte the market at will
While all the things you talk about are true….they are also well known.
My hunch is the Fed will extend it’s MBS purchase program past the March expiration…..bullish.
As long as we see business earnings growth, with somewhat top line revenue growth, and increased productivity with super low labor costs…..stocks will move up, despite the known things you discuss.
There will have to be some unknown, negative surprise catatlyst….that will send stocks down and reverse this bullish trend since March, 09.
“While all the things you talk about are true….they are also well known.”
i would say that, and add that market expectations are very low, and market participation is very low (cash on sidelines). all of this spells money to a contrarian like me.
come to think of it, i just realized why i like this site so much. there is always a very cogent analysis of the downside (there is balance, don’t get me wrong, but there is a mild bias to the downside); the more i read it, the more i realize that from a contrarian point of view, i am getting reinforcement for my bullish stance, for so long as it goes…when the fed stops blowing at the back of my sails, or especially if mr tpc lays out a bullish case, then i am out
You could find an equal amount of sites that are bullish. I’m not sure your strategy is sound.
You must first take a fundamental stance before you read anything on the WEB.
Good luck.
An event like Israel attacking Iran maybe? That situation makes me more nervous than anything happening in the markets.
LOL. Now people believe system is rigged and it is working.
Are those same people who believed no one is bigger than market 12 month ago?.
Maket keeps grinding higher and Vix keeps losing. I am not predicting anything but This is most bearish setup. Next big move will be downside because everyone is t trying to making peanuts by risking a house. Don’t get me wrong, they can get paid off, by peanuts. But you want to make a house, you look at the air pocket downside.
Ithink the vix is getting to low and everyone is complacant with the market. The market is going higher but there is no volume to support it. Mutual funds are not getting more money to keep buying,and the boomers are not going to risk what they have left in the market. It’s only going to take something like greece or another country,or even california to default and everything will unravel. Best of luck everyone.
I agree that when the Vix creeps below 20 that you should start looking for a sharp sell off…as the rally dies evidenced by days when the markets are up / down by less than 10 points…we are currently trying a retest of 10,725 – if the market closes above this number for three consecutive days, I would be a long…if it fails at the 50% retracment again as it did a few weeks ago when we dipped under 9900, then there is a possibility that we will see a steeper sell off.
Problem with the bear theory is that many businesses are doing extremely well which spells higher stock prices and a recovery…for those stocks to get sold off will be a significant opportunity, but will they? Maybe only certain sectors will sell off and maybe these sectors will sell off sharper than before to compensate for the healthy gaining sectors.
So my advice would be what I call the 3 knocks theory…if a key market level is not beaten on the third attempt, then its a good idea to sell. So this will be the second attempt – if we close above 10725, then hold on to your hats as all the sidelines money is going to toss in and we may be headed for new highs given the large increase in Money Supply. The Treasury / White House knows that traders are looking and acting on whether these levels are broken…the trick is to throw enough cash in the right places to beat the indices levels.
Many stock have broken out to new highs and continue to make higher highs…thats a good sign and perhaps we will not have an opportunity to purchase B of A at below $4 again or Sears at under $35…since most large houses are trading on computerized programs, all the rules like 50% retracement, MACD cross overs and cross unders, Moving averages, etc., ie technical trading driven by news both macro and micro events are what is driving this market and in that order. When a company misses and sells off but in the same session dip buyers rush in to sharply raise it according to its chart. So look at key levels, breaks in support levels, climbing charts, etc.
Good analysis. I’m worried that the machines will trigger the next sell off. There’s no algo for that.
Remember folks, an election is just 8 months away. Congress, the Fed, Obama, et al, will do anything to not have a repeat down cycle over the summer. Just as they lifted the cap on Fannie and Freddie on Christmas eve, they will pull out all stops to go into the election with some positive numbers to report. Already they are manipulating job numbers, CPI and the banks’ toxic assets. Like Malcom X said, “By any means necessary”.
that happens to be bernanke’s motto as well, per david wessel’s book “in fed we trust”
Remeber stimulas money has not been used yet only 5% They will use it when its beneficial to the party elections , in any case nothing anyone can do or say to save this robbery of world wealth in one big scoop . Dow will be 2500-4100, Gold $6200, Silver $250, housing 30% down from today, forget the bond market worst than stocks, this jumbo jets nose is heading down 45 degrees there is no way to pull it up, Canadian dollars is KING (Its backed by hard assets)GOLD anyone? Here is an heads up for you pros that know it all when you see the Dow hit 10800 run with all of your three legs to the bank and get your money out and sell sell sell and move to Canada or swtslnd . OH by the way get ready for 22% interest rates by 2013 right in the middle of The War that will end all wars. This will happen as sure as the nose on your face . The party is over and its abouth time it is a great time to be alive I have been waiting 10 years for this remember Gold at $185 well I am smilling all the way to………..LOL
You said it partner!
The Canadian currency is not backed by gold. It is a fiat currency just like the USD and the Euro. Yes, Canada is resource rich but so is the US. Also, Canada’s number one trading partner, still, is the USA. We are not as closely tied to the US as we were say 10 years ago, but its not that decoupled either. You also fail to note that the Canadians are setting themselves up for a credit bubble simular to the US in 2006/7. Their debt to income ratios are skyrocketing again after a minor correction during the major crash we just experienced world wide.
I am a Canadian. Work in Canada but live in the USA. I am enjoying the higher Canadian currency let me tell you and I am glad I get paid in another currency other then the USD (my wife gets paid in USDs so we are kinda diversified in a sense…).
The job market in BC for commerical jobs just dried up for a lot of people. I thought it would have happened before the olympics (the week before) but actually seemed to start last week Monday. I now know 83 sheet metal journeymen who are as of Friday unemployed. That is, ever shop I do startup work for is either without workers or only has a small crew on.
The job market in Alberta is still horrible. My friend has been trying to sell his condo for a loss (he moved back to BC for a job in drafting for mcmansons, yeah, sustainable) in calgary for over a year now. But nearly 1/2 of the condos in the complex are for sale. Sure the gas/oil fields are going strong but they are using more and more technology and less and less manual labor.
Canada seems to be 1-2 years behind the USA at this point but I see a credit crunch coming too. Even though they have higher standards of lending they are quite heavy into US commerical loans which are not looking too good.
manipulatin of the market started back in april and may of 09- where were we ???? – can’t beat the gov or the big boys – ho;d on to your hats the big dip on the coaster is coming up – weeeeeeeeee
Markets can only go down when there is lot of GREED but people are more FEARFUL now.
Real wealth as in Commonwealth is NOT in FIAT paper currencies, gold, silver commodities, etcetera. Although during normal stable financial times these have the appearance and power of such, during downturn crises such as at present their power and glamour is dead and all the monetizing power in the world will not resurrect them until the playing field is level again. My advice right now is to buy REAL ESTATE (land and buildings) anywhere you can with whatever other assets you hold, with the exception of any land West of the San Andreas fault line and if you live West of that line SELL and move as far East as you can quickly! Four major recent Earthquakes tell me that God is warning US (United States) clean up your act for I Am that I Am is returning whether you like it or not and I Wil that I Will establish a Kingdom of Truth, Fairness and Justness against a Satantic Wage-Slave System whether you like that or not also.
From a scientific point of view, there is no basis for thinking that the plate West of the San Andreas fault will suddenly drop. From a religious point of view, it runs just West of San Francisco, not East; I would think your sort of theology would have Him pick a line on the other side [grin].
The financial issue, as I see it, is inflation vs deflation. Thus far, the world has remained in deflationary mode (massive home foreclosures yet to come; commercial Real Estate tanking; banks are holding money rather than loaning it; wages are soft; price inflation remains at “normal” levels, etc). The dollar may loose its status as the international currency; but until it does, its special status will hold it up and thus hold the prices of everything from stocks to food to houses down.
So the question is, when does the massive infusion of money start taking effect? Maybe not as soon as everyone seems to think. It appears that thus far, most of the stimulus money really isn’t getting into circulation. It is going into the hands of banks. But instead of lending it in the current dangerous financial climate, they are keeping it at the Fed since they can get a high rate of return with no risk. No real stimulus; just numbers in bank accounts that make the bankers rich. The trickle down to the rest of us seems pretty puny.
BH, GREAT REPLY! My post was intended to be more political tongue-in-cheek, rather than religious. Sort of like what goes around comes around, if ya know what I mean and I think that ya do ’cause you have a sense of humor like myself. Sir Issac Newton in his Third Law, I think, said it best, [quote] “Action: or the forces of two bodies on each other are always equal and are directed in opposite directions.” [endquote].
If you’re fortunate enough to have any assets or wealth and want to protect them, I really recommend going to this website [http://finance.uncommonwisdomdaily.com/bernankes-secret-debt-solution-to-end-the-financial-crisis] and getting a free copy of “Bernanke’s Secret Debt Solution Report” by Larry Edelson. I personally agree with everything he has to say with the exception of BUY GOLD!
There is a new world currency coming, but this time around buying gold as a protective hedge isn’t going to work. Other than some promising nanotechnology uses for gold in the distant future, gold has no real fundamental value to back it up. However, SILVER is fundamentally a very valuable precious metal and commodity. Applying Edelson’s wisdom, but with silver rather than gold, me thinks one would be on the right path toward protecting whatever assets one has against Wall Street, the Bankers, etcetera.
The value of gold in a monetary system is as a measure of value, not because it is a large portion of the actual wealth. The fact that gold does not have a lot of special uses that may increase or decrease in the near future makes it more stable and thus a better basis for a monetary system, not worse. The point is that gold has real and stable value. A “hard gold-backed” currency requires convertibility to gold and thus a tie to the value of gold; but it does not forbid currency being created based upon other real wealth (such as real estate and accounts receivable at significantly less than 100% value).
I got the free “Bernanke’s Secret Debt Solution Report” that you suggested. I agree with the report (contrary to your conclusions) that gold must inevitably have a more significant role in the next world monetary system than in the current (failing) one. But his specific predictions about what will transpire (with new currencies replacing old and multiple world reserve currencies) seems to me way too complex in its details to be “real life”. What a currency (or monetary system) needs most of all is stability. A complex system will not be widely understood, which in itself ensures instability.
America will seem to be save in the careful hands of Mr President Obama. We all already are suffering for two years due to the irresponsible behaviour of bankers and financial institutions. Restructuring of this branche will take a lot of time and will be aspecially painful with respect to the greedy thieves. Let we be clear without nonsense: it’s time to be bullish because the situation will gradually improve in depth and in breadth significantly.
Here is what I’m taking away from all these points of view: The “market is rigged”; unemployment is continuing to rise albeit more slowly which are the consumers; taxes are headed south in all areas since there’s a lot of people not working-this makes state and fed treasury shrink; the US like the PIIGS and the rest of sovereign nations are printing their choice of medium of exchange to stimulate growth, which isn’t happening; bankers aren’t lending and inflating the money supply as they can make a sure bet by holding on to their money (like consumers, not “spending” in the current climate); the sub prime meltdown is not quite over as the alt-a melt down, which is much larger, begins; the commercial lending meltdown is just starting too; gold, silver and other commodities will be the only way to how one can store whatever wealth you are fortunate to have to ride out this collapse of the economic theory of the last 75+ years. Less than 1/2 of households will pay any taxes. More than 1/2 will muddle through on unemployment, food “stamp” allowances, maybe picking up part time (for cash) work. The Fed bureaucracy is growing like gangbusters, except they don’t produce anything, so production of goods/services is low and getting lower. The Feds want to raid your retirement like drug addicts finding some cash for the next fix. Social Security, Medicare, FDIC, and soon the PBGC will all be in the red and no way to get back in the green.
On a micro scale of my immediate locale, many businesses where I used to shop are gone. I haven’t seen a house in my neighborhood sell in the last two+ years (don’t know about short sales and the like) I only look at weather beaten Realtor signs or homeowners moving through the gamut of brand and non brand realtors; but he houses remain empty. Banks are increasing the rate of foreclosure, but not putting them on the market due to the write down they’ll finally have to own up to; this is expected to accelerate in next few years.
Austrian/Mises view of economics seem to be becoming more of a prognosticator than simply a different point of view of free market capitalism.
You just have to love entropy!
There is something upside down. It used to be that the businesses worked in a frame work largely given by government. Now it is government working within the frame work of businesses.
The only reason to bash Greece is that some deep pocket crook has chosen to target a weak candidate for robbery. Remember, Greece is only 2% of the Eurozone GDP. So their importance world wide is tiny. Why is nobody targeting California which has a much weaker position? It is difficult to speculate in dollars against a state that does business in dollars. Besides that would be unpatriotic whereas bringing down a few million Greeks does not bother anyone.
The government needs to find ways of stopping big speculators who do not add anything to the economy of the country but hide behind hollow phrases like “free market”. Businesses like free markets only as long as they can swallow competitors. A good example is the remote control. Every company favors a standard – as long as it their’s only.
Don’t fall for the rhetoric of the Republicans favoring free markets and privatisation. These are code words robbing and raping the country. Then again, don’t fall for the rhetoric of the Democrats either. They like to rob Peter to pay Paul (minus the commission for the politicians) and promise the pie in the sky which you can eat and still have.
With this arrangement the country is not going anywhere until a real revolution takes place. Remember, seceding from England was no revolution. It was a revolt. The system the British installed survived well though under different names.
As long as the businesses run government there is no way out. And as long as government turns their back at the real problems nothing will change. Good Night!
Greece is failing because too large a percentage of their population works for their government and is highly overpaid due to unionization and overly generous retirement programs; and tax revenue is down due to the weak economy. Yes, this is exactly the same situation as California. But “speculators” are not to blame; the Greek people are to blame for supporting the current political approach for so long. Investors (including speculators) are not interested in loaning their money to those who are unlikely to pay it back; and if they do loan it, they demand higher interest rates, which makes the situation even more untenable for the government. The Greek people want something for nothing. But there aren’t enough working people left to suck the blood of to support it. Other European nations with less generous retirement programs are refusing to suffer for the Greeks.
As for your statements about the Republican party and the way businesses support or oppose free markets based upon their personal gain or loss rather than as a true matter of principle, I unfortunately have to agree with you. But this does not change the simple fact that free markets bring wealth and freedom of choice to people on all economic levels; make it easier for poor children to become wealth adults (and vice-versa) than under other systems; and is the only ethical approach as it does not involve force (the government telling people what to do).
In addition to what you guys are saying here …..we have other issues like the housing market.
Another major problem for a housing recovery is the fact that there are a slew of adjustable-rate mortgages (ARMs) due to reset. According to Jim Nelson at the Daily Reckoning “The majority of these resets occurred between the summer of 2007 and the summer of 2008, which caused a massive amount of mortgage interest rate hikes, which caused millions of foreclosures. Things spiraled down from there, eventually freezing nearly all credit and causing the panic of 2008. Of course, that’s the 50-cent version of recent history. There were plenty of other financial calamities that went along with this, including the bundling of mortgage-backed securities and risky derivative products.”
What bothers me is how will we handle another round of re-sets on top of the other problems I touch on in part one, especially when they are the even more esoteric “Option Arms”?
Jim says “this second wave will come crashing even harder than the first. It’s made up of a type of mortgage called “Option ARMs.” These give borrowers the option of how much they want to pay during the first five or 10 years of repayment. You can pay the full amortized rate, including interest and principal or Interest only, or, a token payment, well below the amount needed to cover the interest on the loan. This third option causes the mortgage balance to INCREASE instead of decrease. And usually, the borrower can continue to make minimum payments until the mortgage balance increases to 125% of the original amount. That’s when the trouble begins…especially if the interest rate increases at the same time. This is the exact situation in which many homeowners now find themselves.”
According to Whitney Tilson and Glenn Tongue of T2 Partners, who are experts on this subject, about 80% of option ARMs are negatively amortizing. Meaning these so-called top-tier borrowers are heading further into the hole. Once their rates reset, they could be in serious trouble.
Obviously the fundimentals seem very weak.
From the technical point of view I see a reverse head (March low) and shoulders in the sp-500 with a target around 1215 ish which is also near a 2/3 fib retracement and a previous resistance and support level. Same with the DOW check a weekly chart and see for yourself.
Will it reverse from there? Will it reverse before reaching the “target” zone. I don’t know. Is there a PPT? If so can they do anything? Where were they when the market lost 50%. There may be manipulation but ultimately the markets will do what the markets will do.
This grand illusion (the economy, the markets, ones own ego/mind) may provide a great opportunity to overcome suffering. Good luck out there.
A lot has been contributed to this thread so I will keep it thoughtful and to the point.
I am patiently on the sidelines for the entire run-up for the simple reason I believed at any moment the second shoe would drop. I was pleasantly wrong in that regards of the stock market.
That said I will quote that old saw attributed to Richard Nixon…”just because you are paranoid does not mean the aren’t out to get you.”
So at this point I am patiently waiting until I hear the water cooler buzz being wrought with references to the bull market this and the bull market that and how we are going MOON! Then it will be time to place my LEAPS puts on the SPY for the 60 strike range.
Two things left wanting in this strategy.
One, the water cooler is empty and there is no one at the water cooler because they have all been laid off.
Two, I am getting a little worried the government is going to ban stock shorting, negative speculating on CDSs and the use of PUTs in options trading…only CALLS and going up will be tolerated.
Enjoy the ride everyone ‘cuz this one is going to be a doozer!