Recap

Posted by Ray on July 7, 2010 under Economy, Main | Be the First to Comment

Today was interesting to say the least, a massive rally on the back of no real news, I guess stress tests that really don’t stress banks balance sheets were the primary driver along with a technical bounce, but other than that all the other news was negative. Let’s review the bullish news that moves the markets 3%. Dallas Fed President Fisher calls out Congress and the President by saying they are inhibiting growth by creating confusion, no surprise there. Delinquencies on homes are stabilizing at extremely high levels, CNBC.com. Reis Inc. released a report showing that retail shopping center vacancies are rivaling all-time highs at 10.9% and rents are dropping, they should recovery by 2016, somehow that must be bullish. Lindsay Lohan is going to jail, I guess, for 90 days, now that really is bullish for whoever makes the drugs to sober people up.

I guess on the heels of all that bullish news it is little wonder that the market rallied so hard today. The only other piece of news that would have sent us to 11,000 for sure is if we declared war on Iran, based on this track record.  We blew through several layers of resistance on the SPY, which I am short and yes today did hurt, thank you for asking, and we could reach as high as $107.12 on the SPY, but overall it is still in a bearish trend, sorry. The volume was nothing to write home about today either and, frankly, yesterday’s mammoth reversal speaks volumes about the condition of this market, it is structurally unsound. However, we have some pretty big news coming up Thursday morning, retail sales and initial claims data will dominate the headlines.

First, if you watched CNBC this morning and caught El-Erain from PIMCO he said something you might have heard before. He said; “Unemployment is no longer a lagging indicator, but a leading indicator.” Any idea where you would have read that? I have been saying that for months now and many have said some pretty nasty things to me about making that claim. What El-Erain and PIMCO have figured out and the people who have no clue that a “V” shaped recovery does not exist have not figured out is that in a post credit collapse world unemployment is not a symptom of the cancer, but part of the actual cancer itself. If the credit collapse occurred because people could not pay their bills it would stand to reason that the more people who are unemployed the worse the problem will get. Perhaps this is why mortgage modifications are failing and defaults are picking up on credit products, depending on how a default is actually measured nowadays. It is just nice to have a high profile person repeat what you have been saying even though he has no clue who I am.

As for the initial claims tomorrow, my guess is that they will be ugly, again, as in +450,000, but less than the 472,000 from the week before because of the July 4^th holiday. Employers tend not to fire people before the holidays, but they will be elevated in my opinion. If, for some reason, initial claims are above 470,000 that will be horrible news and my guess is that will merit a reversal of fortunes in the markets. It is just amazing that we are coming up on 3 years into this thing and we are still seeing initial claims coming in at well over 400K a week. I know the President likes to make the claim that when he came into office over 750,000 people were filing for initial claims a week, but that was for only a few weeks during the peak of the crisis and, frankly, the fact that we have stabilized at 450K a week is nothing to really brag about, sorry.

To make matters worse the emergency extension of unemployment benefits were not passed before Congress went home for the holiday. That left almost 2M people without unemployment benefits and, in my opinion, that will have an impact on retail sales. How much of an impact? I do not know, but more than most people think. The other major thing people have to remember about retail sales is that many retailers closed a ton of underperforming stores so you are looking at retail sales numbers from the top performing stores they have to offer. No longer can we say that these figures include the dogs of the industry which means the figures you see can actually be much weaker, or stronger, than they initially appear. Regardless, credit is still contracting, unemployment is still sky high and that means retail sales are probably not going to be as strong as most people think, but analysts knew this and started heavily revising estimates lower. Not to mention that retailers have zero pricing power so even if sales are good their margins are going to be miniscule.

There is little to be bullish about out there as all the data has been bad and should not be read any differently than being bad. The ISM was bad, the employment report was bad, the housing data is horrible, the political picture is uncertain and the charts are certainly bearish, just look at the RUT. I am not saying don’t own stocks, but be careful what you own, strong balance sheets and dividends are key. Anyone outright bullish on this market is either selling you a fund or is simply out of their mind. Patience is key and there is no need to jump into any stock for any reason as we are in for a bumpy ride. I don’t even think earnings season will do much for us, sure 2Q10 earnings will be good, but the outlook will be not so bullish.

CNBC just doesn’t understand the markets

Posted by Ray on June 29, 2010 under Main | Be the First to Comment

At 9:50 AM Erin Burnett and Mark Haines were talking about what was driving the selloff in equities today. Erin Burnett says; “If it is the LEI number in China driving the markets, which is a number that was only created in May and just revised down, that shows how pathetic the global markets are.” Well, I hate to be one of those bloggers that the Fed says not to listen to, but the reason we are selling off is because of a failed sanitizing ECB bond offering and the banks in Europe are in trouble. Combine that with horrible housing data, high unemployment, record deficits, bond yields reaching new lows, deflationary forces, slower economic growth, ECRI numbers rolling over and the technical’s of the market being bearish I think you can see why equities are selling off.

This, more or less, proves that CNBC is a cheerleader devoid of understanding what is really happening in the equity markets and they simply do not know how to do basic research. This is what happens when you parade all bulls on your program and shout down their opposition, who have been far more accurate. The situation in Europe is serious and China’s economy is slowing because of a stronger Euro, how no one is putting this together yet is beyond me, and there is simply less end demand for products. The only area where pricing power really exists is in food stuffs and most other industries have zero pricing power. Why? Simple, there is no demand which is why we have deflation right now!

Besides the reporters being completely inept and derelict in their duties, they fail to see the most basic issues confronting us today. As I said before, initial claims data has been a leading indicator, right now, of what is happening out there, again, how this was not seen is beyond me, and showed that the economy is extremely weak and really never recovered.  It is insane that they keep talking about the Chinese LEI versus the real issues surrounding the equities markets, it is part of it, but it is the other issues I pointed out. How they kept on the bandwagon of the ‘recovery’ story is a wonder that helps mark the death of the old media outlets where bias is tried and true and a pretty face is worth more than actual knowledge of what is going on in the world.

Deflation, Inflation and Housing

Posted by Ray on June 22, 2010 under Main | Be the First to Comment

There is an interesting story from CNBC.com that illustrates that a bond trader is concerned that the bond market will collapse. It is not the fear that the bond market will collapse that caught my eye, it is the fact that he thinks deflation will fuel the collapse. I do not see that happening, exactly, yet at least. Clearly housing is still seeing deflation and we are not at the bottom yet either.

Logic dictates that we should all be gearing up for inflation, now, but the data does not lie and I can pull the most aggressive data I want and it shows ultra low inflation rates which is scary, frankly. With the massive printing and monetization of debt that we have seen over the past 2 years we should see some inflationary pressure, somewhere, but nothing. Not only has the Fed’s balance sheet grown, but it is growing and so is the national debt, at a record breaking rate. Still, inflation is nonexistent which is puzzling to all economists and policy makers, even housing that is given the most generous tax breaks and, recently, a huge tax credit to buy is showing that prices are falling, not rising. This is a severe problem and it is going to get worse.

Deflation will continue to rip through the economy as the deleveraging continues which could be for another 3-4 years, but there are always caveats which I will go over. The primary reason there is no inflation, this isn’t rocket science unless you are an economist, but credit is contracting and people are saving more which means less money is in circulation. Bank balance sheets are enormous right now, but the irony is they are still largely insolvent and even if they could lend why would they with 10% unemployment and initial claims coming in at 470K a week? All of this means prices will drop lower across all categories, except for food which I admit has me perplexed as well.

The primary reason is the fact that everyone is deleveraging and paying down debt. We live in a society that was driven by consumption, but that consumption was not organic, i.e. actual income driven, it was credit driven. Once that credit is gone, and it is long gone, consumption ends as we once knew it. Sure, we will have hot products like the iPad, why, I do not know, but that is not for me to decide and even those products have a certain shelf life meaning their appeal will eventually wear off. Especially when we have initial claims, on a monthly basis, at 1.8M which is twice the population of Montana and the target market, 18-30, is experiencing a high rate of unemployment.

This lack of inflation is not lost on the Federal Reserve and believe me they are worried about it. Tomorrow you will not see any drastic change in their language or actions. They will likely get rid of paying interest on bank deposits, what’s the point if inflation is nil. In fact, I am willing to bet, this will not be in the announcement, that the Fed’s balance sheet will get even bigger and what should concern you is the amount of currency swaps that appear on their balance sheet. Those swaps are for Europe’s banks that “are just fine” so they can settle their trades in the relatively safe reserve currency, the USD. If that number keeps growing the problems in Europe are much larger than we are being told. Europe will also weigh heavily on tomorrow’s decision and that will be a reason that no major action will be taken as well.

It is clear that deflation or disinflation is here at the moment and I am sure it will get worse, but it will also be somewhat quick. As many of you know the U.S. has decided to not pass an official budget this year. This is the first time this has happened in almost 40 years and there is only one reason I can speculate this is not happening, the $1.6T estimated by the President was a little too conservative and the actual number is probably much higher. Why debate that before the midterm elections? It would also bring the U.S. front and center in the whole sovereign debt fiasco that Europe is going through at the moment. Frankly, our balance sheet is much, much worse than what we are so critical about over in Europe and we haven’t even instituted socialized medicine, yet.

Deflation is great for U.S. treasury debt as investors can capture greater real returns and the treasury pays out little interest, but this is not going to last long. Our deficits and our tinkering in China’s affairs is about to bite us in the rear end in a big way. First, we owe too much and can never, ever repay it, there is just no way out of it and we cannot “grow our way out” and the people suggesting that are loony tunes. Second, I suspect the RMB, Yuan, China’s currency, will eventually weaken, I am very sure of it, but it may also strengthen in the meantime which would be humorous only because China would then be running big trade deficits, not surpluses, and would not have to buy our debt. I wonder how well our $40B daily auctions would go then.

I also wonder if Congress will actually pass the much dreaded Currency Manipulator Bill they are threatening China with, I think that is Smoot-Hawley on steroids. If both these things happen, China lets the currency strengthen to get the U.S. off their back, right before they drop it to new lows, and Congress passes their tariff act, that is essentially what it is, what would that do? It would force Americans to pay much more for goods, that is inflationary, and it would force China to either not buy more U.S. debt because there is nothing to hedge against and in all likelihood China would end up being net sellers of treasuries because all of their bubbles would have popped and they would need to get liquid. All thanks to politicians who have no clue how capital works. That would lead to inflation in a big way because all that inflation we exported over the years would wind up right back home where it belongs.  This, of course, is a worst case scenario.

What is more than likely to happen is the fact that the U.S. simply continues to spend and the bond market slowly begins to demand a higher risk premiums. Eventually it will end up like Greece where the U.S. cannot borrow at reasonable rates, but long before that the Fed will take matters into its own hands and begin to buy treasuries through quantitative easing programs, they did it once, they can do it again, right? Except this time it will be inflationary, but not from a money velocity point of view, from a dollar depreciation point of view. That is much worse because you actually do not have to increase money velocity to destroy the currency which will crush savers and the middle class.

The beauty of this is it doesn’t happen all at once, it happens over a period of months and the government will tell you this is a good thing. How you say? Oh, it is a perfect plan. Because we consume about 80% of what we produce domestically so we won’t see it right away, but what we will see is our exports increase dramatically, because the dollar is falling on the international markets. More people will become employed, sounds good right? Well, I am not done yet. As people become employed they spend more and prices rise and as prices rise wages will need to increase, but no one is buying our debt still, except the Fed. The money supply will have to keep growing to keep up with inflation so they print, monetize and send out more money to banks to get into circulation. Wages will increase at exponential rates, but it won’t mean anything.

You see, it is all fake, driven by the monetization of our debt and eventually the dollar will simply be worth nothing and no one will want to trade with us or at least do business in our currency which means production stops because you cannot exchange our currency for anything else, it is Zimbabwe. The printing of money is a dangerous thing and the economists who insist that what separates us from Greece is that we do have a printing press are right, but for the wrong reasons. It is much more dangerous that we have a printing press because we can do terrible things to ourselves and what I just laid out above it could happen. It might happen because there is historical precedence. There are 2 well documented cases, the Weimar Republic and Zimbabwe.

It happened, in both cases, quickly, very quickly and in Germany’s case they started out with deflation, much like what we have now. As the government repaid debt and tried to keep the economy going they printed money and they went from deflation to inflation in the blink of an eye. They were so efficient at printing money they eventually only printed money on one side of the paper, to speed up the process. They even used wood tokens so people could at least burn them for some value. It doesn’t take much to start down the path of inflationary cycles because neither the Germans or Zimbabwe wanted to be the poster child for hyperinflation, quite the contrary in fact, they, like Ben, think they can control events, capital. That is where they went wrong, capital has a mind of its own and once a path is determined it is tough to change course or stop it altogether. Some very smart men were in both countries and they failed at stopping the inflationary onslaught. I highly doubt our Fed can stop it since they admit they cannot see things coming anyhow.

As far as the folks who say these things cannot happen here, well, they can and they will. It is inevitable at some point and there is no way a deficit reduction committee can stop it or implement a plan to reduce our debt before it happens. There is no political will left in Washington to stop their spending ways. Especially with some 78M Baby Boomers about to receive the mother of all socialized benefits, how do you say no to the largest voting bloc in history? You don’t.  I believe that the whole deflation/inflation debate is irrelevant as we will have both. Plus, investing for deflation is really no different than normal investing, some bonds and strong dividend paying stocks which should be your core holdings anyhow. Inflationary investing, well, that is a different story and while I prefer toilet paper and gold you may prefer tobacco and food, either way. The point is, it is coming and you will not see it happening until it is here.

Why not to listen to Gartman

Posted by Ray on May 27, 2010 under Main | Be the First to Comment

Dennis Gartman carries significant weight in the trading world and many people listen to him. I do not know his track record in stocks, I assume he must be OK, but I do know his track record on gold and it is terrible. When Dennis says to buy or sell gold, do the opposite and you will do very, very well.

Last summer when gold was in the low $900’s Dennis was on Fast Money, a CNBC show, and said he was shorting gold and said it was terribly overpriced. He went on to say the technical’s said it should go to the mid $800’s or lower. He must have lost a bundle on that trade because gold quickly ran higher to the $980 level never to return to the low $900’s again. Ever since then he has been more negative on the metal than positive as it marched higher, until it was in a clear breakout above $1,000 – $1,100 and he bought it in Euros.

I stopped listening to what he had to say a long time ago because he was proven wrong on every call he made and I rarely listen to what the talking heads say on TV anyhow, they are always talking their book. Anyhow, I happen to caught a story on CNBC.com were Gartman said to “run to the exit on gold,” get out before it is too late or you will lose your shirt was the case he was making a week or so ago. Why was he making this call? Because gold was selling off because of a global liquidation and it sank to sub-$1200 and the momo’s were getting out of it, so what. Investors rarely care what is happening right now, they are about what will happen in the future and gold is still a good long-term investment and Gartman knows it because he has changed his mind, again!

This means you should probably sell if you are a trader or prepare to buy if you are an investor because prices are about to get cheaper, if Gartman’s record holds true. According to CNBC.com Gartman said this: “On Monday, Dennis Gartman reversed his call for gold investors to rush to the exits, saying the precious metal was no longer overbought, but also warned that it was a technical call and he is “not a gold bug.” This guy changes his mind more than most people change their socks and is wrong more than most I might add.

I get that people do not know how to value gold that maybe a clue that one should not trade it and rather invest in it instead. Buy some nice pretty coins and stick it in your sock drawer and after Helicopter Ben prints us into the new Zimbabwe you can then cash them in, that is what owning gold is all about, protecting your buying power and wealth. However, the pundits will never get it and one should use their calls as a contrarian indicator of when to buy at better prices since they never seem to get the forecasts right. For the record, I have no real forecast on the price of gold except it goes much higher from here, but I am the type of bug who buys some every month and when there is a big dip I buy more than usual, depending on the reason why. When central banks are talking about printing a trillion here and printing another trillion there it is impossible to believe paper currencies are worth anything at all. Paper currencies need confidence to succeed and what little confidence is left is quickly disappearing which should scare everyone.

What a wild ride

Posted by Ray on May 26, 2010 under Main | Be the First to Comment

The past 2 weeks we have seen the markets do things that simply do not seem natural from freefall flash crashes to intraday 300 point turn around rallies. However, there is one thing that is pretty clear, I would not buy this pull back. As David Rosenberg points out and a few other non-perma bull market strategists, not that there are many left, point out is that these wild swings are not normal in a bull market.

Think back to the market of late 1999 to the early 2000 and you will remember such swings, but do you remember how it ended? If you bought on those dips you never made your money back, ever if you bought the NASDAQ and you would have barely broke even in the S&P 500 if you sold at the peak in 2007. I think it is safe to assume that this market action is a sign of a sick overbought market trying to lure you in to buy one more time before it robs you blind, don’t do it. To be clear, I believe the broad market will move lower, I think 900 to 950 is not an unreasonable target, but we could move much lower than that. Before you say it, no the fundamentals are not so strong that we could not see the lows of last March, more on that in a minute.

I am not saying do not buy great individual companies, not at all, I am bearish on the market, but I like some individual names. I am bullish in the biotech area as there are tons of patents expiring in the next few years and you will see big pharma buy many of these names, but I also like big pharma too. Look at the yields and the rock bottom P/E’s, they are dirt cheap and you should look at some of these names, but biotech is not a prisoner to the business cycle, as long as it is well funded and near approval for a drug. I also like consumer staples that pay dividends, boring names, but they pay you to hold them and no matter what the economy is doing you will always need toilet paper and a toothbrush, I hope at least. I also still like high quality bonds and can make a case for treasuries right now, but use your own discretion, I would stay away from high yield, I sold mine a couple months ago.

Why do I think boring and income is the best model right now? Well, the market is going to correct even more than it already has, kind of a simple explanation. Income strategies, which I have been on the record for supporting since last year, makes sense because we are living in disinflationary, possibly deflationary, times where real yields are much higher than what we think. I am a long-term inflationist, come on look at all the money being printed and Obama wants to double exports in 5 years, you cannot do that with a strong dollar, but right now deflation is the name of the game and income makes sense. Deflation also means stocks need to be trading at much lower multiples than most people think and that is why I think this correction will potentially be much deeper than most people believe. Time will tell who is right about that.

The Fundamentals!

What about the fundamentals? Are they better than a year ago? Sure. Do they support a 20 P/E multiple on the S&P 500? Nope. Do you really think the housing data since the homeowner tax credit implementation was actually real data? No way. How about unemployment, do you believe temporary jobs are going to lead America to the next level of prosperity? Well, all the amazing job growth has been only in the temporary job area, let’s not forget that the actual employment report numbers are tinkered with via the birth/death model which added 188K jobs to last month’s employment report. For those of you who don’t know, the birth/death model are estimates the BLS uses to predict how many new business are started based on how many business died and population growth, it is fantasyland stuff basically.

What about corporate earnings? They have been good, but I do not believe they are sustainable. First, the stimulus is running out, that is a very important thing to remember moving forward. Second, a cool 30% of the S&P 500’s earnings come from Europe and up until lately U.S. companies enjoyed, globally, a weaker dollar which is over since the new sovereign debt issues are driving the value of the dollar higher. In technology a large percentage of earnings came from Asia and I do not believe that will continue much longer because of what is happening in Europe, Greece was a big deal indeed.

You see, Europe represents 20% of the worlds GDP and, believe it or not, China’s top importer is not the U.S. it is the EU. So, if the EU is going to have lower growth because of austerity measures, which they will, it will automatically be a drag on world GDP, but it will specifically hurt China. If China begins to slow down that is very bad news since China is “the recovery story of the world” or some other tag line the media gave it. In other words, China will be buying less from the U.S., exporting less to the EU and the EU will be buying less from the U.S. Also, China will be running, more than likely, trade deficits not surpluses which means they do not need to buy our debt. Can you see the problem now?

Greece is/was a big deal not on its own, but because it was locked in with the other PIIGS which were locked into the EU as a whole. It is all very bad news and no matter what CNBC says we are all still coupled with each other. It is the interlocking of the global economy, especially in the debt markets, that is the problem and there is no escaping it. I am afraid that even when governments guarantee debts that may not be enough anymore because, as the price of gold is proving, people are losing faith in money. Our whole system is based on faith and when that faith is damaged that is when problems get out of control and I believe we are just about at that point. The rumor yesterday was a .50% rate cut, how is that good for the Euro? If anything that would have brought it closer to parity to the USD. Printing another trillion just won’t calm markets because it means nothing. At this point I cannot see much of anything from Europe that will calm the markets.

The only things they can do is let the PIIGS default on their debt and kick them out of the EU, not necessarily in that order. Anything else will just prolong the problem and the printing press is the cause of the problem, not the solution.