Lifted this one from a IHUB poster by the name of cashflowmann, thought it'd be worth sharing with everyone here:
>>The Bottom? Not Likely....
What a week we just saw in the markets! Huh?
We have been counting "this is the bottom" calls that come across TV. Since last Monday, we have heard 47 times that "this is the bottom". But since we can't monitor the financial stations 24 hours a day, I'm sure the number is over 200. And that's why the bottom is NOT in.
For some reason, people have been conditioned to think that if we just get one good old fashioned flush out, where the averages fall 1000 points, we can then start the next bull market. It's the Capitulation puke that 99% of the world is looking for. Somehow, like magic, if we take a massive whoopin, then we can get back to the business of having a market that just rises. People don't like this bear market stuff, it's not nearly as fun as when each and every quarterly statement was heads and shoulders above the previous quarters. So everyone is pleading for that big washout that solves the problems.
But those big flushes, followed by a bull market don't happen in secular bear markets, they happen in cyclical bear markets. This is NOT your typical business cycle recession that we have seen several times since WWII. This IS different. Only one time has the market been down 18 months after a rate cutting binge by the FED. Well, make that two now. So, since this isn't a typical short term bear, why would they still be looking for a capitulation sell off to solve the woes? It wouldn't. It works in the cyclical bears, not the seculars.
"There is a disconnect between the market and the economy" For years and years they told us that the market foretells what's going to happen 6 to 9 months out. It's the "collective wisdom" of millions of investors. All the information in the world is baked into the markets and they are always right. Well, when the market was roaring higher it was "proving" that everything was perfect in our economy. Now that the market is puking on a daily basis, the market is wrong. It's disconnected from reality. Interesting isn't it? When the market is going up, it is visionary, almost Godlike. When it's going down, it's apparently "wrong". (pay no attention to that man behind the curtain)
Over in Euroland, things are starting to crumble. In Germany their business outlook suffered a horrid fall. There are rumors and investigations into accounting scandals. Inflation is heating up. The European averages are crumbling big time. Most are at or near 5 year lows, similar to us. In Japan, they have lost 10K on their index again, and try as they might, they can't get their economy cranking. But surely that has no effect here right? Wrong. Like the commercial says, "we are one big happy family". Unfortunately when a member of the family wanders off track, it effects everyone.
We had a sneak preview to the health of our economy when the Richmond FED report fell apart a couple weeks ago. Then the Philly FED fell apart. Now we see the durable goods numbers falling like rocks. Was it a one month blip or the start of something nasty? We don't know, but we have our suspicions. When outfits like Maytag and Mohawk guide lower for the second half we think they know something. When existing home sales fall 11%, we know that at least for one month, people aren't buying new washing machines.
So, what's the story with all this "bottom hunting?" To me it's clear proof that the bottom hasn't been set, not even a little bit. I know that hurts, and I know it's not popular, but this is NOT a cyclical bear market that the FED fixes with some fast credit and finally we get a capitulation sell off and all is well again. Sorry, not this time. This is a secular bear, a nasty one at that. We aren't going to have a bottom until TV stops asking is this the bottom. Not until the 6 pm news couldn't care less that the DOW lost another 300 points. Not until people are so fed up with stock losses that they swear them off for good. At that point the bottom is in. Right now, there is so much hype, so much hope, and so much "I need my money back" desperation, we are not at the bottom. When everyone "gives up" that will be the bottom.
18.5 billion left the US equity markets last week. But that's a drop in the bucket really. Recent tallies show us that globally we have seen 36 trillion dollars worth of "wealth" go up in smoke. That's a pretty big number , 3 times the entire US GDP. So badly have the markets been treating people that the good old Prince from Saudi Arabia tossed in the towel, saying that he is not putting in any more money, he is concerned about the wild swings. Wild swings? Oh yeah, we have them. But they are not totally baseless swings.
For the most part the analysts have given in as far as technology and telecom are concerned. They realized after being wrong for over a year and a half that maybe tech isn't going to do the "V" recovery thing. So, they just changed their focus to the "broader market". Here in the "broader market" life is surely fine. Look at housing. Look at healthcare. Look at auto's. Life is really fine, buy buy buy. But once again I point out that the only things that are fine is the US consumers ravenous appetite to go into hock for worthless baubles. Sure it's nice to have a new car. I like that too. But it's a losing proposition. The second you leave the lot, they lose value. Same with electronics. But we buy them like mad. So, bubblevision says "look at auto sales, the consumer is alive and well!"
I am not so sure. In our area, you can buy a car with no down payment, no interest and no payments for a year. That makes it pretty easy to move vehicles, even to people who have no plans on paying for it. Repo's are up substantially. Now the Government wants to change the bankruptcy laws. Hmmm. that doesn't sound good for our ravenous consumer. So, what's he been doing? Taking more money out of his house. The refi index jumped 26 points last week. Economists are giddy over all the millions that will flood into the economy, to buy more depreciating baubles. We fear, people are digging a deeper and deeper financial grave.
Housing stocks are tumbling. Obviously it's a disconnect again right? We don't think so. Near the end of a long run, you generally get wild economic numbers concerning any area. Was this week's 11% drop in existing home sales the start of something? We feel it is. We feel that the bubble there is just beginning to peter out. If you are looking to sell a home, you might want to do it now, I think you will be able to buy cheaper in a year. But pity those who are refinancing and taking out money to "blow". Because if the housing market falls just 10%, those unfortunate souls are trapped in a house worth less than they owe. That's not an enviable situation.
What am I getting at? What's the point behind all this? It's simple, but it's scary. Unless there is some hidden magic that I haven't found, unless I am completely off my rocker (possible) I can't find the light at the end of the tunnel. They tell us earnings are improving, but only if you don't look at the massive charges. They tell us housing will never stop, but every bubble stops, they tell us consumer debt isn't a problem, yet Government is changing the bankruptcy laws. they tell us it's okay to use your house as an ATM machine, dispensing dollars each time the value increases, yet that only works if housing never stops rising.
My guess was and still is that we get a double dip recession and the second leg is worse than the first. We are still relying on the consumer, and that's okay up until a certain point. Right now the average American is 48, he has less than 40 grand in a retirement account, and would need 50 years of 6% gains to retire comfortably. That reality is starting to creep in across the country. As boomers retire they are going to need to sell stocks, not buy them. They are going to need to sell houses for income, not buy them. Pension plans are taking big hits, companies are scrambling to find a way to cover the losses. That means money from the bottom line goes to fund pensions. One by one, we see a mirror image of the Japanese economy unfolding before our eyes.
In Japan they had a bubble. But two full years later housing prices were still rising. Everyone was convinced that it had run it's course and it would be up , up and away. But the Japanese demographics were a bit different than ours. See their population is about 10 years ahead of our own. For the last 8 years they have been mired in recession after recession. Housing dropped. Savings increased. Is it possible that we are following in the same footsteps? Not possible, probable.
We might not see a global depression, but we think a dip back into global recession is on tap. we think the market will fall and probably surpass our 6800/980 targets and wallow there for a long time trapped in a trading range of a thousand points or so. We think housing is going to fall 20%. We think the consumer will be forced to stop using credit by new rules. Finally we think corporate profits won't "really" recover for a few years. We could be wrong, I hope I am. but so far we have been pretty accurate, and I haven't found the silver lining that changes the outlook. Sorry.
Now, what about the here and now? Well Wed. we had that huge day, and then Thursday "bifurcated" What is that? Just a fancy name for DOW strong, NASDAQ weak. Then Friday we saw the averages get tossed around all day finally inching higher in the last hour. As we figured, the airwaves are simply chock full of "that was the bottom" baloney, although handful of the smarter ones are saying it was a "short term" bottom, maybe not "the" bottom. Good thinking.
So, what's it mean? Well Wed. was NOT the big bottom in our view. But it very well may have been the start of "something" that resembles a near term rally. We have been looking for one for weeks and it didn't materialize, now we have our best shot yet at getting one. With a big reversal day and at least "some" followthrough, there is a better than 50/50 shot at seeing a move higher. If it really got in gear, it could be a powerful one, but getting in gear is something this market hasn't been able to do in many months.
We have a ton of huge economic reports this week and a host of them are real market movers. It won't be easy to rise through that unless the are "good".
I.m headed into the week "neutral" on the market, from leaning short to not leaning either way.There is a chance this rally could finally firm up and we add a few points to the averages, but it won't last long and we will go back to leaning short once again. They are doing everything under the sun to make one happen. Every once in a while it works.
We will poke around on the long side if things develop well on Monday, but we will be fast to swing back out or even go short if a bomb drops. This is indeed a week to be fast and careful.
Don't worry too much we have until 2019 before an asteroid migh hit earth according to the news!<< |
