Earlie from Earlie:
Lots of PMs enquiring as to why I remain so bearish. Herewith a few reasons.
- Most market participants have been brain-washed by Wall St. into believing that there will be a "second half recovery". The thinking (?) is that the tax breaks and interest rate reductions will "kick in" by the fall. Until recently, N.Y. analysts have been forecasting a rise in profits that exceeds 20 percent. The probability of this occurring is remote. Should the promised "rebound" not appear, any continuation of the current economic deterioration will likely trigger a violent stock market response, given the wide gap between investors' giddy expectations and an emerging ugly reality.
- Fund managers are fully invested and their cash is low. Joe Two-pack is also fully invested (see margin levels for confirmation). Shorts have been cratered. Who is left to buy?
- The Bond markets have been car-bombed. Losses have been the worst of the last two decades. Even though the Bond Boyz rarely leave the dead bodies on the streets, nevertheless, the carnage and casualties have been consequential and we will likely witness a nasty fall-out from this situation. This bodes ill for stocks.
- For a variety of reasons, the "fall" season (lousy pun) can be mean to stocks. The autumn of 2003 has been provided with plenty of reasons for living up to this reputation. Unfortunately, current valuations provide plenty of room for 32 feet per second per second acceleration before Mother Earth abruptly intervenes.
- Lay-offs continue unabated. This continues to "thin" the ranks of the folk responsible for carrying the economic can. Are the surviving consumers likely to spend at an even greater pace just to make up for their increasingly MIA brethren? Or are they more likely to continue to pull in their horns and pay down their frightening debts? The Christmas "selling season" is about to get underway and we will soon have an answer to this question. So far, my economic markers are unanimously pointing in a single direction.
- The Fed has spent most of its ammo and so far, the results of this effort have been anemic. Custer's last stand comes to mind.
- The green back is buckling beneath an unsustainable load comprised of historic current account deficits, trade deficits and now government spending deficits. Meantime, federal and state tax receipts continue to implode. The global free cash flow is simply not large enough to sustain this imbalance for much longer, hence the buck will cave. A free-falling buck chases the foreigners from the stock market.....which has obvious negative implications for the sustainability of current valuations.
-Iraq is not going well. Casualties continue unabated. The oil is not flowing. For many Americans, it is beginning to look like an economic quagmire in which costs are spiralling out of control.
- The underpinnings for the market's recent rally are weak. Fund managers had no alternative but to dive into the rally when it got underway, given their previous losses (missing any rally under these circumstances would ensure near term dismissal). As noted earlier, these folk are now "antsy". Too many of them have a finger poised above the "sell" button. Crowded exits provide well documented consequences.
- Corporate balance sheets are weak and little progress has been made with respect to improving same. Corporate attitudes and strategies are universally oriented towards cost cutting. This equates with continuing lay-offs, further reductions in capital expenditures and non-existent expansion. "Rebounds" don't happen without corporate participation.
- Most economic sectors are plagued with excess capacity, and huge inventories (particularly the tech sector). Very little rationalization has occurred. Within these sectors, pricing power is minimal.
- Virtually all goods transportation sectors continue to report reduced unit shipments. In a JIT system, this speaks volumes as to just how vibrant the "recovery" really is.
- Most organized avenues for the sale of used goods provide evidence of increased availablity of goods for sale as well as falling prices (check out used cars, boats, RVs, etc.).
- The main pipeline through which newly printed money is funnelled to consumers has been significantly restricted. "Refi" applications have fallen off a cliff and standard mortgage applications are similarly afflicted. Unless the Fed finds a way to quickly bring down rates at the long end, the housing bubble will soon deflate. If this occurs, it will be time to turn off the lights. Greenspan has to be desperately digging for a new rabbit.
- Investor emotions have great impact on the stock market. Those emotions were buoyed by the successful prosecution of the war in Iraq. But those same emotions can turn on a dime. Are those emotions turning as we speak?
- Insider selling is at historic levels and insider buying is non-existent. Meantime, the market has "partied on". This juxtaposition rarely witnesses a positive result for bulls.
While not a technician, the many ugly "head and shoulders", "coils" and other worrisome charts do not speak to a continuing rally.
One could go on and on.
Best, Earlie |
