Thoughts:
This week the NABE (National Association of Business Economics) came out and declared that the recession is over. Forty-four (44) of the "best" economists told the NABE that we have weathered the storm and things are moving along quite well. Now I tend to think that things are getting worse – not better. The most recent Business Roundtable Survey showed that 49% of all CEO's expect their sales to be flat or down in the coming 6 months – 79% of all CEO's surveyed expect their capital spending to be flat or down in the coming 6 months – and 87% of all CEO's expect to do no hiring in the coming 6 months. Delinquencies among U.S. commercial mortgage-backed securities surged to a record amount of 3.64% in September, vs. just 0.54% one year ago. Every 13 seconds, there's another new foreclosure filing somewhere in America – more than 6,600 foreclosure filings a day. Yep – there have been roughly 2 million foreclosures so far and our Assistant Secretary of Treasury, Michael Barr, saying that another 6 million families will face foreclosure over the next three years. Hummm – sounds like the recession is over to me!
Even the Government’s own doctored and painted non-farm payroll reports show that we are still losing 250,000 to 400K jobs a month. In the past, employment was a lagging indicator – people would get laid off – they would cut back spending, and as the number of unemployed rose, they would simply hunker down. Uncle Sam would then push a stimulus in the form of tax cuts and/or lower interest rates. Businesses would start to recover and even people that were still unemployed would "feel better" about things – and they would begin to whip out the credit card and start spending again. Even the unemployed felt safe doing it because the businesses were returning to growth, they'd be hiring and felt good about being re-employed soon. What most people don't understand is that because of that "feel good about the future" emotion, the unemployed were using credit to continue spending, which ultimately led to the businesses actually doing better. As the business did better, they hired more people and "bingo" the recovery was in. So, it was always the fact that consumer buying, based on credit, is what ultimately got the businesses expanding, and then ultimately hiring again. In this case - that option is gone. There is no longer a house to refinance – because the home equity lines of credit have been shut down. The credit card agencies have reduced the public's outstanding credit available. Lending standards have risen – so the jobless are NOT going to increase spending. So this time there is NO credit, and businesses have cut back so hard for the past 2 years, capacity utilization is at record low levels. That means that business can increase output many times over, just by expanding the workweek of the people already there. Without the consumer going into hock on credit to buy products and services, business cannot expand. Therefore, without credit, joblessness is a current indicator – and without hiring there is no recovery.
Okay, so where is the NABE getting the idea that the recession is “over"? Please understand – these are the same economists that didn’t see any problems in the first place. Consider that these same 44 economists didn't see the single largest financial disaster of the last 80 years coming, and when the recession hit – they said it wasn't going to be a problem, it was nothing to worry about – and now they say that it's over. It scares me to think that “they” pushed this entire economy down just so they could get their own agenda's pushed forward, and that's why America is reeling in it's second ever “depression".
Yet this week, amid much fanfare, we busted over DOW 10,000. Was it because of a robust economy? Was it because Intel's revenues fell 8% on top of last year’s fall? Nope – it was because Uncle Sam is keeping the market up – and the marketing being up is the only thing keeping the “commoners” from revolting. So enjoy the game while it lasts. Just know that without the $ Trillions in funny money, without interest rates at virtually zero, without "mark to fantasy" accounting, without cost cutting, the market would be at 5,000, not 10,000 – and yes – we will get there.
The Market:
This week they managed to squeak us up and over 10K – for a bit. Yes they missed on Friday, but only by 5 points. We said last week that they'd pull out the stops and try and keep the market moving higher and they have. It really doesn't matter if it's a house built of cards or not, up is up, and we like tagging along with it. But, how long can they keep this going?
Just try and get your arms around the fact that the market doesn't belong "way up here" and that it's being pushed there. If you understand that, you've won half the battle. Now there are a handful of ways this can play out. We could see the market move up, pause, move up, pause and keep on going to January. Or, we could see the market put in a big "last ditch push" and then after half the earnings are out, see us roll over for a good pull down. One thing is certain, 2008 wasn't friendly to a lot of hedge funds and mutual funds – and they didn’t get their yearend bonuses. These same hedge funds want that bonus, and they'll probably let it all hang out in hopes of achieving it.
Unfortunately, the market does not exist to make you fat dumb and happy into your golden years. The market exists just like a casino exists, so the owners of the market, and the main contributors to it - make money. Since we are talking big money here, billions upon billions of dollars per day, the market has evolved to the point where it is impeccable at confusing, confounding and taking the money from the most people at any one time. Years ago we worked on corporate balance sheets, P/E's, price to book and all the standard fundamentals that one might think actually count for something. Then we learned an important lesson. We make our money by trying to figure out how the market would make the most amount of money at any one time. If it's by going higher, and pulling in more people and burning those that went short, up it will indeed go. If the market will rake in more money by rolling over and burning the longs, and punishing the latest people into any rally, then down it will go. Unfortunately – that doesn’t do much for fundamentals – but that’s the way we’ve been trading for a while now. However, if they let the market roll over right now, all the people that were going to sell out if the DOW ever reached 10K again, would be smart. If it just continues to pause, move up, pause, move up, then every "dip" buyer would continue to be rewarded, and the market rarely likes to show it's patterns so easily. So, I'm thinking it inches up a bit more here – because those who say they'd sell at 10K will watch and decide to stay in. Those that didn't think it could ever surpass 10K will say "wow this must be real, we just passed 10K, I gotta get in". And all of those that sold short over the last two weeks would have to cover or lose big time. Then, just about when everyone is totally on board that the market is destined for 11K, they pull the plug and ALL those people get spanked.
But wait it gets even better. Let's suppose we do hit 10,400ish or so. Let's say then they do pull the plug and we lose 700 points or so, causing everyone to scramble, sell out, go short, etc. What would be better than once again reversing and pushing straight up into year end, frying all those that just "got out?" It's almost too perfect - yet I wouldn't be a bit surprised if this is the way it pans out.
Just remain nimble and let’s see how this plays out. We're going to continue to "lean long" but keep our hands near the sell button.
TIPS:
- we’re still holding MOO – agricultural space ETF)
- we’re still holding IPI – agricultural – potash arena
- we’re holding PTEN – with a hard stop 26.06
Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.
R.F. Culbertson
rfc@getabby.com
http://rfcfinancialnews.blogspot.com/
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