Our Thoughts:
I just Don't Trust This Market
Everyday I get asked the same question - "Why are you so glum, the numbers point to recovery". Everyone cites several recessions where in it took a long time before people bought into the idea of a recovery. What’s different this time – JOBS. On Friday the CEO Report told us that 22% of all polled companies plan to lay off more people. The general public may not know how this economy works but they see: foreclosures, inflation, gas approaching $3 bucks, taxes rising, houses on the market for 24 months, a lot of bad things. And what is different this time around – it’s the Internet!
In 1982 (a previous recession):
- The US was still the worlds largest exporter, and the largest creditor.
- People were looking forward to lower taxes.
- Our nation was fiscally sound.
Comparing that to what’s happening presently:
- Greece is doomed - and up to 18 countries could follow in lock step.
- The U.S. is running TRILLION dollar deficits with more to come.
- Wages have been stagnant for 10 years
- All the good paying, blue-collar jobs have gone off-shore.
- Household debt is enormous.
- 49% of all Americans pay NO taxes, leaving the ‘other’ half to pay the bills.
- Baby Boomers are retiring at the rate of 7,000 per day, yet 51% of them have "no visible means to retire". 70% of them have less than $50,000 in savings.
- We are scheduled to see 300+ regional banks go belly up.
- And we're waging wars in 2 locations, eating hundreds of billions per year.
- AND - we’re no longer dependant upon big newspapers for our news!
If that wasn’t enough:
- The U.S. office vacancy rate rose to 17.2 percent
- 149,268 consumer bankruptcies were filed in March – a 34% increase over February - the highest monthly consumer filing total since Congress overhauled the Bankruptcy Code
- California's three largest public-employee pension funds currently face a total shortfall of more than $500B
- The pension plans at General Motors and Chrysler are underfunded by $17 billion and could fail if the automakers do not return to profitability
- The Wall Street Journal reported major U.S. banks temporarily lowered their debt levels just before reporting in the past five quarters, making it appear their balance sheets were less risky
- AND over 212,000 could lose unemployment benefits this week.
The difference this time around – is that we all have access to multiple channels of information – and we can separate reality from fantasy. For example: the American Farm Bureau Federation said that Supermarket prices for 16 basic foods were up 6.2% in the first quarter, led by gains in cheese, vegetable oil and eggs. But the Government said that food prices went up just 0.2% in January and 0.1% in February. Now - Who do you believe?
Yes, right now there is a disconnect between what the economy is really doing, and what the stock market is doing. This disconnect is one of the largest we've seen in many years. Despite the trillions in stimulus, despite the rah-rah of the market, we are economically cooked, and until this recess/depression runs it's course, nothing's going to stop it. The Government can slow it – but they can’t stop it.
The Market:
The Market has wanted DOW 11K for months – but it’s tough when the bulk of the American population doesn't have the means to invest, and most of the foreigners are trying to get money OUT of the US(S) Titanic not put money in. So, for the past 3 weeks we’ve been running in place. Consider this: 8 million people are out of work and 3 times that are "under-employed" – with the remainder being very scared of touching the stove – AGAIN. So, Friday (after an incredibly boring session) they circled the wagons and late in the afternoon, pushed and pushed and broke through DOW 11K - to end the day at 10,997.
Okay - now what? This week is the official start to "earnings season" and yes we're going to hear some tremendous earnings. Uncle Sam has spent trillions to keep things moving and companies have cut employees and expenses to the bone. But my guess however is that we are still in a topping phase. It takes a long time to roll over after a year of the biggest financial stimulus and Wall Street push in our history, but roll over we will.
Was Friday the top? I don't think so. I think we still have a climactic "blow off top" coming. I could easily see us gain 150 - 200 points, and then start a long process of stair stepping downward - lose 300, bounce for 200, lose 400, bounce for 300 and so on. After all, history shows us that "stocks" often rise up into their earnings, but interestingly the "market" doesn't have to follow along.
So we will lean long into the stocks that are going to release earnings - usually taking a position 3 to 5 days before the report will reward you - but we never hold over through a report, we always sell out the day ahead.
Tips:
I would be a lot more optimistic if:
- Uncle Sam wasn't spending the upwards of $24 trillion in stimulus,
- Banks were marking assets to market, instead of to "model" which the FASB has allowed them to do,
- Taxes were about to go down instead of up,
- There were NOT 7 million homes in a "shadow inventory",
- Good paying jobs were abundant, and
- Companies reported GAAP earnings instead of proforma.
Therefore, I’ve traded very little this past week and have only two positions open:
- MS purchased at 30.27 – with a stop in at 30.30
- LTD purchased at 26.02 – with a stop in at 25.99
I’ll be trading stocks (approximately) 5 days prior to their earnings reports – and then selling the day before their earnings release – as these next several weeks unfold.
If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.
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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