Posted 19 July 2012 - 04:53 PM
HOME OF "PICTURES OF A STOCK MARKET MANIA" July 18, 2012 Alan M. Newman's Stock Market CROSSCURRENTS Alan M. Newman, Editor Excerpts from our current issueRationales & Targets Friday’s action is an indication that stocks may now be ready to turn up in what most would call a traditional summer rally. Truth be told, many of our trading indicators reached “oversold” levels and prices were poised to at least turn temporarily. However, we are certainly not looking for much and still strongly believe we are overdue for a rather large smash to occur as usual, in the fall. Until then, a series of starts, stops and hiccups should keep the major indexes in a fairly tight range from 12,500-13,100. We will eventually comment on Europe and it won’t be positive. Turmoil over deficits and debt overseas will translate to less consumption. China is cooling off. As long as the jobs market continues to stagnate here at home, spending will be restrained. Subtract Bank of America, and you have negative earnings expectations for the S&P 499. The path for lower estimates has been down for a year. Sure sounds like less consumption in the pipeline and less to come. Sure sounds like a bear market. Programs Explode The week after our last report, featuring a chart of program trading on page three, the NYSE reported that programs accounted for 46% of trading for the week ended June 22nd. This represented the 4th highest reading on record. The U.S. markets have been commandeered and no one cares. ETFs have also changed the game and no one wants to discuss the broken mechanics that result in some players only owning a small portion of what they think they own. We’ll explain more in our next issue. No Jobs, No Investors THE ORIGINAL ARTICLE HAS CHARTS NOT INCLUDED HERE. TO SEE THE ENTIRE NEWSLETTER, USE THE FREE TRIAL LINK ABOVE. The recovery from the March 2009 bottom in both stock prices and the economy was certainly welcome, but net inflows into mutual funds only lasted from April through August 2009. Over the next 14 months, outflows totaled nearly $50 billion, with positive inflows enjoyed in only four months. In November 2010, investors gave it one more shot but even that lasted only six months. For the 13 months from May 2011 through May 2012, every single month has witnessed outflows and we take this as proof that investors are totally burned out, exasperated and are not likely to return to the fold anytime soon. While analysts, strategists and commentators pretend it is business as usual, it is not. A sea change has occurred. After recording an all-time low of 3.3% in March, the cash-to-assets ratio for mutual funds rose from 3.4% in April to 3.7% in May. Despite the larger percentage of cash, liquid assets only expanded by $1 billion, thus firepower or ammunition to drive another rally remains severely limited. We have made the case repeatedly that the cash-to-assets ratio will have to expand dramatically before any huge bull phase can commence. Ten days before the bottom in 2009, the cash ratio had expanded to 5.9%. We would likely be comfortable on the long side again if the ratio achieved the same level but given the secular withdrawal by investors from all things pertaining to stocks, even a 5% cash-to-assets ratio might conceivably be sufficient to catalyze a renewed interest in equity. Until such time, we believe sponsorship must remain minimal at best. Equity funds are 96.3% invested. There is precious little room between today’s levels and 100% invested. As well, the stock market is still highly leveraged. Margin debt remains over 2% of GDP for only the sixth time in modern history. Again we hasten to remind, the more leverage is in place, the less potential firepower there can be for a new bull run. At the bottom in October 2002, margin debt was less than $139 billion. A mere ten days from the March 2009 bottom, margin debt was under $200 billion. Total margin debt is now $315 billion and was over $330 billion just two months before. Below, the first huge spike in margin debt versus GDP appears in 1999, the year we believe the mania for stocks commenced. The higher horizontal line represents the average for margin debt versus GDP from 1999 to present. The lower horizontal line represents the average level of margin from 1958 through 1998. Two vastly different phases! It is hugely instructive to comprehend that in the first phase where the utilization of margin debt is a relatively conservative tool, GDP averaged 7.6% annualized; in the second phase, where margin debt was accepted without reservation and somewhat haphazardly, GDP has averaged only 4.2% annualized. A nation built on leverage cannot possibly work as efficiently. Leverage is a tool, it is not to be applied in all circumstances and to the greatest extent possible. As a consequence of the piling on of leverage in all aspects of our economy, including the federal government, the future is considerably murkier than before. The U.S. total labor force participation rate climbed steadily from 58.5% in 1963 to 67.3% at the peak of the mania, coinciding with the first phase of normal leverage cited above (a slight lag would be expected before the participation rate turned south). Since then, as leverage has swept through every aspect of our society, the participation rate has contracted considerably to 63.8%, right back to where it was at the of 1981. The dwindling participation rate is another reason to expect the secular bear market for stocks to endure, despite all attempts by the Federal Reserve to engineer a significant recovery. QE1, QE2 and Operation Twist have clearly not turned the corner for the economy, which still stagnates. In the process, the government itself has turned on the leverage spigots and will again run into yet another debt ceiling problem before the summer ends. The ceiling has been raised 11 times in 11 years, most recently to $16.4 trillion, up $4 trillion and nearly one-third since the end of 2009. Ironically, the surge in the national debt also coincides with the reduction in the labor participation rate. If this is not the most troubling development in decades, we’re certainly hard pressed to think of another. For the first time since the great depression, there has been no job growth for an entire decade. We expect QE3 in the fall and it is not going to change anything. 
INTERESTED IN PERSPECTIVES YOU'LL FIND NOWHERE ELSE? ENROLL IN OUR FREE TRIAL. NO OBLIGATION. WATCH THIS SPACE FOR MORE COMMENTARY ON AUGUST 15th. WHY NOT REQUEST A FREE TRIAL?http://www.cross-currents.net/steward.htmlPowerful Commentary. Unique Perspectives. ABOUT ALAN M. NEWMAN Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S. The newsletter is published roughly every three weeks and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/. Subscription rates are now $189 for one year and $100 for six months. A FREE 3 issue trial subscription is available by emailing us (click the "free trial" link above). Please note: trial requests must include name, address and phone number and must originate from the email address the trial is to be delivered. Trials are only available by Email (.pdf files). U.S. Mail subscriptions are available but include a nominal surcharge for postage and handling.
