(Courtesy excerpt of the weekend’s Daily Briefing. Video ‘technical corner’ analysis and projections are posted nightly at www.ingerletter.com ; please visit for details.)
Gene Inger's Daily Briefing . . . for Monday April 26, 2010:
Good weekend!
Active managers . . . are perpetuating this move; and that’s fine; if unsustainable. Of course even the bulls are increasingly nervous about the ‘melt-up’ characteristics that are somewhat aided-and-abetted by realization that corrective action is very overdue.
For our part, as odd as it may seem; we have not had a single stock short-sale aside efforts to hedge our longs periodically with intraday guideline shorts in the S&P; while at the same time being willing to periodically trade long as well (with bias for blow-off action that will resemble upside capitulation). I’ve also been long (personally shared it regularly) the single area that has led this move higher most recently; and that’s Oil. I have consistently felt that Oil stocks (since calling the top last year around 140 and a low point assessment on the break of 75) that oils were the least risky way to play the upside; after previously exiting Financials (and others like Ford), bought late Feb. ‘09.
Not trying to say we’re bullish here; as we’re not. Just that the trend is your friend and is up until it’s not, and that’s the point we’ve tried to emphasize while alert for failure. I think this is a scenario where even the shrillest bulls that I exchange thoughts with, in all candor, are nervous while cheering on their ‘winners’. That the S&P forges ahead, in a sense, is assisted by the almost daily spikes early that fade, then short-covering that flips the market to higher levels, as the hedgers (not really bears) run for cover. It is perfectly normal behavior (more for members). Later look for the same crowd (etc).
While pundits crow about home sales; they typically ignore these are the final days of the stimulus-led move; though nobody doubts that if Government ‘threads the needle’ successfully (that means tons of jobs which seem almost an impossibility quality-wise for now), eventually many new home will be needed. Not larger ones; which is why all the action is concentrated in the low end (that’s where most distressed sales are too), as the higher end actually is seeing some further deterioration, generally unreported.
Timing-wise of course we refuse to chase this market (while holding stocks that we’re absolutely comfortable with, whether it’s big oils, small refiners, or specs like Pure); and have outlined the prospects (as we envisioned) for risk to increase (timing note). Even if one is bullish, it’s reasonable to say prices generally are exceeding normal value criteria, for full recovery; or certainly for anything shy of that.
The coming week will probably see even higher efforts as the GDP looks superficially better, and maybe the massaged (unrealistic) Employment Report shows. Upgrades, of all kinds of stocks and sectors, has occurred widely; and the results are being seen in terms of drawing-in what can be drawn-in. Not enough has changed with leverage, and not enough has changed with respect to reform (reform?) to sidetrack this as yet. And for those who think the market is a monolith moving higher; take a look at ‘tech’. You’ll find that aside Apple and one or two others; the sector has traced out bearish patterns for a number of stocks, and even outside cell-phone sensitive competitors to Apple, there is palpable weakness, not strength. This may sound like heresy with the enthusiasm that exists, and the promises of the VP for 500,000 jobs a month coming (and we hope he’s right); but that’s the reality if you look at (reserved remark).
That means the dangers of volatility when the pieces do come together for a break at least seem as vicious as ever, if not more so. The only saving grace would be a ‘real’ evidence of more than stimulus based cyclical recovery (whether economy or market) and something more secular. We don’t have that; much less structural improvement.
Daily action . . . has assessed all these main points, and will now summarize a bit of it before the weekend videos take a look at where technical matters stand now. As for the coming week, look for smug optimists (assessment and forecast for members).
A semblance of sanity returns . . . to the marketplace; after extended market rallies that we expected after Easter, became ever more anemic, and then eventually fragile as noted the other day (and even on strong days the underlying divergences are just a bit visible, if one looks). For weeks we noted that the structure of trading made this a tough market to take lower (nervous bulls grinding higher in peer-matching trading, not because they believed the optimistic propaganda), but that once it broke we’d be facing a (forecast of future pattern resolution and ensuing likely action). In the reality of it all, the challenge was believed different than merely attracting sidelined monies.
That may be why they’ll be tempted to ‘run for the hills’ on the first signs of more than a well-advertized overdue (say 5%) ‘correction’ in the Senior Averages, and ponder rather what happens when that forthcoming decline approaches 10% or likely more. In many sectors I’d argue that’s already underway; with the Oil-led rally masking the distribution under-cover of a firm Dow and S&P over the course of these past days in the face of a melt-up scenario that is actually not the panacea (more commentary).
Overall we’re of course impressed by this week’s turnaround; but most of it was Oil and short-covering; as outlined as likely to provoke a further rally, within our morning MarketCast comments. Thus while it was a wild ride; nothing underlying has actually changed. What would be sobering (redacted). However; that’s not the only thing that can shake the market, and again is a sort of temporary support for the U.S. markets (has been so far) as a ‘safe haven’.
Financial analysts are also loath to touch upon the ‘real’ quality of banking earnings it seems; as nary one brings up the subject of what situation the banks would be in had there not been taxpayer money at the ready (beyond keeping the doors open; the old argument as to why bailouts were needed; when we all know the doors would have stayed open anyway; what wouldn’t ..is as outlined to readers). It’s pertinent because spreads are widening and toxic debt still hasn’t been unwound.
A fragile financial sector . . . is subordinated to virtual daily hammering into investor heads perceptions, that banks are in great shape (well better thanks to taxpayer buck ‘contributions’) and that the health of the global economic system has been restored. I will be the first to say it’s slowly regaining some health; but depart from the optimists glowing assessments, by denoting the rising threat of sovereign debt (specifics here); and the rising delinquencies and societal polarization here it seems right in the U.S.A. Not to be forgotten: toxic debt is still largely not unwound.
One characteristic of this recovery has been the surplus of funds for ‘public’ projects; but paucity of money for ‘private’ activities. That is part of the recovery’s fragility let’s be clear about. Lots of talk about helping small business; and very little actual moves. At the same time this ‘public policy’ bias has contributed to the sharp government rise in overall indebtedness, during a crisis that all along has had this at elevated levels. It may be that focusing on public rather than private funding has distorted the recovery.
Nevertheless, in this ‘threading the needle’ effort by Government, so far they are not totally failing; and that has to be recognized too. It’s the ‘bang for the buck’ aspect we are concerned about; along with the debt built as a result. Remember; somewhere in the near future they have to come to grips with this even of (redacted for members).
Because of the (previously noted fairly often) focus on the public sector (usually stuff that is depreciating, make-work, and not contributing to rapid growth) rather than the private sector, the biggest nearer and intermediate threat may continue to be arising from government (here and in Europe too) taking-on toxic asset debt and that capital injection into defective institutions. There is debate on the interlocking relationships, as have occurred as a result of all of this; and it is inappropriate to ignore this area.
This is all very complex, and there are no regulations proposed that can address this as of yet. We have argued for a couple years that on the recovery there needed to be a ‘real’ reform that not only limited derivative trading to standardized exchanges, and which prohibited commercial banks from delving into this realm. (Expanded analysis.) If all this remains unaddressed, we simply migrate into new phases of financial crisis.
A narrow focus on earnings and ‘confidence’ has prevailed, rather than any broader perspective. That has even witnessed some sidelined money that just two weeks ago was seeking shelter; currently coming into the market. An upside capitulation? (more)
I have called this a controlled Depression since forecasting about three years ago, that the Fed and Treasury would facilitate systemic stabilization, but not much more. I regret to inform you that we were and continue correct. It dovetails in that businesses and even municipalities (we know of two) who concurred with our specific expectation back then, circled their wagons, harbored their cash, and properly rode-out the storm. Watch and see what investors do when (not ‘if’) the market eventually breaks anew.
Conclusion: stabilization efforts notwithstanding; overall recovery and deleveraging conditions will prevail (not may prevail) through this year, and probably into next year as well. Intervening rallies in markets will occur (some fairly wild), of limited duration, at this point. If other developments unfold that could change prospects we’ll evaluate.
Bottom line: continuing characteristics; include (consolidated) the following bullet points:
· Perceptions of credit crisis as behind, and economic crises ahead discounted; are premature.
Further bullet points provided members; please visit ingerletter.com site for details.
MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks forecast substantive failures by markets; particularly as 2010 evolves (whether just as a correction of a worse case remains to be assessed). Remember back in early 2007 we denied the 'liquidity' momentum as a canard; believing housing only the first asset bubble to deflate. We then outlined structured investment vehicle failures; banking issues, the confluence of asset deflations, and more; continuing with interruptions per projecting long ago: 'a perfect storm'. New sets of storm clouds are quietly gathering.
As the debt bubbles continue to deflate, alternating tradable moves continue from a trading perspective. Against that backdrop dating from a macro (adjusted) Sept. S&P 1600 +/- short irrespective of interim oscillations. Technical analysis via video follows.
Daily Briefing Technical-Corner MarketCast Videos
Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers primary technology issues (needed for assessment of general factors in tech, or as compelling developments call for) that are key movers in the NDX, SOX or S&P, plus ideas ingerletter.com thinks might merit further reflection. (Individual stock comments generally are provided in video overviews only; occasionally I'll have some thoughts here; however increasingly most all analysis is via video, as it should be.)
Three years ago I commenced projecting an 'accident waiting to happen'; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now a market may struggles with over-extended rebounds as this economy restructures.
Though enormous efforts have avoided systemic disaster on the banking front; there is no equivalent rescue of the overall economy besides perception; nor restoration of engines for sustainable growth. People are adjusting to lower expectations; which will never be a favored approach to American life. Actually we don’t see it as permanently alternating the future; but we still have major adjustments to work-through. That’s the reason we warn about chasing rallies; not to mention major ‘commercial’ adjustments as are ongoing. And as I’ve said; there are fairly visible new storm clouds gathering.
Enjoy the weekend!
<h2 style="">Gene</h2>
Gene Inger,
Publisher
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