(Weekend ingerletter.com excerpt; with technical analysis via videos.)
Gene Inger's Daily Briefing . . . for Monday July 12, 2010:
Good evening;
Structural changes . . . involving many aspects of our nation’s finances, are not in a conveniently shunted-aside in a miraculous fashion; though rising equity prices can tend to give temporary ‘cover’; obfuscating the oncoming unaddressed challenges. I suggested days ago in indicating the prospects of a ‘Mom’s b’day’ rally thrust after a lower-low, that we’d see Pollyannaish interpretations with prices going up, and then gloomster-like reflections, when prices resumed declining, perhaps in July’s 2nd half.
(Portion redacted) although in one of two weekend videos I’ll comment on new price points for the Dow in this move, and where we stand for near-term action. Not to be overlooked; a nominal Expiration occurs late next week; and that’s part of it too. Weeks ago, as we lifted off the initial ‘crash’ (the ‘flash crash’ as a preview just as we thought earlier), I indicated we could get a rocky rebound from roughly late June into early-mid July and then the continuation pattern as outlined. Not easy day-to-day; but essentially that’s what’s being played-out. And of course those who tend to facilitate what some believe the Government wants (higher prices to save the day) would like to emulate last year, but there are available liquidity issues and exhausted Fed policies that somewhat hamper that prospect, not to mention seasonal patterns. (As we noted to our members repeatedly, do not confuse potential liquidity with funds as might be available or allocated for market entry with respect to the near-term; in fact the opposite may be the case as is reflected in higher savings rates and so on.)
Daily action . . remarks on the overall picture discussed in 2 videos this weekend; plus do note there is less of a massive upside surge in the markets than viewed by the permabulls who dismiss the concentration of volume in a smallish market portion.
Essentially it’s a tiered market right now; with Oil most days commanding the lead; as many other stocks are causing investors to shed tears, as the Averages give illusions of greater strength than the market really displays. And it may well run out of steam.
A capsule of the week’s earlier comments, and then the weekend videos follow:
Bear market rally or not . . . higher prices are higher prices. However, now that the pundits are arguing that ‘money can be made’ on the upside here; that’s a good sign they want ‘you’ to bid the market up; perhaps so they can sell their stocks to you just in time for (ensuing action as outlined and expanded upon).
That is especially so in those stocks among the big-caps that have very underfunded pension liabilities ahead; especially in the ‘full funded’ mandate for 2011 requirement. I’ll touch on this a bit more in one of the two videos. And then there was Goldman in today’s session; talking about a weaker Dollar and stronger Euro…almost cause one to speculate whether that means their positions are established, and (redaced) is a prospect (also reserved). Downgrades of some of the financials, mediocre action in almost everything but leading sectors (Oils and a few big caps again) is noteworthy in that the ‘talk’ has improved because ‘price’ rose; but the ‘walk’ remains the same.
For sure we realize there are markets that can extend without justification; but given what is a (smart) proclivity of Americans to build personal cash and not commit more funds to most all money managers (that’s what the statistics and surveys say) is not contrary for this time of year, but reflects the need to rebuild personal liquidity. I think the charts that reflect the overall growth of liquidity and corporate cash do not reflect ‘why’ that money is being guarded jealously (as is appropriate); so again comparison to recent years is (as noted).
To say ‘this time is different’ if one is suspicious is also an incorrect statement. Since this environment is more like the ‘60’s than the ‘90’s or this past decade for sure, one might suggest as we have that compared to comparable periods of slow growth (not relative to extreme contractions, but to historical baseline bell-curves), this time is not different, but is quite similar. That’s the argument for ratcheting down (as outlined).
Also, I do not embrace the pseudo-Marxist analysts who try to acknowledge Chinese supremacy. That’s a crowd that belittles the United States while arguing buying more at the same time (there’s a conundrum). Now it’s convenient for them to encourage a buying spree in Chinese stocks; which probably implies their pals increasingly are so worried about what’s coming over there (property bubble bursts again for openers) to the point where they try to elicit promotions of their stocks at inflated prices by us. Of course China has long-term growth, and lots of that is from essentially colonizing the natural resources of much of the world. But not everybody wants to be colonized by a communist state, and much of this relates to the contracting ability of American firms to truly be a world-stage player. We still need to be a (portion redacted) before major upheaval come (redaced).
Rally mode . . .surrounding seasonal (also known historically as ‘Mom’s B’day’ rally), actually gives no solace for rejoicing, contrary to the robust expectations some argue. Not only did 99 stocks account for 50% of the day’s volume (high frequency trading); but the problem is that what this move did was (and it wasn’t unexpected and actually played from the long side twice during our intraday guidelines, albeit nervously since we’re not optimistic about sustainability); but again it was Oil and Semiconductor led.
So you displace the shorts, bring-out the President to talk about increasing exports to help big companies (were those the ones that moved today; yes), but say nothing for efforts to help small business which is responsible for most spending and hiring in the Nation; aside an allusion (probably stimulated by his talk with Bill Clinton who ‘gets it’) to recognizing that governance that is extremely favorable or unfavorable to business isn’t going to be successful in the long run. Personally I thought he was pained to say even that much; but that he obviously got a lecture from someone about how most of the jobs in this Country are generated by the private sector; not by government itself.
What would have triggered an even stronger rally (and we hoped for it but realized it was unlikely in remarks ahead of the President) would be extending the tax cuts and really doing something to support business and growth across the land overall. No offense to the President (as I want this Nation to recover and markets and people to do well), but the universal accolades from many in the media seem to reflect the market’s rise, more than really giving credit to the President for anything in his remarks. Many of his speeches have been excellent with respect to capturing the stress and concern; but it seems there’s never sufficient hard-hitting follow-through to put teeth into the issues not to explore policies that seem intended to weaken (more).
Bottom-line: my suspicion is that this market rally will be extended or accelerated by the HFT activity; but when taken in the context of the overall picture, deleveraging of the global and consumer sectors continues, and (reserved). There is slow or just no growth (depending on where you look); and this will hit home in the near future. Of course you have periodic intervening rallies especially when the shorts are crowded a bit; but it doesn’t change much. At least we have been allowing for a seasonal thrust in this general area; so for us to be ‘wrong’ (if one wishes to term it that way); you’d have to have the market fail to decline in the second half of July and erode in August.
For us to be right short-term; it doesn’t matter if markets extend further short-term; it’s what it does in the ensuing 6 weeks; basically from mid-month or slightly thereafter forward. I hasten to mention we remain a ‘bad’ headline away from complete reversal of this rebound from the psychologically notable S&P 1000 area. Nothing is changed really. It’s more than a dead-cat bounce; but it was concentrated in the very stocks all the High Frequency Trading computers could influence (note I didn’t say manipulate). However that is the issue, as they basically took this market up simply as they ‘could’.
Given that there has been no capitulation; the odds favor (forecast reserved). Pattern and volume are not impressive, and again we never got a washout that would have been classic. We don’t have to; but there is no consensus of optimism; just wishful rationalization.
So we are rise above the 1040 resistance; and the issue is whether supply swarms this market in the days (or weeks) ahead. The VIX (Volatility) will spike back up at the same time; and normal investors already standing aside will feel vindicated. For sure the other side of that is that all that is overcome like last year and off we go to the races again. However, there is nobody who believes bullish rationalizations as were prevalent at that time (as were invalid; just took time to prove it); while for sure things may be getting better in some areas, but insufficiently to justify prices a lot higher, and perhaps (based on historically similar patterns), a good bit lower after this move.
Deflationary influences are not abating . . . so there is going to be residual impact, regardless of how well some analysts think the market is digesting European issues (as by the way are not so well resolved as some of the pundits suggest). There really is nothing in terms of consumption rising significantly; nor housing improving any time soon; nor geopolitical risks abating; nor a reprieve from the implications of the gusher in the Gulf (disaster than is also an unaddressed opportunity); nor unemployment that will remain heavy for a protracted period of time; much less the encroaching difficulty with state and local budget situations (which by themselves could be a new challenge of serious financial significance)… none of these are eliminated due to a market rally.
Note that the ‘emergency new supplemental Bill’ included a ‘deemed as passed’ non-existent 1.2 trillion budget, which allows the Administration to start spending fiscal ’11 money without the constraint of an actual budget. There is therefore just 1.1 trillion on the ceiling left, and that means it will be breached within six months as this rate. The monthly debt roll continues to be ridiculous, as it perpetuates large problems ahead.
This week the Baltic Dry was smacked-down once again; firming affirmation of global slowing. The bulls can’t have it both ways (more on this reserved for our members).
I also note that for three years I’ve argued ‘cash is not trash’ (it still is not) and that all the contrary arguments were intended to get you to take unjustified risks, or to spend beyond your means; precisely what got this Nation into the problem in the first place. Government needs inflation and a debasing of the currency. They did not get that so now they’re in a quandary about what to do next. The President’s call for more newer spending is ‘old time religion’ and won’t work; just as the pleading for some states to defer cutting budgets because ‘we can’t handle too much at once’ is an old argument as it’s past that point, and there are about 40 states that can’t meet their obligations.
Many easier answers were addressable 2 years ago but they didn’t address them at the time. So now you do come down to fiscal restraint and doing it the old fashioned or proven way; earn it; don’t borrow it. This is very hard for politicians, or labor unions for their pensioners in particular, to accept. Because it means sharing the challenge.
Look at net borrowings; look at toxic debt; look at mediocre recovery; and if one still doesn’t understand this (maybe they don’t want to) just look at the M3 Money Supply.
The bottom line: things remain tenuous at best, and potentially fairly dire at worst; in a sense. That doesn’t mean the U.S. isn’t more resilient than some areas of course; but it does mean that it’s the height of arrogance to see ourselves insulated at all with this situation (few discuss U.S. investments intertwined with certain paper in the EU); much less to recognize that large multinationals remain overpriced given these risks.
Debt impairment . . . is the concern; not earnings and recovery optimism as prevails, at least among the delusions of those who see a sustainable economic recovery with no contractions to test the mettle of the turnaround efforts domestically or worldwide.
I have called this a controlled Depression since forecasting it over 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 who concurred with our specific expectation then, circled their wagons, harbored their cash, and properly rode-out the storms.
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 market rallies do occur (some fairly wild), but 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:
· Simply put: banks rarely loan during Deflation; have little desire to ‘fund’ depreciating assets.
(balance of bullet points provided at ingerletter.com )
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 quietly are gathered.
As the debt bubbles continue to deflate, alternating tradable moves continue from a trading perspective. Against that backdrop retaining 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 finished struggling with over-extended rebounds as our 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 I warned about chasing rallies; not to mention major ‘commercial’ adjustments as are ongoing. And as I’ve said; fairly visible new storm clouds were clustering.
Enjoy the weekend!
<h2 style="">Gene</h2>
Gene Inger,
Publisher
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