(Courtesy excerpt of Gene’s www.ingerletter.com weekend analysis. Forward outlook provided via Flash video charts outline technical prospects for the new trading week for subscribers only.)
Gene Inger's Daily Briefing . . . for Monday October 12, 2009:
Good evening;
A ‘lack of confidence’ . . . among professional money managers (actual consensus) concurrent with a record number of respondents to investor surveys expressing their optimism, may seem to be an interesting conundrum. (This point is expanded upon.)
In reality, while we’ve tended to caution against expecting markets to ‘implode’ at any particular moment, mostly as momentum and pre-Expiration structure argued against that (not forgetting my view that this market has ‘not’ been really jammed overbought as some thought; even as it is by all yardsticks extended, with respect to persistency without notable corrections); what you have is a situation that is becoming (again not quite there) more similar to a comparable sentiment inversion as followed the start of last year’s more-than-mild hit. Clearly the backdrop’s notably considerably differently.
Now as concerned as we remain about this market, we knew they ‘could’ and would take it higher until they couldn’t; and it’s been all-too-obvious that Dow 10,000 and of course something like S&P 1100, were targets of those pushing this market (which it seems includes not only traders and banks subsidized with our borrowed tax dollars, but foreign monies such as possibly from China’s Sovereign Wealth Fund or others).
For that reason, as detailed each day without in our intraday comments; we take the occasional stab at the short-side (preferably on spikes up, not downside little purges) and tighten things up for either a profit or hopefully breakeven as a session evolves. I have not suggested, nor have I personally taken, broad bearish positions as of yet; at the same time having tried to warn that what we’re developing is probably the quality of an (nature of a potential top, barring exogenous events as may become interlopers down-the-line, is outlined to ingerletter.com members). A point aside scalping trades is to hold-off trying to ‘make’ it break (like permabears try), and realize this takes time to mature; such as per our discussion about (ideal) equidistant ‘A-B-C’ phases of the rally. I’m absolutely distrustful of this advance, but that relates primarily to not buying into extended markets, which isn’t the same as ‘telling’ the market to break any time.
At the same time, when it does break, there will likely be a scampering for the exits it seems (to preserve those gains under-belts so far this year), but not without (noted to our members). Hence one of these hit-and-run short efforts may turn into something more impressive, but that has nothing to do with what conventional investors should be doing (they never short the market anyway), which I have repeatedly suggested is basically make sure they have sufficient capital aside, so as to take advantage of any such more dramatic correction, for buying eventually.
To wit: at a major top like 2007 or the false rebounds in 2008; I’m interested in shorts; in an intermediate situation which is ‘controlled’ we think within controlled Depression environs; there are positions that we shared we accumulated late in 2008 near lows, and again in late February and early March. Of course we’ve been too skeptical as it extended with the most minimal corrections in the Summer, however, only now is this approaching those equidistant measures, which doesn’t ensure a break or collapse, but at the same time enhances the prospects for (fully outlined at ingerletter.com).
Because it may well be corrective in nature (the economy is a mess, but the ‘fix’ is in even including foreign money and ‘Agency’ purchases, which many of you realize), it remains an environment in which we can be suspicious of how heavy the market will be hit ‘when’ it breaks (commencing in the next –reserved- sessions or so I suspect), while realizing that the valuation matrix is absurd with respect to forward earnings or the like. But while appreciating the fundamentals, trading has to include technicals at the same time as investors (aside trading proportions of their assets) probably did not and should not have done anything aside some additional nibbling last Fall and in the late Feb./early March purge, as suggested then. A point here is not committing fresh capital into rising prices as have gone so far north they’re near a precipice of (noted).
Daily action . . . realizes that some of the banks could surprise on the upside (with of course our taxpayer support, withheld from really sparking jobs and growth engines) I think (a few on the downside, and then later a large number of bank failures is likely).
Meanwhile the Federal Reserve that some hate so much (we won’t even comment on Ron Paul’s book; especially in the midst of this reparative effort) has overcome heavy constraints on policy posed by dysfunctional credit markets and the zero funds rates. These programs provided critical financial system support as we argued a year ago; and added liquidity to the system, while they did not meaningfully open credit markets very much. Close attention to the exit strategy will become the key; and that actually has a negative portend for markets, for our international lenders, and favorable for in fact the beleaguered Dollar. That’s why the Trade Deficit improvements are primarily from the officially-denied Government soft-Dollar policy. Looking forward (members).
Bottom line: this remains a market hell-bent for Dow 10,000; and you know how we’re thinking (subject to revision when we get there) that gets handled by the markets. At the same time this is also remains a schizophrenic market environment, where short-covering, program trading, foreign entity buying and institutional traders are at the old game again; which probably is not going to create a public capitulation into buying as would be required to loft a market significantly higher without (outlined to members).
A few capsule summaries of this week’s remarks, then the weekend technical video.
A funny thing will happen on the way to Shangri-La . . . bumps in the road. Few analysts are giving credence to any warnings about banks (reserved remarks); while we think progress on the way to recovery is rough at best, and overplayed by many sectors at worst. Then there are commodities. It is (always) impossible to divine how far breakouts carry (like Gold); but while this is not a call for a break (redacted for our members), we do suspect (as outlined).
Still expect the worst is yet-ahead for delinquencies and various commercial defaults in the months ahead; and that retail won’t recover not by midyear next year, but later for that matter. Some think 2012. But even that is without logic based on jobs growth, or a propensity of citizens to rebuild their financial bulwark, rather than debit balances of their favorite shopping spree venue. Think more in terms of ‘full employment’ which also is wishful thinking when you hear ‘four years’ try (estimated target) on the way to forecast prosperity in the decade 2020-2030 (with of course all various troughs well before). Even then, it requires mitigating tremendous debt Government has wrought.
So if the outlook is bleak how can the market advance? Because it can. Maybe usual behavior such as money looking for something that works; or possibly those who are stuck with non-performing corporate bond (vulnerable) or Treasury holdings, who just might (China Sovereign Wealth Fund and some OPEC members perhaps?) forcing a ‘play action’ fake that relates to myopic analysis that sees those who colored much of the available commodity and mineral rights both in Africa and Latin America, as being reflective of what’s going on in America (when nothing could be further from reality). I do not think the U.S. ‘consumer’ is (details about conditions)). I think U.S. ‘consumer’ behavior is like responsible citizens instead of punch-drunk spenders. If people don’t spend it can mean they discovered what in the old days was considered grandparent ‘depression’ mentality: also known as sensible ‘frugality’. How long can that last? (ah)
This is not negative analysis; this is a positive interpretation of the eventual outcome of frugality upon the wellbeing of the Nation; as it recognizes this simply takes time. It is also concurrent with our long-standing view (since projecting the real estate high in 2005) that such a bubble was a ‘once in a lifetime’ event never to be seen again. The commencement of modest stabilization and recovering property prices (timing likely, outlined) tantamount to the creation of jobs and growth engines; and I think that also means enforcement of common-sense trading policies and even those immigration laws that are already on the books. Most of the new ‘czars’ and laws are superfluous, since all Government had to do was admit they dropped the ball widely and enforce.
Macro action . . must include two items before I forget, that I touched on long ago as well as intraday today: 1) that the Chinese, besides having ventured into Africa and Latin America for mineral rights and so on (cornering a lot of commodities), are doing other things; like a) control over Freeport Grand Bahamas (75 nautical miles off Cape Canaveral in case you believe there’s more than cargo in warehouses on that Island);
they’re funding current widening of the Panama Canal, surrendered by a one time would be internationalist named Jimmy Carter, whose protégé has done little aside a base agreement in Columbia to consolidate American interests in the region as yet; c) China is doing this to facilitate oil tankers carrying oil to China from Venezuela, and of course this Government has totally forgot about .. ‘The Monroe Doctrine’.. bet it isn’t seriously noted in schools, lest defensive reality interfere with idealistic dogmas.. not to mention that Iran has concluded a nuclear technology agreement with Chavez; of course heaven forbid this would be discussed on National mainstream news, while d) at a meeting I learned of a friend’s son who owns orange groves in Central Florida (around Lakeland and Ocala) now being surrounded by Chinese who’re buying every parcel they can get their hands on… bet that didn’t make the news; as I hadn’t heard of that. And incidentally I don’t fault the Chinese for being smart capitalists; I fault the U.S.A. They are acting as shrewd businessmen; the U.S. is acting like well..a chump. The second item we’ve addressed before; Oil. I have said that ‘as such time’ Oil goes over roughly 80-85, I suspect that’s approximately the inflection point where you’d get a separation from the tracking of the S&P and Oil, which has been better than what of course you all hear about; the Dollar contrast. You could have Oil go up AND the US Dollar, while Gold and the market Averages tumble; and that would be fascinating. As to timing of that; well, there is a rising wedge pattern technically; but precautionary, in Oil, and lots of silly talk about Saudi Arabia needing ‘financial assistance’ in-event the world stops using oil. Please; isn’t that what you’d hear before they break it higher?
The restrained pace of economic recovery . . . (if indeed that’s not exaggerating it in terms of optimism) is visible just about everywhere ‘except’ the market Averages at this point. (Last) night’s special chart showing distribution of ‘Net Gains’ in firms justly we would think should be a graphic of net losses. While I want ‘reality’ to be fantastic, of course, for America’s future; most of the comments border more on cheerleading (a vital part of keeping morale high, but that’s differentiated from actual planning by at least those who ‘get it’..otherwise you’d see lots more ramping-up by companies now we’d think.) During the current recession (or controlled Depression), small firms have accounted for about 45% of the job losses; much higher than during prior recessions.
An economist at the Atlanta Fed (Melinda Pitts) notes it’s ‘not clear’ whether the small business sector will continue to play their traditional role in hiring staff and/or helping to fuel employment recovery. If she’s right then (implication explored for our readers).
Bill Dudley, who took over the New York Fed from Tim Geithner, identified restrains it seems in many financial areas, that inhibit small business (which hires the majority of all new jobs historically, and unless we’re going to just have oligarchs, will again as in the fullness of time we migrate out of this mess), and thus restrain economic revival. I note that these remarks are within the last 24 hours (not dated); so are in-context. As an analyst, I’m well aware the stock market keeps pounding ahead (thought it might, as this is the middle of the week before a nominal Expiration after all); but I cannot be lulled into a false sense (further remarks on this subject follow).
Of course I realize that they’re trying to have a repetition of the reflation we correctly and persistently were bullish about in last 2002 and 2003 (and for several years). But unlike that one, this is stretched without the underlying favorable growth possibilities; without the broad consumer purchasing power; and without generally available credit. It also is occurring with the borrowing power of the United States somewhat crimped.
I say this not as an excuse for not being more euphoric about our own forecast turn in the late February / early March timeframe as it increasingly matures, but because it is of concern. At the same time, even back in 2002-2003 we said that kind of effort was empowering consumption, not ‘real’ growth, so thus was a cyclical rebound as I think it’s fair to say it was (ie: the major or secular top occurred as projected back in 2000); and thus we said ‘afterwards, the piper will have to be paid’. Sure, in hindsight would have loved to cheer this on more in recent weeks; but logically irresponsible to do so, and at this point can’t suggest one throw discretion to the wind to chase after dreams.
And yes I know that there are lots of folks worried and lots who are bullish (the ones that usually are all the time, so we tend to put more weight on being flexible realists). The ability of this market to move forward has been impressive; but inherent within that is a danger of what occurs when the fuel runs out. Hopefully it will be more like a ‘movie theatre’ that has a fire, where at least some if not most of the patrons will get out their exits in time when the warning is issued; as contrasted to an airplane flying at 35,000’ where usually luck’s not on one’s side when trying to exit at that altitude.
Concurrently I’m aware that longer-term indicators (and oscillators) are by no means heavily in overbought territory as some contend (a point made periodically); but they will not (technical interpretation follows for our readers). With pressures it seems on all sides to attack the Dollar, promote inflationary fears amidst a Deflation; I on one hand wish the ‘controllers’ of this advance success (as it levitates values for a lot of Americans who were harmed); while thinking it has a real ‘charade’ character to it.
Further the public debt ‘bomb’ is still out there. We have periodically noted how that has grown rather than shrunk, with tax mileages increased, rather than reduced, so as to give taxing authorities a leverage to milk citizens for more rather than budget trimming; though finally some of these taxing units are coming more into line. That’s also a painfully slow process, and it triggers concern about future debt dynamics too. In this regard a pending California Bill is an appropriate bipartisan realistic approach.
Conclusion: stabilization efforts notwithstanding; overall recession and deleveraging conditions will prevail (not may prevail) through this year, and probably into next year as well. Intervening rallies in markets occurred (some fairly wild as outlined). In event other developments unfold that could truly change prospects; we’ll evaluate.
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Bits & Bytes . . . provide investors ideas in a few stocks, often special-situations, but also covers assorted technology issues as are key movers in the NDX, SOX or S&P. (Individual stock comments generally are provided in the video overviews only; once in awhile I'll have text thoughts here. Increasingly most all daily analysis is via video.)
Thirty-one months ago I commenced projecting an 'accident waiting to happen'; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now a market struggles with periodic rebounds as this economy tries to restructure.
Though enormous efforts avoided systemic disaster; there is no equivalent rescue of the overall economy besides perception; nor sustainable growth engine restoration. People are adjusting to lower expectations; which will never be a favored approach to American life. Actually we don’t see it permanently alternating the future; but do have major adjustments to work-through. That’s the reason we warn about chasing rallies; not to mention major ‘commercial’ adjustments as are ongoing. Visible storm clouds.
Enjoy the weekend; and Columbus Day!
Gene
Gene Inger,
Publisher
~Gene Inger’s Daily Briefing™ (The Inger Letter daily analysis on www.ingerletter.com)
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