HOME OF "PICTURES OF A STOCK MARKET MANIA" April 14, 2011
Alan M. Newman's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
Excerpts from our current issue
Rationales & Targets
If it weren’t for the Fed’s Permanent Market Open Operations (POMO), it’s likely stocks would be several thousand points lower. The Fed has tossed so much money into the financial system through its bond purchases that the money must go somewhere, like into stocks. There has been nothing in the news background to imply the kind of run we’ve had and despite the government’s efforts to placate and assuage participants with positive stats, we do not see it. One of every eight Americans is over the age of 65 and those who are receiving social security have been robbed by a system that cannot measure inflation adequately. The elderly pay more for food and gas but one Fed governor believes iPads are a more valuable measure of inflation! Like the SEC, the Fed appears to be totally clueless. In the meantime, the recent extremes in sentiment, as measured by Investor’s Intelligence, mutual fund cash-to-assets ratios and margin debt scream that the possibility a major top is in the making. There may actually be a chance for a retest of the March 2009 lows at some point.
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A few weeks ago, the Bureau of Labor Statistics (BLS) reported CPI up 0.5% in February, the fastest pace of inflation in almost two years. So called "core" prices, which do not include food or energy, rose only 0.2%. Given our dependence upon food and energy, we have never been comfortable with the inane notion that everything else determines the core but then again, we have never been comfortable with the common wisdom foisted by our authorities. As we showed in our February 21st issue, inflation appears to be significantly understated and the only question is by how much. While the federal government would have us believe the numbers are rather tame, somewhere in the neighborhood of 2.4%, our own personal gauge leads us to believe inflation is running between 5% to 6% annually and John William's ShadowStats.com, puts inflation at an annualized rate of 8.7%, believable given recent price increases. Of even more concern, recent news indicates that more increases are clearly in the pipeline. The government reported that wholesale prices increased 1.6% in February, a huge jump, and wholesale food prices soared 3.9%, the biggest increase in 37 years. Walmart’s CEO Bill Simon warned “inflation is going to be serious.” Given WMT’s sales of $422 billion, we think Mr. Simon has a good idea of what’s in the pipeline (see http://tinyurl.com/4hxkncg).
One of the measured responses to this awful and depressing news was NY Fed Governor William Dudley's take, delivered shortly before the BLS reported the bad news on the CPI. Dudley was in New York, giving a speech on the progress of the economy and touting the success of QE2 and lower interest rates, but frankly, the government has helped Wall Street firms and banks, not consumers. When the questions inevitably came, the crowd was anxious for Dudley to explain why they were paying so much more for food and gas. Food and gas prices are not part of the "core" inflation computation since they are assumed to be more volatile, even though the increases can remain in place for a long time and function as the primary impetus for the prices of everything else to increase. Thus, the fed's logic seems quite perverted and opposite to reality. But don't tell that to Mr. Dudley, who insisted that other prices were falling to make up for the perception that prices were rising across the board. Dudley beamed, “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful. You have to look at the prices of all things.” Of all the dumb things that Mr. Dudley could have uttered at that point, this was undoubtedly the dumbest. According to Reuters, the remark "prompted guffaws and widespread murmuring from the audience," and two highlighted quips from attendees, “I can't eat an iPad” and “When was the last time, sir, that you went grocery shopping?” Indeed. Apparently, Mr. Dudley lives in a fantasy world, as do many of his compatriots in the federal government, who are compelled to fix what ails us by debasing the nation's currency.
Not all feel that way, witness Richard Fisher, President of the Dallas Fed, who insists that the U.S. debt situation is at a tipping point (see http://www.cnbc.com/id/42209447). Most important in our view is that Fisher warned of signs that “the speculative style of trading that had helped fuel the financial crisis” was again surfacing. Clearly, our feature article has showed just that. Frankly, we can’t understand how the environment has produced so much optimism. The collapse of the economy from, 1929-1932 took decades to fix. Although the world is a far different place now than it was then, the 2007-2009 debacle was a close second place in every regard. Perhaps the bottom is in. But that does not mean an all clear signal is in place. In a previous secular bear market, the Dow bottomed in December 1974 at 592 but was not able to put the 1000 mark behind it until October 1982, eight years later. And the Dow had first hit the 1000 mark 15+ years before, in February 1966.
This Is A Booming Economy?
You just don’t know who to believe nowadays. The government says the economy is growing at a decent clip, up 2.8% in the fourth quarter of 2010 and supposedly, even faster now. Roughly one-third of GDP is retail and judging by insider activity, things do not look all that rosy. In our most recent tally of the top ten RTH constituents, there were 140 sellers and only 2 buyers. The 70 to 1 ratio is the worst we have ever recorded for the RTH. So was the shares sold to shares purchased ratio at 3909 to 1. Insiders sold over 32 million shares, the most we have ever tallied. Note how selling dried up into the March 2009 low and has since soared. More evidence of a huge top being put into place.
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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/.
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