I'm back!

Hi everyone. I am sorry I haven't posted anything this past 10 days as I was back east and was busy with family. I will resume my posting on a more regular basis. Thanks for your visit.

This morning CNBC had the head of VISA on their show talking about their new Digital Wallet which will make charging easier and the use of the actual Credit Card to fade over time in favor of the digital phone embedded chips or software. However, that was not what caught the most of my attention. When Mark Haines asked him his view on the Consumer and the economy he said, we are still in a slow recovery, with the emphasis on the word "slow". Then he elaborated on what he meant. He said that while the economy has not lost ground but it is barely advancing. So when you hear from Bernanke say we have "moderate" growth, substitute the words, "slow to non existent!" That was the most accurate pronouncement I have heard to date in describing this stagnation.

You can try and blame the President but if you miss blaming the Republicans, you have your head in the sand. They have tried to stop this President at every turn. They want to cut spending drastically, but not invest in anything that would create real stimulus and jobs. That's the jam we are currently in. Heck, many didn't even give any praise to our President for getting Bin Laden. But enough on that for now. It's good to be back!

5 Year overview of the Dow and S&P500 (UPDATE)

I have posted 2 charts this morning showing where we are relative to the longer term market trend because many of you are wondering whether we are going back up to new highs in the market. The news outlets are full of people who are predicting just that and say that the worst is over and we are ready for as breakout to the upside. My data analysis suggest that is not going to happen any time soon. I believe we are now most likely to drop over the next few months and into October, as we end Q3.

Let's look at both charts above for a moment. There are similarities in the pattern of both charts and I have added a blue downtrend line for each, which we will not go above, and also a red resistance line, also a barrier to moving higher.I know looking at a 2 month chart gives you a sense we might be going up over Dow 11,000, but I am confident that is not going to occur. We closed at Dow 10,466 yesterday. The last 4 days have been down in the Dow, not up and while yesterday's market action for the Dow was impressive, as the Dow was up much of the day in the face of headwinds caused by a lower than expected Q2 GDP number, it still had negative distribution if you look at the Volume chart.

I have been disappointed that so many have been fooled by the media and aren't really giving as much weight to the economic data for the past week. There were many negative readings for the week if you check the previous post. This is not an economy in real recovery. It is weighted down by the Consumer not really seeing things better from their day to day experiences. Until that changes I am sorry but the economy won't really recover as we hope it will. We are unfortunately in this mess for years to come. My guess at least 5 years from a Housing and Jobs point of view. More foreclosures are lining up this Fall, as Adjustable Rate Mortgages must refinance to Fixed Mortgages, over the coming 6 months to a year and which were set 5 years ago. Many of these people borrowed on their equity and assumed prices would continue to go up as they had for many decades. Unfortunately this group is most likely most vulnerable to foreclosure as they are retired people who borrowed the equity on their homes and now their homes are under water. It is so sad.

UPDATE: Sunday 6:00pm PST


I changed and updated the original S&P chart from what was posted. Notice that on the S&P chart I have drawn 2 blue lines. Notice that when I connect the #2 Blue line under the last "W" pattern and extend it back over the 5 years, you can see it touches all the low points, this before the market had problems in 2008. To me the use of software program trading has resulted in patterns like this. It isn't just coincidence this happened. It is programmed to. This 2nd line does not show a similar analysis for the Dow. It is likely we will stay bound in the S&P between these 2 blue lines although the #1 blue line is not as much resistance as is the solid red horizontal line which crosses the axis at 1,190.

It's the economy stupid! Boom, Bust or Stagnation?

Many are wondering when the economy will be coming back to pre recession levels anytime soon. I gave this some thought and when you look at the math, it looks dismal. Let’s take a look at it.

First, let’s begin with the Consumer. The Consumer has been responsible for 70% of the spending in the country. The other 30% comes from the Business community buying from each other. Since nominal GDP (Gross Domestic Product) of the United States was $14.2 Trillion dollars in 2009. Assuming the Consumer contribution, of 70%, that comes to $9.94 Trillion dollars. Ok, now let’s assume that even though the numbers I presented are for 2009, let’s assume there was no recession that year. (The reason I say that was because the nominal GDP for 2007 was $13.8 Trillion dollars, not far off from 2009.)

The Unemployment rate in 2007 was only 4.6%, while today it is 9.7%, and as high as 20%, if one counts those not collecting benefits and have given up looking for work. There are about 237 Million people in the Civilian non-institutional population and the Civilian Labor Force has about 153 Million people. The officially unemployed total about 15 million people.

In 2006, total discretionary income totaled $1.7 Trillion dollars in 2006. Nearly 78% of all discretionary income is held by households earning more than $100,000. “While the percentage of households with discretionary income has risen over the past several years, purchasing power remains concentrated in the wallets of the affluent,” said Lynn Franco, director of The Conference Board Consumer Research Center.

So, if you take approximately $10 Trillion spent by Consumers, and then figure in the unemployment rate of approximately 10%, you have about $1Trillion less dollars for Consumers to spend. Add in the fact that 78% of all discretionary spending is from households earning more than $100,000, and it is even a higher number than $1 Trillion. That doesn’t include the businesses that don’t have money to spend buying other’s equipment, which represents the 30% of spending done by business. There could be another $1 Trillion less spending by business. That’s a huge hit on the economy.

If you put the $2+ Trillion out of the economy and then add in the Governments $0.8 Trillion Stimulus package, you can see we still are a long way off to making up the difference. As long as we continue to have 9-10% Unemployment rate and higher real Unemployment, we will not come out of this mess anytime soon. This implies to me not to believe the stock market will continue to rise. As a matter of fact, when these inferences become more recognized as truth, we may have a double dip recession. We will know by September/October this year whether that plays out. Oh, and by the way, conveniently, this is just before the November mid term election, where the Republican Party hopes to make much gains and take over the Congress. It will be the time when Democrats are more vulnerable to losses. Stay tuned!

Market update.

It has been a while since I posted last. But the reason is there hasn't been much commentary to make on the market. As you can see from the chart above, the Dow did rise the last 2 days but on lower volume than there was 3 days ago. Many are awaiting resolution to the issue of Greece debt before commiting new money to the market. Besides the top of this market is just below 11,000 and no one is going to risk buying unless a correction of 10 % has been made. That is why volume is dropping instead of rising the past 2 days.

Another point to be made is the fact that the 200 Day Moving Average is rising and it won't be long before we go below that level. I expect it in the 10% major correction I expect before the end of March. That will be the end of the 3rd quarter and many will speculate about how bad things still are. Then comes the first few weeks in April where earnings are announced for the 1st quarter.

The Consumer has not increased spending, nor will they until the unemployment picture looks better. That, unfortunately, is a long way off. New Home Construction was up in January and the market moved up accordingly, but that isn't a good thing as there are many houses still in foreclosure or short sales and the last thing the housing market needs right now is more houses on the market. We need a little scarcity of available homes for sale right now, not building new ones to add to the market.

Market summary for June 17, 2009

The Market closed mixed today and the change was insignificant in all three Indexes. However, the big news to me today was that the Put to Call ratio closed at 1.13 which is the highest it has been in a long time. As a matter of fact, within the first 1/2 hour, the Put to Call ratio hit a high of 1.41. From the chart above you can see where that would have been, if it closed there. But still, 1.13 is getting up there.

I expect this to go higher before the market closes on Friday as Options are expiring each day. Today, VIX, VXN, RVX Options all have expired. Tomorrow morning settled index options cease trading. And on Friday, Expiring equity, P.M. settled index options and treasury/interest rate option classes cease trading. Expiring cash-settled currency options cease trading at 12:00 p.m. EST. The Quarterly Options Expiration doesn't occur until June 30th.

The volume for the Dow today was still significantly lower than the Moving average, but it was equal to yesterday's. The Nasdaq seems to have equal volume to its moving average. The Nasdaq gained 11 points today, the Dow lost 8 points and the S&P500 lost 2 points. The trend is still down for 2 out of 3 Indexes and the Dow has now fallen back below its 200 day Moving average. The S&P 500 is still above its 200 day MA but it is very close to going back below it again. The Nasdaq still has plenty of room above its 200 day MA.

Volatility was somewhat lighter today as the VIX closed at 31.54 today, down slightly from 32.68, which was yesterday's close.

Data announced in pre-market today was the CPI (Cost of Living Index). Many investors have been discussing perceived inflation concerns. But today, the CPI index came in at +0.1%, hardly inflationary. Yet many worry that eventually the heavy spending by the Treasury and the Fed flooding the market by printing as many dollars as the presses can turn out. I am sure eventually we will need to worry about inflation, but every sign I see is that we are still in a deflationary period. Everyone is dropping prices in hopes to gain more volume and sustain profits. But the Consumer is deaf to these announcements and continue to save cash rather than spend. As long as this continues, this economy is not going to recover anytime soon. You may not believe this but the best way of testing this premise is to ask yourself the question, Am I spending as much now as I did a year ago and am I going to be spending more over the next 6 months? Anyone want to respond, click on the word Comments and add your opinion as to how you are answering this question. Please also leave the name of the State you are living in currently.

Also, please don't forget to take the Mini Poll on how long you think the recession will last. Thanks!

Market update for June 11, 2009

Weekly jobless claims came in at 601,000 which was down 24,000. Continuing Claims were at 6.816 Million jobs. Retail Sales were up 0.5% compared to last month being down. However if you look behind the overall Retail Sales number, the reason it was up was because of Commodities and Energy price increases. The more important numbers for sales of Electronics, Furniture, Appliances and other Consumer discretionary spending items, were all down. The Consumer has stopped spending in all but the absolutely necessary items. This does not bode well for Retailers. We are heading into the months they consider placing orders for Christmas that require long lead times to manufacture. Look for Coal in this Christmas's stocking.

The so called Green Chutes don't look so green today even while the market is trying to go higher. By the way, when you read other articles talking about "Green Shoots", notice they are misspelling it. I'm not a good speller as writing on flip charts over the years has taken its toll from speed over accuracy.:)

The Futures today are pointed only slightly down, while they were slightly up earlier before the Retail Sales and Weekly Jobless Claims were announced. European markets are down currently so it is a good bet today will be down as well. I am still consistent with my outlook that the markets will head lower and not continue to rise. We are in a range which only goes as high as 9,300 and as low as 7,800 but we will test the lows at the 7,200 and possibly go to the low of 6,440 on the Dow by Options Expiration near the end of October.

There was also an article today titled Option ARMs Threaten U.S. Housing Rebound as 2011 Resets Peak from Bloomberg news and the Housing market. One excerpt worth noting was this:

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy, said Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia. Owners who surrender properties to the bank rather than make higher payments for homes that have plummeted in value will further depress real estate prices and add to the inventory of properties on the market, she said.

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” Wachter said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

The possible fallacy in the market rise, these past days

There are some fundamental assumptions accounting for the market rise these past few days. The assumption is that with all the bad news out, the market has risen and therefore is real, because the market is about 6 months ahead of the economy. The problem with that assumption is that included in that belief is that the end of the bad news is close in. That's what's wrong.

Today's ISM Manufacturing index came in at 28, which was the lowest it has been in over 30 years. Do you honestly believe we have seen the worst of the layoffs? Do you believe that shoppers saved the day this holiday period? If true that would make a huge difference since the Consumer represents 70% of the economy.

My experience tells me businesses are still shrinking and it will take a long time before that shrinking stops or reverses course. It's really nice to see a 235 point gain on the Dow. But what will the coming weeks and month provide to us? My guess is more of the same. Not trying to rain on any parades. Just trying to call it as I see it. Hope you took some profits if you had them on some short trades or added to your short positions as your day will come.