Market outlook: Painful times

Lest there be any doubt, the markets are heading down a lot more down. If you had any doubts, look at the volume of Fridays drop in the chart below, with 280 million shares traded. Average volume runs about 180 million shares these days. The volume for the last two days should have woken you up to what's happening. The major stock of the Dow 30 stocks responsible for this spike at the close was Cisco's stock. This market move of the past 30 days is a systematic steady erosion and not the quick panic correction followed by a nice rebound. This is eventually going to get quite painful for most people.

Most people will watch the drip, drip drip of their losses like a deer caught in the headlights. Those of us who are on the short side of this market, will reap the rewards of our patience. But here this, I will not take much pleasure out of this as the true meaning of this decline was avoidable and many fine people are going to be hurt financially. As a newsletter I read today said, "Wall Street thinks all is rosy, but Main Street knows it is a depression."

I have posted many charts on this site and showed some 30 year charts in those posts. The future does not look rosy. I wish it did! But we must face the reality that our elected officials are not trying to solve our countries problems. And let's be honest here folks, the Republicans are still saying no to any taxes, even for millionaires. They would rather see us default on our debt and try and win some political advantage then to fix the economy. I realize I am being partisan here, so save your emails to me. The last time this happened was when the then Speaker of the House, Newt Gingrich, shut down the government. They lost the next election smartly. It wasn't necessary. People were reacting to the inflexibility of those in power. If everything is on the table, so is taxes!

What's it going to take to get out of our economic funk? It's contrary to what you think!

We are all concerned about the economy and the stock market. The talking heads on CNBC and other networks like Bloomberg are asking questions like these: Will the Fed's Quantitative Easing work this time when it didn't seem to work last time? What's it going to take to get more confidence back to Consumers? Will the individual investor return to the stock market or have we lost a generation of investors? I have given these questions some serious thought and with my background of understanding people and the psychology that drives them, there are answers which will seem contrary to what the experts in the Fed and the markets are currently providing. Here are some of my answers to these questions.

For confidence to come back, the stock market must go down and have a retest of the lows! It is the only way where people will be convinced that the market is reflecting the economy. Without the drop, which by the way had been predicted by me incorrectly for the past 6-9 months, people believe the markets are being manipulated (which they are) and therefore an unsafe place to invest or to make money. It is the very avoidance of market turmoil, which has driven the lack of confidence in the connection of Wall St. to Main St. I am not saying it won't scare people, but they will feel relieved if there were a successful test of the lows and that there is the all clear sign with respect to investing in the market and the economy. The economy needs a spark right now and the Fed can't provide it. It has shot its wad already and it failed. The government isn't responsible for creating jobs, it's the Private sector. The Private sector won't until the mood of the Consumer is more optimistic and they are spending somewhat more than they have been.

I am afraid without the market drop, hordes of people will stay in a funk, things will remain depressed and many will feel there is no hope of recovering. The world needs the boldness and courage of the American people to lead the world out of this mess. The answer is NOT to try and protect the stock market but to allow it to reflect reality. We need the stock market to fall and retest the lows successfully so that we can reset the psychology of the public.

The Economy and Unemployment: A discussion of current times.

I thought a discussion was in order since the release of the 10.2% Unemployment rate data on Friday. It is difficult for most Americans to really see the impact of these numbers but I am going to share some observations with you on how America is slowly changing like a faucet dripping water or the boiling of a pot of water, it takes time to really notice the change.

Let me start with a quote from Haver Analytics which was published on Saturday.

"The official unemployment rate continues to pale in comparison to the rate which includes "marginally attached workers" and those who are working part-time for economic reasons. It rose to a record 17.5%. Another tally of joblessness indicates that with "discouraged workers" the unemployment rate rose last month to 10.7%. Not only are more individuals unemployed or have stopped looking for work, but the median duration of unemployment jumped last month to a record high of 18.7 weeks. The ranks of those unemployed for 27 weeks or more rose to 5.594 million (145.9% y/y), also an historic high."

Here are some historical facts. The unemployment rate for the years 1923-29 was 3.3 percent. In 1931 it jumped to 15.9, in 1933 it was 24.9 percent. It then steadily decreased until 1941 when it stood at 9.9%. In 1942, after U.S. entry into World War II, the rate dropped to 4.7%.
(Source: US LABOR STATISTICS.) Looking at the data announced on Friday, October's unemployment rate jumped a whopping 0.4%, one of the highest jumps in over 5 months according to the chart above. You see we may be starting a higher monthly rate increase than the previous 5 monthly increases.

Let me put a face on the above quote by using an example. Last time I walked around the famous Newbury Street area in Boston, a prized Chic upscale shopping area, I noticed how many small shops and sizable buildings had "For Lease" signs plastered over windows of empty store fronts. Some advertised whole Floors in the multistoried buildings For Lease. The streets were full of people and bustling from one place to another, but not many carried bags of purchased goods. I grew up in Boston and in all my years I have never seen so many empty store fronts in this neighborhood. You see it isn't just the lower class areas being affected by this economy, it is the upscale enterprises as well. This is a change in American's behavior of seismic proportions. With more Small businesses going out of business, it will mean more layoffs, more foreclosures, more vacant apartments and more suffering for far too many people. I am afraid this is going to be commonplace in the next year. I saw the same thing in an Francisco neighborhoods as well.

The importance of this isn't just in the Retail Sector, it is affecting all Small Businesses because credit has dreid up for most or their savings and cash reserves for a rainy day are spent trying to hang on until the economy turns around. But wait, you say the experts have said the economy has begun to turn around and the stock market is up, The Fed has proclaimed the recession is over and we will be coming out of this eventually. Call me a skeptic, but I do not see things getting better any time soon. The next big shoe to drop is Commercial Real Estate. And with all the small shops closing you can see the ripple about to happen to the buildings too. There will not be buyers of these properties until the prices drop more. And so it goes on and on.

Think about the airlines now for a moment. With much business being curtailed for small business and the number of layoffs in large companies still continuing, the airlines will be standing next in line for a bailout. I purchased 2 tickets to go from the East Coast to San Francisco one way and non stop. Can you guess what the price was for the combined tickets? It was less than $270 total! That's less than what it costs to pay for gas to drive across the country. This can't be good for the airlines. They are selling tickets across the country for about $135 a piece. This is amazing and can;t be profitable when you consider the costs of airplanes, the salaries and benefits for pilots, flight attendants, mechanics, ticket handlers, baggage handlers and all the corporate office functions needed to run a company like IT, accounting etc.

The American Consumer is going through a fundamental seismic change in sending habits that will be permanent for this generation. We are not at the end of this economic downturn. If it were a baseball game I would say we are in the 5th inning with still more baseball to come. Cash is KING and will be for some time to come as well. It has been the American Consumer who has spurred our economy the past 30 plus years. They have been responsible for 70% of our economic growth and for now and for years to come, they are going to be restrained. A good test of this hypothesis is to ask yourself about your planned spending for the holidays. My guess is that it will be about as restrained as it was for last year.

You can try and fight this tend or you can go with the flow and accept it for what it is. Some are calling this period, The Great Recession. Does it remind you of another similar phrase? It does me and for good reason! No wonder Consumer Confidence is way down. And the differences between Wall St. and Main St. need to be reconciled.

For another commentary on the unemployment data read this article from Seeking Alpha titled, "And Bernanke Didn't Think Unemployment Would Reach 10%."

Markets will be down for the coming week. Why?

I have been thinking about the market drop on Friday on accelerated volume. I was trying to come up with some possible reasons which have not ben the usual suspects. This is difficult to do as I have been expecting this pullback for months and I seen signs everywhere that things aren't going to get better any time soon on the economy even though Wall St. seems to defy Main St. So what did I come up with this time and what would be the rationale that this time the market drop is for real and will continue at least for Monday or Tuesday and then possibly on Friday.

So first, Treasury Secretary Geithner was interviewed on Meet the Press by david Gregory. Geithner when pressed seem to say Unemployment will continue to rise even while the economy is recovering as employment is a lagging indicator. But there was more in Geithner's head tilting, a sign of not wanting to answer directly the questions as he knows more than he is saying. I think Geithner knows that next weeks announced Unemployment numbers for October are going to take us over 10% and then the heat will be on. That happens on Friday I believe.

But besides that big piece of news, there are elections being held in several States for Mayor's and for Governors as well as a Congressional opening in Upstate NY, which will reflect a defeat for Democrats which Republicans will play up with the media, as they should. One can rationalize President Obama has had only a short time to fix the problems and one could argue that he may have made some problems worse. But that will be decided by historians and I am not a historian. But I believe that this gives impetus for the markets to correct specifically at this time. It is before Thanksgiving and the start of Christmas Shopping season, so the damage might not be that much of a drag on business than what the economic conditions are already saying about Consumer Spending this year. So what better time for a correction.

This is also in advance of proposed legislation for Regulatory reforms which have already passed Rep. Barney Franks Committee. There is nothing Wall Street would like more to do than to cause alarm to be slow about imposing additional regulations as the market is fragile, they will say. Gee, all this at a time when Executive Compensation is being ratcheted down in 7 of the largest firms bailed out by the Fed. Oh, and late me remind you that this past Friday was the end of the year for many Funds. So, yes, this is the best time politically, financially, economically and emotionally to have this correction. It is all part of the manipulation we have come to expect. To me it is long overdue and I have been saying so for months. But heck, what do I know, I'm only the 200 lb. Gorilla in the room. :) Yes, the market should end down for the week. Hedging with some ETF Shorts might be a smart play for some quick profit.

My Direxion 3x Short of the Russell index, symbol TZA, was finally up for a week. It went up 19.4% since last Friday, Oct.23rd. I see it going up another 20-30% this week as well. It closed Friday at $14.28/share. The ETF of the Financials, symbol FAZ, also moved up this week gaining 18.5% since Oct. 23rd.

UPDATE: 5:30PM PST
The NIKKEI has taken the lead tonight and is down over 250 points. The reason for this can be twofold. First, it could be a reaction from the Dow drop on Friday but it could also be because CIT has announced it is declaring bankruptcy protection.

Bailout: Wall Street or Main Street? Who to believe

The predicate for this $700 Billion dollar bailout plan is that it isn't to bail out Wall Street, it is needed to bailout the economy. Well let me point to previous calls by the President and Wall Street as to what determines the health of the economy. There are 2 things that determine the health of the economy. It is Corporate spending and Consumer spending. In fact, we have been told around Thanksgiving each year that it is the Consumer which determines nearly 67% of that equation and Corporate spending the other 33%. One could make a very good argument to give the $700 Billion to Consumers instead.

Yes, business needs to be able to borrow to get the goods and equipment necessary for their businesses to function. And our economic system is based upon consumption. However the Government doesn't tax consumption. Maybe it should and we need to reshape the tax code. As more and more of our population retires we won't have enough Income from the rest of the population to tax adequately to get the necessary funds to keep this ship afloat. Maybe indeed it is time to change the tax code to a Consumption Tax and away from an Income Tax. That way everyone pays including illegals and those who cheat on their taxes.