Market comments for Sept. 20, 2011

Today I have a series of 3 charts to show you, but before I do a little explanation and commentary. Over the past several months now our US market has been in a relatively tight range of between 11,500 and 11,000. It has been a stated fact by many analysts that the US market is following the European markets due to the concern of a default of Greece. Even as recently as this past weekend, there was news that the governments bailing out Greece wanted to extract some guarantees that Greece was serious and they wanted to see Greece promise to layoff about 100,000 government workers. So that is the backdrop story.

I have put together a chart of Germany's DAX Index, France's CAC 40 Index and the Dow. All are 1 year in duration as of the close yesterday. First the charts and then the commentary.



As you can see from the charts above, Germany and France's Indexes are still apparently going lower and the Dow and other US Indexes seem to be not following the most recent trend as show by my red lines. To me I interpret this to mean that 2 scenarios are possible, First and to me the most likely scenario is that any more of a drop by these European markets may result in a sharper drop by the Dow. The other scenario is that we will disconnect from these European markets and stay within our tight range until our own economic results determine our separate direction. Much depends right now on the politics of the negotiations by Congress over the next few months and to whether the joint committee will be able to agree on spending cuts and revenue increases. However, be forewarned that Europe is really driving our markets and we could be setting up an alarming drop as many are not prepared for the market to go lower. I was at a party on Sunday afternoon where someone who was talking about the market stated that all indicators he has been watching have flashed a Bull market rally is about to begin. I told him I didn't know what he was watching but I think we are firmly in a Bear market and we are going much lower.

Market comments for March 21st and the week

It was not surprising this morning that the market is up. The Dow is up 165 in early trading to 12,027 and the S&P 500 is up to 1295, all because of 2 things. First the success with the No-Fly Zone in Libya and secondly because of the fact Friday was Options expiration lat week. Let's face it the news isn't that good with Oil this morning up another $2.00/barrel. Many expect this trouble in Libya to end badly for Libyans. Don't forget we are dealing with a mad man in Gadhafi. And as they say the acorn doesn't fall far from the tree and he does have several sons, who are by his side in all of this mess.

Expect this week that we will form a lower low than we did last week at the Dow will make a try at going below 11,400. We have had 3 strong rallies the past 3 trading days and I think that string of moves is about finished.

Last week I purchased the Agricultural ETF, symbol DBA for $32.60, as I see agricultural commodities rising with oil prices surging on Middle East concerns as well as of Japan's nuclear reactor concerns and recovery from the Tsunami and earthquake. I expect DBA to go to $36 in the short term because of these problems.

And on the political front, the Republicans are not dealing with the debt issues except in very small ways. So the mountain of debt we have is still rising with this republican Congress and this unwilling President who has his eyes only on 2012 and not making any mistakes. He has been absent on this issue for fear of angering constituents. But that's not leading at all, I'm sorry to say!

Where's the market headed? Some facts to consider.

I was trying to use news items to see the probability of the market going up versus down going forward. So I have listed all the things I could remember that would affect the market negatively and which would positively. Here’s a glance at them:

Positives:

-Stock market rallied this past year and recovered 70% of the losses from the lows.
-The SubPrime mortgage problem has run most of its course.
-The divisiveness of the healthcare reform Bill has abated and the Bill passed.
-Personal Savings has increased this past 1 1/2year
-The Dollar has rebounded from its low after the Euro has dropped significantly.
-The US Auto companies have been restructured to be more competitive and profitable
-The Banking system has been saved from total collapse and Deposits are insured by the government, for up to $500,000 per couple.
-Freddie Mac and Fannie Mae were saved from the brink of collapse
-The Stimulus plan has created some jobs.
-GDP was 3% in the first quarter
-Corporate earnings for the most part beat expectations (but expectations were set low last year. Top line growth has been muted but cost savings have led the way for earnings improvement.

Negatives:

-The debt level of the US is astronomical at a significant % of GDP
-The EU has had near collapse of Country debt for Greece and is threatened by similar issues from Spain, Portugal, Ireland, Italy.
-The Gulf Oil crisis is destroying habitat and livelihoods in the Gulf for years to come
-North Korea has threatened war against the South and us over the Missile torpedo on the South Korean ship
-The National debt will be increasingly difficult to pay as interest rates rise.
-People are afraid and causing GOLD and Silver to rise dramatically as they don’t trust currencies.
-Stock market is poised for a Super Grand cycle correction according to Elliott Wave Theory.
-New Home Construction is still down and Home Prices are continuing to go down.
-The CPI is near zero with all the Stimulus money throw at it and we are in Disinflation now and headed towards Deflation.
-Bank lending has tightened significantly and 3 Month Libor (rate the Banks charge each other for lending) rates have increased.
-Official Unemployment rate remains high at 9.9% while the unofficial rate, which includes those looking for Full time work from part-time workers is at 20%.
-Wars in Iraq and Afghanistan
-Issues with Israel for Obama Administration over building Settlements
-Latest incident of Israel raiding the flotilla of boats bringing supplies to Gaza
-Issues with Iran and Nuclear materials for possible bomb building.
-Terrorism: A host of attempts to terrorize us from Detroit bound passenger lighting his pants on fire to the Times Square attempted car bomb and many others trying to harm the US.
-The Tea Party movement
- Political divisiveness between Democrats and Republicans
-Arizona Immigrant laws newly enacted.
-Financial regulation not yet passed to prevent Too Big to Fail banks.
-Stock market looks poised for another selloff
-Now Fixed Rate Mortgage owners are going into foreclosure and rate appears to be increasing.
-Commercial Property is now feeling the problem with businesses closing and there are now an increasing number of For Lease properties For Sale. The U.S. national office vacancy rate of 17.3% was the highest in 16 years.
-Credit Default Swaps still are an issue and have not been resolved since the crash of 2008.
-Most Fixed Income retirees are getting in more and more of a financial bind and may have significant problems financially surviving in their retirement.

That’s my list. What does it say to you? Do you think that these can be overcome and drive the market higher this year or next? To me the Negatives far outweigh the Positives and my inclination is that bodes poorly for any chance the markets will stay at current levels for any prolonged time. The best hope I can see is that we won't go as low as I have predicted, which is below 4,000 to as low 2,500 on the Dow. Now that is truly scary!

Do you have any items you want to add either on the Positives or negative lists? Please feel free to make a comment with any additions you have.

Consumers still paying off debt. A good thing for them but a bad thing for the economy

I came across a good chart and data provided by Haver Analytics on Consumer Debt. You will remember that I said in a recent post that the Consumer is 70% of the equation in Sales in this county and until they start really spending, the economy is going to stagnate. Add to that the fact that unemployment will also stay high as long as companies can increase productivity with their existing employees. In the chart above you can see that things don't appear to be trending in the right direction for the economy to pick up.

In the Haver Analytics posting today, here is what they said:

"Consumer borrowing continued its retrenchment during February. Consumer credit outstanding fell $11.5B, reversing a revised $10.6B January increase which was much larger than reported last month. The Federal Reserve reported late-Wednesday that the resultant 4.0% y/y decline in credit outstanding remained near the record. During the last ten years, there has been a 60% correlation between the y/y change in credit outstanding and the change in personal consumption expenditures.

· Usage of revolving credit was cut sharply. The $9.5B drop followed a modest January increase and left usage down a near-record 9.1% y/y. Versus February 2009, finance companies lowered lending by 14.3%, commercial bank lending fell 12.7%, pools of securitized assets fell 7.4%. Loans from credit unions offset some of these declines with a 6.5% increase while savings institution raised lending 1.6%."

Dow and markets in for more trouble (Update)

As you can clearly see from the chart, the Dow is staying below its 3 year downtrend line, shown in red. This week's failed auction in Portugal to raise money was the catalyst for world markets selling off. It is a very fragile situation and this coming weeks auction on Wednesday should reveal more weakness in markets, unless someone steps into the breach and buys.

There has been concern shown in news articles that the Euro itself may fail. There are at least 4 Countries with the problem of high debt and a high % of their GDP allocated to paying it off. The US is not as bad as some of these countries but we aren't the best either.

In the meantime, be ready for another leg down in markets as more nervousness takes hold. This will cause the Vix to rise up again while Gold and Silver will take another drop.

I still have my ETF Shorts, TZA, FAZ and my Silver ETF Ultra Short, ZSL.

UPDATE 9:00AM

One thing I forgot but thought was important to add and that was that the Total Put to Call ratio on Friday closed at 1.21 which is the highest it has been since October. The rebound during the day from the 165 drop in the Dow most likely came because of this technical Buy signal. It may be good only or a day or two of trading but I think we are headed lower. Listen to the video of Noriel Roubini on Bloomberg.com to hear his most recent comments on the world financial crisis facing the EU.

Bad economy, jobs lost, huge government debt: Do you want this to change? Then wake up and pay attention to what has happened!

Ok, I am on a rant and while I am at it I wanted to comment again about why we are in trouble as a country and how each political Party over the past 25 years has advanced or tried to eliminate some of the problems. As I said in my last post, Republicans say they are against big government. I don't think any Republican out there would argue against that claim. But as you can see from the chart above, (and please click on it to enlarge it and take a real good look at it), it is much worse than even this chart has shown, the Republicans have created most of the debt of this country. This is indisputable and based on the facts. Now they tell him to "Reduce the burden on our children and grandchildren (which they created). It makes sense they would do this from a values perspective when you think about it. What better way to shrink the size of all government than borrowing money for things like tax cuts and wars of choice (Iraq) and putting the government into a debt so large that the only thing anyone can do is either raise taxes, which Republicans are so much against, or shrink the size of government. That has been their strategy for the past 25 years. The Republicans have deliberately raised the debt so there isn't any money available to solve problems like healthcare for all or paying teachers a decent wage based on how important it is to be able to compete in the world with a first rate education.

President Obama and the Fed are trying to do everything they can to help get us out of the most recent mess, which by the way wasn't created by most Americans. It was created by the Free Enterprise program run amuck by a relatively small number of greedy individuals through a push for deregulation in both Banking and Insurance. It is those same greedy people who want as many tax breaks as they can get, some not even willing to pay their fair share of taxes. For them, it's all about me philosophy. Most of the social change that has happened in this country has been the result of the Democratic Party, like Social Security, Medicare and Medicaid.

So I guess I am more of a Democrat these days than a Republican. I am more left than right leaning and I voted for Reagan when he ran for President. But the Republican party of the past 25 years is nothing like the Republican Party of 25-50 years ago. They were more rational, tried to do the right thing for Americans and were more willing to work in the middle of the spectrum with Democrats. Those days are over as is the former Republican Party. We became a debtor nation under Republican leadership. I am totally behind our President for the changes we had hoped for. He will succeed if we get behind him as this is still our country. The voices against him are the ones who created all of our mess. Get behind him or you will lose your country for good. There, now I have said it!

The greed of Wall St. and the Banks have put US second to China

The headline news today is from Paul Volcker. Here's some excerpts from Bloomberg's article:

Volcker Says China’s Rise Highlights Relative U.S. Decline
By James Tyson and Michael McKee

Sept. 29 (Bloomberg) -- Former Federal Reserve chairman Paul Volcker said the rise of China and other emerging economies has underscored a decline in the comparative economic and intellectual leadership of the U.S.

“I don’t know how we accommodate ourselves to it,” Volcker, an economic adviser to President Barack Obama, said in an interview with PBS’s Charlie Rose taped yesterday in New York. “You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do.”

The former Fed chairman also said unemployment at 9.7 percent will slow the pace of recovery from the U.S. recession as Americans default on mortgages and consumer loans. Moreover, commercial real estate loans are likely to cause further losses for banks.

“This recovery will be slower,” he said. “We can’t just pump up consumption and pump up housing again.”

Most of the people who did this to America were leaders in the financial system of our country and they have ultimately relegated our country to a more diminished place in the world economically. Yes, we still have strong Military power, but eventually this sellout of our way of life because of their greed will affect Military spending too. We have no other choice. We're broke while the wealthiest of Americans participated in this scam on America. They were supposed to be so smart, but couldn't they have seen derivatives produced no real products for consumers or really added any substantive assets to our country. It was all just paper (money) and it made our real wealth disappear as we have now nothing but debt and we owe it all to China.