The Midnight Rambler

2009-09-15T21:20:00.001-04:00

The Gut, It Speaks

I am getting a strong feeling that the metals are preparing for one push higher before sharply correcting. I will up to sell all of my silver around 17.40 which could very well be hit by tomorrow. Wherever gold is at that point would represent a good sale in my opinion. Obviously this could portend wider upcoming weakness as well, after, as stated, one final blitzkrieg higher.

2009-09-11T09:34:00.006-04:00

The Verdict May be In

I was confused. I can admit that. I was worried about the COT structure, and the level of equity and commodity prices. Long bonds were rallying and the dollar appeared to be stabilizing in the high 70’s on the US dollar weighted index. On the other hand, it has been a successful 18-month consolidation, with gold trading at the high end of its range. There was a picture-perfect reverse head and shoulders bottom, with its credit crisis low of 680 being the head, and its two identical shoulders registering lows of 850, gold’s approximate high in 1980. Daily trading ranges had begun to tighten, you could feel a break in some direction was imminent. Below 930, there was no support until 880, which was minimal at best, so the downside potential was significant. The deflation story had been gaining potency as credit contraction and deleveraging continue to occur. My bets were cautious as well. As I wrote, I had taken routine stabs at hedging out my physical position in the futures market. I knew it wouldn’t be long until a verdict was reached. Now, with silver’s penetration of 15.16 and gold’s penetration of 990, all downtrend lines from even the most long-term peaks have now been taken out to the upside. What does this mean?

I believe strongly that after an 18-month consolidation, a break of the narrowing technical triangle of higher lows and lower highs must be taken at face value, an extraordinarily positive achievement for the intermediate term. Gold has never recorded such an accomplishment and disappointed, except perhaps during the March, credit crisis inspired high of 1009. Some feel gold is setting the stage for a brutal head fake to the upside here. I cannot be one of them. I am choosing to follow history perhaps even more than reason. While the deflationary thesis seems credible, so does the inflation thesis, and has, as such, been the most difficult question of any for economists and market observers to truly “answer.” I will always respect the decree of the action, and gold’s recent drive through well entrenched resistance will certainly help inform my inflation/deflation thesis going forward.

Does this newfound optimism in the metals mean I am going to add to my position today or tomorrow? Not necessarily. Silver is mini-parabolic and is registering a 14-day RSI of 76, traditionally strong sell territory, and as for the COT, well, bulls will probably dread seeing next Friday’s report. While all of these factors could result in sharp drops from most likely even higher prices than Thursday’s, the drops will probably be caught. I have seen gold drives of the past like this one, where it ran and couldn’t even selloff more than 3 bucks before running again, and again. In all those instances, higher prices were in store two and three months out. Remember folks, while I’m not buying more silver before it corrects, 3 days after an 18-month consolidation is not necessarily late, as much as it might feel so to some. Taking a stab on the short side in silver makes the most sense with first resistance coming in at 16.95 and then 17.50. Those are the two prices in play, and they are conservatively higher. The objective would be a quick drop back to the 15s. Gold I will be more careful as it is not quite as parabolic as silver and upside bands of resistance harder to identify aside from its all time high of 1032 and the aforementioned credit crisis peak just short of 1010. For now, that’s all I have. Is it still possible this one giant head fake? Sure, there are ways to respect that and stay open to the overwhelming positives that this week’s action portends.

No Advantage

2009-08-25T18:16:00.002-04:00

Unfortunately, friends, this is one of those trading times where an advantage is hard to gain. Monday and Tuesday, August 24 and 25, are a perfect example. In both cases, markets sold off substantially from opening strength. But, before jumping in a full bear suit, they closed in the green both days, albeit less green than achieved around 9:45 in the am. I am obviously respecting the market's trend and potential for a blow off to my S$P 1112 max target, so that's keeping me from getting too aggressive on the short side. As for gold, i stand equally confused. Whipsawing between 935 and 955, gold is overbought on a futures basis (COT structure), but not overbought enough to suggest that it MUST go down. As a matter of fact, gold's sideways to down 'last couple of weeks' has improved the COT structure, but only slightly. Confusing matters, gold's MACD an RSI, other technical indicators traders cue for an edge are in no-man's land, that area between the baseline and the service line in tennis where any good coach will yell at you for standing. All in all, the situation calls for being flat here. Those with longs that are NOT parabolically extended may wish to hang on for one final push. Shorts would be advised to be cautious of one final hurrah. I am flat, as a pancake. I am waiting for a down move in gold and silver before adding exposure, but i am equally cognizant that we could be carving out a base right here. Like i said, confused. And if i am confused, not to toot my own horn, but its pretty damn confusing out there. I guess i gave it a ring...my horn. Anyhow, that's not important. When i get confused, i get flat, and that's where I'm at, proudly. Downside risk is growing. And i certainly wouldn't have liked oil's 3 point plunge today if i were loaded on the bullish side...

2009-08-16T23:15:00.008-04:00

----“Give a man a fish, he’ll eat for a day.

Teach a man (or woman) to fish, he’ll (she’ll) eat for a lifetime.”

A great friend taught me about the importance of such parenthesis… I switched veterinarians after the Doc said about our girl, Fozzy,“He’ll be alright. Just bring him back next month for his…….”

Cash for the Clunks: Ok then, I did take Microeconomics in college, and obviously received a different training. In my world, anything that sells out in 4 days is/was mispriced! Take the government’s own celebration POPCORN!—that the program will clean our air, removing these 184,000 some gas guzzlers off the road. That it will create much needed demand in the struggling automobile industry from manufactures to suppliers. Ah, yes. But maybe, just maybe, if you had modeled it correctly, performed just a little preliminary testing, “just a little bit of the ma-mincy”, you would have figured out that $2,250 (instead of $4500) might sell out in 3 weeks (instead of 4 days), and take twice the gas guzzlers off the road. Further, foreign car companies (as they sold the lion’s share of the new “environmentally friendly” cars) might have sold twice as many cars as they did. Take a look at the table.

Top 10 New Vehicles Purchased (under the program)

Here is the data sent to us by the NHTSA on August 5, 2009 at 3:30 pm.

1. Toyota Corolla
2. Ford Focus FWD
3. Honda Civic
4. Toyota Prius
5. Toyota Camry
6. Hyundai Elantra
7. Ford Escape FWD
8. Dodge Caliber
9. Honda Fit
10. Chevrolet Cobalt

So now, as you pay for your countrymen’s mortgage, you may treat them to a new foreign car, one that will help clean our air…aaaaahhhh, give a man a fish, yes, I am quite sure that these 184,000 cars are simply cars that will not be sold next month or next year, for they were sold now. Nothing structural has changed—no one has learned to fish in any of this. No one has even learned to put a worm on a hook. This was simply needling the US economy, and because it makes no sense to any economist with a brain, the program was championed on the softer side… good for the environment! Ever popular with applicants, why wouldn’t it be, though new rules, an Obama favorite, has confused dealers and consumers in the process. Just before the people reach maximum frustration, wise Congress diverted another 2 Billion dollars from the renewable energies budget to expand, yes expand, the program, because, of course, it’s was such a success. That’s funny, because when asked what the long-term drivers of growth and employment in this country might be (everyone wants to know…I still don’t know), the current administration routinely cites, what, what was that, wasn’t that the program you trimmed to pay for, yes, renewable energy, the exact department whose budget targeted for this one-time pop in sales. Read all that again. So now we get a good sense of what’s going on here. I sure am going to take a nice deep drag of clean air today and smile, “Clunkerless.” But the smile will soon collapse as I picture the short-sidedness, the myopic behavior, the selfish desire to become a career politician that has driven should-be leaders to cartoons. But they are leading us. That’s the law. Or what’s become of it.

2009-08-16T23:13:00.003-04:00

Markets Starting to feel like a beached Whale (With Obvious Potential to Unbeach itself!): Well, it certainly looks like the “straight shot” thesis, “Scenario #2, suggested in the July edition of the Rambler has come to pass, that continued upward thrust of equity and commodity markets without adequate pause or retrenchment. I had thrown out the objective of S&P 1050-1100 and sure enough, top tick right now is at 1017, not quite to my target. As all difficult markets, they stop just short of a no-brainer bet, meaning every bet takes brains and then some. Technically, the picture looks worrisome to me here. The S&P currently sits at 1003 and find myself flip-flopping on whether the correction started Friday (preventing me from gaining the short exposure I have long-dreamed about with tingles, yes, tingles), or if there is one more, blow-off run to my target in the works. If I am guilty of any sin as a trader it is that I am notoriously early (on too much to list), so that’s obviously the concern preventing my aggressive shorting here. As a younger man maybe, but birthdays and a marriage have added some much needed seasoning to this filet. So what’s the move? I will be taking my long exposure close to zero here, while respecting the market’s momentum, though waning. It is my desire to get short select commodity, financial, technology, etc stocks around the top, but am unwilling to stick my neck out too far just yet, though I want to so badly. I am long-long-term bullish on gold and silver, but have been significantly trimming positions in both on strength as they are over owned and underperforming (gold is, not silver—another sign of exhaustion=silver’s outperformance). Major down moves usually sink all boats like up-markets lift them. I have learned by making excuses for keeping this stock and that commodity the hard way—now I simply sell everything and relax (at least I want to think I do; no, I am close). Yes, yes, I will keep some physical metal position on as “dollar catastrophe insurance” (humbly, I just can’t be sure of anything necessarily…these are, as they say, uncharted waters), but I feel like the dollar, for reasons unbeknownst to me, perhaps simply its relation to the crappy currencies it finds itself competing with (save the Australian dollar, though prices now reflect the difference), seems ripe for a bounce. Many commentators are posting dollar charts and info right now, showing severely oversold indicators like the RSI (Relative Strength Index—just an indication of how overbought or oversold something is) as well as a paltry 3% bullish sentiment reading, as reasons the dollar may soon advance. These data points are embraced by contrarians as the crowd is always assumed to be wrong about what they think en mass (much like Murphy’s law—what can go wrong, will go wrong). The dollar could be forming a revere head and shoulders bottom here, and wise traders should wait for a move above 79 on the US Dollar Index to confirm that technical beauty. A stronger dollar would be another factor favoring a correction in equities, but things can stay oversold for quite a while, so be cognizant of that in the case of the buck.

Yes, it’s too difficult for this overworked brain to determine if this 1017 level on the S&P was the top. Friday’s action was a clear negative, as commodities broke, universally and convincingly, to the downside from consolidation ranges, with much real estate below. I keep mentioning commodities because they, more than anything, serve as the barometer of future economic expectations. Gold is working on a mini head and shoulders top (not good). Sugar is reversing its parabola (don’t short it). There are signs that we could be close.

Remember: Because the market is so heated, and with the knowledge that bubbles, parabolic upswings, can go much further than one can stay solvent, I am refraining from any short positions until S$P 1100, but will be aggressive there. If aggressiveness or worry (for these newsletters come but one a month) has you clamoring for names to short if the S&P hits 1100 before we speak again, just pick something in an economically sensitive sector that has had a big advance and analyze. While this isn’t the most professional advice, it sure does work, as good stories are already priced into the big movers. But be sure to be diligent, and only make bets that you can afford. I can’t imagine what the prices would be like at S&P1100, but I will not be fooled. They will be priced, like houses in 2005-2006—to sell. Don’t listen to the folks who say the path is clear from S&P 1018 to 1200+. I have thought about it, and while possible (anything is really possible), this market is set to top at 1112 at the highest. Getting there necessitates a crowd that is screaming S&P 1200 (that’s how it will hit 1100!), but they will be wrong. Giddiness is rampant, I simply don’t know why, as this economy seems little improved with some spotty patchwork plugging its gaping holes. I keep hearing about this segment of the investing population, this pathetic group, the underinvested bulls--Hedge fund managers are apparently so worried about relative performance that they are routinely cited as the reason that the stock markets cannot go down even two days in a row (for they keep “capitalizing” on weakness, if you can call 150 Dow points weakness, Cramer will, he’ll rave about the sale). All I know is this, the more something moves in only one direction, on the correction, it will be the same, one direction, relentlessly, to the degree that it was on the upside. Newton’s law folks, Matter cannot be created or destroyed. Oh, I can’t wait, I can feel it in my gut, that this group, the underinvested bulls, shall soon become known as the overinvested bulls, or the bulls that bought the bank’s junk at the top. This next down move is really going to separate the cream from the crap (or is it supposed to be crop) as far as investment managers are concerned. Ants in my pants; it almost feels like Christmas Eve as a 7 year old boy. These guys are no better than you or I, save a few (maybe!)

2009-08-16T23:12:00.003-04:00

The rise of China: There is no doubt that upticks in Chinese production and business activity, which have softened the deep blow to their great export machine, has fuelled much of the optimism that has lifted world markets. China’s market is up around 80% from its lows with the major industrialized world seeing gains of roughly 50%. We all know that China was the first to pass a government stimulus plan, and at 550USD billion, its size relative to the Chinese economy exceeded even that of our own. But there was another factor at work in China’s resurgence, namely a literal opening of the credit spicket. Chinese banks, rumored under strict orders, have lent a whopping 1.2 Trillion USD since November 2008. To put these numbers in perspective, this is approximately 4X the total bank credit issued in China for the whole of 2008. The money was used to purchase stock, evidenced by the Shanghai Composite’s magnificent rise. And the money was used to buy real estate, a booming market in China now. It’s interesting as the Chinese, in many ways, seem smart to me. Those thoughts probably are cemented in the fact that they have the strongest balance sheet of any nation on earth, one that reports a surplus. Our Congressional leaders, I am sure, could not even begin to muster the word’s spelling, “Cirplous? (What is this?). But there are certain things that make me wonder if this perceived intelligence is really just a function of the Chinese running a young, populated, underleveraged export center. Export-centric, when faced with a similar growth slowdown to what we are battling in the US, will they make mistakes too? We all know the Chinese own too many dollars via government bonds, but, as they were buyers at much lower prices, their overall portfolio has done well to date. Of course the words to date are important, as it is a portfolio that cannot be easily liquidated. All foreign holders of such debt have their eyes glued on the Chinese—a classic case of a cartel where there are obviously behind the scene agreements on sale limitations. For you econ buffs, it’s a case of prisoner’s dilemma with transparency. Whether or not the Chinese have put too many eggs in one basket will be determined in the future, but I suspect if you offered them out on half the position, they’d take it in a heartbeat. But what about this lending? 1.2 trillion in 9 months, much of it speculating on real estate sounds a little like what just happened in the US, no? As a matter of fact, I have heard that sources on the ground say as few as 5-30% of the purchases are owner-occupied. Familiar? Now, to those calling for an imminent bubble popping here, I will gently remind people that China’s household debt is nowhere near the extremes seen in America, and that bubbles often can take longer to pop than reason dictates. But certainly, there are reasons to be cautious on China. And I do think it self-evident that, as China goes, so does the US, at least in the intermediate term.

2009-08-16T23:04:00.002-04:00

On the debt: If you’ve been reading my articles, you already know that I am incredibly concerned about the debt level in America. While a certain deleveraging has occurred at the business level and the household level (two sectors I believe have responded smartly to an overleveraged debt bubble), debt levels are still not in line with income and have to be reduced further. This process will not conclude anytime soon. But at least it is underway, and only upon its conclusion may we once again enjoy a new virtuous economic cycle where growth spurs jobs which lifts income, thus increasing consumer spending (of the good kind), ultimately leading to more growth, perpetuating the cycle. Unfortunately, the government, shockingly late in understanding what exactly was breaking down, has taken the exact opposite approach. Justified as the “spender of last resort,” bureaucrats have stepped in for all groups deleveraging in the name of stabilizing growth. Priority Number 1 for this clan is clearly not putting the country, our country, our one and only, back on firmer footing for the future after a period of such drunken excess, mismanagement, and greed. No, it is to look good to the people (I can’t get that Youtube of Jon Edward’s 30 minute hairstyling session out of my mind http://www.youtube.com/watch?v=7kCAFkfFLQQ ) and, more importantly, maybe, to come out of the current recession as fast as possible. As a matter of fact, it certainly seems as if massive action has been taken to mask the problem until perhaps the 2010 mid-term elections, at the expense of sound balance sheets, balance sheets that may permit a tax code that is supportive of growth and not suppressive of it (though they may be dumb enough to think this response might actually work!) It’s these intentions that I cannot confirm, but my mind wanders. Other people tell me, “No, they know, but if there is a rug to sweep something under, they will sweep it every time.” Adjustments are coming, of course they are. So the question is, “Did they know and deceive us, or were they just dumb?” Of adjustments, I am hearing rumors flying of an August downgrade to the 2009, and potentially 2010, budget projections, during the mid-year budget assessment, due in July, but creatively postponed by Obama and friends. They will say that unemployment has exceeded their estimates, putting pressure on growth and income, while expenses are at the high or higher end of the range. This is only the beginning of such downgrades in this author’s opinion. I am quite sure this “disappointment” in our fiscal strength was a driving factor behind the Obama Administration’s hopeful insistence (not granted) on rolling out health care reform before the August recess. Passing health care, with all of its new calculations by the Congressional Budget Office, always the same, higher costs than envisioned, would be easier before the revisions to the overall national deficit projections, so that is the reason for the delays and now the rumors. It seems pretty clear that, in the end, a watered-down version of health care reform, if it can still be called health care reform, will be championed by the Democrats even though most onlookers will know quite well that they botched this one big-time, and should suffer consequences as a result.

But back to the debt. These revisions are going to be the trouble here. Revisions cause new math, and new math will show rising debt to GDP levels. It has been predicted by some that debt to GDP ratios for developed countries may rise to 120% by 2013. This would be a first, and the big question of course, is where all this money is going to come from? The second question is that, if the money does happen to be garnered from the global private sector, how much investment demand (non-governmental demand) is going to be crowded out? In laypersons terms, if a bunch of private money gets invested in the endless stream of bond auctions occurring around the globe to finance such “public spending,” what effect will that have on all the private money that is supposed to be invested in the real economy, on up-start business, and the like—traditional engines of real growth? So now you understand crowding out. Anyhow, large persistent deficits will make crowding out a big problem. If not financed through bonds sales, large deficits can be attacked by raising taxes which also serve to strip people of the money they would otherwise use to make investments. The final way to make the difficult numbers of a large deficit work is to print a portion of the revenue gap. Over time, this method will also backfire on itself as the increased money supply will ultimately work its way into the real economy, thereby reducing the value of the money itself which makes goods and services more expensive (requiring more of the weakened money to purchase them). We call this inflation. Unfortunately, this government will never be truthful about the real rate of inflation, it will always understate it, as entitlements of all kinds, Medicare and social security, are indexed to the Consumer Price Index. We already have no idea how we are going to pay what we have promised to an aging generation. Can you imagine what those numbers would look like if compounded by a 10% annual rate of inflation? Yikes! Like during 2005-2006, when homes, food, gas, health, and education costs were doubling in some cases with official CPI figures standing under 5%. You will be on your own to know, no, to feel, when this monetary devil has struck. Good news, you will not be alone, the bond market vigilantes will be right there with you. But this is still a ways off in an economy that continues to deleverage. The deflation story is hard to ignore, as credit, employment, income, consumption, and production continue to contract. Further, I do adhere to the narrowly understood view that inflation and deflation are somewhat psychological phenomena as they are driven by the perception of future pricing, or the future value of money. Currently, fundamental deflationary forces listed above could very well combine with changing consumer attitudes towards debt and “extravagance” and perpetuate a spiral if you will, one that is feared most by policy makers and bankers who understand that a system based on leveraging the value of assets, requires growth above all else to preserve itself. Danger awaits, sadly enough.

2009-08-16T23:03:00.003-04:00

And now for the questions (inspired by Todd Harrison at Minyanville.com, the best financial website I have come in contact with, one that all of you with that yearning, that economic burning, should consult—Yes, I do write for them, for free, obviously, you crazy conspiracy theorists!):

--Can anyone else wait for the phrase underinvested to morph into overinvested?

-- Inflation or Deflation—yea, you give it a try, THE most difficult economic question on the books?

--Could it be that deflation does, as many have predicted, precede inflation? I am one that believes previous inflation when credit was expanding greatly this decade was much HIGHER than reported. That seems like the reverse.

--Will Jim Cramer, a man who recently referred to himself as an “Investment Titan”, ever quit his day job?

--What is the future of media? I am proud, and thankful to support independent media sources as mainstream news makes me feel like I am living in North Korea, not quite.

--Wasn’t monopoly the greatest board game you’ve ever played?

--Can gold break $1000 without a significant selloff in bond prices, a rise in yields?

--Speaking of North Korea, isn’t it cool, despite the reality that he’s really no different from the rest of them, that we are able to call in the Viceroy, Mr. Bill Clinton, to go to North Korea, and pull out two enslaved Americans! Dusty Bill, highly likeable guy, apparently even to the North Koreans. I still stay up at night picturing his opening line on Kim Jong-il. Did he go with a John Wayne? Robert De’Niro? Maybe a Jack Nicholson? Ahh, too tough to venture.

--If the Republican’s wanted to gain Congressional seats (as we know they do) isn’t is common knowledge that they need to abandon the moral platform, run with this deficit thing, and grab the fiscally concerned, independent middle, unsatisfied by the Democratic response to this nation’s travailles?

--Are we on the cusp of a migration shift, namely those in Central America, previously glorifying this nation, heading back home, due to the new reality, as my own ears have heard, the “Bills keep going higher, but work is hard to find?”

--Is it time to buy land in Central America, Guatemala perhaps?

--Can we all just be partly happy that Sheila Bair has fundamental problems with the Obama administration giving the Federal Reserve, a private entity, that has the unique privilege of selling us money it is cleared to create (yes, out of thin air!), more power, power, power.

--“What’s that honey? Yea, yea yea,” I guess I’ll stop now.

Till next time, John Cassimatis, Your Midnight Rambler, signing off…

Tax policy set to deter economic growth:

2009-07-23T22:29:00.001-04:00

“Read my lips, no new taxes,” “If you make less than 250,000 dollars, your taxes will not go up by one dime.” Over time we have heard these lofty pledges by candidates running for the American presidency. In the current case, while President Obama may honor that pledge for a little while on the income tax front, it is clear that taxes on the fringe are all set to rise. From new taxes proposed on investment transactions, to cap and trade (hidden tax on consumers), to sin taxes on liquor, and cigarettes, and dare I say gasoline, to new inheritance taxes, and taxes on the wealthy to pay for the health care bill, to continuing on with the highest small business taxes in the world, it is safe to say that the current administration and its Congress is hell bent on raising revenues while honoring its central campaign pledge for as long as it can. Please note in a rare and possibly unnecessary confession, I just don’t want you to think I am a hard core Republican (we are just getting to know each other after all) that I voted for these Democrats this time because I thought they were going to govern from the center and also because I was appalled by the Bush presidency. At this point, I think it highly unlikely they would earn my vote again. Anyhow, a budget crisis due to optimistic growth projections and a California-esque inability to cut spending in any meaningful way, spending that is annually above what we are technically entitled to enjoy based on what we produce, may force the President to renege on such promises, but that is a bit off in the future. In any event, trickle-down economics has been abandoned, and while I still sometimes agree with Al Sharpton’s assessment: “We didn’t get the trickle, we got the down,” it is hard to argue that creating conditions for the issuers of jobs to succeed should be something to ignore to the degree that we are leaning towards. Keep in mind, as a framework, that taxes on Britain’s highest tax bracket just jumped from 40% to 50% in response to their budget crisis. Many people I know in the industry are thinking about relocating to other more tax-favorable locations in Europe. For a financial based economy like England has, this may turn out to be more troublesome than envisioned. But time will tell if this is just noise. In any event, Republicans are currently rolling in their graves as current policy appears to be as far left as Bush was right. In a nation that describes itself as centrist, I find it incredible that we cannot seem to get a centrist in office, someone who is morally liberal, fiscally conservative, and is mindful of the underprivileged.

Practical market advice—2 scenarios:

2009-07-23T22:28:00.000-04:00

I am going to tell you my market thesis. Scenario 1: I suspect we rally a tad in mid July (we are actually doing that now), followed by heavy selling through mid August. That will be when I will aggressively look for entry points into stocks that performed well during the March to June rally, stocks whose prices have corrected substantially. Commodities are an obvious choice, as is technology, a bright, promising sector well along on an almost decade consolidation. A further deployment of stimulus funds, coupled with increased production due to tightened inventories, amongst other short-term positives may drive the expected fall rally to be quite strong and could realistically propel the S&P as high as 1050-1100. At that point, I will sell virtually everything, get short, turn off the computers and relax for the remainder of 2010 and beyond. In a nutshell, this is what I am expecting and I have a reasonably good feeling about this. So, those anxious to make some money back, I would at least consider your strategy along these lines. In mid-August, hopefully after this deeper market correction, I will start to get serious. That’s my plan, just thought I would let you know, it is the type of practical commentary that I shall aim to convey in these newsletters, tangible things that may help you in your personal decisions. Please understand this is just my opinion, and the timeframes indicated are essentially rough guidelines as next week’s action could enhance or violate this thesis. But the general point is this: at some point this summer if the S&P finds itself lower than currently and that’s when I will look to make some purchases.

Scenario 2 (The straight shot thesis): We continue to rally without any major disruption to S&P 1050-1100 and I then get short everything under the sun except for shiny things that can conduct electricity. This possibility will keep me from looking for shorts here. In this case obviously, the rally would occur now and the later fall would be the bloodbath. Markets just seem to be in no-man’s land here. This scenario is as plausible as the first so be wary.

Speaking of Debt

2009-07-23T22:25:00.000-04:00

Speaking of debt: DEBT, DEBT, DEBT Consumer debt, bank debt, mortgage debt, government debt are at levels we have never seen before, even in relation to GDP, with perhaps the only time we were close being during World War II ((at least in terms of public sector debt). This is a major problem!

“The Entitled Society”-- pretty amazing. I suspect many older Americans are so fearful of this nuveaux moral fabric, this complacency, this by definition “We are the United States, of course everything will be fine” attitude. In a society where consumer spending accounts for 70% of economic growth, one can see just how vital a healthy and willing consumer is to the system. Unfortunately, the consumer spending numbers that we are using as our ‘normal’ reflect one off-deviations from the drivers of such spending, namely job and income growth. They stand belly out, belt unbuckled, after home equity loans, signature loans, car loans, mortgages, all of it. As the consumer continues to nurse its hangover and realign its balance sheet, consumer spending will remain soft, slowly contracting back to a new normal level that more properly corresponds to income.

Unfortunately, what policy makers do not seem to understand, is that you can throw a bunch of money at banks to help their balance sheets, you can line the pockets of every federal agency as we saw with the Omnibus spending bill, but ultimately, you cannot make people spend money if prudence is dictating them otherwise. There is a larger paradigm shift going on here. Consumer attitudes have been dramatically changing, rather quickly I might add. And perhaps rightly so, as the government attempts to essentially fix a problem of too much credit and debt by creating and encouraging its continued expansion. Fortunately, consumers appear wiser this time around and its one of the behavioral adjustments that the government has NOT taken into account as it projects its 3.8% domestic GDP growth rate for 2010 and its 4.5% average growth rate for the following 8 years. I am quite confident that GDP estimates will be ‘shockingly’ downgraded next year as this understanding sets in, and in turn, the budgetary shortfall will be exacerbated as revenues will obviously also fall short of expectations. As a matter of fact, I don’t think we will have to wait that long. I am hearing mumblings of an economic revision to the downside as early as mid-August, thereby raising the numerator (deficits and ultimately debt) and lowering the denominator (GDP) in the all import DEBT TO GDP RATIO. This is going to be a real problem, causing all sorts of what I shall call “new math” arising and it’s not going to be pretty. While I remain somewhat optimistic that the market may see another sizeable rally after some retest of a higher level than the March lows this summer, it is a rally that will run into a brick wall in the early part of next year at the latest, and may very well not materialize at all depending on how more recent action unfolds. The only one ‘surprised’ by the announcement will be the President himself, and his Congress, and the people on CNBC, and a lot of people that do not take the time to read alternative media like The Midnight Rambler. Worse, those surprised will endure a beating in the second half of 2010 tantamount to what they just went through in 2008 (though in Obama’s case, that’s not quite true, as 2008 was a great year for the man, and 2010 should mark the beginning of his political demise). I can’t remember who said it, but the saying goes like this. “It’s not the first loss of 50% that truly wipes out investors, it’s the second.” I suspect there will be a time late this summer when I will recommend buying stocks, but never forget, that is only if they substantially sell off from here, and that it will probably be the last good rally for the next five years (but who knows really, maybe a latent computer bides its time!), a rally to be sold aggressively at its conclusion. But we will talk about this more in the August newsletter. Should the S&P hit 750-800 or so before you hear from me again, please know that I will be buying commodities, Technology, banks, whatever and anything for the final hurrah.

“Big Slice Version”

2009-07-23T22:20:00.001-04:00

Employment as a Lagging Indicator: You are either a CNBC anchor or the President himself if you’ve found yourself lingering around the “improvement right around the corner, unemployment is a lagging indicator” store. Or you’re high on Ether, maybe smelling salts. No, I don’t believe for one second that one of you good folks thinks that things are OK. There will be no V-shaped, or rapid economic recovery, this time around. There are simply too many headwinds to long-term growth. Highly questionable economic policies coupled with the ball and chain, the elephant in the room, Atlas’s burden, the all powerful, all mighty, horrible word, DEBT, shall prevent the American economy from doing what we are accustomed to…bouncing back. No, the computer was a tremendous growth engine, changed everything for the better, so many brilliant people, thank you, keep working, but there will be no imminent virtuous cycle of economic growth that fuels its own engine, save a new paradigm created, good luck on that, although I’m sure we do have some of our best men and women on it as we speak!. One of the great claims by the bulls in the recent showing of market strength through early June was that the unemployment data is a lagging indicator, that the economy will be long on its way to recovery before the results trickle down to the jobs data. It was this belief that kept propelling the Dow Jones Industrial Average up 100 and 200 points despite continued readings of massive job loss. The President himself has publically clung to this “statement of fact” in many recent addresses on the state of the nation’s economic health. I may not have the President’s official credentials but I can tell you that, unfortunately, this time it is different. Yes, yes, I know those are dangerous words, words that, over time, can cause one to over-think simple relationships. Nevertheless, it is different this time. Typically the model goes something like this—slowing growth causes the Fed to slash interest rates, which boosts credit, which translates into consumer demand, which improves business balance sheets and production, and ultimately necessitates that business expand to accommodate such growth. Jobs are then created, and long after the stock market and leading economic data have improved, the unemployment data finally kicks in and stamps an official end to the recession. That’s how it’s supposed to work. But we have a problem. The Fed has already taken the Fed Funds Rate to 0%, but with consumer debt so high relative to income plus massive losses still unrealized on bank’s balance sheets, credit has continued to contract. It seems as though consumers are as reluctant to take on credit as the banks are to accommodate them. This, my friends, is a headwind, and a strong one. When I think about it, it almost seems as if jobs, this time around, will be a pre-requisite for truly coming out of the recession. At least maybe, we’ll meet in the middle or something. But we have to get back to more traditional relationships between income and credit, income and housing prices, income and consumption. Yes, I think it is quite safe to say that credit can be expected to contract as long as people continue losing jobs or settling for less employment than desired. This reality should serve to delay any strong recovery, or new virtuous cycle arising from the ashes. Please flush, if you will, the traditional model of moving out of a recession down the proverbial toilet.

Yes Sweetheart, I would like some fresh Basil on my pasta tonight.

Dismantling the V-Shaped Recovery, Obama’s “Rosy Forecast”

2009-07-23T22:13:00.000-04:00

“Abridged Version”

Things are bad. Things are going to stay bad for some time, years not months. The government’s forecasts of GDP, deficits, debt, employment will all be revised to the downside over the next year. This is a time to buckle down and to be realistic that a new, virtuous cycle of economic growth requires far lower total debt as a basis for credit expansion. Do not be fooled. Sure we may rally more this summer or fall, but there is another bloodbath in the making. Our political system seems fractured, career politicians manning the ship alongside the invisible hand of major financial institutions. Be smarter than your neighbor. This is the real deal, Evander.