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Three Reasons Why This Maket is Doomed…
10/07/09 by John K. Whitehall
Filed under Bourbon & Bayonets
It never ceases to amaze me. After the market turns – even a little bit, as it has the past couple weeks – there seem to be no shortage of I-told-you-so analysts pushing over each other to loudly proclaim on CNBC that we “may” have had a top and there “may” be a pullback, and hand you an umbrella for yesterday’s rain. Few tasks prove easier than predicting a 5-10% pullback when 3-4% has already occurred.
I put my reputation on the line with every submission to our website, as I mentioned a couple of weeks ago when I said I was staying short, even as the market ran to its recent highs. Where are all the pundits who were screaming “buy” as we hit 1,080 in the S&P on September 23rd? Well, they’re not on television anymore. Convenient. Let me make something clear: I would rather make a prediction that isn’t full of half-hearted possibilities and insanely vague “5-25%” directional estimates, and be wrong than have my readers confused on my position. If I’m wrong, I’ll admit it, tell you why, and we can both learn from the events that transpired.
Peter Schiff is right
Well, mostly right, anyway. Let me explain.
Today I observed Melissa Lee hosting “Fast Money” on CNBC giving a sarcastic raised eyebrow followed by an eye-roll to Peter Schiff, who has been a rather frequent guest on the network since the market has climbed to recent highs.
Let me point out that Melissa Lee, a graduate of Harvard College, has been working in the financial markets for some time. However, somewhere in between teasing her hair back to 1987 and applying her makeup by stuffing Mary Kay products into a shotgun, she forgot the fact that she is a reporter and host, not a money managing expert. I don’t care how many times Schiff has cried “wolf”, she shouldn’t be dismissing his opinions, especially when he’s making sense.
Peter Schiff has been a bear for quite a while, although he suggested a rally coming on his March 8th blog, just before the actual low point. Oh, and he did it for real, he didn’t just say he did 6 months later as most money managers have.
However, since around 8,000 in the Dow, he resurrected and has been maintaining his bear market perspective, citing poor fiscal practices (which few would argue with), high unemployment (among other poor economic data), and general state of denial from corporations and investors alike.
Today was no different, as Schiff continued to defend his position, claiming that our economy is using band-aids to perpetuate the same problems that have come to light in the past year. Although I did not agree with his bearish perspective when the Dow was approaching 8,000, I certainly agree with his current argument that the huge rally since March is a result of throwing cheap money into the markets to finance a false recovery. In other words, the government might as well have just bought trillions of dollars worth of US equities. With taxpayer money.
About that, he’s dead on. He’s also dead on, in my opinion, by choosing to invest in foreign currencies and selectively investing in foreign stocks. Although a weak dollar is happily pursued by our government at every opportunity and is inherently good for stock prices, it is not a great thing for the long-term health of our economy, and those who are paid in US dollars will eventually pay the price. Which, apparently, will be higher.
The only point on which I disagree with Schiff is the extent to which he believes an economic collapse will ensue. For example, Schiff claims that within the next few years, we’ll see gold at $5000 per ounce. I am not quite sure that will occur. At least, I am hopeful that it will not.
Mutual Fund Cash Levels
Historically, when the levels of cash held by mutual funds reaches a certain level of surplus, it’s a bullish sign (in other words, more money on the sidelines waiting to be invested). Conversely, when the levels reach a certain level of deficit, it’s a bearish sign (as it would be evident that most available funds have already been invested).
At the recent low point in US equities in early March, mutual fund cash (adjusted for inflation) was at a 12-year high. Of course, this was followed by our most recent bull run of about 60%. However, the current levels are now in deficit. In fact, the last time they were this low was in October of 2007. That’s right – the top.
Indicators such as these are not completely fail-safe, but they do provide a very interesting picture. Not to mention the 14-day RSI has fallen below 50 in the S&P and we’re knocking on the door of the 50-day moving average.
There’s also the common sense factor. If the market begins to look grim, those funds that have taken part in this rally are not about to lose what few clients they were able to maintain by riding stocks any lower than they have to. There’s plenty of equity to sell.
Trigger-shy investors
Speaking of common-sense factors, regardless of the amount of fabricated, window-dressed, sugar-coated and misleading “positive” news that has crossed the headlines recently, the bottom line is that we’re up 56% even after the most recent pullback (if you can call it that), and people still don’t have jobs.
It is true that there are many retail investors who are trying to get in at this point (they’re usually the last to do so, which should tell you something right there). However, there is a glaring difference between investors, both retail and institutional, who think the market will rise and those who believe the market will rise. I will elaborate:
Stocks go up because demand goes up. Actual demand. In other words: buy orders. Investors and analysts can talk all they want about a bull market continuing, but unless they’re putting their money where their mouths are, it’s going to make no difference whatsoever. The only aspect that matters is those investors who are willing to press the “buy” button, even after we’ve come all this way. The question is… are people willing to put everything they may or may not have made back on the table once again with so much uncertainty about the future of the economy? My guess is no. Not with so much downside possible.
Final thoughts about the immediate future
Now, before I get carried away, I do believe this market is going higher – eventually. But I don’t trade for eventually. I invest for eventually, because “eventually” could be 15 years. Therefore, I do have some small long positions, diversified in foreign and US equities, as well as – you better believe it – foreign currencies.
What I trade is a different story. I am still currently mostly short, as I mentioned in my last article, and I’m happy about the recent pullback. I’m about 70% convinced that the market will still go lower, and that today (and possibly tomorrow) we will have a little move to the upside in the meantime. I will be surprised if people do not begin to take their profits before the S&P hits 1,050, which will send us on another leg down. I will reiterate, however, that I am not looking for much below 1,000. Not because I think that will be a bottom, but rather because I just plain don’t know what will happen after that. I need to see some more news and information, false and fabricated as it may be. But, bear in mind (no pun intended) that uncertainty, as it continues to permeate the markets, doesn’t usually lead to purchases.
Charles on Wed, 7th Oct 2009 4:31 PM
I am alos bearish on the economy but not on the market. As lond as the Fed keeps printing money the S&P can go to 5000. Of course a container of milk will go to $200. Therefore I have a bias but I trade what the charts are telli ng me.
ed b. on Wed, 7th Oct 2009 4:40 PM
the stock market will appreciate as long as there is positive earnings.
The big question is where or when.
Robert on Wed, 7th Oct 2009 4:53 PM
I for one am thinking, like the phrase in the Tom Hanks movie Big; “I don’t get it”. Other than the stock market what part of the economy is improving? We sold a bunch of cars by subsidizing buyers, we sold some houses by subsidy and have propped up banks with bailouts all while losing 8 million jobs?
To paraphrase the President: Wall street is drunk again and the only question now is who will wake up with the hangover?
Ralph P. on Wed, 7th Oct 2009 4:55 PM
Fundamental analysis is interesting but it has nothing to do with the stock market. The price charts tell it all and they say the U.S. stock market, Gold and Oil is going higher. All that matters is the supply and demand of stocks and commodities. Everything you talk about is the wall of worry that bull markets climb.
carl h. on Wed, 7th Oct 2009 5:09 PM
It really doesn’t matter how high the market goes up, the fact is that main street is still in trouble and I’am sure wall street is not going to bail them out!!!! I have read Peter Schiff’s book crash proof and it is uncanny as to how he perdicted this crash. He also stated that the govt. would start siezing safety deposit boxes, and just last week there was a report on tv about Calf. siezing boxes and auctioning the contents claimimg the owners were unknown. He also said that gold and the stock market would be equal in price that hasn’t happen yet but it could soon.
James M. on Wed, 7th Oct 2009 5:38 PM
Excellent observations. When would you say mutual funds are heavy in cash as a percentage of total value?
Greg W. on Wed, 7th Oct 2009 5:48 PM
Schiff may be right eventually but for the time being I think there is more upward movement in front of us. The sideline money still isn’t in the party but they will soon be figuring out that the shifts that are taking place really do amount to a devaluation of dollars. When that sinks in fully there will be a rush to find someplace safer than cash that is losing value big time. Hedge funds and money managers have to find a place to go with it. Bond market sucks, T-bills not very impressive,real estate not easily converted, foreign currency still risky with world markets still unstable; so I agree with a major run up in gold and commodities. Of course the easy way to see this would be to look at what China is doing with all the greenbacks it has accumulated. They are moving big on just about anything that will keep its relative value while dumping dollars to do it. Water, Oil and Gold are high priority to them and that will add a lot of upward pressure. I don’t think it is hard to imagine $2000 gold any more with some possible higher spikes caused by possible panic or flight from the dollar. It is inevetible that the relative values are going to be adjusted one way or another with the dollar losing strength in the world. That fact can’t be changed. There has to be a pay day for what has and is taking place with regard to our deficit sending. I guess I would have to say I would believe $5000 gold before I would believe it going back below $1000.
Bob H. on Wed, 7th Oct 2009 6:10 PM
I agree with your comments about Melissa Lee, she should be taken out and forced to work in the back room of Taco Bell for the rest of her life.I read Peter’s book and it is great. These talking heads(Dumb asses) on cnbc don’t have a clue whats really going on in the real world. Keep up the good work.
Bob H.
M M on Wed, 7th Oct 2009 6:59 PM
I don’t see how gold can keep from reaching at least $5,000/Oz and silver around $200+/Oz, especially over the next three years!
1) The government continues with their printing press. The one thing Bernanke knows best. The Chinese didn’t want his chairmanship with the Fed to continue, but by golly, Obama wants more of the same nonsense. No wonder this is but one of several reasons they’ve had it!
2) Because of this printing press and other manipulations in which the gold and silver prices have been caressed by bankers with the government’s blessing (and the CFTC’s turned head didn’t help any) we can expect the pressure cooker to finally pop. The seals are straining badly now and various countries are turning up the heat.
3) Finally.. China, India, Brazil and to a lesser extent, Russia continue to improve their productivity. The USA has proven so restrictive to domestic production and friendly toward foreign industrial growth that few products remain which are value enhanced. This country CANNOT remain solely a government and services-based economy and keep any status other than third-world. Our freedoms have been going to the woodshed and down the outhouse. What else is there for Washington to take from the Sheeple? It’s getting to be very slip pickins’ if truth be known. Unemployment at under 10%? I would be willing to wager it’s around 20% or greater nationwide.
nick m. on Wed, 7th Oct 2009 8:13 PM
People have no money, no savings, incomes have not gone up and savings have become difficult.
Equities have been wiped away all thru out the world.
Everything, including food had now become unaffordable.
Who is going to buy shares and real estate.
Only speculators and the rich ones., making it even more difficult for the poor.
The result is, creation of terrorism, robberies, thefts,so and so forth.
nick
nick m. on Wed, 7th Oct 2009 8:37 PM
Has any one done any analysis on devaluation of the dollar.
That means, the dollar will reduce in its buying capacity abroad, will pay a higher price on its purchases abroad and everything here in US is imported for daily use.
Exports may increase but that is not going to compensate for overall costing.
India Devalued in 1968 and paid a very heavy price on its economy and the result, the then FM was made a scapegoat and fired.
It brought about a general depression, imports became costlier, exports did not improve since manufacturing costs increased.
and the ultimate result was that India faced such a difficulty that it had to put Gold as security in England to feed imports and open up the country for foreign investments, get rid of all the controls on trading/business activities.
Burma demonetized its currency, replaced with new in late sixties and the result was a DOOM., complicated with the Communist/totalitarian regime which unfortunately still exists and the people are starving.
The worst tragedy took place there when thousands of people died within twenty four hours of a cyclone hit and the Govt just could not do anything.
Let currencies take their natural course. trying to manipulate does no do any good at all.
nick
Bob F. on Wed, 7th Oct 2009 9:22 PM
I can’t believe how irresponsible the Federal Reserve and the other central banks are in keeping interest rates at such low levels. In effect they are forcing the public to enter into a very speculative class of assets, namely the stock markets. At the same time, Bernake is creating the illusion of wealth among many Americans as they see the values of their stock portfolios rising, yet the value of their currency plummets. To quote the old saying, “It’s a crazy world!” I agree that these stock markets may be approaching a dangerous inflection point. However, given the degree of manipulation by the world’s central banks who seem to have an interest in perpetuating this bubble, I do not have the courage to short this market.
Charles M. on Wed, 7th Oct 2009 9:27 PM
It’s very difficult to time your trades using fundamentals. More and more lately, it seems to me that malicious forces are at work behind the scenes to manipulate the markets. Thus, I use fundamentals only as a warning. Then I wait for an actual breakout to time my trades, such as they are.
I’m not concerned if various reliable commentators have differing opinions. No one is perfect. Their opinions serve only as possibilities, at least for me.
I. McIntyre on Wed, 7th Oct 2009 9:39 PM
I saw the same interview by Melissa Lee and couldn’t agree more with your observations. It seems that the “Reporters” on CNBC are more intrested in making the news than reporting it.
It is further proof that you must do your own research.
S. Martin on Wed, 7th Oct 2009 10:22 PM
Alli have to say is dow 1000 here we come YES 1 not 10 thousand… when wave 3 ( in elliottwave speak ) hits it will leave you breathless, it took 300 years to get here but be over in a flash, relatively speaking, hold onto your hats it’s gonna get interesting !!!!, Simply put i agree with the bear market mentality, but like they say be careful what you wish for becuz it might come true
You asked for a correction, well … your gonna get it and then some !!!!
Dave I. on Thu, 8th Oct 2009 8:01 AM
#1The Economy is in Terrible shape across all sectors anyone saying any different does not live in reality.
#2. More bad news will come via the commercial sector before year end
in the form of commercial note defaults, commercial realestate holdings
retail sales , manufacturing sales, = increased unemployment , more
commercial banking problems,and of course lower tax revenues for
federal, state & local government.
#3. Energy prices especially oil will increase , due to increase worldwide
consumption, and reduction of output exporlation & production finds.
it takes several years to bring projects from drill bit to production
at this point all I can say is Please wake up america. We need an all
out effort to bring all energy projects online, oil,gas, coal, solar,
hydrogen, biofuels, etc. We need affordable secure energy for our
economy to fully recover otherwise god help us.
Dave I.
bobby b on Thu, 8th Oct 2009 5:50 PM
Dust off a chart and take a look at the market in 1929-1930. A 48% decline (yes Virginia, this crash was worse-53%) was followed by a 48% rally into 1930. Thats when Hoover famously said “This recession is over. The business of America is business”. Yes, and whats good for General Motors as well.
This 53% decline has now been followed by a 56% rally, and everyone is talking about the “V”. Could somebody please point me to one statistic that shows a meaniful bottoming in this economy? Notice I didn’t say”recovery”. Employment is on a glide path downward, and there is no plan to slow it. Without jobs the foreclosures continue and the commercial real estate “extend and pretend” game will end for the banks.
This rally has been bought and paid for by the Fed. It is a last stab at stabalizing the system, but it will not revive the economy. As Greg W said, we are a long way from paying the tab for our excesses. Without a meaningful way to emloy millions in new jobs with a new future, this is just end game stuff. Enjoy the ride.
TOM on Sat, 10th Oct 2009 12:09 PM
I agree that there are signs of a lessening of values; however, I remain optimistic.