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Applied Investment Technology, Inc. |
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JULY 2010 Market News |
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FROM June …. the jobs report for the month of May….. we actually got a total number of 431,000 jobs in May, of which 411,000 were temporary census workers, the net was a mere 20,000 new jobs….. Or was it?? In May the BLS added 215,000 jobs —- they just made this number up! …. start with 431, less 411, subtract the phony 215 to get a LOSS of 95,000 jobs for May. Recovery? ….the folks who have been unemployed for longer than 27 weeks hit a new record at 46%. As long as unemployment remains high, there is no reason to believe that other areas of the economy will get better. The situation in Europe continues to deteriorate; simple reason is that they are all mired in debt, there is no way & no will to bail them out because that’s just a guarantee it will happen again. I would argue that we are not in a recovery….. the trading range is still in tact in spite of all the negative news; the indices have bumped up against the 200 day moving average and retreated. As we close in on the end of the first half of 2010, it’s clear we have a bumpy road ahead. The economic picture was not great before the BP disaster, but now it is much more precarious. WHY? the withdrawal of the taxpayer money; ...after throwing in excess of a TRILLION dollars at the problem, the best we can generate is a 3% growth rate, & the prediction for the next quarter is a sickly 1 to 1.5 %; the leading economic indicator FELL in April & is at a 47 week low; transfer payments ….. Disappearing!! Small business.... not hiring. ongoing mess created by the oil spill….. talk of 35 rigs moving to Brazil; states will lose a fortune in tax revenue; the environmental impact will be much worse because of the gases & other chemicals being released. …..two things working against those trying to resolve the BP situation: (1) the WH clearly wants to use this as another stepping stone to getting rid of oil, drilling, etc. (2) the Federal Bureaucracy is simply too large to handle any disaster efficiently. As one writer stated, “No company answerable to their shareholders or investors will risk capital in a country which has brutally abandoned the rule of law.” The WH is stuffed with academicians, professing to know how to “fix” the economy, by continuing to throw more money at pet projects and then claim success. Small business can’t get loans or capital; 2011 they face new regs & taxes, sending capital & jobs overseas. Obama is back on the road to push his “clean energy, that can lead to new jobs, new exports and new industries.” The strategy is to “get the private sector to invest in this future” and he believes the only way to do that is to “put a price on carbon pollution”. …..is achieved by (1) massive subsidies from the taxpayers (bailouts) for companies that pursue “alternative” energy sources such as wind & solar; “investment” = massive new energy taxes so that our current costs soar. (2) the more expensive energy is now more competitive with the “alternative” and that will draw in private investment. THE math: Dept. of Energy states subsidies for oil & gas amount to $0.25 per megawatt; for coal it’s $0.44; for nuclear it’s $1.59. But for WIND the subsidy is $23.37 and the granddaddy of them all is SOLAR, which is subsidized to the tune of $24.34!! ….net loss of 2–5 jobs for every GREEN job created. mfg indx dropped... lowest reading in 10 mos; housing data:1) existing home sales fell 2.2% in May 2) new homes sales DOWN 33% 3) “supply” rose to 8.5 mos; “mortgage fixes” — the # of mtg trial modifications that were cancelled = 55%. Fitch Rating - most in the “permanent” modifications will default within 12 mos under HAMP. The default rate is expected to be up to 75% on subprime & 65% on prime! Durable goods orders down in May & ECRI— is back to December 2007 levels, at –6.9%. At –10% we are back into recession; 100% of the time. NOTHING is going to improve without clarity. BP disaster’...gases will kill all the marine life as the oxygen is depleted from the gulf, creating “dead zones”. a rally is still expected over the summer! JULY 2 FRIDAY So where’s the rally? After completing the worst first half of a year since 2002, with a deeply oversold market, heading into a holiday weekend, all the ingredients should have been in place for a bounce in the markets. But facts are a stubborn thing and the recent economic data have been anything but good. Let’s start with the grand daddy number of the week… the NFP or nonfarm payrolls report from early this AM. No one expected a stellar number but even with the census data taken out, it managed to disappoint. On the surface, the private sector reported an addition of 83,000 jobs in June. However, if we allow for the birth-death fantasy number (which added 147,000 jobs) we quite possibly lost 64,000 jobs. BTW, the birth-death numbers are adjusted every Jan. and July. In Jan. the adjustment removed 427,000 jobs! Since Feb. the birth-death fantasy has added 728,000 jobs. After the July adjustment, will there be any job creation? Also in the report was a drop in the RATE of unemployment, from 9.7% to 9.5%.... Which sounds great unless you know why. As happened a few months ago, the labor force plunged by 652,000, the largest fall off in a year. Without that, we would be well over 10% in the “RATE” category. A few more tidbits in the report: (1) 46% of those without work have been out of work & looking for at least 6 months (2) average hourly earnings dropped 0.1% in June bringing the y o y trend down to 1.7% (3) U6 or aggregate unemployed is at 16.5% (this is in the “recovery” or “expansion” phase) In the 2001-03 “jobless recovery” U6 never broke 10.5%. As a result of the drop in payroll or wages, auto sales dropped 6%, consumer confidence dropped sharply and retail sales came in below expectations. With the support from the government “stimulus” fading, it’s clear that after pouring an enormous amount of money into the WH “recovery program”, all that happened was an extension of the recession. The “extend & pretend” was a complete failure and the proof lies in the fact that Congress is once again, trying to pass another “emergency” spending program. Someone in the WH has to get a grip on the definition of insanity. Clearly this failed strategy has yet to be recognized, except by those of us footing the bill, taxpayers. Just a sentence on housing since I have beaten this topic to death. Bottom line… nothing has changed. Prices are still falling, inventory is huge and without jobs, the housing market is NOT going to improve. As to the markets……. As I said in the opening comment, we are very oversold which should bring a rally soon. I would expect the rally to be short, sharp and on low volume. In other words, it will fail. When that happens we will have the all clear to enter the ETFs that are profitable when the market is down. In other words, I will buy the “short” ETFs for the indices since we will have solid diversification, and less risk exposure. With negative sentiment, the state of uncertainty as well as the lack of any recovery, I fail to see how the markets can rally. The Fed easing took it higher in ‘09, creating huge pools of liquidity for the large institutions to drive the markets up. But that has been taken off the table as an option for now. Assuming the Fed does not reverse their position, expect further declines into the fall as we get closer to the midterm elections. Even then I doubt the course will change. I believe the WH will attempt to pass every bad piece of legislation it can write before the year is over, and more so in the lame duck session if there are large losses on the left. The markets will then decide and let us know which direction the trend will be. FRIDAY July 9th We should have more four days work weeks if the markets can respond as happened over the last few trading sessions. But, we know the rally was due more to a very oversold condition along with a clear case of short covering than to a shorter work week. Last week I stated that the rally is likely to be short, sharp and on low volume. To date that has been the case with volume so low on this Friday, it appears as though many have walked for the week to take another long weekend. With Congress out of town for the 4th of July recess, the threat of new onerous legislation is off the table for a few more days. The most recent debate was over more spending to extend unemployment benefits, fund the wars, pay for more public sector union jobs, and of course throw in a little pork to round out the package. The bill was stalled because some wanted it paid for & others did not. I bring this up because it gets to the heart of the debate over spending and what can be done to bring the country out of recession. Some refer to this as the Keynes vs. Hayek debate but that is doing a disservice to Maynard Keynes. The exposure to the Keynes theories is always the spending portion without regard to the savings. Keynes said that governments should use the “good times” to set aside money for the bleak periods. Then when the cycle went into a trough, the rainy day funds could be used to help stimulate growth by investing those funds in INFRASTRUCTURE, versus the way the money has been wasted by this WH. The version of Keynes on display today is to spend money, on anything & everything, public or private, consumption or investment….. Just spend government (taxpayer) funds, which is what politicians love doing more than anything else. Hence the call for more spending before they left for the holiday. On the other side of the argument is Frederick Hayek who believed in supply-side, or Austrian economics. The debate centers over spending by government & run up large deficits, or provide incentives to the private sector with tax cuts, free trade, unrestricted movement of capitol and PRIVATE debt. On display today is a massive distortion of the economy with excessive spending, absurd deficits, and no end in sight. If we do not change direction, deflation will continue and the collapse will make Greece look like a picnic. The media refers to the policy of this WH as Keynesian economics but whatever it is called, the result has been a total failure. After 18 months in office, well over a trillion dollars spent and the best we can say is people are not losing jobs at the same rate. Hardly reassuring because that would have happened without any spending of taxpayer money. In addition, we know that incomes are weak, retail sales are flat to lower, housing is still in trouble, prices are under pressure, treasury yields are still falling, and this is not a complete list. All of this points to deflation which is very destructive to an economy. Taking a look at what the supply-side economist would suggest, we would be looking at a completely different picture that would unleash the potential of the economy. Taxes should be cut across the board, the Bush tax cuts should NOT be allowed to expire, the health care law should be repealed and done over to take the mandates out. This would remove the uncertainty for business owners and give them the freedom to choose how they spend their money and do for their employees. As happened in the 80’s, when taxes were cut, revenues to the government exploded and the country went on to proper for decades. Taking a look at the week ahead for the markets……. Earnings season for the second quarter will begin and as always, the focus is on what the companies say about their future more than what they did in the 2nd quarter. Markets are always looking ahead. Comparisons will begin to get a little more difficult now that inventories have stabilized. More than that, the taxpayer funded support has waned & the economy is slowing. The ECRI report today put us further into negative territory at –8.3; just a fraction away from –10 which is recession. I would expect the rally to fizzle, due to a buyers strike, more uncertainty as well as a plain old lack of motivation by investors. If the indicators line up, we will take the next trend, which I suspect will be down. FRIDAY July 16th After bumping up against resistance all week, Mr. Market is not able to move past the usual suspect moving averages (plus or minus an allowance for volatility) which means we are closing the week in the red. As mentioned at the close last Friday, investors are not exactly enthusiastic about taking any risk in spite of the dog & pony show coming from the WH in what they are calling “Recovery Summer”!! The WH spin says that our tax dollars have raised growth in the 2nd QTR by as much as 3.2% & added 3.6 million jobs. Let’s look at the data & compare what is said by the WH versus actual statistics: —- Industrial Production slowed in June from +1.3% in May to +.1% —- Manufacturing fell .4% following a 1% jump in May —- Business Inventories went UP .1% in May but that was met by a .9% DECLINE in sales —- Retail Sales fell by more than 1% in May and .5% in June; heavy discounting will be needed to move the goods —- The NY manufacturing area had a 15 point drop in May; new orders fell to 10.13 from 17.53 & growth in shipments also fell —- The Philly Fed Index for July came in at 5.1 versus 8.0 for June…. A slowing in growth & new orders went to a negative 4.3 after a year of being on the “plus” side —-- Unemployment — this needs no explanation because growth in the private sector is grim; in addition the hourly earnings and work week have both declined —- Fed minutes released this week stated that officials expect growth to be slower than previously thought; a quote from the minutes “most expected the convergence process to take no more than five to six years.” —- ECRI and to polish off that list of impressive recovery stats…. The ECRI Leading economic Index has just come in with a reading of –9.8% — Remember that at –10 the economy has gone into recession 100% of the time. As if the above were not bad enough, the Congress is looking out for us again this week by passing the bill that is laughingly referred to as “financial reform”. It is 2300 pages long, creates an estimated 243 NEW rule-makings, adds thousands of pages to the Federal register, will make credit more difficult & expensive for small business, creates new taxes, favors unions, and does not even address the nightmare twins of Fannie & Freddie! OH, and there is one last item to throw into the mix….. Consumer sentiment took a TEN point DROP today which was totally unexpected by those same experts who seem to always miss the target! How many months have we been told that there is NO chance of a double dip recession? The ECRI reading is a hair from signaling that dip. As they say, that was then….. What now? With respect to the markets, I suspect a WH already in trouble with respect to the midterm elections will attempt to get stock prices higher using the same process as March ’09. They will have the Fed embark on another round of aggressive easing (QE), putting excessive liquidity into the system, (banks) as they buy our debt via a round trip through the banks, flooding the institutions with credit to invest in the markets. The Fed wins, the banks win and the consumer loses as the debt continues to grow. A truly Machiavellian scheme to achieve their goals. The question is whether it will work the second time around…… the only thing we can be certain of…. the economy is slowing; housing is still a disaster; unemployment will continue to be a huge problem and of course it all boils down to one item! Without jobs there is no recovery. At present the market is still locked in the same trading range…. A broken record…. As we set lower highs and lower lows. The round trips appear to be getting shorter and more abrupt. As we get closer to the elections, it will be very clear if the Fed has stepped in and we will be prepared. On the other hand, should Monday provides a follow through to the sell off we had today, we’ll look for an indication of an all clear to tip toe into the short side. FRIDAY July 23rd Last Friday I was looking for a follow through to the sell-off, and this week we are back to the low volume rally mode. As mentioned above, a second round of easing (QE2) would not be out of the realm of possibility given a WH that is in deep trouble, a faltering economy, and a Fed chairman in lockstep with the absurd policies accounting for our current dilemma. In fact, to the astonishment of many, Bernanke has actually endorsed MORE stimulus to boost the “recovery”. What?? Is that because the last trillion dollars was so successful in revving up the jobs machine?? He also confirmed that the Fed stands ready to do what was necessary to bolster the economy, growth, etc. That’s Fed speak for QE2 has arrived. This weeks market reversal took place in spite of lousy economic numbers. On Tuesday the housing starts for June were down .7%, permits fell 3% in June after big drops in May & April. In spite of the VERY low interest rates, consumers are not buying. Demand for home mortgages is at a 14 year low! The housing mess has not changed due to falling demand & an excess of supply. When over 7 million borrowers are 30 days (or more) late, foreclosures are rising, & more potential buyers are underwater, it is clear that housing will not recover for several years. The jobs picture has not changed & many would argue it has gotten worse because the unemployed are being paid for another extended period. Jobless claims rose once again last week as hiring is on hold due to economic and political uncertainty. As more is learned about the laws forced on the public with respect to the enormous costs, there is less appetite to raise taxes in 2011 by some in Congress. However the WH seems intent on raising rates in spite of the crushing effects on the economy. Lastly, as you know, I have been tracking the pace of the ECRI — this week it broke the critical level & hit –10.5 a sure sign of trouble ahead. The brief rally this week has returned us to the same place we were a month ago. Ebb & Flow! As stated last week, if there is follow through and indications of some strength/volume/trend…. We will certainly test the waters. As in all bear market rallies, it’s one we will rent and not own! Enjoy your weekend!
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