Monday, January 4, 2010

Monday Evening Review

Your humble blogger has been 4+ busy catching up on the torrent of commentary on the macro situation, as well as evaluating specifics. Here are a few observations.

Technically, the S&P 500 (ETF = SPY) looks as if it has broken bullishly to the upside from the rounded dome it was forming off of last March's low, a chart formation which the best of the large banks (JPM and WFC) remains in. The leading stocks are techs with their own breakouts, such as ORCL and IBM which were highlighted here recently; certain specialty companies such as TEVA and BUCY; and a number of others. A number of stocks are in record territory. The stock market is acting very much as it did after the horrendous 1974 bottom(s), though then the problem was rampant price increases and shortages, and now the problem is wage cuts and commodity price increases without shortages. In 1976, stock prices hit new nominal highs, but the underlying economic problems led to years of real declines in stock prices, only bottoming 6 years later adjusted for inflation. The same thing could well be happening now, though as of today, the risk of price declines remains, perhaps just as unthinkable as 21% interest rates and sustained double digit inflation appeared in 1976.

The weekend remarks by Fed Chairman Bernanke suggesting no tightening any time soon (many think 2011 is the earliest) may have added to short-covering in the precious metals to send gold up over 2% and silver up 4% today. Fundamentally, the decision of the Fed and the Treasury to backstop all Fannie/Freddie losses may have added to the resolve of the gold bulls to buy and hold gold until fiscal responsibility returns a la Mr. Volcker 30 years ago.

If you read John Hussman's latest letter, Timothy Geithner Meets Vladimir Lenin, which reviews his prior thinking and which I recommend, you may have your faith in the U. S. government tested assuming you have a modicum of faith before you read it. Dr. Hussman is looking for about 7% annualized inflation over the next decade, though not beginning immediately. His reasoning is powerful but does NOT tell you not to own intermediate terms bonds now.

Meanwhile, David Rosenberg has returned from a trip to Israel and elsewhere, a bloodied bear but unbowed. He returns with a (free) subscription only lengthy argument for economic weakness being the predominant condition in this country, is bullish on gold vs. our dollar, and argues for deflation being the current major problem.

The Discover Small Business Watch is out for December. Consistent with November's survey and the NFIB November survey, business remains poor and worsening for its respondents:

The number of small business owners who think the economy is getting worse was down to 49 percent from 53 percent in November; while 24 percent of small business owners see the economy staying the same, up from 16 percent in November; 25 percent see the economy getting better, down from 28 percent in November; and 2 percent are not sure.

22 percent see conditions for their own businesses getting better in the next six months, an improvement from 19 percent in November; but still in contrast to the 52 percent who see conditions getting worse, 24 percent who see things staying the same, and 3 percent who aren't sure.

35 percent rate the current economy as fair, up from 30 percent in November; while 61 percent rate it as poor, and 4 percent rate it as good or excellent.

18 percent of owners say they will increase spending on business development activities such as advertising, inventories and capital expenditures in the next six months, 26 percent will make no changes, 51 percent plan to decrease spending, and 5 percent are not sure.

51 percent of owners have experienced cash flow issues in the past 90 days, down one percentage point from last month; 45 percent of owners have not experienced cash flow issues, and 4 percent aren't sure.

Finally,'s polling continues to find that its respondents are seeing no net hiring at the companies at which they work. This parameter remains about as bad as it has been over the past 13 months.

To summarize, cheap short term money appears to be used to speculate in the financial markets, but not enough economic activity is really happening to be consistent with a strong, solid economy.

Who knows what the powers that be will do, but my bet is that they will continue to do what they have been doing, which is to utilize the power of the government to benefit Big Finance at the expense of the rest of us.

Where are Big Financiers putting their winnings? If you think most of it is going into 3.8% 10 year Treasuries, think again. Some, of course, will do so. I'm still thinking Swiss gold vaults that have run out of storage space.
Is gold overbought? Technically, not any longer. Is it overpriced? With unlimited U. S. dollars having gone to or having been pledged to go to bail out bondholders and stockholders of private companies, and with gold's cost of production said to be $800/ounce, it is hard to argue that it is too high in terms of dollars. Yet most Americans own little or no gold and those investors who do have in general at most 5% of their net worth in it. Yet most American investors own lots of stock even though the insiders in public companies haven't been on the buy side for about a year.

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