A Regional Fed Head Hints at Taking the Punch Bowl Away

Forget Cyprus.  The best sign that the current stock rally is in trouble came from SF Fed president John Williams today (LINK):

 "Assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer," Williams said. "If that happens we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year," he added.

That's the beginning of the end for the speculators.  What do I know, I'm not an economist, but looking at the slow pace of both nominal and real GDP growth, to the extent they are measurable, I would guess that unfortunately the country is in recession or something close to it if one subtracts the Fed's bond-buying programs.

Currently, though the Fed is super-easy and the Federal government is stimulative, though the second derivative of the deficit has turned sharply negative.  However, once that adjustment is made, both the bank and the Fed are stimulating, which makes it difficult to have a major bear market in stocks.  Overvalued as stocks are by many traditional criteria, so are bonds, and stocks were vastly more overvalued than today between 1998 and 2001-2.  So, yes, they can go (much) higher.

Consumer Confidence Rises While Current Conditions Are Poor: Implications

The nearby chart found on a Zero Hedge post was interpreted at ZH bearishly. On this one, I might take another view. Granted the chart is not a very long-term one, but my eye sees a pattern in which expectations in fact lead the present situation. It looks as though the two parameters diverge and come together; the two bear markets were presaged when stable to declining expectations plunged.

Yours truly believes that very high-quality stocks, not necessarily global in that the US dollar is probably no better or worse than the Euro or yen, will probably outperform cash on a multi-year horizon; at least there will be periods where that will be true. The more core belief here is that almost all financial assets are overvalued relative to earnings, so that cash is a rational place even at no interest.

How many people know that IBM today hit a more than 10-year price high? Or that Oracle is at an almost 9 year price high? Or that McDonald's is churning near its all-time price high that was set in August 2008, well into the bear market?

In other words, this has been a stealth bull market in selected stocks. Furthermore, it is quite easy to envision IBM, which has an amazingly strong chart, to run way past its 1999 high of $137 to the $180 range simply based on fundamentals ($12/share earnings for 2010 times 15 P/E). Of course, at some point the cycle will turn, Hewlett-Packard may pressure IBM in services and IBM could earn $8/share and given about zero tangible book value for the company, the stock could be halved from here. In fact, considering that oil prices had a 4-fold range last year, IBM stock could do the same. For now, however, the political imperative is growth and rising asset prices, and the feeling at EBR is not to fight the Fed or the trend.

The stocks that have garnered the most attention, such as Bank of America, are struggling. Quiet bull markets are marvelous things.

Gold was in a quiet bull market this summer. When it got noisy, it was time to sell.

The single best chart of a major asset class continues, in fact, to be gold. It is felt here that it is likely to continue to be strong, though likely not the single best asset for appreciation, but rather to be a superb asset on a risk-reward basis. Either growth will be strong, goosing commodities, or "money" will be "printed" to create either growth or the illusion of such. Not shown is a 2 year chart of gold, but it is ordinary bull market stuff, showing about a 14% annual appreciation from about $842 per ounce to today's sub-$1100 price. Not only that, we are close to two years out from the prior price high over $1000/ounce. In that context, the latest sell-off looks jejune and very possibly finished. Absent a major geopolitical action or major Fed money-printing announcement (which appears unlikely given decent economic data lately), fireworks in gold are neither expected nor desired. A move to GLD $113 from about $107 now would not be surprising in the next month, however. Gold is already off the headlines and thus has reverted to a quiet bull market though not a forgotten one; in other words the gold bull market is far from young.

Copyright (C) Long Lake LLC 2009

Twas Brillig and the Slithy Toves Did Gyre and Gimble in the Wabe

Bloomberg.com is choosing to run with S&P 500 May Climb 6% on Santa Claus Rally: Technical Analysis, which says:

The Standard & Poor’s 500 Index may end the year as much as 6 percent higher if a typical December rally drives the gauge past a key resistance point, according to technical analysis by Bell Direct’s Julia Lee.

The index, which closed yesterday at 1,096.08, has climbed through December in 16 of the past 20 years, said Lee, an equities analyst in Sydney. Further gains this month in what’s sometimes known as a Santa Claus Rally could push the gauge past 1,121, the 50 percent retracement level that Fibonacci analysts identify as a point of significant resistance.

“The 1,121 level is the 50 percent retracement from the high of the bull market in 2007 to the low of the cycle in 2009,” said Lee. “It will be a challenge to break past that, but if it does, my guess is that the index will drift even higher to 1,160. If it doesn’t, we’ll probably just see a sideways movement.”

While I give some credence to technical analysis, it is irresponsible to the non-professional reader to suggest that with 2 weeks left in the year in what is usually quiet trading, and only about 7 trading days, that the index can rise 6%. Annualizing a 6% gain every 2 weeks gives an appreciation rate of about 329% yearly.

Yes, anything can happen, and yes, an improving economy associated with Fed ease is a potent combination for the bulls. But it is much better to see gloomy headlines that worry that stocks are poised for a fall than the uber-bullish gibberish quoted above. Rather than waste your time reading this stuff, please reread perhaps the most famous piece of nonsense ever written, namely Jabberwocky.

Copyright (C) Long Lake LLC 2009

Credit Suisse Calling a Topping Process?

Found on ZeroHedge.com, here is a Credit Suisse chart.

More and more fundamental and technical contrary indicators are pointing in the same direction. Markets that are manipulated such as this one are even more difficult to forecast than ever, but what I especially don't like is that if one goes back to the euphoria spike around late 1999 to the current spike, the market averages are down in nominal terms and down hard in inflation-adjusted terms.

In other words, we may be looking at a high level of optimism and therefore at relatively high share prices superimposed on a continuing structural bear market. In contrast, the 1987 peak in optimism was in the setting of a massive, overbought structural bull market in financial assets and steady growth in wages, profits, jobs, stock payouts, stock buybacks, yada yada yada. The brief bear market merely brought the averages back to the uptrend line. Anyone who wishes can check long-term charts of such stocks that have gone up massively since their bottoms such Ford, AmEx, BofA, etc. and still find virtually all of them within structural bears: lower highs as of today with lower lows established since last November or this March. (And this is without adjusting for inflation (or, for BofA and its ilk, without adjusting for dividend payouts, to be fair)).

If stock averages are to move lower in the near term, it appears likely that money will move into intermediate-to-long Treasuries. In fact, the chart of TLT (long T-bonds) tracked the up and down jiggles of the stock averages today amazingly. The junkiest stocks such as Citigroup that have gone up the most percentage-wise are the most obvious candidates for decline, even if they should be fated to be bull market favorites over the next few years. Or, they could just turn out like Nortel and eventually simply fade away.

Copyright (C) Long Lake LLC 2009

Is Larry Kudlow a Contrary Indicator?

This spring and a number of NASDAQ and S&P points lower, EBR pointed to a Ben Stein opinion piece in the New York Times that was ridiculously bearish and suggested that based on Dr. Stein's track record in recent years, this was probably an actionable buy signal (and yours truly started buying stocks). Unfortunately, another prognosticator of a different type-- a permabull, is back-- and he's snorting more than I have seen him. Dr. Lawrence Kudlow writes in It's a New Bull Market: resilient capitalism pushes back against Obama:

Let’s call this what it is: A new bull market in stocks has emerged from the ashes of the financial meltdown and the deep recession that followed. And it’s signaling the onset of economic recovery. Free-market capitalism is more durable, resilient, and self-correcting than its detractors would have us believe.

This is not just a summer rally — although a 12 percent market rise since July 10 is absolutely splendid. There’s a lot more going on here. Over the last five months, since March 9, the broad-based S&P 500 is up 46 percent. If I’m not mistaken, a 20 percent rally that is not quickly reversed constitutes a bull market. We are more than double that, and there will be no total reversal.

He goes on to snort as a snorting bull should. Another snorter is the Economic Cycle Research Institute (ECRI), which was brave in calling a recession but was clueless as to how bad it would be just as it was getting horrible. For example, on August 29, 2008, the face of ECRI, Dr. Achuthan, gave an interview to the BBC which was titled Mild Recession Despite Positive GDP and in which he explained "that even with more than 3% growth the U.S. is in a mild recession".

And the ECRI is good at forecasting, far better than Dr. Kudlow has been lately!

The S&P 500 was in fact priced for a mild recession that would, it was expected, give rise to another expansion. It was 1t 1300. It is now a little under 1000. It would be cut virtually in half within only 6+ months from the date of that interviewer. Here is the ECRI today:

The index's annualized growth rate continued to soar, reaching a new five-year high of 8.8 percent from 7.7 percent the prior week. . .

ECRI Managing Director Lakshman Achuthan has said the recession is already beginning to wane, and that increased stimulus from Washington is not necessary for economic growth.

"Not only is the U.S. recession set to end this summer, but the recovery is apt to be stronger than many expect."

The weekly index rose in the latest week due to firmer housing activity, said Achuthan.

Now, how could $23.7 trillion worth of support to the financial system, with specific massive support to the housing industry, not fail to produce "firmer" housing activity given that new home construction fell to its lowest level since the 1940s? But so what? You may have seen a Seinfeld episode about whether certain prominent features on a young woman were natural and if so, you will recall that they were real. But this housing firmness feels fake.

The depression that is probably ending is the longest since the Great D and the most severe in many ways since then, as well. The NASDAQ rally is fundamentally and technically suspect. Treasury bonds are acting better. ECRI's bullishness is long in the tooth. The snorting and chortling by Dr. Kudlow could be the sign of at least an intermediate top.

Copyright (C) Long Lake LLC 2009

More Frothy Signs in Stocks as Pushers Get Desperate

How the mood has changed from the despair of this winter and last fall!

Perusing the headlines of Barron's online makes one think it's 1999, not 2009. Forget the bull noises about Apple (breathlessly reported is that it has $31 B in cash (which it does not)). The truth is that Apple has never paid a dividend, may never pay a dividend, and sells for about $110 billion dollars more than it is worth under generally accepted accounting principles. A mere 5 years ago, AAPL sold for one-tenth its current share price. Are you sure that the iPod won't become a commodity item, the iPhone the same, and the computer business won't get overwhelmed by the next new things? And that Steve Jobs can continue to work?


Also ignore that a bull market winner, Family Dollar (FDO) has a CEO who just unloaded $7 M worth of stock. You, the little guy, should buy and hold. (And FDO is one of the "good guy" companies in EBR's book.)

Ignore that Barron's is leading off with a pitch for Siemens, one of the most corrupt companies around ("Bribery was Siemens's business model," said Uwe Dolata, the spokesman for the association of federal criminal investigators in Germany---from PBS.org).

Here's the first scary thing:

Leaving U.S. Stocks for Foreign Opportunities
Subscriber Content Read Preview
Financial adviser Dawn Bennett has dumped domestic equities for emerging markets such as Peru and China.


When Barron's expects you to pay money to get "subscriber content" so you can read about some kid who is long Peru when you can buy Eli Lilly or BMS for 8-10 times earnings and a secure 6% yield, IBM for 11 times earnings, and P&G on a down year for 15 times earnings, you should realize that things are frothy. (This comment is NOT a market timing tool; remember "irrational exuberance" was correct but 3 years early--December 1996.)

Here's the second scary thing:

Hot Research PM
AMD Ready to Advance
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FBR Capital Markets upgraded the chip maker to Outperform

Per the Yahoo/Finance AMD chart, the stock has gone down for the last 26 years. It has a negative tangible net worth. It is down about 10% after hours due to results so poor that even most of Wall Street's paid optimists want to dump it. Yet Barron's, once a bastion of reality-based investing, chooses to highlight perhaps the one shop
that upgrades this over-promising, under-delivering company.

AMD has never paid a dividend. If you had bought the stock 26 years ago, you would be down by half. If you had done something really risky and invested in and rolled over 1-year FDIC-insured CD's, you would have approximately quadrupled your money. Yet, only a few years ago, AMD was about 10 times higher than it is now. (I hope that's not a cautionary predictor for Apple Inc., but that's why I mention both companies in the same post.)

The truth as seen here at EBR is that this is probably the most confusing time for an investor in an investing lifetime. Perhaps the closest is the 1973-5 upsetting of the then-orthodoxy that recession and high inflation were incompatible. But $23.7 TRILLION of government intervention down the road for such little economic results, and promises from a campaigning-for-renomination Ben Bernanke that small savers will continue to be forced to subsidize JPMorgan Chase et al for a "considerable" length of time, make all predictions chancy.

But when you take it one day at a time, you can't help but worry when stocks such as Eaton shoot up- aided by Jim Cramer's hype- just as their sales and earnings collapse, and Barron's wants to charge you money to be exposed to such bull---- market idiocy as getting rich off of Peruvian stocks or by buying one of the worst-performing large tech companies known to man.


Copyright (C) Long Lake LLC 2009