Here Comes the Summer Rally Friday, Jun 10 2011 

Here Comes the Summer Rally

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The Hindenburg Omen – A Potential Fat Tail Event on the Horizon? (revised) Tuesday, Aug 24 2010 

The S&P 500 has been flashing a number of technical signals to the market over the month of August. Amongst the various signal we had an inverse head and shoulders and an ascending wedge giving investors bullish and bearish signals. August 11th provided a resolution with the ascending wedge breaking down and the market moving significantly lower. More troublesome was the market’s action the next three trading days. After large moves in one direction the market typically consolidates in the opposite direction as short term traders look to book profits and others buy on dips/sell into strength. What we had was the opposite, a market that could not move higher and instead drifted lower.

On August 12th, a Hindenburg Omen signal was triggered. A Hindenburg Omen is a statistical sign made up of market indicators which foreshadows a move to the downside. Just one Hindenburg Omen is not enough as there needs to be confirmation of the first signal within 36 days. If this signal is not confirmed then the signal is not valid.

The Hindenburg Omen has 5 criteria which must be met.

1. The NYSE 10 Week moving average is rising.
2. The McClellan Oscillator is negative on that same day.
3. The new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for 52 Week Lows to be more than double new 52 Week Highs.) This is a mandatory condition.
4. The daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day with
5. The smaller of the two numbers being greater than or equal to 69.

Delving into these criteria what we find is an indicator which attempts to signal the possible occurrence of a fat tail event.

First, we have a rising NYSE 10 Week moving average which suggests a market trending upward followed up by a fair portion of stocks making new highs.

But underneath the surface there is trouble. The McClellan Oscillator, used by traders to gauge market breadth, is negative signaling that more stocks are falling than rising. This is a sign that a correction may be approaching.

Next we have the 52 Week Highs and Lows. In an rising market one would expect significantly more new 52 Week Highs than new 52 Week Lows. But here the number of new 52 Week Lows are close to the number of 52 Week Highs, relatively speaking.

The number of 52 Week Lows are also more than 2.2% of the total NYSE issues traded that day. This sends a signal that the 52 Week Lows tail is getting fatter, a sign of underlying weakness.

What we find is that while the market appears calm, there is significant turmoil and weakness underneath the surface.

While a Hindenburg Omen does not mean the market will crash it is a signal that a fat tail event may be approaching in terms of a market pullback.

Thursday and Friday of last week provided a confirmation of the original signal. According to the Hindenburg Omen there should be a move to the downside in the next 40 days.

This does not mean there will be a crash. The downside move could only be as small as 5.5% for the signal to be accurate.

It is not my belief that we are heading for a second stock market crash but investors should tighten stops on long positions and/or hedge long positions until the danger passes.

The underlying market weakness following the markets drop on August 11th combined with weak economic reports should give investors pause. The inability of the market to move higher indicates a lack of buyers as investors seem to be waiting on the sidelines.

Now there is good news to report. This drop, should it occur, would put in a major low for the four year Presidential cycle leading to a solid rally into 2011. In other words, protect your long positions and get your cash ready to allocate so you can buy at the bottom.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Technical Commentary – August 23rd Monday, Aug 23 2010 

S&P 500 – The short-term charts look weak but close to oversold levels. This means we could get a short rally next week if economic numbers are not disappointing. We do have a double top at 1130 and another at 1100 and they are resistance levels. The Labor Day holiday will affect trading this week and next with smaller than normal volumes.

On the longer-term charts, the S&P fell below its 50 week moving average (1100) and was unable to climb above last week, possibly turning it into a resistance level if we are unable to make a move above it in the next few weeks.

The 1100 level is becoming an important psychological barrier for the markets. If we are unable to break through it is likely we move back to the 1050 level and then 1000.

On the weekly chart you can see a clear head and shoulders top tracing itself out. Right shoulders can drag themselves out for sometime so this may take a bit longer than expected to resolve itself.

It is not a pretty chart but 1000 will provide a major psychological support level for the market.

NASDAQ – The short-term charts show an index searching for direction after the sharp drop 2 weeks ago. We seem to be rattling around between 2225 and 2160. Just like the S&P we may see a short rally next week with the Labor Day holiday.

The longer-term charts are once again telling the story. The weekly charts shows a golden cross with the 50 week moving average oh so slightly above the 200 week moving average but last weeks rally was not able to take us above the 50 week or 200 week moving averages (2237 and 2220 respectively).

More importantly, the head and shoulders top is much more pronounced here than the S&P. Traders are looking at these charts with trepidation.

TSX – Clear downtrend on both the short and long term charts with prices making lower highs and lower lows. The TSX is at the upper boundary of its trading range and seems to be looking for direction.

The 50 week moving average has become a support level at 11622 with moves below being met with buying. If the TSX falls breaks below 11622 we are likely to see a move down to 11000 which would be the lower end of the trading range.

Economic statistics out of the US are likely to guide the Canadian market as investors will worry that a slowdown in the US will filter back to Canada.

Commentary

The US stock market is at a critical level. Economic statistics have been weak signaling a slowdown and there is the potential for 2nd Quarter GDP to eventually come in a full percent lower than first reported. Markets have been pricing in strong economic growth and it appears as though growth will be coming in below forecasts.

In addition, we have a Hindenburg Omen signal which was confirmed on Thursday and Friday of last week. The Hindenburg Omen does not guarantee a crash but it does signal significant underlying weakness in the stock market. If the market does move lower there is a chance some of the charting signals resolve themselves in a manner which will disappoint investors.

This is not a time when investors should be adding to equity positions unless you are using short ETF’s as a hedge. Investors should be on the sidelines waiting for a trend to establish itself and getting cash ready to allocate.

Once again, I am not calling for a crash but investors should be aware of what Mr. Market is telling us. Economic and technical indicators are showing weakness and investors should be on the sidelines until a trend establishes itself.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Technical observations – July 25, 2010 Monday, Jul 26 2010 

United States

S&P 500

Technically, the daily chart is having a nice rally through the 50-day moving average and after factoring in the bearish sentiment as measured by AAII this rally may have some legs in the short-term. In order to turn positive the market is going to have to move through the 200-day moving average AND the June high, which would set the stage for a rally up to the April highs.

The weekly chart is bearish with a potential head and shoulders top formation and resistance at the 50-week moving average. Failure to break through resistance will be a significantly bearish indicator and will likely signal a move to new lows on the year.

The monthly chart is bearish and has been so since March when the stochastic peaked and we tested resistance at the 50-month moving average. Currently we sit at an important crossroads testing support at the 200-month moving average. Failure to maintain this support level is a very bearish sign and sets the market up for a possible retest of previous lows.

Nasdaq Composite

The daily charts of the NASD have just pushed through the 50 and 200 day moving averages with the next target the June highs. Technical indicators appear to be getting close to overbought territory and how the index behaves as it approaches the June highs will determine if this is a short-term top or preparation for a move to test the April highs.

The weekly chart is a bit more bullish as the index has just pushed through a convergence of the 50 and 200-week moving averages. A head and shoulders pattern is in the process of forming attention should be paid in the event the current rally runs into resistance in a few weeks time.

The monthly chart has just pushed through a key resistance level with the 50-month moving average. While the technical indicators are bearish, it is not inconceivable that the current rally continues for a small amount of time before finally rolling over.

Canada

TSX

On the daily charts, the TSX is tracking the Nasdaq Composite. Having already moved through the 50 and 200 day moving averages the next test will be the recent July high, which stands very close to Friday’s close. A move higher would mean the TSX would likely test the June highs then the April highs.

It is possible the TSX will lead the US and provide market leadership over the coming weeks.

The weekly chart shows a range bound market with the 200-week moving average providing significant technical resistance. A move through the 200-week moving average would be a significant technical breakthrough and a bullish signal but as we approach that point we may see the market enter into overbought status.

The monthly chart is showing significant technical resistance at the 50-month moving average level that is approximately 200-week moving average level. A move through this level would be a very bullish indicator for the Canadian markets.

It is possible that the Canadian markets diverge for some time with the US markets as the Canadian economy as a whole emerged from the downturn relatively unscathed and the Canadian banking sector is rock solid. The biggest concern would be a slowdown in the US caused by a lack of hiring, weak banking sector, a weak housing market, and slow consumer demand. Since a significant amount of Canadian exports are dependant on the health of the US economy Canadian economic growth will likely slow over the second half of 2010 into 2011.

A strong banking sector and vibrant consumer demand will allow the Canadian economy to weather and stormy seas caused by a slowdown in the US allowing the Canadian economy to be in the sweet spot globally with moderate economic growth coupled with low inflation.

Summary

So far, our beginning of the year call to be long the first quarter and short thereafter has been correct and the market appears to be following the expected path for 2010.

Looking back over history and the four-year Presidential cycle, the stock market’s low in the 2nd year of a Presidential term provides a nice rally into the third year as the President gears up for his reelection campaign.

Currently, the cycle was thrown off by the crash in 2008 along with the sharp rebound in 2009 but should return to form this and next years.

Within the larger 10-year cycle, the stock market has negative returns during the first few years setting the stage for positive returns later in the decade.

Investors should remember that while stocks are cheap, in the context of a long-term sideways market, it does not mean they cannot get cheaper.

Classic bull markets start in times of cheap stocks, as measured by PE’s, over a long-term horizon. It is likely that PE’s will continue to move lower as we see earnings increase over the next few years setting the stage for the next classic bull market.

With the indices led higher by low quality stocks and typically underperforming markets leading the way investors should be wary over the rest of the year until a tradable low is in place.

While the market continues to churn it is best if investors wait on the sidelines for the dust to clear.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

4th Quarter Investment Thoughts Thursday, Oct 1 2009 

I would like to start by making a comment on my last article. Globally, there are values in financial stocks in countries not hit as hard as the US and Europe. My bearish stance is US based, not global.

If one takes the time to look they can find good values, especially in Asia and Canada where banks are lending and making solid profits.

Recent home sales numbers were positive. Inventories are being cleared from the system; which given the new wave of resets is a very good sign. There is a question of what will happen in 2010 when the tax credits expire. I have a pretty good idea on how this plays out in the coming year but would like to see more data before my thesis gets solidified. In the meantime, if sales and inventories continue to fall, properties in the grey market will likely come online. The faster this glut of grey market properties work their way through the system the quicker we can return to normal.

The scenario is similar to how tech companies had to wait for equipment purchased by dot.coms who went bust to work their way through the system in 2001 and 2002 before they started to see any growth.

The recent pullback in gold and silver is a pause that refreshes. Gold seems to be tracking the dollar which is headed for a retest of the lows made in 2008 which retested lows made in the 1980’s. The key is what happens next year during the period of time when we retest. Do we dare look back to what happened more than 25 years ago? I have a pretty good idea how this scenario plays out through 2010 but once again need to see more data before my thesis become solidified.

Neutral to bearish in hard commodities. There are some seasonal factors at play here and the technical charts do not look strong at all. An upside breakout would turn me into a bull but I believe each metal, with the exception of gold and silver, needs to take a break and reassess its fundamentals vis-a-vis stockpiles and supply-demand fundamentals.

Agriculture stocks continue to provided fantastic value and returns if you are willing to do your homework.

Sugar should underperform relative to other soft commodities.

The broader market is likely headed higher after a correction but there are better returns elsewhere outside the major indexes. The next group has yet to emerge and assume leadership in the market so what we are seeing is not the beginning of a bull market but rather a correction in a long-term (decadinal) sideways movement.

The Fed statement spoke about extending the mortgage securities purchase program into the first quarter of next year. This is an admission that they will not be able to wind down this program as fast as programs like TALF.

Rates will end up staying low in the Unites States much longer than people expect. I believe that those looking for a rate hike in 2010 will be disappointed.

The real question going forward in monetary policy is ‘Who globally will lead the charge to raise rates?’

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Why I am Bearish on Financial Stocks Friday, Aug 28 2009 

After seeing quite a large rally from the March lows the market appears to be extended and indicators (stocks above 200 day moving average, market PE, bullish/bearish %’s) are signaling some rough seas ahead. While stock could conceivably move higher there are a few reasons why I am bearish at the present time.

Harkening back to 2007, I would like to give credit and thanks to Credit Suisse for the following graph.

As one can see the initial tsunami of bad loans has receded and financial stocks have been licking their wounds and repairing their balance sheets but we are at the beginning of the second wave. This second wave of option reset mortgages will do more damage because of the already weakened state of banks.

The relaxing of mark to market rules has helped repair balance sheets but there will continue to be problems throughout 2010 and into 2011 until the 2nd wave of resets recede.

As the resets continue, non-performing loans continue to rise, causing additional strain on an already weakened banking sector. It is unlikely that we will see a significant drop off in non-performing loans until the bulk of the option resets are completed.

Bank failures continue on a weekly basis with the problems being felt mainly by small and medium sized institutions. Some larger weakened institutions have succumbed to the pressure as well. Recent comments that the FDIC may need additional capital should sound a warning bell across the financial space.

While the housing data has been bullish due to buyers assistance programs, one needs to keep in mind that the reported figures are month-over-month data, not year-over-year. As we get into the fall and winter months the MoM figures will decrease as seasonal patterns take place.

Housing inventories continue at a high level, with many homes being taken off market and rented until the selling climate improves. As we continue through the resets, it is likely that inventories stay high until the potential overhang from option and agency ARM’s clears. Any spurt in new home construction will slow the housing inventories from being worked off in a timely manner.

Retail sales numbers continue to be disappointing, although we are entering a period where comparisons will be much easier. The year over year data shows a 9.4% decline in June and an 8.3% decline in July. Again the YoY data is more telling than the MoM data.

High levels of unemployment will constrain spending and GDP growth into 2010 and later. Government stimulus programs will provide the necessary counterbalance to weakness in consumer spending helping to guide the economy through this difficult period.

This is not an approval for the governments polices but one needs to note that a similar path is followed in every recession. The authors problem lies in the wasteful programs and high deficit levels that state and federal governments carried coming into the recession which only exacerbates the problem going forward. Spending that is targeted at areas to provide future growth is preferred over the construction of dog parks.

So while global economies are likely to come out of the recession without much problem (Japan will be an exception) GDP growth in the US is likely to be below normal levels.

Inventory restocking will give a bump to GDP growth in the coming quarter as will government stimulus programs. This combination will set the stage for renewed consumer and business confidence in the coming years but first we will need to get through the a possible double dip recession in 2010.

So while the market itself may move higher I see better value and higher upsides in the precious metals and agriculture sectors where there are some very interesting values globally. Quite often the best values are off the beaten path.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Investment Thoughts (August 3rd, 2009): Monday, Aug 3 2009 

Not going to chase the market for a number of reasons, but most of all we should see a retest of the March lows sometime in the distant future, maybe a year or so. The US banking sector is still not healthy and has been propped up by regulatory rule changes.

So while financial stocks may be doing well at the present time they will not be the leaders in the new cycle for a variety of reasons. Among them are the mark-to-market rules, increasing non-performing loans, and difficulty in earning a solid NIM in a 0% cost of funds environment.

In order for a new bull market to begin, a new sector must take up the leadership mantle. The leaders from the previous cycle do not lead in the new cycle.

Technology is unlikely to provide leadership as R&D budgets continue to get cut. Businesses are unlikely to commit to major capital spending programs, despite a 0% interest rate environment, amidst falling revenues and uncertain consumer demand. Consumer uncertainty about the future will translate to a cautious business environment going forward.

It may sound strange to say this but with top line revenue growth falling and earnings estimates being met by cutting employees and R&D budgets, this is not a healthy sign for the future.

Without top line revenue growth earnings momentum will be difficult to maintain. You can only cut so much staff and R&D. At some point revenues need to grow and that will only come through increased consumer confidence.

When you combine an US unemployment rate that has gone from 5% to 9% and 70% of US GDP being made up of personal consumption, it is no surprise that consumer demand is weak and consumers are tightening their budgets. We will need to see strong hiring in order to get consumers feeling better about the future and opening their pocketbooks.

I am not a proponent of massive budget deficits but right now government spending is propping the US economy from falling off a cliff. This happens in every recession so there should be no surprise here.

Government spending is adding a couple of percent to GDP at the current time. A significant portion of the stimulus money is targeted to be spent in the coming years which should help the recovery. The question is how much will it affect hiring which should translate into higher tax collection as well and possibly allowing the government to meet their optimistic projections for the 2011-2012 time frame, although it is not the authors opinion that the overly optimistic projections will not be met.

The biggest question concerning the recovery should come from the balance sheet of the Federal Reserve. It is Mr. Bernanke’s intention to begin shrinking the balance sheet of the Federal Reserve in the coming years bringing it back down to a reasonable level.

The largest problem is how much will the shrinking balance sheet constrain the economic recovery. In order for the Federal Reserve to sell the securities it now holds there needs to be a buyer on the other side of the transaction. It is unlikely that the capital will come from drastically higher leverage levels at hedge funds and banks. This means the capital needs to come from either foreign governments or the private sector. Capital coming from the private sector will mean less capital for investment purposes. Capital coming from foreign governments means competition for Treasury sales.

Any recovery will be slow and grinding which is not what the bull camp wants to hear.

So what am I doing right now? Sitting on the agriculture purchases I have made over the last six months. Farmland, fruit, vegetable, and sugar production has provided a nice hedge and decent returns. There is tremendous value in the sector with some stocks already surpassing pre-crash highs.

Gold and silver should begin moving to the upside in the next few months but I am content to wait for a washout correction. This should occur about the time we get either a peak in the US Dollar, the US equity market, or both. We have yet to see a 50% retracement from last years lows which is giving me pause, although there are some interesting trades in the large cap sector.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

We are back….temporarily Sunday, May 10 2009 

I am back temporarily to expound a bit on what is going on. Do not get excited but I feel the need to cut through the noise once again and give a bit of clarity.