Market Topping - The Bull's Logic

Bullishness in the market has never been so high since late April of this year.  The Fed has repeatedly come out and assured people that they will intervene with QE2 if necessary and the investor public sees this as a good thing and bids stock prices up.  What's funny is investors are eyeing the weekly jobs report with the following rationale:

• If the jobs report is better than expected, then the economy is recovering and we can be optimistic and buy stocks.
• If the jobs report is worse than expected, then Bernanke will implement QE2 and this will be bullish for stocks and gold.

When the market gets to this level of optimism where nothing can go wrong and no matter what happens, we go higher, that usually is indicative of a top in the market. Also, bullish sentiment is near late April 2010 sentiment, volume continues to be weak, and we are at the top end of our trading channel, and quite near resistance.  All highly suggestive of a top in the market.

We are days if not hours away from a big (probably steep) correction in the market.  We might make one more stab upwards in anticipation of the jobs report, but any rally at this point is a fantastic opportunity to go short.

We are about to enter "minor wave 3" down, and that means the sell-off at the very least must breach the lows of the end of wave 1, approximately 1010 on the S&P 500. In all likelihood, we will at least sell off to 9400 DOW before the end of wave 3.  Of course, it won't be a straight line down, but that is the next big target before we have a significant rally.

Protect your Assets

The S&P 500 has rallied over the past couple of weeks by over 8%, as more and more bulls jump on the bandwagon. Bullish investor sentiment is now closing in on 90% which is quite high and indicative of a short term top. This is just another counter-trend rally in a larger Bear market.  At the beginning of a Bear market, there is typically a significant number of months of heavy resistance to the downside as hope and optimism keep the markets propped up while economic indicators slowly deteriorate. Some people refer to this period as the "Slope of Hope", but once it subsides, the sell-offs can be steep and nasty.

So I think now is an appropriate time to start discussing where one should put your money to keep it safe.  In a deflationary environment, there are not many stocks that will make you money.  But in severe deflation (which I believe we are headed towards), all stocks will be big losers, even some of the best quality dividend paying stocks that are regarded as "safe havens".  Just look at 2008-early 2009 as illustration of this.  There was almost no stock that didn't sell out well into double digit percentages before bottoming in March 9, 2009.  So, what good is a "safe" dividend stock paying 6-8% dividend if it loses 20-40% of its value???

You might be thinking "what about bonds?" at this point.  In a normal environment, bonds would be a logical alternative to stocks, but this is not a normal environment. Debt-ridden businesses and municipalities will make even bonds a risky investment in the coming years.  Municipalities and even entire states will be facing bankruptcy in the coming years as continued high unemployment and high debts wreaks continued havoc on balance sheets. Of course, there will be a very high pressure to bailout the biggest bankruptcies, but why take the risk?

Real Estate is even worse.  As I have posted before (twice), real estate is still over valued and is due for more corrections. Even precious metals like gold & silver sell off in a deflationary spiral.

One word: CASH.  This is the only asset class (other than shorting the stock market) that will survive unscathed in a deflationary spiral where panic sets in.   If you think you can stick it out through the next leg down and keep the "buy and hold" mentality alive, you are wrong. If you thought the March 9 low was ugly, you haven't seen anything yet.  The vast majority of individual investors who "hold" their assets through the sell-offs will eventually panic out near the low points in the market.  It happens in every recession, but this one especially as we will see extreme lows in the market that will shock almost everyone.  There are few people that will have the stomach to weather the storm all the way through, and large fortunes will be lost as a result. Don't be one of them, protect your assets NOW.

Crossroads: Inflation vs Deflation

As time goes by, I get more and more Bearish on the long-term economy.  First, let me tell you what I know for certain:  We are in a depression, and the worst is yet to come. There is really no doubt about this in anyone's mind who has a clue about economics and a record of predicting market trends correctly.  Years from now, when the history books are written, this decade will be referred to as the darkest, deepest depression our country has ever seen, and there is nothing we can do to stop it at this point. The question is really what type of depression we will face.

In one camp, we have the inflationists, with Peter Schiff being one of the most well known. They say (in a nutshell) that the dollar will continue to plummet to farther and farther lows due to money printing and as a result we will see commodities and precious metals soar in price, dramatically raising the cost of living for the United States as unemployment stays high, taxes are raised.  This could very well cause hyperinflation.  However, in this scenario, since our economy is so weak, stocks would underperform inflation as everyone flocks to commodities to keep their net worth from sinking in value.  Ultimately, the United States would be forced to raise interest rates to stave off inflation but this will slow down the economy even further relative to inflationary pressures.

In the opposite camp, we have the deflationists, with Robert Prechter and his Elliot Wave analysis at the forefront of predictions. This scenario, which I regard as significantly more likely, will be caused by the American people pulling back spending with increasingly pessimistic views of the state and future of our country and economy, sending earnings and the stock market in a downward spiral.  Deflation has already started happening in the past few months, but it is only in its beginning stages. Deflation theory at its core says that this must happen in order to de-lever the decades of debt our country and its people have been building up.

In my opinion, both camps are right and it is only a matter of timing.  I do believe that in the next few years, we will experience severe, unrelenting deflation only to eventually lead to high inflation afterwards.

But make no mistake..... no matter how the scenarios play out, it will be ugly. Really, Really, REALLY ugly.  I have been saying that I believe that less than 1% of the american people really have any idea of how severely bad our economy is going to get in the next 5 or so years.  Very few people in our time have experienced the Great Depression, but most of us have heard stories about it.  Banks failing left and right, people losing their entire net worth... unemployment at 25%.  So what can we expect in this decade??  I believe it will be even worse than the Great Depression for reasons which I will outline in future blogs coming soon. I will lay out survival strategies and what you need to do to protect yourself. For now, I will leave you with one thought until next post. Whatever you believe or don't believe about how bad our economy will get, do NOT, I repeat do NOT underestimate the severity of how bad it can get. It's human nature to do so, as we are all optimists by default but this is not a time to be complacent. Keep these thoughts in the back of your mind, and I'll post back soon with some specific predictions, thoughts, and strategies.

Chris

How to fix a debt crisis? Issue more debt of course!

This article comes a bit late, but I think this topic is important enough that it needs to be stated.  About a month ago, the European debt crisis which started in Greece started spreading to other countries in Europe, sparking a global sell-off in equities.  This is hardly surprising for anyone who understands economics, but what is unbelievable is what happened next.  A 1 Trillion dollar bailout package.  Wow.  Right when I thought government idiocy couldn't stoop any lower, they prove me wrong.  How do we solve the world's worst debt crisis in history?  Of course, issue more debt!  What's even more surprising is that many people are actually RELIEVED over this news, which shows absolutely NO understanding whatsoever about what caused this whole crisis in the first place.  "Kicking the can down the road" not only does not solve the problem, but it makes it worse. We have just entered the beginning stages of a worldwide sovereign debt crisis which will eventually spread to the United States, and it's going to get ugly. 


On Friday, we got a jobs report that was absolutely abysmal.  Although 430,000 jobs were created, almost all of those jobs were for the Census 2010 program!  In other words, the jobs are non-productive and they do not grow the economy like private sector jobs that produce goods and services that people actually want to consume.  This is just the latest indicator on how unhealthy this economy really is.  Many years of over-consumption for the US consumer is now going to be followed by another period of deflation, where consumers pull back and save money in the face of another down-turn in US housing prices which has just begun.


What all of this means for the stock market is a double-dip recession. The "recovery" that we experienced over the past year was not a real recovery, it was a result of stimulus programs, inflation, and relentless printing of money.  None of which actually improve the economy, but they do create the "appearance" of an improved economy.


The next 6-12 months will be ugly as the 2nd leg of the recession (depression) takes hold.  The fundamental problems that caused the recession in the first place (i.e. debt) have never been solved, and now it is time for it all to play out.  Cash is king, folks.  Prepare yourselves for some ugly times.

Double Dip is Imminent

I have been purposely reluctant to be calling for a double dip for the past few months because I was afraid that people would tend to just 'tune me out' and call me a crazy person in the face of a rallying stock market.  I have officially changed my stance as of today, the first day since July 2008 that the market has closed below the S&P 500's 200 day moving average.

The bulls' main argument against another deep correction is that earnings are very good.  This is of course a short-sited argument, but very typical nonetheless. Fundamentals always look good at the peak in a market. That's WHY it's the peak in the market.  With the entire global economy in debt-ridden turmoil, future U.S. company earnings are bound to be seriously impacted, and the stock market is now anticipating this.     But the United States debt is one of the worst in the world... do we really expect to come out of this unscathed?  Furthermore, the fear that this correction brings on will snowball to the downside.  As is typical in every market cycle, the markets will overcorrect and stocks will get extremely cheap.  A deflationary period is imminent which will cause a double dip recession. I expect 5000 on the DOW.

Prepare yourselves for a wild ride. It gets ugly from here on out.

Beginning of the US Currency Crisis

If you want to know what is happening with the upcoming currency crisis, how our market has rallied recently, and why the dollar is doomed to fail eventually with hyperflation, this is your video.

However, this video covers inflation, not deflation.  What we are facing today and at least over the next year is another deflationary period not unlike the one that took hold in 2008 and early 2009.  We will see massive stock sell-offs in the medium term.  The inflationary period described in this video will not come until later.

Warning:  This is a hugely informative video, but it is long.  At 55 minutes long, you will need a good chunk of time to watch it.

http://www.youtube.com/watch?v=eb1n1X0Oqdw&feature=player_embedded#!

A new Bear Market

I have been publicly Bearish for months, but now it has finally become clear that we have entered a new Bear market.  But after a steep sell-off last week, we had one of the biggest 1 day rallies I can remember in recent times after a EU bailout was announced.  This was enough for me to predict a short-term rally would continue for at least a few days, but alas it looks like I may have been premature in that call.  As I write this, the futures market is down about 0.5% just hours after a 3.5% rally.  A scan of the blogs and sites I follow indicate that the smart money is not fooled by this bailout and the subsequent rally. Europe’s problems are far from solved and in fact they are just beginning.  Although we did not yet break the 200 day moving average, I believe it will happen in the next few weeks.  Once that happens, all bets are off on how low we can go.

We have just entered the beginning stages of a Sovereign Debt Crisis, which started with Greece, but will ultimately end in the United States (through a collapse of the U.S. dollar).

Brace yourself. It’s going to be a wild ride.

Why every investor should pay attention to the 200 day MA

200 Day Moving Average (Part 1)


With all the talk over the past couple years on how Buy And Hold is dead (whether you believe that or not), I think it's prudent to at least re-examine your rules for when to buy and when to sell so you can maximize your own profits or avoid steep losses.


Most individual investors just hold their stocks through downtrends thinking that over the long term the stock market will appreciate. I am here to challenge that viewpoint and perhaps give you a simple alternative that can save you a lot of losses in any recession. If you a trader, you probably know everything about moving averages, but most individual investors don't even pay attention to them. I think this is a mistake.


Ask anyone on the Street, and they will tell you that today's stock market is driven largely by technical patterns. One of the most basic indicators that everyone on the Street looks at is the 200 day moving average of the S&P 500. This is largely considered a key technical long term trend indicator of the overall market.  If the S&P 500 is above its 200 day moving average, it is bullish for the overall market. If the S&P 500 is below its 200 day MA, it is overall bearish for the market.


Before we examine why the 200 MA is so important, I need to emphasize one of the rules of investing and trading that most novice investors don't understand:  "NEVER LOSE MONEY".
That was not an attempt to be facetious.... Although don't take it too literally either.  Not every investment or trade will be a winner. Not even the best traders/investors in the world can achieve that.  The universal key to profits is knowing when to cut your losses.... and to do so quickly before losses stack up.  This is largely regarded as the #1 mistake novice investors make. They hang on to the stocks thinking that the market or their stock will recover eventually.... until the market just gets sooo bad, that they can't take the pressure anymore and they sell their stocks in a panic for a substantial loss. Sound familiar?  I've been there myself in the past.  This should be your #1 goal to avoid this scenario at all costs because it can literally kill your portfolio in a heartbeat.


So how does this have anything to do with the 200 Day Moving average?  Well, as I will demonstrate (in part 2), the 200 Day Moving average is the simplest way I know that investors can avoid having their portfolios decimated in a recession.... guaranteed... if you use it correctly.  It can enhance your long term returns so much, that you will be overjoyed compared to the LT Buy & Hold methology of the past 10-20 years.  Not only that, but the best part is you only need to spend a few short minutes a week pulling up a Yahoo Finance chart.


Part 2 coming soon.

Housing Outlook Unchanged

I see many people saying that housing has bottomed and that real estate purchases are on the increase now and our future is bright.  As I posted in November 2009, I see continued downside in housing, and I have not wavered in that view.  


It's not surprising at all, however, that real estate "appears" to be in recovery right now.  Interest rates are at all time lows and can't go much lower, the stock market is rallying with the media having a field day calling an "economic recovery", we have government giving tax incentives for real estate purchases, and there is increasing chatter in the media that the window of opportunity is closing fast on buying a home with rates as low as they are.  It's no surprise that we see a small surge in home buying with those variables in play.


I expect Case-Schiller numbers at or below 100 once the government stimulus programs and tax incentives are done with and we see interest rates return to normal levels. You can't fight supply and demand, we have too much housing inventory built up from the housing bubble and the prices are still too high. Price supports and tax incentives just prolong the agony. Once prices have fallen to a point where we see property management firms sprouting up to acquire properties and convert them into rental units then we'll finally get some stability in the housing market, not before. Right now, we are still in the era of property prices being too high to even break even on rent monies!  You didn't see that before the housing bubble!


The housing bubble has really created a number of beliefs in the American public which are totally false.  The most obvious one is that home prices will always rise.  This has already been disproven, but yet people still think that we cannot have more downside. Go figure.  Housing can go up and down just like stocks.  It's true that it's not as volatile as stocks, but home prices can get ahead of themselves like any other asset. Home prices have still not corrected back to the level of long term inflation, and I believe supply & demand and low consumers savings rates actually predict that we will fall below the inflationary rate in the medium to long term until people start cleaning up their own personal balance sheets.


This is why I'm still not buying a home, even with today's low interest rates.  If I were desperate to get out of apartment living, then I probably would though, because rates are going to rise soon enough. But for now, I'm OK with apartment living.

Inflation & Gold

The following article was actually written on March 16, 2010, but I've been slacking on my blog updates lately. I'm going to try to keep more regular updates in the future and start posting this URL in more places to gain views.


----------------------------------------------------

Foreword – Why I am writing this

First of all, let me go on record and say I am not trying to be Mr. Doom and Gloom here.  I am interested in one and only one thing: the truth.  Truth comes from homework, research, verifiable facts,  but not the media.  My goal with this blog is not to depress people, but to prepare them for what’s coming. I do not expect anyone to just believe every word I say at face value. Even if you might have a lot of doubts, if you admit just a “small” possibility of these events coming true will prevent some people from getting blind-sided yet again by our ongoing economic crisis’s.  Maybe I’ll even influence a few people to do their own research and confirm the “truths” themselves.

Let me just get it out of the way right now.  I am making a very bold and very dire prediction here, but it is not a unique one.  I predict the decade we have just begun will turn out to be a decade from hell from an economic stand-point. I believe it may even be worse than the Great Depression.  My reasons are numerous, which I will write about over a series of articles. 

Starting with….

Why high inflation is not only probable, but a virtual certainty

First we need to level set everyone and review what exactly causes inflation. You can verify this in any Economics 101 book, but I'm pulling this from Wikipedia:

• "Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply."
• Furthermore, "the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth"

Today, the primary argument I hear & read against the possibility of high inflation is that it hasn't happened yet even though we have been printing money like mad. This is of course explained by the fact that all this printed money goes right into bank reserves to capitalize our banking system. And it's well known that banks are still not lending this money. In order for inflation to occur, 2 things need to happen:

1.       Growth of the money supply (done and still very much in progress)
2.       Increase of velocity of the money supply. (NOT done).  In laymen’s terms, inflation doesn't happen unless that printed money is in circulation. If it's sitting in bank vaults, it won't cause inflation.

The Fed is the #1 holder of our own U.S. treasury debt.... Far beyond even China at something around $5 trillion. Doesn't this strike a red flag in your mind?  We are printing money to buy our own debt!  Oh if only I could do that. I could just rack up Millions of dollars worth of credit card bills and never have to worry about it because I could just print my own money to pay it off.  What an idiotic idea. It's simply common sense that this will have severe consequences down the road, but our political system focuses only on short term re-elections not long-term viability.

This is really just Economics 101. The United States is not immune to the laws of economics. Inflation occurs when you expand the money supply (IE print money), once that money starts circulating. We have 1/2  that equation today. The banks are still not lending it though, but they will eventually.  This is an immutable law of economics like supply & demand. You can't get around it. It just is what it is.

We will see double digit inflation in the coming years at a bare minimum. It's hard to see any scenario where we don't see all-time high inflation (well into double digits) due to astronomically high money supply expansion.  If  our government continues printing money at the pace it has been, chances of hyperinflation (50%+ inflation) will keep rising.

[following is an except from Peter Schiff, In speaking about an opposing economist's statement]

"... that we can borrow money from the world with impunity, that we can print all the money we want, and it's not going to affect inflation, it's not going to affect interest rates. According to Paul Krugman, as long as we a have high rate of unemployment, we can print all the money we want. Interest rates won't go up, inflation won't go up. I got news for anybody who believes in this, including Krugman, They are in for a rude awakening. This again is even more irrational than the people who were saying the Dot Com era is a 'new era', or that the real estate prices were justified by the fundamentals, they would go up forever. In the long term scheme of things, when they write the history books about this period of time, this is going to be the 1 thing that people look at and say "I can't believe people were that dumb."  It's like we look back at the Salem Witch Trials, and don't understand how people could burn witches. This is how. It is the mass popular delusions and the madness of crowds." - Peter Schiff, 03/16/10

This is what Schiff has a real talent for.... calling out the bullshit. He's usually arguing against a crowd of optimism and "hope", but he has demonstrated time and time again that he has more understanding about what is truly going on in our economy than anyone else.  Remember, hope and optimism don't influence the economic reality. You need to be on your toes and be prepared for what is coming down the road.

The case for high gold prices

Of course, once you become convinced that high inflation will happen, high gold prices follow automatically.  It's not speculation. It's simple math. As the value of the dollar goes down due to inflation, any fixed value asset (e.g. gold) PRICED in dollars goes up.  This is because it will now take more Dollars  to purchase the same quantity of that fixed value asset. There is a famous illustration on gold prices that says something like this:

4000 years ago, an ounce of gold bought you a fine man's suit.  Today, an ounce of gold buys you a fine man's suit.

True, gold prices are volatile in today's stock market. But gold is storage of value that does not deteriorate in terms of purchasing power over the long term.

Paper currencies come and go, but they all eventually go to Zero through dilution over a long enough time period. However, gold keeps it value throughout  time.  Therefore, you can think of it as a hedge against inflation. It's protection that everyone needs in this day and age. Anyone who believes that our reckless fiscal policies will actually lead to a long term APPRECIATION of the dollar or of the dollar keeping its value is being naive.  Let’s think about this rationally…. If we can just keep printing money, and get a strong dollar out of it, why not just keep the printing presses running 24/7/365 for the next 50 years?  How strong will the dollar be then??  Will gold then go to zero?   Of course, this is nonsense.  There’s only one direction the dollar can go long-term with relentless printing of money. And that is down.

Now, multiply this ten-fold because most major developed currencies are deteriorating in value from ongoing financial crisis’s around the world.  The Canadian Dollar and the Australian Dollar are two notable exceptions.  The Euro and now perhaps even the Yen are on a downhill course.  As more and more people and central banks become leery of these deteriorating currencies, guess what they’re going to flock to?  Come on, I’ll give you 3 guesses.  Nope, not Pork Bellies.  Nope, not Slinkies.  Yes, GOLD.