Here is my analysis of this week’s events. It’s pretty complicated.
Let’s first talk about stocks. The major indexes only declined in a small way. There wasn’t that much action. However, by looking at the chart of the Dow Jones Industrial Average (.DJI), I’m getting a feeling that these past few weeks the stock market is trying to test new lows. This past week, there have been a few times when the market went down by 100 points or so. But some strange force always manages to partially pull it back up. Keep in mind that the Presidential Cycle Year 3 is almost over, and it’s almost summer. Is this the beginning of the stock market declining again? I honestly don’t know. The government has been manipulating the stock market like crazy, so they obviously don’t want stocks declining. However, the macro economy situation does not seem to good. Which of these two forces will overcome the other and determine which way the stock market is going; I don’t know.
Here’s why the macro economy isn’t doing well. In my summary of this week’s events, I mentioned that Wal-Mart’s domestic sales were not good. Gas prices are forcing consumers to travel less for shopping needs. Also, I noticed something from Home Depots recent earnings report. Companies nowadays are still keeping up their earnings; not because of better sales, but because companies are still cutting back on costs (including labor costs). Corporations are sitting on piles and cash and not using the money because they know that the macro economy isn’t good (despite the stock market saying otherwise). Corporations know that the macro economy isn’t improving; it’s just the Fed manipulating the stock market. Inflation is also taking a bite out of corporate profits.
So why is the Fed manipulating the stock market. Well, Alan Greenspan came up with a theory saying that in bad economic times, if the Fed can drag up the stock market and make people feel richer (because of higher stock prices), then consumers will go out and buy stuff, which in turn will drag up the macro economy. Unfortunately, this theory is not working right now. Housing is still nowhere near 2006 peaks. And Alan Greenspan must have forgot that a house is the average person’s greatest asset (or liability if you have a mortgage). Unemployment is still rampant, so there’s no way the unemployed is going to go out and consume like there’s no tomorrow. The “official” unemployment rate may be improving, but the real unemployment rate is not. People are starting to give up looking for jobs.
In order for the macro economy to improve, there needs to be a new, BIG bubble in a market. Only a big bubble can make the average worker feel richer, and go out to buy stuff. However, all the bubbles have already been popped. The tech bubble ended 10 years ago. Right now, there are no big inventions in tech; just improvements on already available technology. This is not going to create a new tech bubble. The housing bubble has recently been popped. Bond interest rates are close to 0. So I believe that the next 5-10 years will be a time of economic stagflation.
Commodity prices and inflation (real inflation, not the “official” numbers) is taking a chunk out of consumers’ wallets.
But just because the macro economy doesn’t improve doesn’t necessarily mean that the stock market won’t continue to climb. The future is especially murky at this time.
New home starts (Philly Index) were worse than expected. This implies that home builders don’t see an increase in home buyers. Double-dip housing perhaps?
Europe is once again on the news. New debt troubles, bond troubles, blah blah blah. Europe’s problems never seem to end. The root of the problem is the Euro. It wouldn’t be such big of a deal if Ireland, Spain, and Greece all had their own individual currencies.
Now, I’m going to talk about silver. I don’t know a lot about commodities, but silver is what I’m currently looking at. Silver is definitely still in a bull market. Remember that all bull markets exceed previous heights, and silver has not yet exceeded it’s previous height of $50.20 an ounce. Now, silver hasn’t moved much in the past few weeks. This is saying that the market is looking for a direction to go. I’m going to let the trend tell me where prices are going. Still waiting on the sidelines of the market.