Analysis of this week’s events.

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.

Summary of this week’s events.

Another quiet week for the markets, and here’s the round up of what happened this week.

Positive things

  • The public has gone LinkedIn crazy. LinkedIn is now at $93.09. People are screaming tech bubble 2.0 once again. At least the LinkedIn people are now amongst the super rich. This should help the Californian government with some additional tax revenue.
  • Oil prices are down. But we never know when it’s going back up to $120 (crazy fluctuations this year).
  • Initial Jobless Claims fall to 409k from 438k (but still above 400k for 6th straight week).
  • The Dow fell only 0.66% this week, S & P fell only 0.34% this week, and the NASDAQ fell only 0.89% this week. Not bad.
  • International sales for Wal-Mart are still strong.

Negative things

  • The Philly Fed index was way worse than expected. Existing home sales were worse than expected, and initial claims were once again over 400K.
  • Domonique Strauss-Kahn and his sex scandal (it seems like all the big people in the world have too much sex).
  • Greece is once again having to restructure their debt (this never seems to end).
  • Although the government doesn’t admit it (because how their measure CPI is wrong, they don’t include oil or food), inflation is really making consumers feel the pinch. GAP recently admitted that inflation will take a huge bite out of their profits. Wal-Mart’s recent Q2 2011 earnings report also noted that domestic sales were weak, due to consumers driving less (oil price increases). Consumers really are feeling the pinch from inflation.
  • Housing starts and permits were below expectation (double dip in housing maybe?).
  • IMF says that Ireland will have problems issuing new debt.
  • Spain might reveal secret debt.
  • Motor vehicle production falls in April due to Japanese earthquake. This was expected. Nowadays, no retailer of wholesaler or manufacturer keeps a lot of spare inventory. The Japs introduced the efficiency of just-in-time-delivery. It’s efficient all right, until an earthquake comes along and the manufacturer realizes that they have no spare inventory left.

Why silver isn’t in a long term bear market.

You’ve probably heard about all the hype about falling silver prices. Just a few weeks ago, the people were screaming of a bubble in silver. And they nailed it dead on. Now silver prices are back down to $34.95 per ounce, and it seems like silver is dead. Except it’s not. I believe that the silver bull market is not over, so here’s why. Let’s start off by looking at it from a fundamental point of view.

Silver’s demand is still there, and possibly rising. We’ve recently seen the U.S. hit its’ debt ceiling, and now the American government is depending on pension money to function. Not that the government will default of course, but this debt problem is really making investors worried about the bond market. With interests rates at such low levels, no one really wants to buy bonds. The housing market is stuttering (if not double-dipping), and stocks are ok (but not back to pre-2007 levels). So that leaves one market left: commodities. The commodities market that investors are most likely to pile into are gold and silver (sentimental value).

China holds trillions of dollars of American debt. What they want to do right now is divert their surplus away from buying American bonds towards buying gold and silver. This is the only logical solution. The Chinese government won’t be buying other currencies, because currently there is no currency that seems stable in the long run (problematic euro, screwed-up yen). So the demand for buying gold and silver from China will be enormous. As a Chinese man myself, I recently learned that the Chinese government is urging it’s citizens to buy gold and silver. Now that’s real demand that’s going to last for years. The Chinese have trillions of dollars to exchange for gold and silver, and they’re not going to accomplish that overnight (that would drive up gold and silver prices too fast, which is expensive for the Chinese). There will be a few years of steady demand from China for silver.

I’m not going to talk about the supply side of silver, because those numbers can be randomly made up, and there really is no way to actually quantify the real supply of silver in this world.

Another huge force in the silver markets are the traders; the people who depend on technical signals. These traders know that the silver bull market is not over, so that means silver prices will once again break the $50 per ounce barrier (all true bull markets surpass old heights). During the past few days, the silver market has gone sideways. However, volume is still huge, but slowly decreasing. What does this imply. I think it means that the traders are unsure of where to go. As I said, volume is huge, but slowly decreasing. But all this time, prices have gone sideways. This means that at first, a huge number of investors were selling, and a huge number (equal) were buying. Now, the market is settling down to see which way prices are going.

I believe this will be a classic “resistance – support” scenario. If prices break the resistance, which for SLV seems to be $32.50, then prices have further down to go. If it breaks on the upside, which I believe is $39, then it has further up to go. But beware of traders’ remorse. So now, it’s best to wait and see where the market wants to go. Go with the flow, as my grandpa used to say.

Stock market and bonds investment cycle.

I read this interesting articles on the Ritholtz blog about the investment cycle for bonds and equities. In most cases this cycle is correct, but some extreme things may happen that may through off the cycle. Here it is.

1. After a washout, valuations are low and momentum is lousy. People/Institutions are scared to death of equities and any instruments with credit exposure. Only rebalancers and deep value players are buying here. There might even be some sales from leveraged players forced by regulators, margin desks, or “Risk control” desks. Liquidity is at a premium.

2. But eventually momentum flattens, and yield spreads for the survivors begin to tighten. Equities may have rallied some, but the move is widely disbelieved. This is usually a good time to buy; even if you do get faked out, and momentum takes another leg down, valuation levels are pretty good, so the net isn’t far below you.

3. Slowly, but persistently the equity market rallies. Momentum is strong. The credit markets are quicker, with spreads tightening to normal-ish levels. Bit-by-bit valuations rise until the markets are fairly valued.

4. Momentum remains strong. Credit spreads are tight. Valuations are high, and most value-type players have reduced their exposures. Liquidity is cheap, and only rebalancers are selling. (This is where we are now.)

5. The market continues to rise, but before the peak, momentum flattens, and the market meanders. Credit spreads remain tight, but are edgy, and maybe a little volatile. This is usually a good time to sell. Remember, tops are often a process.

6. Cash flow proves insufficient to cover the debt at some institution or set of institutions, and defaults ensue. Some think that the problem is an isolated one, but search begins for where there is additional weakness. Credit spreads widen, momentum is lousy, and valuations fall to normal-ish levels.

7. The true size of the crisis is revealed, defaults mount, valuations are low, credit spreads are high. A few institutions and investors fail who you wouldn’t have expected. Momentum is lousy. We are back to part 1 of the cycle. Remember, bottoms are often an event.


The economy won’t get much better.

I’ve been thinking about the overall fundamental economy this past week, and I’ve come up with a conclusion. I believe that from a fundamental point of view, the American economy won’t be going anywhere in the next couple of years, even if the stock market keeps advancing. Here’s why.

First of all, in order for the economy to be growing, the average American needs to spend money on buying new stuff. Unfortunately, everyone’s feeling pretty poor right now, so no one’s in the mood to spend like there’s no tomorrow. The stock market may be up, and Americans may have recieved a little retirement portfolio boost, but people are still feeling poor. Housing prices are still down. And in today’s age, the biggest asset an average American owns is his or her house. Plus, people are still in debt after the go-go spending years of the 2002-2007. Workers’ incomes are increasing much either, because corporations nowadays are trying to squeeze employees. According to the government, inflation is at 3.1%. But that’s incorrect. Has anyone over at the government every been to Wal-Mart grocery shopping lately? Have they seen the gas prices at the pump recently? If the United States used the Tony Index for CPI, then I’d say that inflation is 7%.

All this stuff isn’t making the average American feel richer. And if the public doesn’t feel like it’s getting fat on excess money, then it’s not going to go out and buy all the wonderful stuff that’s been driving the American economy over the past 50 years.

WARNING: Even though the economy won’t get much better, but that doesn’t mean the stock market won’t increase. Look at the past two years, from March 2009 to today. The economy hasn’t improved much, but stocks have more than doubled. That’s because the Fed likes to manipulate the stock market. It makes it look like the Fed is actually “saving” the economy, when all they’re doing is helping the rich investor get even richer, while leaving the average American stressing how to pay his or her bills.


Presidential Cycle Year 3

Recently, I’ve read GMO’s quarterly newsletter, and I came across Presidential Cycle Year 3. Now this theory is very interesting, and it seems to work. Presidential Cycle Year 3 states that in the third year of the President’s term, which is currently September 30 2010 – September 30 2011, the overall stock market will go up. Now here’s the evidence that supports the Presidential Cycle Year 3 theory.

Dow Jones Industrial Average (.DJI)

September 30 2010 – September 30 2011: so far + 16.25%

September 30 2006 – September 30 2007: +20.75%

September 30 2002 – September 30 2003: +16.62%

September 30 1998 – September 30 1999:+27.95%

September 30 1994 – September 30 1995: +52.36%

September 30 1990 – September 30 1991: + 19.65%

September 30 1986 – September 30 1987: +48.86%

Some people say that the Presidential Cycle Year 3 works because in the third year of the President’s term, he is facing the upcoming election. The government purposely manipulates the market so that everything seems good; that way the President has a better chance of getting re-eclected in the next election. Now who know’s if this reason is the truth. But even if it’s not, this Presidential Cycle Year 3 theory still holds true.

Unfortunately, I just learned about this cycle, so it might be too late to get in on this cycle and make a few bucks. :(