Stocks & Equities

The Market Surprises

Posted by Equedia

on Monday, 19 March 2012 03:58

The major indices reached multi-year highs with the Dow breaking solidly through the 13,000-point barrier, the SP 500 edging over 1,400, and the Nasdaq Composite ploughing past 3,000 all in the same week. The market is now up over 30% from its October 2011 bottoms and nearly reaching 4-year highs.sc

When you look at technicals, the market is pointing to higher prices.  

We enjoyed straight days firmly above the old highs of 1370 earlier in the week, which helps confirm the recent breakout. With the recent softening of the bond market, this technical sign may help provide the catalyst for the next leg higher.  

The recent sell off in the bond market means we are likely near the end of a 30-year bond rally. Over the last 30 years, rates have been going lower making the bond market a safe and profitable haven for investors - especially with the recent economic volatility.  

But rates are now bouncing up from historic lows.  

That means bond investors will start losing money for the first time in a LONG TIME. As stocks make new highs, naturally bond funds will see outflows and stock funds will see inflows. This fresh money coming into the stock market could help push the market up to higher highs.  


(From a timing perspective, this doesn't mean the outflows from bonds will diverge into stocks right away. We've also had some surprisingly strong gains over the last few weeks which may signal a short term sell off. However, over the next few months, we may see more gains in the market up until May as predicted in the paragraph from above.)

U.S. gross domestic product (GDP) expanded an average 2.4 percent per quarter in the 2 1/2 years since the recession ended in 2009. While that means the world's largest economy hasn't had a smaller post-recession recovery rate since at least the 1940s, it also means there is room to climb higher when compared to past events. In the 2003 bull market, GDP rose 2.7 percent on average, before the S&P 500 surged 102 percent. In the 1982 rally, the rate was 5.7 percent with equities more than tripling during that cycle.  

Does that mean we're about to see the markets climb even higher?

When you have a market that has performed so well so fast, it's really hard to jump in. From a psychological standpoint, there is by far a better chance for the market to head down rather than up. But from a technical standpoint, the market is looking to climb higher.

If we breach the 2007 highs and stay above there, we could be in for another strong bull market rally.

The one biggest concern scaring investors is the volume in trades that has been pushing the market higher. Trading at the New York Stock Exchange declined to the lowest level since 1999 last month, with the average volume over the 50 days ending Jan. 25 slowing to 838.4 million shares. The value of stocks changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005.  

Keep an eye on bond outflows - the more this sell off continues, the greater chance the volumes in the equities market will increase on the buy side.

The Bigger Picture

The problem with our market today is that investors are reacting to daily news events. I have said this many times before. If you're a day trader and have time to trade the news, this is the market for you.  

But for most investors, waking up at the break of dawn and trading in front of a computer screen all day doesn't work. That's when you have to look at the big picture. The big picture is the real reason the markets are moving the way they are.

Right now, the markets are moving because of easy money and slightly better economic numbers.

The world continues to print more money - whether it's a direct infusion of liquidity, operation twist or giving banks money at negative real interest rates.  

Bernanke just told us last week that interest rates will remain at current low levels until late 2014 and that operation twist will continue. That means free money for at least another two years. While he suggests that there is no QE for now, he surely did not say there won't be another one coming. The Fed will continue to play a major role this year.    

There is so much printed money being flooded into the world and the stock market likes that type of liquidity. World money supply has soared dramatically over the past two years. Eventually, the piper will need to be paid. In the meantime, this liquidity has built a foundation under the stock market.

The IMF just said Greece will need more money - even though it just got hundreds of billions weeks ago. Brazil has promised to keep interest rates low for at least another year. Every week I stress that free money will continue to pour in around the world. But do you know how bad this situation really is?

The World's Best and Worst Example

It took the U.S., the world's largest debtor nation, more than 200 years for its own debt to reach $1 trillion. In the past four years alone, this debt has soared by over $5 trillion.  

The U.S. is currently running deficits of over $1 trillion per year, which means this number will only keep growing. The U.S. has no way to pay this debt off - not without making major cuts that will lead to a revolt. When you consider that millions of baby boomers are now reaching retirement age and will be drawing on social security, the debt levels will continue to grow even faster than it has in the past four years.  

That's a scary thought.

If you look at U.S. total debt, the U.S. is now at about 400% debt to GDP ratio. Morgan Stanley says there's "no historical precedent" for an economy that goes over 250% of its debt to GDP ratio without a crisis or huge inflation.  

So when will it be time to pay the piper? When will this all come crumbling down? I don't know. For now, politicians will continue to do what they're doing. They'll continue to patch things up by printing more money to pay for expenses, including paying the interest on their loans. They'll continue to sell their debt to any nation that can afford to buy it.  

Most people think that China is the number one holder of U.S. debt and Japan number two. Those people are wrong. The number one spot belongs to the Fed - by more than half a trillion dollars.  

In the long run, all of this money printing and cheap money will devalue the dollar - especially against the purchasing power of gold.

(for now, we may see strength in the dollar relative to other currencies such as the Euro but this is based on its value relative to other currencies and not the purchasing power for assets such as gold and silver)

While gold and silver have recently experienced a selloff, these represent buying opportunities in the big scheme of things. I stick with my prediction that gold will be above $2000 and silver above $40 before the year is over.  

The truth will eventually unfold. Take every opportunity to protect your wealth.

In the end, "He who has the gold makes the rules."

Until next week,


Timing & trends

Charting The Legacy Of The Baby Boomers

Posted by ZeroHedge

on Saturday, 17 March 2012 10:09

Click Chart for Larger Version: While it is difficult to properly attribute blame for the collapse of the US economy, which commenced in the early 1980s, on either the Fed's policy of easy money starting with Alan Greenspan (and terminating with today's statement by Goldman that merely a suggestion of "not easing" may be equivalent to "tightening" - a symptom of a terminal junkie), or the resultant self-indulgent lifestyle of the maturing baby boomers, one thing is certain: the paradigm downturn of the United States began in the early 1980s.


Walmart Shoppers


Stocks & Equities


Posted by Pragmatic Capital

on Friday, 16 March 2012 07:49

File this one under the “check back in 10 years” folder.  This is a stat that will blow your mind.  Apple’s market cap is now bigger than the ENTIRE U.S. retail sector.  Now, I wouldn’t short AAPL in a million years, but these are the sorts of crazy stats that make you think “hmmm, is this really sustainable?”

As ZeroHedge says: "A company whose value is dependent on the continued success of two key products, now has a larger market capitalization (at $542 billion), than the entire US retail sector (as defined by the S&P 500). Little to add here". 



Bonds & Interest Rates

Stress Tests No Sweat - why the Fed is keeping interest rates so low

Posted by Peter Schiff - Europacific Capital

on Friday, 16 March 2012 07:39

The Federal Reserve ran another "stress test" on major financial institutions and has determined that 15 of the 19 tested are safe, even in the most extreme circumstances: an unemployment rate of 13%, a 50% decline in stock prices, and a further 21% decline in housing prices. The problem is that the most important factor that will determine these banks' long-term viability was purposefully overlooked - interest rates.

In the wake of the Credit Crunch, the Fed solved the problem of resetting adjustable-rate mortgages by essentially putting the entire country on an teaser rate. Just like those homeowners who really couldn't afford their houses, our balance sheet looks fineunless you factor in higher rates. The recent stress tests assume market interest rates stay low, the federal funds rate remains near-zero, and 10-year Treasuries keep below 2%. Why are those safe assumptions? Historic rates have averaged around 6%, a level that would cause every major US bank to fail!

The truth is that higher rates are the biggest threat to the banking system and the Fed knows it. These institutions remain leveraged to the hilt and dependent upon short-term financing to stay afloat. While American families have had to stop paying off one credit card by moving the balance to another one, this behavior continues on Wall Street.

In fact, this gets to the heart of why the Fed is keeping interest rates so low. Despite endorsing phony economic data that shows the US is in recovery, the Fed knows full well that the American economy cannot move forward without its low interest-rate crutches. Ben Bernanke is trying desperately to pretend that he can keep rates low forever, which is why that variable was deliberately left out of the stress tests.


Unfortunately, rates are kept low with money-printing, and those funds are starting to bubble over into consumer prices. Bernanke acknowledged that the price of oil is rising, but said without justification the he expects the price to subside. This shows that Bernanke either doesn't know or doesn't care that the real culprit behind rising oil prices is inflation. McDonald's, meanwhile, is eliminating items from its increasingly unprofitable Dollar Menu. A dollar apparently can't even buy you a small order of fries anymore.

Unless the Fed expects us to live with steadily increasing prices for basic goods and services, it will eventually be forced to allow interest rates to rise. However, if it does so, it will quickly bankrupt the US Treasury, the banking system, and any Americans left with flexible-rate debt.

That is why the Fed feels it has no choice but to lie about inflation. If it admits inflation exists, then it may be pressured to stop it. However, if it stops the presses, it will bring on the real crash that I have been warning about for the past decade. Just as the Fed's response to the 2001 crisis led directly to the 2008 crisis, its response to 2008 is leading inevitably to either deep austerity or a currency crisis.   

[For more on the crisis ahead, pre-order Peter Schiff's latest book, The Real Crash, due out in May.]    

Imagine this scenario:

When the banks fail as a result of higher interest rates, the FDIC will also go bankrupt. Without access to credit, the US Treasury will not be able to bail out the insurance fund - which only contains $9.2 billion as of this writing. So, not only will shareholders and bondholders lose their money next time, but so too will depositors!

Americans are much less self-sufficient than they were in the Great Depression. One only needs to look at Greece to see how a service-based economy deals with this kind of economic collapse - crime, riots, vandalism, and strikes.

There are a few countermeasures left in the government's arsenal, including selling the nation's gold, but there comes a point at which the charade can go on no longer. The sharply widening current account deficit shows that we are becoming even more dependent on imports that we cannot afford. Just as homeowners had a good run pulling equity from their overvalued properties, Washington and Wall Street will soon find the music turned off. And there will be no one there to help them clean up the mess left behind.

I propose a new rule of thumb: until true economic growth resumes in the distant future, the fed funds rate should also be used as the "Federal Reserve credibility rate." We'll use a scale of 0-20, which is approximately how high rates went under Paul Volcker to restore confidence in the dollar. So, until the end of this crisis, if the fed funds rate is near-zero, all the Fed's statements, forecasts, and stress tests should be given near-zero credibility. When rates rise to 5%, the Fed's words can be assumed to be ¼ credible. When they hit 20%, that would be a Fed whose words you could take to the bank - if you can still find one.  

For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor newsletter. CLICK HERE for your free subscription. 

For a great primer on economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes.


Gold & Precious Metals

This Could Spark a Massive Move in Gold

Posted by Jeff Clark via Peter Grandich

on Friday, 16 March 2012 05:48

Get ready for a golden summer.
Precious metals have been selling off lately. Gold is down 10% from its peak last August, including a violent $100 drop last Tuesday. Silver is down almost 30% since its peak last April. It dropped 6% in just one day last week.

20120313 GSW_SILVER1


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