06.05.2010
Market Report
Investor Education Series: Volume I. Issue 1
Original article written by Net Advisor™
Technical Trading
The Dow closed about 2 points below its intraday Flash Crash hit on May 6, 2010. It seems that the market has been using this low as a technical bench mark where it has rallied up from this point twice until Friday, June 4, 2010.
We didn’t close on the lows of the day which is positive, but we didn’t rally much off the lows either, thus making it difficult to call direction for the market next week. We could either see a low opening Monday 06-07-2010 then a rally, or we could go even lower to around 1044 or 1025 on the S&P 500 Index over a brief period of time. The S&P closed at 1064 on 06-04-2010.
On or about 05-27-2010 and again 06-3-2010 we hit a near-term double top on the S&P 500 Index suggesting the next move was lower, which it has been. It is highly possible that we could retest the February 8th low on the S&P which was around 105-106. If we close much lower than that, we could hit the October 2009 low of about 102 on the S&P 500 (Chart above).
Based on the economic problems in Europe, and the U.S.A. both which are not improving, thus I argue that this will take years to stabilize. Governments are pumping trillions in the global economies to reflate them from recession. Unfortunately, this has done nothing but put a band-aide on a patient suffering from cardiac arrest.
The Euro
It seems that the Euro may eventually trade in parity with the U.S. dollar. (Source: Reuters) At some point, the Euro is likely to have a technical rally which would also send the financial markets higher for a short time. This would probably be a time to initiate downside protection for short term traders, or take profits for 1-10 year investors.
Financing Debt Risk
As long as global governments continue to rack up debt, create an anti-friendly business environment, force more and more regulation over businesses and financial markets, and increase taxes on business and consumers during a recession, this will not create a growth scenario. As I have been saying professionally since summer 2007, until the consumer is stable, the economy won’t be stable.
What also doesn’t make any sense to me is why the U.S. government is financing most all their new debt using short term 2 to 5 year treasuries. All of this debt will have to be refinance again in the short term, and more likely at higher interests cost.
“More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest…In fact, $4.8 trillion…The country depends heavily on borrowing to fund what it wants to do. But the more debt it racks up, the more likely it becomes that creditors could demand a higher interest rate for making new loans to the government.”
— (Source: CNN)
It would seem to make more sense to finance debt by locking in at near record low interest rates over a longer period of time. If we recover from the recession earlier, we can then pay that debt off faster with any surplus. I know, government and surplus are terms of we just really don’t hear. Yet the risk of financing huge debt in the short term makes a huge assumption that the economy will turn around quickly and sharply. I think this is overly optimistic, and not at all realistic.
What Shape Is Our Economy?
We hear a lot of talk about the U.S. is in a V-Shape Recovery (point 1, point 2 (story link gone), point 3, point 4) or whether we will have a new recession or a new Bear Market, or a “Double Dip Recession.” I don’t think we have exited the last recession. I have argued that we are still IN recession. As for what shape the economy is really in? I think we will have ups and downs over a number of upcoming years until we find real stability. In September 2009, I coined the phrase that we are in a Charlie Brown Recession. If you look at his T-Shirt, it shows a zig-zag patter of going up and down repeatedly.
Despite repeated rhetoric from the Obama Administration’s for blaming “past policies” I have not heard a single bit of credible economic evidence that the current economy is someone exclusively tie tied to the Bush Administration. It has been all talk making people believe something that is just does not support the facts. Evidence shown in this graphic here (Table 3, 2001) shows what worked and got the U.S. out of the last recession.
How Long Will the Recession Last?
In 2008 there was a lot of comparison talk of the U.S. economy similar to the Great Depression, and how we nearly missed a repeat case scenario. Depending on how one calculates that period, the Depression lasted as little as 10 years (1929-1939); or as much as 16 years (1929-1945). So if our current recession is similar in some respects to the Great Depression, why would this recession last just 2 years (2007-2009)?
It would seem to me that if we have similar economic scenarios and comparisons, that we would have similar time-lines for recovery. I am not saying that we will be in recession for 10-16 years, but 5-10 years is not out of the realm of possibility. Housing is also likely to take decades to return to 2006 levels. (Source: USA Today)
Part of this longer recovery period is that the average consumer has no place to tap money other than from their current job. Banks have kept lending tight after years of loose lending practices. With few exceptions, home prices have continued to fall, thus home equity has disappeared for millions of homeowners since 2006. Thus people can’t use their home equity like an ATM card to finance other purchases. Despite a huge 2009 (Bear Market) rally, the S&P 500 Index ended down for the decade (Source: Washington Post). Thus, many people’s retirement statements are down over the last 10 years (2000-2009), so tapping into profits from stocks is not there for many people.
A Little Recession History
During the .com bust of 2000-2002, the entire slide was tied to stock prices, not home prices. In fact with the help of low interest rates from 2002, as I saw it, money moved from the stock market to the real estate market.
Real estate continued to boom on low rates until the Fed pulled the plug on those low interest rates beginning in 2004 to 2006. The FED Funds Rate (interest rate the FED makes to banks for typically overnight loans) increased four-hundred-twenty-five-percent (425%) in 2 years. The FED Funds rate was 1.00% on 06-25-2003 and moved to 5.25% on 6-29-2006. (Source: NY FED) Coincidentally, this was about the top of the real estate market.
This move by the FED opened up a whole other story, which I will cover more at a later date. Just know for now that when both housing and stock prices fell simultaneously, it was a double hit to the financial reserves of consumers. As banks also tightened credit and lending standards, this made it difficult to impossible for many people to refinance debt, forcing record bankruptcies and along with loan defaults. Factor in a slowing economy and thus decreased consumer sales, led to jobs losses.
How to Make Money in a Recession
For the long-term investor, with say 25-40+ years, dollar cost averaging in major market indexes, with reinvesting all dividends and capital gains, and doing this in a retirement account seems to me to be the more conservative strategy to ride out volatility.
For the short term investor (under 6 years) and for the trader, there are plenty of trading opportunities in a volatile market, but that is another report.
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