Multi-Year Bear Market Returns

Weak economic data, overvalued sector valuations, continued problems at Fannie (FNM) & Freddie (FRE), and negative daily and weekly charts for The Dow mark the second half return of the multi-year Bear Market.

Two major weaker than expected data economic data points wilted the bullish green shoot economy.

First was the weaker than expected reading for Consumer Confidence, which I discussed last week. Then there was the Employment Data for June reported last Thursday morning.

The US economy lost another 467,000 jobs and another 350,000 Americans dropped out of the work force. This resulted in another rise in the Unemployment Rate to 9.5%.

The average hourly wage was steady at $18.53, but coupled with a decline in hours worked to 33 hours, which is a forward indicator shows that consumers’ Cost of Living continues to rise.

ValuEngine shows five of eleven sectors as overvalued as the second half of 2009 gets underway.

Overvaluations begin with Basic Industries by 15.2% and Capital Goods by 15.3%, both of which were supposed to lead the Global Economic recovery and benefit from President Obama’s Stimulus Plan.

I have doubted the green shoot scenario, and it sure seems as though an economic recovery is unlikely until 2011, which is the earliest the mortgage crisis might stabilize.

The cheapest sector is Healthcare at 14.5% undervalued, but this is a sector of uncertainty in the face of President Obama’s upcoming battles on healthcare reform.

Fixing Housing is the key to recovery, but not with Fannie Mae and Freddie Mac suffering more losses.

You can add another $6.1 billion to the cost of Conservatorship of Fannie and Freddie and up the $86 billion shown on the chart to $91 billion making the total cost to date $846 billion.

The total amount committed to Fannie and Freddie is more than $2 trillion, and the potential cost is open ended given the categories that read “no limit”. All of this money down the drain could have used to begin my “Mortgage Mulligan” program when I first suggested it back in February 2008.

In May 2008 on Fox Business I called for the nationalization of Fannie Mae and if we did that, mortgage rates would be much lower as the GSEs would have been gradually liquidated and new mortgage issuance would be US backed via the existing Ginnie Mae program.

Freddie Mac has now received $51.7 billion from the US Treasury under Conservatorship, and still has access to an additional $149.3 billion.

This money is not helping homeowners, and represents continued losses for tax payers. All we are doing is wasting money to help shore up the books of the two failed mortgage giants.

The daily and weekly charts for the Dow Industrial Average are negative.

The daily chart for Dow shows declining momentum with the industrial average below its 21-day, 50-day and 200-day simple moving averages at 8,557, 8,445 and 8,425.

The weekly chart shows that the mid-range down trend has been sustained, that momentum is no longer overbought and is declining below 80. Weekly closes below the five-week modified moving average, now at 8,409 keeps the weekly cycle negative.

My proprietary analytics shows that closes this week below my weekly pivot at 8,347 indicates risk to my quarterly support at 7,681 over the next three months.

Comments

[Mad Hedge F...:]

Green shoots be gone! Now that we are solidly into a correction, I have been flooded with requests from readers to call the next bottom in the S&P 500. Well here it is. Brace yourself. Put it on a Post-it-Note on your computer. It is without a doubt and unquestionably going to be 880, 850, 830, 800, 750, 666, or 320. That last number works out to be 90% of the book value of the S&P 500, which was the low seen in the 1930s depression. Yes, that depression, not this one. You are really asking me to solve a one billion variable equation, because that is the number of direct and indirect participants in global stock markets. If the few green shoots out there start to die off, the meltdown in commercial real estate accelerates, the Fed missteps by draining liquidity too soon, or there is another unforeseen shock to the system, then you can go with the lower of these numbers. If we are distracted by the health care debate, emerging market economies continue to perk up, and this strength helps our technology stocks stay alive, then sleepy narrow trading ranges will dominate, and the higher support levels will hold. But no matter what happens, I will be able to come back to you in three months and claim that I was right.

Jul 06 11:22 AM

[Maxe Paul:]

Instead of cutting and pasting your same old lines, i will have a real crack at predicting a 10% to 15% correction in the S&P with a lower target of 815 in mid/late July. We will then see the bear market rally continue to the 1050/1100 area, target time September.


On Jul 06 11:22 AM Mad Hedge Fund Trader wrote:

> Green shoots be gone! Now that we are solidly into a correction,
> I have been flooded with requests from readers to call the next bottom
> in the S&P 500. Well here it is. Brace yourself. Put it on a
> Post-it-Note on your computer. It is without a doubt and unquestionably
> going to be 880, 850, 830, 800, 750, 666, or 320. That last number
> works out to be 90% of the book value of the S&P 500, which was
> the low seen in the 1930s depression. Yes, that depression, not this
> one. You are really asking me to solve a one billion variable equation,
> because that is the number of direct and indirect participants in
> global stock markets. If the few green shoots out there start to
> die off, the meltdown in commercial real estate accelerates, the
> Fed missteps by draining liquidity too soon, or there is another
> unforeseen shock to the system, then you can go with the lower of
> these numbers. If we are distracted by the health care debate, emerging
> market economies continue to perk up, and this strength helps our
> technology stocks stay alive, then sleepy narrow trading ranges will
> dominate, and the higher support levels will hold. But no matter
> what happens, I will be able to come back to you in three months
> and claim that I was right.

Jul 06 12:08 PM

[Larry House:]

This market cannot be approached with wishful thinking. The challenges are real; the solutions are hard and long to acheive. Consider the risk/reward, and keep in mind that one doesn't have to take action. Sometimes inaction is the best action. Defensive stocks still make sense, and energy stocks may become attractive at some point, but we have a long way to go.

Jul 06 12:13 PM

[Dave Wrixon:]

Frankly it is a bit like trying to measure and predict the movements of a Gate Leg Table.

Jul 06 12:36 PM

[upgrayed:]

I don't see how nationalizing the mortgage agencies would save taxpayers money. Either way the government is agreeing to cover their bad bets. Unless you want to leave their investors holding the bag which could be accomplished with or without nationalizing Fannie/Freddie.

Jul 06 01:10 PM

[Ryu Mei Co:]

It is not that I dis-believe the doomsday/depression logic that S&P500 may go down to 500 or less, it is just that the hyperinflation/stagfla... factor should be consider, right?

Or are we talking about a short term rapid decline and then inflation kicks in and we will see a steep rally?

On Jul 06 11:22 AM Mad Hedge Fund Trader wrote:

> Brace yourself. Put it on a
> Post-it-Note on your computer. It is without a doubt and unquestionably
> going to be 880, 850, 830, 800, 750, 666, or 320. That last number
> works out to be 90% of the book value of the S&P 500, which was
> the low seen in the 1930s depression. Yes, that depression, not this
> one.

Jul 06 08:47 PM