Keeping My Investments on Sidelines as Market Lacks Clear Direction

Where is the market going? Traders seem to fear more to the downside than the up. At least they are paying more for protection against the former than the latter.

Now, I cannot blame them. The market increase has been rather spectacular. Much more of a climb much sooner than most economic recoveries after a recession, and it was the worst recession since the Great Depression. Go figure. I know the market was down drastically in March, but for good reason. It is the massive run-up that has me scratching my head.

That Fiscal Thingy

There is little I can say that can add or better summarize what is said in this linked piece, though I have to say it has me a bit worried on where the market is going over the long term. I, for one, am giving serious thought to moving to another country. Seriously, I love the U.S., but if it is screwed fiscally for the rest of my life then why would I waste the rest of my life dealing with the problems? The world is big and there are places not in our pitiful state. Nonetheless, this is where I seem to be stuck for now, so I am going to continue to focus on it (and keep my passport up to date).

The best you can say today is that the U.S. is skating on fiscal thin ice. How far can we go before our lenders cut us off? Are we going to devalue our own dollar to screw our lenders? Will health care years from now make this the end of days for the U.S.? All legitimate questions. No answers here as the jury is still out. Nonetheless, they all present reason for pause.

Do other countries fear America could go as California has? I doubt it, but when our a (formerly) financially vibrant state is about to go under, they cannot be happy that it is happening. Giving out IOUs and getting a credit downgrade next to junk is not a confidence builder. How can the most populous state and biggest economy state get a near junk rating? Not hard to answer the question. Better question, how did we let ourselves get here? Either way, this must be a positive for the long term market - not.

Seven More Down

I took the weekend off, so forgive me if this is old news. The FDIC closed seven banks on Thursday (usually Friday but that was a market holiday). Without doing a lot of research I believe this is the most closings in one week since the S&L crisis- certainly the most for the past several years. That has to be a good sign for the market?

Founders Bank, Worth, IL

Millennium State Bank of Texas, Dallas, TX

The First National Bank of Danville, Danville, IL

The Elizabeth State Bank, Elizabeth, IL

Rock River Bank, Oregon, IL

The First State Bank of Winchester, Winchester, IL

The John Warner Bank, Clinton, IL


Here is Another Good Market Sign - Rising Foreclosures

I have reported here on real estate market conditions, both residential and commercial, on a regular basis. The commercial side is just getting started on its bad news and I reported on it last week, so let me focus on the residential side again. For one thing, option ARMs (those adjustable rate mortgages that give people options on how much to pay - even an option to pay LESS than the monthly interest) are peaking late this year and next. And, apparently, subprime losses have still not bottomed out.

For another, prime and jumbo mortgage defaults are on the increase. These are high value mortgages that cause a lot of pain. For a third, homes are under water at record amounts so there is jingle mail. And for a fourth, unemployment is still mounting. So banks, including (by FDIC closures) local and regional banks, are in a world of hurt for months to come. Yep, that bodes well for the market.

And as I mentioned last week, commercial real estate is not doing well, not well at all. There exists many billions in refinancing need in CRE and the credit simply is not there.

So after all these very positive market signs I have to admit that I am mostly on the sidelines in my investments. There is no clear direction. I truly believe the worst is not behind us but the markets have solidly punished my expectations for a few months. Either way, I look at fundamentals and simply shake my head. I do not see the 2 + 2 that supports the markets recent rise or it staying there (and yes I know it is a fair amount off its recent peak). Let me know if you think otherwise.

Disclosures: None

Comments

[Subhankar:]

What is clearer than the Dow going below its 20 day, 50 day and 200 day EMAs? Surely, Monday's pullback notwithstanding, the Dow is "Southbound".

Jul 07 09:25 AM

[goldhammer:]

Mr. Brown, Thank you for your column.

Your comment about emigrating is a serious one and deserves some insight and comment. The problem of course is where to go. I would be interested in your possible destinations, because I think there are probably a lot of smart, ambitious Americans who may be considering the same thing. If that is not a bad 'leading indicator', I don't know what is. Keep us posted.
/goldhammer

Jul 07 12:02 PM

[Mad Hedge F...:]

Good move. Given the profusion of negative indicators, and moving averages rolling over like the Bismarck, I would be remiss in my public duties if I did not tell you to sell everything. Dump the reflation trade. The “green shoots” are dead. Liquidate emerging markets (EEM), commodities (DBA), the metals (GLD), foreign currencies (XEU), and cover your shorts on safe haven pays like Treasuries (TBT), and the yen (XJY). Real estate in all forms will continue to die its own private death. Batten down the hatches. Reduce your risk. If you can’t sell, then hedge your positions. If you can’t hedge, then sell calls against you positions. If you can’t sell calls, then find another line of work, because there are so many inverse ETF’s around these days, you no longer have an excuse to take a big downside hit. This is where your stops earn their pay. I begged you, pleaded with you, and beseeched you to dump your position on May 1 (see “sell and May and Go Away” (www.madhedgefundtrader...) and June 16 see “the worm has finally turned” (see www.madhedgefundtrader...), and now I am trying again. Please also revisit the short plays I offered earlier on the S&P 500 (SDS) (see www.madhedgefundtrader...) and the Euro (DRR) (see www.madhedgefundtrader...). And don’t ever call me indecisive, waffling, or equivocating.

Jul 07 12:07 PM

[Joyful Alte...:]

My own businesses are doing well, after an awful first quarter, and residential real estate is doing better: yesterday a crew ran water and sewer lines into a 3-acre horse pasture across the street from my house, and one or more houses will be built there.

The stimulus package seems to be being put to good effect around here, with one road closed for reconstruction of an elderly bridge and another road being reconstructed and redirected. Even commercial real estate looks pretty good, with finishing touches being added to a new gas station-convenience store-drug store minimall on the main drag, as well as, believe it or not, a new car dealership, both within "walking distance" of me.

But further away from my doorstep, the state has a budget impasse from income decreasing and citizens' needs increasing, and state workers are about to go on partial pay. I have friends in Georgia and Michigan who've been permanently laid off jobs they've held for 10 or 15 years. And the national and world stats don't look good.

Marketwise, I'm sitting on the sidelines, with cash at the broker's, waiting to see what happens next.

Jul 07 12:18 PM

[Larry House:]

Interesting ramble, Craig. Seems you had quite a bit to get off your chest. Couldn't agree with you more about the lack of clarity for investing. I am currently out of stocks (went in stocks in March, sold couple of weeks ago, just lucky), but I do hold corporate bonds. Seven to eight percent right now is quite acceptable to me. Who knows when stocks will do better than that?

Jul 07 12:40 PM

[Old Trader:]

Craig,

Regretfully, I'm compelled to agree with you, in regards to relocation. I'm close enough to retirement age to start thinking about it seriously (i.e. trying to decide where might be the best bet).

Larry; agreed that high quality debt is not a bad place to park some money, at least in the short/intermediate term.

Jul 07 06:53 PM

[Craig Brown:]

Old Trader and Larry, Thanks for your comments. One place I am beginning to look at is Costa Rica. I have not been there but I hear it is beautiful and unexpensive. Obviously there are a ton of issues you need to work out, but it may be worth it. If not for two little ones I would be exploring these options a bit more seriously at the moment, but I have a two and five year old and hope to educate them here before leaving. That attitude might change, but for now I am here.

On the place to park some money, I cannot and will not give specific advice but some people smarter than me are saying some municipal bonds, insured by Berkshire, are paying decent returns - especially in these times of low inflation/deflation. The tide could turn quickly on inflation so be ready for that, but relatively high paying municipal debt with a Berkshire guarantee is not a bad place in my mind to park some money while the market sorts things out. Not advice, just telling you what I am looking at presently.


On Jul 07 06:53 PM Old Trader wrote:

> Craig,
>
> Regretfully, I'm compelled to agree with you, in regards to relocation.
> I'm close enough to retirement age to start thinking about it seriously
> (i.e. trying to decide where might be the best bet).
>
> Larry; agreed that high quality debt is not a bad place to park some
> money, at least in the short/intermediate term.

Jul 07 08:47 PM