Fritz Hottinger's  Instablog

Some years ago there was a comedian (can’t remember his name) who created laughter with his phrase, “Who are you going to believe, me - - - or your lying eyes? “.  Well, there are some ebullient economists, as well as federal spokespeople, who should be using that phrase today.

According to a Nov. 2 headline in the Money section of USA Today, nearly 4 of 5 economists they surveyed believe the country is in a sustainable recovery.  “Sustainable” is defined as “won’t slip back into recession”.  To quote from the article, “the market low reached in March was a wild overreaction”. 

Then this caveat follows:  the market could rise or fall 10% in the months ahead because of uncertainty about the recovery’s strength.  With the Dow presently testing the 9700 level, this prediction offers a spectrum of future readings somewhere in the 8,700 to 10,600 range.

Well, who are you going to believe, these prognosticators, or your lying eyes?

The government told us the economy grew at 3.5% in the 3^rd quarter, but they do not emphasize that it was their programs (cash for clunkers, $8,000 first-time homebuyer credit, TARP funds, earmark projects, etc) that fueled such growth.

It did not come from the true engine of our economy, small businesses and individual consumers.

Thus, it would pay to read any statistic generated by the federal government with a large grain of salt.  There is a political purpose to promising the electorate they will be cared for, then presenting upbeat employment numbers, projecting future cost savings, and painting a rosy future.  But let’s put down some numbers for your “lying eyes” to digest:

That same Nov. 2 article gave us some S&P 500 data, which this writer finds much more meaningful:

Aug 13 – 17  dip     -3.3%

                                       Aug 18 – 27  rally  +5.2%

  Aug 27 – Sep 2    dip   -3.5%

 Sep 3   – Sep 22  rally +7.7%

Sep 22 – Oct 2    dip    -4.3%

Oct 2   – Oct 15  rally +7.1%

Oct 16  – Oct 31  dip    -5.6%

rally not yet in sight

At first glance it would appear that these swings are nothing to worry about because the rally percentage is greater that the dip percentage. And if you do the arithmetic, the index is up 5% after all the dips and rallies.

 But remember, if you lose 50% of a holding, then it has to double (increase by 100%) just to get you back to even. And historically the market doesn’t gain even 10% a year.

Moreover, these current dips are appearing in increasing severity, whereas the growth curve of the rallies seems to be losing headway.  Given the high level of uncertainties that abound right now, markets world-wide are exceedingly fragile.  It would not take but one shock to give us another Oct, 1987.

Using a sailor’s metaphor, the horizon looks threatening.  It is time to trim sail, batten the hatches, and prepare to weather a storm.  Investors should be looking for companies that have tangible assets (oil, gas, perhaps even gold in some form) and ones that have shown ability to survive severe downturns (revenues not dependent on disposable income).  These all come to mind as offering investors strength in a storm:  

GSG, PWE, XLE, GLD, XLP, KXI, EWX.

Traders should be looking to gain more off the downside, going long on contras like SDS in any rally, and taking profits on the market dips.

PS.  As this was being written, CNN carried this quoted message from President Obama:  “Businesses and consumers now realize they need to manage debt more carefully”.  Not one word about our Federal Govt doing the same.

Time to don your foul weather gear!

Well, if Halloween doesn’t spook you, maybe it is because you were already spooked out by the market action this past week, which culminated with Friday’s 250 point drop in the Dow.  (see table)

Previous Octobers gave us grim news (think 1987 and 1989) from which we quickly recovered.  But that rosy history is not likely to repeat this time.  There are just too many negatives, foremost among them the global view that our exorbitant printing of dollars is undermining its value.

The U.S. is (was ?) the economic engine for the world, and in spite of what our government gurus say, that engine is driven by consumer spending, not the spending in Washington, DC.    U.S. consumers will continue to be tapped out by the increasing costs of just plain existing.

Federal officialdom may fool some citizens with “adjusted” numbers for the CPI, unemployment,  jobs created and saved, the savings coming from the long-promised “health care for all plan”, and the ballyhooed “cap and trade”  to reduce our energy costs and save the globe.

However, there are not many of us lining up to buy the bridge our federal government is trying to sell (or even the Penn. Turnpike, recently offered for sale).  We have heard before that bromide: “a rising tide will lift all boats”.  But we are intelligent enough to know that tides also recede on a regular basis.

We see local taxes rising, utilities like FPL requesting 30% rate increases, our States needing new revenues to balance their budgets, and the price at our neighborhood gas pumps increasing weekly.  Discretionary income is shrinking.

And whether the GG’s (govt gurus) want to believe it or not, that is the fuel that drives the consumer engine.

Cautious investors, and their number is growing constantly, are increasing their respect for a market that can swing 3% or more in the course of one day.  They are aware of other statistics which could shock the market to even greater extremes:  $770 billion of commercial mortgages presently underwater; over 100 bank failures thusfar this year with how many more to come; the CIT bankruptcy which will ultimately deep-six something like $2 billion tax-payer dollars; the dollar losing its status as the pricing medium for oil; etc, etc.

In previous messages we have used the analogy of a ping-pong ball bouncing down a stairwell to describe these 3 digit market swings.  You can expect to see many more of them as the year draws to a close.  But do not be fooled by the upward bounces, some of which come to you courtesy of the PPT.   The ball has not yet reached the basement.  The overall market trend is still down.  And we expect it to stay down until, not just the US, but the world’s economies recover.

It is not too soon to add a contra like SDS to your portfolio. 

Well, they did it!  They pushed the Dow back up over that magic number of 10,000.  (Let’s save for another time the questions of why is that level so important, or what is the euphoria behind this sudden boost .)

More important tonight is the question “What is going to keep it there?”

A few days ago I published on my SeekingAlpha blog a chart showing that the Dow does not rise when unemployment is rising.  And it should be obvious to all serious investors and traders that if employment is rising at all, it is only in the government sector - - - and perhaps many of those jobs are just part-time, like collecting a crowd to stand behind our President as he gives us his latest words of wisdom.

According to a Wall Street Journal article dated Oct 5, the unemployment rate is now bouncing against the 10% level.  Private-sector payrolls are lower today than at the end of 1999.  The U.S. needs to replace 7.2 million lost jobs, and population growth will require another 100,000 new jobs a month.  Where are these going to come from?

Are tire manufacturers going to bring back to the U.S. their overseas plants so they can re-employ union workers here?  Probably not until there are stringent tariffs on tires made in all the countries besides China.  And that will precipitate a trade war, which is more likely to boost inflation than it would the Dow.

Are the steel mills in the rust-belt of Indiana, Ohio, Pennsylvania going to re-open and re-employ Steelworker Union members?  Certainly not in the next five years, and more likely, never again.  Those jobs are gone forever.

Right now our country is facing one of the most important political debates in our history:  Shall we, or shall we not, have government-mandated health care?

The plans being debated are extremely complex, and only the Lord knows what will come out of the “sausage-maker machine” or what the ultimate cost will be.

But it will be a safe bet that:

you will not be allowed to purchase health insurance across State lines;

and

legal harassment of doctors and hospitals will be allowed to continue.

So much for “cost containment”.

At the risk of sounding overly-skeptical, one cannot help thinking that it is in the best interest of the Obama Administration to have the country smiling and euphoric as this historic debate on health-care winds down to its final vote.  And what better way to create some euphoria than to boost the Dow back up to an historic milestone. 

Those who doubt the ability of an Administration to “paint the tape” so to speak, should review the origin and continuing existence of the President's Working Group on Financial Markets, the PWG - - - otherwise known as the Plunge Protection Team or PPT.

The PWG/PPT includes the Secretary of the Treasury, who serves as its chairman, and the Chairmen of the Board of Governors of the Federal Reserve System, Securities and Exchange Commission, and the Commodity Futures Trading Commission.

Despite President Obama’s pledge to run an open and transparent administration, the activities of this Group are not being disclosed.  Since disclosure could only prove or disprove government intervention in the market, the shroud of secrecy can only add credence to the interventionist theory.  And what are we to make of it if it is true?

This bubble will burst eventually, like all bubbles do.  Even a government the size of ours cannot levitate a stock market indefinitely.  There have to be earnings, or at least the expectation of them, to support stock prices.  Yes, those companies selling goods overseas will show increased earnings as the dollar falls against foreign currencies, and gold, and oil.  But as the dollar falls our imports become more costly, and in most economic texts this leads to inflation - - - unless of course we take a pledge and renounce all imports.   Not very likely !

In spite of, or perhaps because of, this latest run-up of the Dow, our crystal ball is showing stagflation on the horizon, that ugly combination of inflation and continuing unemployment.  To quote from Wikipedia:

<<<  - - - central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets.  Together, these factors can cause stagflation; >>>.

To this writer’s eyes, both these factors are already well in place. 

A.

The money supply has been increased beyond all previous records.  Government debt is projected in the trillions so money supply cannot be reduced unless the U.S. eventually reneges on its pledge. (Bernanke’s mop-up plan is still just a question-mark.)

B.

Excessive regulation has already been set in motion. On the international front read latest on tariffs imposed, and lack of follow-thru on pending trade agreements - all in payment to labor unions for their support in last November’s election.  On domestic front read daily outpourings of the pending health-care legislation and its most probable impact.

Given these stark facts, prudent investors should be selling into this bubble.  And while traders might be long for the short-term, they are certain to weight long-term trades to the short side.  If ever there were a time for CAVEAT EMPTOR to be printed on your screen, it is today!

An early CNBC headline today (10/6/09) read:  Stocks Power Upward! 

Then came others: “crude is higher, greenback lower, dollar under attack”, “gold hits all-time high”.  What are we to make of these confusing and contradictory claims?

The primary purpose of our Seeking Alpha columns and threads is the sharing of financial information, without digressing unduly into political discussion and debate.

This writer has found it almost impossible over the past several months to comment on either current market conditions or future direction without trespassing into the political realm, and thus gave himself an extended sabbatical.

Today these reservations are being abandoned - - - there is just too much at stake not to speak out.  As this is being written the Dow is up 157 points after gaining 112 points yesterday. And now it rests (comfortably?) above 9700.  What will keep it there is anyone’s guess!

But let’s posit a few:

§         continuing investor exuberance

       (based on more promises and more hope?)

§         continuing US government largesse for the next needy category

       (bailed out banks, homeowners, auto mfrs, clunker-owners = I’m next)

§         continuing purchases of US paper by our major debt-holders

      (China cannot shoot itself in the foot; they want us as consumers of their exports)

On the other side of the scale, weighing much more heavily IMHO, are some economic facts difficult to ignore:

§         Unemployment rate is now bouncing against the 10% level

§         Private-sector payrolls are lower today than at end of 1999

§         US needs to replace 7.2 million lost jobs, and population growth will require another 100,000 new jobs a month  (WSJ/10/5/2009)

The Dow does not climb when unemployment is rising.  (see chart below).

This latest charge by the Dow has ambiguous origins, and is not to be trusted.  Cautious investors and traders will keep in mind that the Treasury still runs the PPT (Plunge Protection Team), and does not have to disclose its activity in the market.   Statistics from government agencies, regardless of the administration in power, are often slanted to produce desired results.  One egregious example:

Need to reduce budget deficits?  Just remove food and energy from Consumer Price Index, thus reducing future Social Security outlays.

Political considerations can no longer be ignored.  They impact the marketplace severely.  This Administration has frightened the public with its oratory and ubiquity, and with promises that intelligent investors know cannot be kept.  With true unemployment rising and unlikely to decline any time in the near future, consumers are tightening their belts and their purse strings.

And they are not likely to relax their grip any time soon.  Their fears of what this Administration could do are many:

ü      airwaves are filled with unsupported statements rendered as fact;

ü      unkept promises of transparency and openness, bi-partisanship;

ü      pay-offs to labor unions, trade groups, financial backers; trial lawyers, etc;

ü      trade agreements altered or abrogated to benefit constituencies;

ü      a visible trend to “Chicago politics”: to secure power create dependencies that can deliver votes;

ü      demagoguery of the Health Care Plan (17% of our GDP) with no solid answers to legitimate questions;

ü      39 Executive Branch czars (at last count), not vetted by Congress.

This list could go on and on, but by now you should have the drift - - - there are just too many reasons to be doubtful of what this Administration will do to the economic fabric of our country, in both the short and long run.  The investing public will not be fooled in the long run.

Now is the time to SELL High - - - take advantage of it.  Take some money off the table while you have this opportunity.  The time to BUY LOW is sure to come.  One more glance at the chart above should be all the proof you need.

PS//

Wise investors use times like this to add a contra to their portfolios.  We particularly like SDS, which HottingerSignals holds and trades.

Dear Fellow Investor,

Dear Fellow Investor,