Sol Palha's  Instablog

Marcus Aurelius

121-80 AD, Roman Emperor, Philosopher

The Dow has gone on to put in a series of new 52 week highs, something that has eluded both the transports and the utilities. We personally do not place too much emphasis on the Dow Theory which focuses on the transports, we. However, to do place quite a bit of weight on the utilities as they generally lead both the industrials and the transports.  At the very least the  Utilities should have put in one new 52 week high and more importantly they should have done it before the industrials and or the transports.  As both the transports and the utilities have not put in new highs we have what amounts to a double non confirmation signal. This suggests that at the odds of the Dow mounting a strong to decent correction are pretty high.

If we examine the 20 stocks that make up this average we find that at least 10 of 20 stocks have not put in new highs. The stocks are BNI, AMR, LUV, UNP, CAL, EXPD, GMT, JBLU, NSC, and OSG.  The index is therefore, being carried higher by only 10 stocks.

Finally, in the early stages of the rally total volume traded surged to and past the 7 billion mark several times but not one single high took place on even 7 billion shares of volume. In fact, since the 17th of Sept total volume on the NYSE has not even once reached the 7 billion mark.

The two charts clearly illustrate the divergence between the Dow industrials and the Dow transports and utilities.  At this point in time, prudence and caution are warranted and traders should think twice before jumping into the markets.  For those individuals willing to take on a bit of risk the market can be shorted via DOG, DXD, REW, etc. 

Oliver Wendell Holmes

 

 

Disclosure:

 

 

Source: Bank of Japan
 

The Japanese markets have still not recovered after the real estate bubble which lasted from 1986-1990 despite having dropped interest rates to zero and throwing volumes of money at the problem.  Look at the above chart, total Debt in 1990 was roughly 150 of GDP: today total debt is close to 290% and the market is still in a funk.  Could this be what lies in store for the U.S?

  

In 1990 the Nikkei was at 40,000, today almost 20 years later it is having a hard time trying to make it to the half way point despite all the money the government has infused into the economy.   Worse yet the main down trend line is still intact and after all that money the Japanese government threw at the economy the Nikkei is trading close its lows; currently, it's at 9,695, roughly 75% below its all time high.  Let’s remember that Japan is a big exporter and manufacturer of goods. The US, on the other hand, has lost most of its manufacturing capacity and imports far more than it exports. It’s starting of on an incredibly bad note in comparison to the Japanese.

We have listed charts from two sources; the differences are minuscule at most.

 Source: Steve Keens Debt watch

 

 Source: Ned Davis research

  

Surprise, surprise, the picture is simply terrible. Total debt now accounts for roughly 380% of GDP, and we have only just begun spending.  The Japanese started from 150, and it took them to 20 years to push it to 250%. We are, on the other hand, are starting at almost 380%, and we have just begun our so called stimulus programs. The government is projecting a deficit of 9 trillion dollars in the next 10 years; they moved this estimate up from 7 trillion to 9 trillion in less than one year.  If they increased their estimates by almost 28% in one year, do you think this estimate is going to remain unchanged for 10 years?  They also raised the deficit for 2010 by 19% to 1.5 trillion.

Now here is the massive difference between the Japanese and the U.S. The Japanese consumer has saved a huge amount of money and continues to do so, they can thus (and to some degree they have indirectly financed this debt by purchasing government paper. The U.S. consumer, on the other hand is broke and strung by his heels with debt; we had two years where the savings rate was actually negative (2005 & 2006) talk about arrogance and foolhardiness.  So we are entering into this mess with a Debt to GDP ratio that is 2.6 times larger than the Japanese and with the consumer completely broke. To make matters worse we are fighting two wars and trying to solve a multitude of problems when the nation is for all intents and purposes almost bankrupt.   Let's not forget the rising unemployment rate which officially is close to hitting 10% but unofficially (the number of individuals that have given up looking for work plus those that are still looking for work) is probably well over 15%.

Going forward the situation is only going to get worse as the government is going to have to continually create money out of thin air to fund many of its social programs, fund the two large scale wars that are costing this nation several billion dollars a month and pour billions and billions into Medicaid and eventually into social security.  The only hedge therefore would be to get into commodity based assets.  Investors should use all strong pull backs to either add to or open up new positions.  For example, right now the natural gas sector is relatively cheap and undervalued, some plays in the agricultural sector are also rather cheap and so some positions could be opened up in these sectors right now.   We would wait for pull backs in the other commodities based sectors before opening up new positions as many of them have experienced very strong upward moves in the past few months.   

Investors looking for a hedge can consider the following ETF's

In the natural gas sector we have the following ETF’s,  UNG, GAZ and FCG, which gives you a bit more bang for you buck as it invests in the companies that actually produce the gas as opposed in natural gas futures.

In the agricultural sector the following ETF’s should be considered

MOO= we would wait for a pull back before opening up new positions

DBA

DBC= it’s a bit more diversified than DBA as it holds positions in Gold, heating oil and crude.

After stronger pull backs the following ETF's can be considered.

USO, GDX, GLD, CUT, AGQ, KOL, PSAU, PSTL, etc

 

Disclosure

We have positions in UNG and are planning on opening several new positions in key stocks and some of the ETF's listed above.