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Sy Harding founded Asset Management Research Corporation in 1988 for the purpose of providing stock market and economic research to institutions and serious investors. Harding’s engineering background, coupled with his experience in operating high-tech businesses through numerous economic... More
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  • Everything Still Looks Bullish – In The Rear-View Mirror

    In his 1999 warning that the stock market over the next 17 years "will not perform anything like it performed in the past 17 years", Warren Buffett made several other interesting observations.

    He said [in 1999], "Investors in stocks these days are expecting far too much. . . . . . Once a bull market gets under way, and once you reach the point where everybody has made money no matter what system he or she followed, a crowd is attracted into the game that is responding not to interest rates and profits, but simply to the fact that it seems a mistake to be out of stocks. In effect, these people superimpose an I-can't-miss-the-party factor on top of the fundamental factors that drive the market. . . . . . . Investors project out into the future what they've been seeing. That's their unshakable habit: looking into the rear-view mirror instead of through the windshield. . . . Staring back at the road just travelled [this was in 1999] most investors have rosy expectations."

    If we do that now, we sure see no problems.

    There's a super impressive bull market stretching back for more than four and a half years. We see there were some bumps in the road that needlessly made investors nervous. The economy slowed in the summer of each of the last four years. But the Fed solved those situations by jumping in with more stimulus each time. There was a debt-ceiling fight in Washington in 2011 that resulted in a 20% plunge by the S&P 500. But that was obviously just a buying opportunity once Congress came out of its funk at the last minute and took care of the problem. In the mirror we can also see that markets in Asia and elsewhere plunged, and the eurozone debt crisis kept popping up. But for the U.S. market, those were clearly just bullish bricks in the wall of worry that stock markets climb. And look at that. Investors who were previously seeing only the 2008 crash and its aftermath in the rear view mirror, and as a result were pulling money out of mutual funds all through the bull market, finally turned the corner, like what they now see in the mirror, and have been pouring money back in at a record pace for almost a year now.

    More recently in the rear-view mirror, the Federal Reserve threatened to taper back its QE stimulus. But when markets showed their displeasure, the Fed changed its mind.

    So, all is still looking great in the rear-view mirror, rosy in fact.

    But Buffett has been right, at least so far, with his 1999 prediction that the next 17 years wouldn't look anything like the previous 17.

    I mean, looking further back in the rear-view mirror than just the last five years - maybe you shouldn't - prior to the current bull market there have been two severe bear markets since 1999, which until recently have had the market significantly underwater for 13 years, in fact by as much as 50%.

    So let's humor Warren and look through the windshield.

    Whoa. Okay, so it takes a little adjustment to look ahead rather than back. Everything is so clear looking back.

    Buffett said in 1999 that we should be looking at the direction of interest rates, profits, and valuation levels, not through the rear-view mirror, but through the windshield. Interest rates because "they act on financial valuations the way gravity acts on matter: The higher the rate the greater the downward pull. If government rates rise, the prices of all other investments must adjust downward." Corporate profits because the value of a company's stock ultimately rests on its earnings.

    Okay, so interest rates that had plunged to near zero over the last five years, are beginning to rise, enough so that it's apparently spooking the housing market.

    And corporate earnings growth has been slowing significantly over the last year or so.

    And in the last few weeks, Buffett, Carl Icahn, and Stanley Druckenmiller, three billionaire investing titans, all came out with concerns that the market is getting rich and fully valued.

    And what's that in the road just ahead?

    Why, it's Congress, playing their debt-ceiling game again.

    And just beyond them is the Fed, ready, just as soon as Congress gets its road block out of the way, to dial back the stimulus the economy has needed to keep its head above water.

    So okay, maybe the view is not so rosy through the windshield.

    Maybe it is time for investors to pull their eyes and hopes away from the rear-view mirror, and focus on what lies ahead for a while.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Sep 30 4:49 PM | Link | Comment!
  • Stock Market Reaches For New Highs Even As Risks Rise.

    The stock market took advantage of the lack of economic reports this week to rally back toward its bull market highs.

    The previous week's economic reports, particularly the dismal employment report last Friday, were forgotten as the threat of a military strike against Syria faded.

    Concerns about the Fed dialing back its QE stimulus remained in the air. But that worry retreated also. The consensus opinion is that the weak employment report will force the Fed to do very little if anything except emphasize its intentions to do no harm by taking it slow and easy with any taper.

    Meanwhile, ignored by the market, the economic risks worsened.

    Even though there were very few economic reports this week, what there were did not paint an encouraging picture.

    It was reported Friday that Retail Sales were positive by only 0.2% in August, the smallest increase since April, and less than half the consensus forecast for a 0.5% improvement. The University of Michigan/Thomson Reuters Consumer Sentiment Index plunged from 82.1 in August to 76.8 in September, a five-month low. The Producer Price Index was up an unexpected 0.3% in August on the back of higher food and energy costs. And the Mortgage Bankers Association reported that mortgage applications fell by 13.5% last week.

    Against that backdrop, next week returns to a normal schedule of important economic reports, including the first look at the housing industry in a while, with the Housing Market Index, New Housing Starts, permits for future starts, and Existing Home Sales.

    And the Fed's highly anticipated 'will it or won't it' September FOMC meeting will begin on Tuesday, with its QE taper decision being announced on Wednesday, and Chairman Bernanke's often provocative press conference following after the announcement.

    Can Chairman Bernanke pull off the potentially confusing balancing act of lowering the Fed's economic growth estimates again, as it's expected the recent economic reports will force it to do, while at the same time convincing markets that the QE stimulus, which has been the main support for the economy for five years, can now be safely dialed back?

    Meanwhile, on the market's continuing rally, Goldman Sachs reported that the market's gains this year have been driven much more by the expansion of Price/Earnings multiples than earnings themselves. That is, the willingness of investors to pay higher prices for stocks regardless of slowing earnings growth. The report notes that of the S&P 500's 18% gain this year, only 5% is related to earnings, and 13% due to an increase in the Price/Earnings multiple investors are willing to pay.

    Will so-called smart money continue to be wrong with their concerns over such situations, while public investors have been so right in pouring money into mutual funds and ETF's at a near record pace this year?

    That divergence in expectations apparently continues.

    The Consensus Inc. Bullish Sentiment Index of professional investors reached a high 78% in March and has plummeted to 50% since. Meanwhile the poll of its members by the American Association of Individual Investors (AAII) has moved in the opposite direction. It jumped to 45.5% bullish this week from 35.5% last week, and from only 28.9% bullish in August. (Not that it necessarily means anything, but it was at 45.1% bullish the week of July 25, the week before the ugly August market correction began).

    And while bullish investors are making profits with their renewed confidence this year, hedge funds have had too many bearish positions and are having one of their worst years ever.

    Even Stanley Druckenmiller, founder of Duquesne Capital, and former portfolio manager for George Soros' Quantum Fund, with one of the hedge-fund industry's best long-term track records, said this week that he is "lost" regarding this market. In a rare appearance on Bloomberg TV he said, "My guess is I believe the market is topping . . . But right now I'm lost. I don't play when I'm lost, because I know in the future I won't be lost."

    Investors and the media may not believe that hedge funds won't continue to be lost. As always, investor sentiment turns quickly, and in spite of their long-term records, hedge funds are being written off as no longer being 'smart money', as evidenced by articles like that in Bloomberg BusinessWeek in July titled 'Hedge Funds Are For Suckers'.

    There is no question, as this week showed, that smart money continues to be wrong with its nervousness, and non-professional investors continue to be right with their enthusiasm and confidence.

    How much would I bet it will continue indefinitely? Not much.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Sep 13 3:00 PM | Link | Comment!
  • The ‘Banking Industry/Regulators' Time-Bomb!

    When President Eisenhower left office in 1961 his parting message to the nation was to "beware the Industrial/Military complex". He warned that military contractors had become so chummy with Congress and the Pentagon that "the potential for a disastrous rise of misplaced power exists."

    We now face a much more dangerous power grab that could actually melt down the entire financial system of the country if it isn't brought under control.

    I refer of course to the still growing power and influence of the financial industry.

    We've already seen frightening examples of how out of control it has become, how undeterred it is in its quest for huge profits for a chosen few insiders, with total lack of concern about the effect on the rest of country.

    The U.S. is still reeling from the manipulative build-up of the housing bubble, the sub-prime mortgage mess, the resulting real estate crash, and the financial crisis of 2008 that required a multi-trillion dollar bailout of banks and brokerage firms.

    And the threats continue unabated.

    We were promised new regulations that would prevent the abuses of the past, downsizing of the financial firms that had become too big to fail and had to be bailed out, punishment of the wrongdoers, and so on.

    You know what a joke those promises have become.

    For four years the financial industry has successfully lobbied to water down and delay the new regulations. The previously too big to fail financial firms have become even larger and more ominous through mergers suggested and abetted by the regulators as part of the rescue effort from the 2008 crisis. No one has gone to jail, most of the same 'masters of the universe' that ran the firms before are still running them (and still drawing down unconscionable salaries and bonuses).

    I was shocked to read the other day that the 5-year statute of limitations for the SEC to bring charges related to the 2008 meltdown will soon run out, and SEC officials are 'concerned' that they won't make the deadline on some cases on which they supposedly want to file suits.

    The costs of the 2008-2009 bailout that prevented the country from plunging into another Great Depression, are still hanging over the rest of us in the form of a weak economy, record government debt, record budget deficits, and the so-called 'fiscal cliff' to be faced in 2013.

    So is the financial industry ashamed of its former activities and pitching in to help? No sign of that.

    The latest scandal is the manipulation of the Libor (London Interbank Offered Rate). And it's a beauty. The Libor influences hundreds of $trillions in financial contracts around the world, including mortgages, corporate loans, loans to individuals, and interest-rate swaps. The 16 major banks that set the rate are under investigation by authorities in the U.S., Canada, Europe, and Asia, suspected of manipulating the rate.

    As Bloomberg News puts it, "The investigators are piecing together a breath-taking portrait of avarice and deceit, with the potential to become the most costly manipulation in the history of banking." Forbes says. "The Libor rate scandal could make banks' mortgage and foreclosure troubles look like child's play."

    Already giant Barclays Bank has agreed to pay $453 million to settle U.S. and British allegations, and its three top executives have resigned.

    Bad enough. But once again it must be asked - where were the regulators?

    It's being reported that as far back as 2007 the U.S. Federal Reserve was concerned about the arbitrary way by which Libor was being set, and urged U.K. officials to reform the process to prevent the possibility of manipulation.

    Nothing was done.

    This week we've had the shutdown of futures trading firm Peregrine Financial Group Inc., and the alleged disappearance of $215 million in customer funds. Where were the regulators on that one? The firm was involved in dozens of arbitration disputes with disgruntled customers in recent years, but that didn't alarm regulators (who now say the firm was cooking the books for at least two years, and issuing fraudulent statements to customers).

    Interestingly, last fall futures trading firm MF Global imploded, and an estimated $1.2 billion of customers' funds disappeared. Regulators then ordered a review of all futures firms to ensure the safety of customer money. And even with that review, Peregrine Financial Group was given a clean bill of health in January.

    To be sure, these latter two situations are collapses brought on by the shameful activities of individual firms and not the result of industry-wide practices.

    But that is not the point. The point is where are the regulators in all these situations?

    It doesn't seem to matter if it's industry-wide practices like those revealed in the investigations after the 2008 financial collapse, or activities by a small group of major banks as is alleged in the current Libor scandal, or the fraudulent activities of individual firms that result in losses only for their own customers. Where are the regulators?

    Washington continues to have the resolution of the still out-of-control financial industry and its regulators pushed into the background, while they argue over immigration laws, same-sex marriages, and how to handle healthcare.

    Meanwhile, the clock is ticking on very serious economic and financial time-bombs, the potential damage from which dwarfs all other concerns.

    Someone had better wake up and get with it.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 13 4:24 PM | Link | 1 Comment
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