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Wall Street Strategies has been providing independent stock market research since 1991 to individual, retail and institutional clients through a balanced approach to investing and trading. Charles Payne, our founder and chief analyst, is routinely sought after for his stock market, political,... More
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  • Stock Market Hooked on Weak Dollar By: Charles Payne 2 comments
    Oct 27, 2009 10:37 AM | about stocks: UA, AMTD, IACI, VLO, WYNN
    The market is sensing that the long-awaited pullback could occur, but it may occur on a mixture of sobering news and revelations. Yesterday, stocks slipped all over the place as there was speculation about the first-time homebuyers program, which I concluded a long time ago was a done deal but now it may be a done deal with a twist. The politics of envy twist that predetermines all courses of action at the White House is rearing its ugly head in negotiations to keep the program into 2010. The thing is that bipartisanship could be achieved as there are numerous Republicans on board, many supporting a bill from Johnny Isakson (R-GA) that would expand the pool of Americans eligible. The Isakson Bill would expand those eligible to include individuals making $150,000 or less and couples making $300,000 or less. In other words, people with heavy tax burdens would have access to some of that money.

    Right now, the plan is flawed (in addition to contributing to what will be years of record deficits) because the current plan limits it to individuals making $75,000 or less and couples earning $150,000 a year. As a result, it has little hope of denting the inventories and reversing sinking home prices. There are many rules of thumb for would-be homebuyers, including rules on how much houses should cost in order to be a good deal. Conservatively, people are told to incorporate a formula of 2.0 to 2.5 times your annual income to find the maximum home value to purchase. Others say that it's okay to buy a home that's 3.0 times your annual income.

    So, at $57,000 (median household income 2007), it would mean a household could afford a home for $171,000 or less. Here's the rub, even after this horrific meltdown the median home price for existing homes is still $175,000. So, why wouldn't there be a plan to allow people with more investable income to participate in programs designed to spark the housing market? I know the answer, and it's frustrating to say the very least. Yesterday, talk of a plan that would keep parameters the same (read: not for all Americans) and the credit at $8,000 to be phased out, with the credit declining by $2,000 each quarter until the end of the year, was abundant. Cockamamie is the word that comes to mind. There's no telling what's going to happen with this program now. I'm still pretty sure that it's going to be extended, but it may come with petty strings that help the agenda of wealth redistribution more than just the housing market.

    Yesterday, the dollar bounced, and it sent shivers down the spine of the stock market. It's not a good sign that the market is so sensitive to the dollar that even the slightest move higher sends equity investors to the sidelines. The next U.S. budget is going to be laced with more spending to go along with more stimulus and more schemes to level the playing field by removing rewards generally associated with success in capitalism. We are talking about spending, spending, and more spending. All the while areas of the economy that could turn that spending into real revenue growth are going begging, begging, and begging some more as maneuvers to make big businesses cry "uncle" will trickle down and simply push smaller businesses out of the picture completely. This all means more debt and a lower dollar. In the meantime, interest rates are edging higher.


    Although the Fed is hinting at winding down some of its emergency measures the lack of credit, higher unemployment, and anxiety about the true nature of the rebound in the economy could tie the hands of the man that has gone on about how the biggest risk to the system is removing accommodation too soon.

    So what's going on is that the market is worried; it has been a long time and bulls and bears have been longing for...yes...longing for a pullback. I can tell you right now it would work; having several positions lower at this point has resulted in a flood of calls. I love the handholding aspect of it, although it's sad to know that the overwhelming majority of stocks in question will be dumped at a loss and then come charging back. Recent rallies have been inconvenienced by modest pullbacks, but even those carried an element of fear.

    There was a time this past summer when many people were ready to throw in the towel. It stands to reason that the higher the market gets the more intense the worry and concern. But, there are too many people playing the market day to day, and all it takes is a string of difficult sessions to send these investors to the showers. The market is due for a shakeout, and it could be a wild ride so I hope investors don't base decisions of value in their portfolio solely on the stock moving down with the broad market.

    The ugly session yesterday has us focused on key support points:
    • * Dow Jones Industrial Average: 9,850.0 is a key support point, but the bigger number would be just north of 9,600.0
    • * S&P 500: closed below its 20-day moving average, and from here the next important support point is 1,040.0
    • * The NASDAQ composite held at its 20-day moving average and it looks like 2,130.0 is pivotal on a closing basis.

    There was much anxiety yesterday concerning the massive amount of debt offerings from the Treasury Department this week. Auctions totaling $123.0 billion begin today, and each will be waited on with baited breath.

    By the way, I'm not a fan of deficit spending on homebuyers programs but if they are going to do such programs it should be fairer and smarter. I'm still of the school of thought that a certain amount of pain is unavoidable, it can be deferred but it just can't be sidestepped. The government is attempting to place so much pain onto the Federal Reserve balance sheet or our never-ending debt load. The nation got in over its head, and that pain will be felt at some time. Moreover, the further out we try to push it I think the more painful it becomes. Just think if big banks got billions in direct funds and trillions in pledges and the poor can still purchase homes with 3.0% down then it stands to reason those in the middle are going to feel all the pain. That's right; the middle class gets to endure their own pain and the pain of others.


    Words of Wisdom

    Keep an eye on the bank stocks. The sector was the source of weakness yesterday as Dick Bove continues to change his tone on the group (I had a good debate with him on "Fox Business Dot Com Live" last week and wondered why he was so sanguine about the industry rebounding when they weren't providing the loans needed to make sure the ecomony would get back to normal). Also, speculation on Bank of America (NYSE:BAC) and its uphill struggle to payback TARP was a weight.

    Don't Forget About Earnings!

    Earnings results this morning have been really good, with many solid beats and good guidance. However, Valero (NYSE:VLO) was a major disappointment.




    Written by Charles Payne, CEO and Principal Analyst of Wall Street Strategies (wstreet.com) providing independent stock market research to over 30,000 subscribers, in more than 60 countries. Mr. Payne is a regular contributor to the Fox Business and Fox News Networks. For more information about Mr. Payne, please refer to the company’s website www.wstreet.com.

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Comments (2)
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  • Mayascribe
    , contributor
    Comments (9984) | Send Message
     
    Charles: Another fine article.
    27 Oct 2009, 11:34 AM Reply Like
  • Mark Bern, CFA
    , contributor
    Comments (4892) | Send Message
     
    Good article!

     

    "All the while areas of the economy that could turn that spending into real revenue growth are going begging, begging, and begging some more as maneuvers to make big businesses cry "uncle" will trickle down and simply push smaller businesses out of the picture completely."

     

    That last part about small businesses is the key point for me. As more and more small businesses are taxed, regulated, and squeezed out of business by government, banks, and big competitors, the job creation ability of America dwindles. Small businesses are the engine the drives the American economy. It seems so ironic to me that this Administration seems, in nearly everything it has done, to favor the big businesses that it says are villains. It is making the rich richer and increasing the number of poor. I suppose that is being done purposefully since they "say" that they represent the poor and the poor do seem to believe them. Of course, when all your information comes from MSM, how could you believe any differently?
    27 Oct 2009, 01:33 PM Reply Like
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