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Weekend Thoughts And Some Technicals

Below are some thoughts I've had this weekend....

Look for a strengthening dollar to continue to hurt our export sector over the coming year.  Lets not forget about China either, because they have their currency pegged to ours.  This will be an additional headwind for their economy as well.  They are now the largest exporter in the world.  Tell me, how is China going to lead the global recovery if they are the biggest exporter in the world and their currency is appreciating thereby making them less competitive in the global marketplace?
 
The pension problem is starting to creep up.  The market may rally and rally, but there are big problems underneath the surface.  Underfunded pensions will lead to more tightening at the state level through job cuts and/or tax increases.  All this simply leads to headwinds for economic growth for years to come and one of the primary reasons why I don't think we've hit bottom in the stock market just yet.  The debt needs to be taken care of and we won't be able to outgrow it this time.
 
I am in complete agreement here.  We are in a new normal with subdued demand which will last for a long time while we get the debt monkey off our back.  Worse, there was "Ricardian Equivalence" concerns on the part of companies in the article too.  Once we as a nation repair our balance sheets (and innovate some new "life changing" product/discovery) will we be able to consume like before.   
 
 
Latest increase in the discount rate is not a good idea in my view.  I equate it to the Fed officially signaling that they believe the crisis is over.  At the same time market participants might not see it as anything important.  The economy is still too weak and any semblance a continued process in the "exit strategy" would be way premature in my view.  The high probability of a double dip would increase even more.  In the end, we are down a dead end anyways.  As soon as we decided to save the banks (instead of letting them fail) and stimulate to try to grow out of the problem, we embarked on a route where only stimulus would cause any growth in the economy (at the expense of larger debt loads in the future).  Without it, it's back to stagnation/recession... See my wet vs dry wood analogy which I wrote a while back.
 
This article really interested me, especially this quote in the last paragraph.  "The recession lasted “about a year and a half,” which would be “much shorter than the typical banking crisis downturn".  Umm... maybe the recession hasn't ended.  While statistically it has, on main street it clearly hasn't.  
 
Tying in with the comment above, here is an excellent article written by Thomas Hoenig (President of the Kansas City Fed)...  Pretty much ties in with my thesis (see previous link above)
 
...And with the advent of higher taxes in the future, can you see why consumer spending will not rebound in any meaningful way to get us out of recession?
 
For all the talk of inflation, Walmart doesn't seem to be seeing this.  Look at the 3rd paragraph, and this is coming from the largest retailer.  I don't know how much more clear it can get.  We are either headed towards a recession with deflation really showing up, or the Fed keeps rates very low and accommodative and we start seeing margin squeezes everywhere (stagflation).  The CPI numbers a day later drove the point home in my view  
 
In Europe, populist ire on both sides Greece vs. EU is increasing.  It seems more and more likely that Greece won't be able to institute its draconian measures and a recent vote found that Greece would rather drop out of the Euro altogether, devalue and get on with its life.  Meanwhile, the public in Germany is really denouncing the idea of bailing out Greece and for good reason.  The practice of punishing the financially prudent savers to bailout the inprudent is reaching a boil.  Couple that with some important bond auctions from Greece and Spain coming up and we may have some fireworks as soon as next week.  
 
Quick Technical Update.
Weekly Volume at very low levels in this latest rally.
 
Financials have lagged during the correction and rally.
 
Credit markets are flashing red flags.  This latest rally has not been reflected in the credit markets.  We are about to break below an important support level.  
 
Overall there are many obstacles ahead and it might be starting to affect the markets....finally.  While we might trade in a range over the next couple of months, the risks are clearly to the downside know as any external shock (and there are many possible ones out there now) could derail the rally and the fall would be quite hard in my view.  
 
Keep those stop losses tight!!
 

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