2007 again

[blygh]

The market is starting to look like 2007 all over again. The Bull market has lasted 2 years 4 month - in 2007 it had lasted 3 years - they rarely last more than 2.5 years. In 2007 after a double top in July and October, a 50% fall over the next 18 months. Some traditional drivers of growth - medical care and defense - are stallled. Real estate peaked in Jan 07 - it has now been static since May. Bond yield have dropped along with inflation. Financials are in the tank - Where are the drivers of growth? Consumer spending? Down! Government spending? The party is over. My answer - there aren't any. My expectation - deflation and high unemployment - my plan - TIPS

Blygh

[ira85]

It does seem like the tide is turning. Two weeks ago it seemed like the recovery was going to continue to slowly build. Quarterly earnings were coming in above estimates. But it sure seems to be a different ball game now. No more stimulus. In fact govnt will be cutting spending for years, a long term anti-stimulus. A slowing economy, stubbornly high unemployment, and no relief in sight. But in 2008 the housing market, the implosion of Lehman Brothers and the big banks, credit default swaps, AIG all turned a pullback into a debacle. Is there a catalyst for disaster now? European implosion? Italy maybe? Of course most of us didn't see it coming in 2008, so why would we be able to see it now.
But I'm afraid you're right about the risk of a real sea change shifting from optimism to nada. A significant correction at least, a resumption of the secular bear market, quite possibly. But Armageddon, I don't see it. Not yet anyway. Instead of TIPS I'm hedged short (SDD & SRS) and in gold (UGL). -ira

[blygh]

Ira, do you have a target for the Dow or the S&P? I am thinking 9500 on the Dow - My short ETFs are DTO, RXD, and SRS (Oil, health care, and real estate). I should probably short technology too but a few analysts seem to like the sector. I don't expect a bull market until unemployment is down to 6% and the housing market heats up. - Blygh

[ira85]

To have a target, I'd have to have the direction AND the extent of the move right. I'm just trying to get the direction right. I want to correctly identify the major trend. We've been in a bullish trend for equities since March 2009. I was very slow to realize there wasn't going to be a re-test of teh 2009 lows and missed a lot of the rally. I also was extremely late to catch the trend in gold. I'm just hoping to do better this time. Is this just a blip in an ongoing bull market or the beginning of a serious trend change to the downside. I'm playing it to the downside for now. But as SD says, I want to let the market tell me what it's doing and not go just on what my provenly flawed logic says the market will do.

I like your short ideas. Seems like the end of QE2, the prospect of anti-stimulative cuts by the feds, the slowdown in China, and the debt crisis in Europe amount to a lot of reasons to expect global economic slowing, generally falling equities, and a good time to short cyclicals that have had a good run, like energy, REITS, and small caps. But since that is logic, it would be wise to check the charts and make sure it plays out as expected.

[sd]

Blygh,
You may be right!
Wow, what a day and I got to be home mid day-
todays price action- 500+ drop in the Dow was the real attention getter f0r the market--
I think your short ETF's are showing a very nice gain- Ira's too.

I had UGL long but sold it today- Gold gapped up to a new high and then started to sell - It and Silver did not participate in the run for cover sell-off.
I went long EUO and ZSL- with the ZSL (shorts silver) .

With today's big gap down, do we have more follow through selling tomorrow, and then get a snap=back rally on an oversold market?
Vix up 30% !
Jobs report tomorrow may affect the market.
Good Luck! SD

[blygh]

I am letting the bond market tell me about stock direction. When the 10 year Treasury hits a 2.5% yield I have to ask myself why? The best answer I can come up with is expected deflation. With all the productive facillities we have throughtout the world - manufactured goods have to be commodities - which means no economic profits (=profits in excess of the profit on the undifferentiated product) - although corporate profits look pretty good - The alternative is that the junior investment managers are playing with the market while the senior traders are in the Hamptons for August - I expect a rally to mid month

[ira85]

Blygh, I'm with you on the significance of Treasuries. Last week, I expected the deficit ceiling showdown would cause fear of a downgrade and treasuries would sell off. Boy was that wrong. As the ordeal went on, treasuries hardly budged. And when a deal was announced, treasuries soared. I literally asked myself why would billions be pouring into 20 year treasuries yielding next to nothing and facing a credit rating downgrade? On the face of it, it made no sense. But Treasuries tend to rally when markets expect the worst. The answer I came up with was there must be a perception that the U.S. treasury, denominated in dollars and facing a downgrade is one of the best safe havens. That must mean the alternatives are looking very, very shaky, i.e. anything denominated in Euros or involving European banks. As lame as the U.S. treasury bond looks, it must be perceived as safer than the alternatives. That's a pretty gloomy outlook, suggesting low confidence in Euros and Yen and low confidence that stocks will hold up.

So gloom and fear was the right call for his week just ended. But now what? The 20 year treasury shot to the moon. It's far, far outside its trading range. Seems ripe for a correction. So today, Friday, I covered all my stock shorts and bought TBT to catch a relief rally when the world doesn't end. But this evening the headline is a downgrade from S&P. I have no idea how that will play out. There will probably be big moves Monday morning, but what? What and where is the greatest fear seems to be the game now. I'm holding UGL, thinking no matter which currency is under fire, gold will seem like a safe alternative. For now at least.

[blygh]

Very insightful analysis Ira. My gold play ( along with silver and platinum) is GLTR -I am a little concerned about India and China gold demand After an inital schock as mutual funds who are committed to AAA securities sell off their treasur ies - I expect cooler heads will prevail. Earning are still impressive - I maintain positions in the Swiss Franc, Canadian dollar and the Russian Rouple - I did not cover all my shorts. China I see is down big as is Australia in the opening late Sunday EDT - export dependent countries should take the biggest hits. Uncle Sam is no longer the world's best customer.

[ira85]

2007 again? As of 8-27-2011 the market seems to be telling us this is going to be worse than we currently think. Why? Multiple signs of global economic slowdown. Lots of commodities have fallen below 200 day moving averages, i.e. copper, metals and mining, oil, coal. Also stock markets around the world have also dipped below 200 day moving averages, S&P 500, Europe, Japan, emerging markets (EEM), Asia x Japan (AAXP). So with stocks and commodities all way down recently, what’s up? U.S. Treasuries have soared as interest rates have fallen to record lows. With savings accounts and U. S. Treasuries paying nothing (interest rates lower than inflation), isn’t that an example of “cash is trash?” But on the market rebound this past Friday, the market was up but long Treasuries (TLT) were also up. So people weren’t pulling money out of Treasuries to buy stocks. They were still piling into recently downgraded, zero paying, falling dollar Treasuries. If there was ANY real confidence the stock market had bottomed wouldn’t there be some shift of assets out of cash/Treasuries and into stocks?

In June 2008 we heard the bottom was in, the correction was over. Stocks were a good buy. That same litany is being pushed today. Buy dividend stocks. Great companies are on sale at low PE ratios. Buy now. That was the cover of Barron’s last week. Just like the summer of 2008. But in 2008 the second shoe fell in October, the near collapse of the banking system. We don’t have that now, right? Well the banks are stronger, but what about European sovereign debt? Isn’t that also a systemic risk to the world’s credit/banking system? If Greece defaulted there could well be a selling panic in the other southern European sovereign debts. And as the market value of all those sovereign debts were marked down drastically, all the banks and pension funds in the world that hold Euopean bonds would see their balance sheets go bonkers. Big systemic risk, still out there, no solution in sight.

So European sovereign debt seems to be the potential other shoe still hanging out there that could derail the system. Does anyone, anywhere believe a solution to that debt crisis is near? Does the European Union have any track record of successfully resolving such problems? I haven’t seen it.

The old advice is don’t try to catch a falling knife. The Dow Theory gave a Bear Market signal 8-2-2011 when the Dow Industrials and Dow Transportation averages both closed below the June lows, according to Robert Colby. Until proven otherwise, I’d say all signs point to a bear market. Surprises in a bear market are to the downside, as the selling goes on longer and lower than people expect. Bear markets always go through a transition as investors begin to recognize it’s not just a healthy correction, but something worse. And those great values become much deeper discounted, greater values. Market rallies are selling opportunities.

So I’m taking bear market hedges against my long term long holdings. I plan to buy emerging market stocks, energy and basic materials once the trend changes. But for now it seems the bear is in control and we should respect the bear will have his way with the markets for the time being.

Where are we now? Market gurus seem to avoid putting their necks on the line to make clear statements on this key issue. But since I have no newsletter sales to protect or clients to impress, I can take the risk and make an unequivocal market call.

Seems to me we were in a secular bull market from 1982 to 2000. Then we slipped into a secular bear market that is continuing to the present and will continue until 2016 to 2022 or so. Within that secular bear market there was a cyclical bear 2000-2003, a cyclical bull 2003-2007, another cyclical bear 2007-2009 and a cyclical bull March 2009 to August 2011. We rolled over to begin the next bear phase and time will tell just how long and low it will go.

If the European sovereign debt crisis is somehow resolved soon and growth picks up in the U.S. and Europe, then all bear bets are off. Or if some massive QE3 scheme is unveiled to fuel another run-up in financial assets, the bear hedges come off. It’s just I can’t see that happening. It seems the markets will have to resolve the problems politicians and central bankers can’t. -ira

[bankedout]

I agree with your analysis ira.

[sd]

Well expressed Ira, agree with your logic-
As you said, you don't know when the next rabbit gets pulled out of the hat-and this market can stage a quick rally-like today's action- on top of Friday's- Best played as shorter term trades-IMO- SD

[blygh]

It seems that our collective opinion is being proven - My only concern is that good earnings may be putting a bottom on things but the market may be pricing in falls in earnings over the next two years - I keep some money in VIPSX - Vanguard Tips - up 11.2% YTD - what does that tell you? Boomernomics tells us that equities are not the place to be for retirees or for pension funds with high payout- eliminating major drivers. Roubini's interview in the WSJ - which I cited before someplace here - is worth a look and seems to be playing out (he cited a 50% probability of a double dip) -we seem to be headed for a double dip.

[sd]

Collectively I agree we all believe we have every reason to go lower.
Listening to Doug Kass tonight, he makes a case that the S&P is at an all-time buying opportunity- I highly respect Kass since 2007 - banging the bear bell with a select few others.
He also did nail the market bottom in 2009-
That said- It feels like we should see a BIG follow through day on huge volume with a close LOWER through the support levels to scare the bejusus out of the market- Where the trading 'breakers' are tripped as we have a capitulation sell-off-
Keep in mind, this is no longer your Daddy's stock market-Or perhaps the market we all think we trade in -
This market responds on a dime to news events when it is tuned to that channel, and disregards completely when it's not-
The majority of the market trading is now automated, and us little investor / traders are competing with sophisticated trading programs ( MATRIX anyone?) .
This slide here feels like the real thing- Butwe have had 2 sharp days down- .....We likely will see a bounce in a day or two- an opportunity to take some profits off and await the bull rally- SD

[bankedout]

My thoughts are the quantitative easing, and bailout money is gone. That type of "funny" money was propping up the markets the last couple of years. Now losses are across the board and nothing the US does will be able to break the fall. The ball is rolling down hill too strongly now.

We shall see.

[blygh]

I agree bankedout. There is just nothing to drive this market. The question is, where are the best shorts - I covered some yesterday - (NFLX, CLF, CNQ) I think I am going to short country funds which ran up on the value of extractives (gold, copper, aluminum, timber, potash (?)) a lot of the BRICs -But some folks think we are at a bottom because gold broke (still have DZZ ,sd?) - in which case I want to invest in companies with reasonable dividends and low elasticity of demand (VZ, T) - By the way ZROZ- rocketed up yesterday - not sure why - thoughts?