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Market View: What News Could Finally Signal A Bottom?

I have long mentioned that this is a fundamental downturn, not a cyclical one, and that fundamentals have to dramatically change to change that view. With that said, considering “hope springs eternal” in the markets, in general, what news could cause a possible bottom, or at least a near term bottom?

I believe a signal to the possible end, or at least some type of hope for a bottom in housing, HAS to take place before it is even possible to consider an economic bottom, let alone a possible recovery.

The Senate finally passed the housing bill Friday that would allow financial institutions to shift “their crap” to FHA at a discount to the current market values, if they so choose to do so. While this is possibly a massive risk to taxpayers (and most likely is), this would allow the banks to take one last MASSIVE writedown and finally signal and end to this housing fiasco. This bill still has to pass the house and the president would need to sign it. There is a provision (a very stupid one) in it that “gives” $3.9 Billion to lenders to “fix up foreclosures” and the President has said he will veto the Bill if this is not removed.

I completely agree with the President on this issue. This is not only literally a taxpayer gift to lenders holding these properties, it is also nothing more than another welfare program. The inner cities want this money so they can “fix up distressed areas”. Meaning they want taxpayer money to rebuild the inner cities where virtually all homes are in foreclosure. At some point in this country we have to stop with this nonsense that the government is going to “give” people money because things did not work out. The taxpayers ARE the government from a financial view. We are paying this money. Quite frankly, I am tired of this mentality, but whatever.

Anyhow, I believe if this bill passes and is signed by the president AND you see one last massive write-down from financials, that will likely signal the bottom for financials. And make no mistake, as I have mentioned many, many times, they are still holding many billions in bad loans that I believe they are not disclosing. This could finally put one final bottom, one final write-down, and provide some clarity as to what their balance sheets really hold.

Market View: Forget Valuation, Look At Fundamentals

I have long mentioned that I believe in firm numbers. I have also mentioned that the market is not rational, on any level, and never has been, not will it ever be, contrary to what is taught in schools. It is driven by fear and greed, nothing more. That is why you see stocks trade at 3 or 4 times what they are likely worth, and others trade at a very small fraction. Fear and Greed.

To be long this market, or any market or stock, ask yourself a simple question. Are the fundamentals getting better or worse? If they are getting worse, FORGET valuation, it is 100% meaningless. If fundamentals are getting worse, earnings may implode, and your “cheap” stock may soon have a 150 PE or even negative. Never, ever, ever buy a stock on valuation. But them on fundamentals.

Until I see at least the “possibility” of the fundamentals getting better, I will keep my long term “very negative” outlook, as I have had month, after month. Reality may suck, but it cannot be ignored.

StockBlade VS Briefing.com and May 6th Revisted

On May 6th I basically went head to head with Dick Green, President of Briefing.com, when I reviewed their opinion of the economy. He wrote an article that was titled “The Recession That Never Was”. It basically said that we are not going into recession, people were over estimating everything from housing to oil to inflation to jobs, etc. etc. etc. I basically started my review of their economic opinion by saying Dead Wrong. That should have made my opinion rather clear.

In that post, I went on to say that he is dead wrong because he did not understand what the true problem was, this is not a cyclical downturn, it is a fundamental downturn, which is far worse and can last far longer. The problem is we have never really experienced a fundamental downturn in the U.S. economy, IMO, since the 30’s. All other downturns were cyclical. The fundamentals were in place for an economic recovery once inventory was cleared, etc. That is no longer the case. It is fundamental because of declining real incomes and debt levels that cannot be supported by those declining incomes.

I suspect based upon that belief that people are overly pessimistic on the economy (he would likely consider me a doomsdayer) their opinions on economic figures have been far too optimistic. For example, let’s look at today’s numbers, all of which were not only above consensus figures, but way above reality.

Unemployment Rate: 5.5% Briefing 5.4%

Nonfarm payrolls: -62,000 Briefing -50,000

Initial Claims: 404,000 Briefing 375,000

ISM Services: 48.2 Briefing 52.0

To be fair to Briefing.com the consensus estimates were ALL too high, they were just higher. On the other side, I have been saying that the economists are wrong, analysts are wrong, Briefing is wrong, Paulson was wrong, Kudlow is wrong, everyone not named Peter Schiff was wrong, basically. The economy was going to get far worse than people realized and last far longer than people expect. Then, many months after I had been screaming from the top of the mountain Buffett began saying the same thing.

Today’s numbers have unfortunately once again proven me correct.

Market View Recap: Unfortunately My Views Have Proved Correct

I have probably made dozens of posts on here that the market was wrong, the economists were wrong, the Talking heads were wrong, the fed was wrong, everyone was dead wrong - the economy was going to get far worse. I normally do not like to make macro calls as i have mentioned, because the market can be wrong for a very long time, and you will be bankrupt trading it far before you are proven correct.

 But the evidence has been so overwhelming it could not be ignored. The economy has been a “false economy” for at least 10 years, I suspect longer. it has been built on paper, nothing more. First, we had the stock bubble that created fake wealth. It was not real, it was paper. Then we had the housing bubble that also created fake wealth that was not supported by incomes. Then the game ended and there were no other options to contunue the fake economy. We are now seeing the “real” economy without the paper to support it. It isn’t pretty.

I have said for probably a year that I believed we would likely see the worst recession of our lifetime this time because I saw no other assets to leverage to falsely support the economy. I still believe this is the correct view, unfortunately. Economies cannot grow long term unless real incomes increase. Real incomes cannot increase unless countries are buying our goods rather than us buying theirs. I believe it really is as simple as that. Money has to flow in, not out. Like any business or family, if you have far more money going out than in, it will one day prove disastrous. It is a simple matter of when.

This is why I have been harshly critical of “long term” holder strategy for the markets. I am 100% convinced this strategy ONLY works if real incomes rise over time. This increases consumption over time, and increases profits, over time. If those incomes do not increase, then it is a false premise.

Disagree With Us Please

People disagree on message boards all the time. But never here. They come on to read what I have to say and leave after. Please post if you do not agree!!! I may have missed something. I am not the all knowing Trading God. I have been “lucky” in most cases, I will admit. But I am not always correct. If someone sees something i may have missed, ask or point it out. I try and have no ego when it comes to the market. This is because i rarely ever say “I am right on this” as the Talking Heads do. I say this is what the market is telling me. Big difference.

The only call that I have made that I can recall on “fact” other than what the market was saying was housing/homebuilders. Cramer and others said long and I came out the same day and said “they are dead wrong”. I did this because once in a blue moon the facts are so overwhelming that they cannot be ignored and I knew for a fact I was right AND the facts would prove me correct in short order. And they have.

Point being, there are not enough people on here that disagree with me. I do not want to be like Cramer and my readers become sheep. Do not refrain from pointing out if I am ever wrong. I want to hear it as I may have missed something important. If my view should have a fork stuck in it, say so.

I think the problem is that we present the market in a FAR different light than others and people simply do not know what to make of it. What? The market trades on numbers and not logic? People cannot comprehend it and do not know what to make of it and do not know if they should agree or disagree - so they just read.

SP 500: Monthly Close

I had mentioned 1383 early this month a number of times and said it had significance long term. Well, the month ends tomorrow. If we close out the month weak and below 1383 I believe the market is in trouble. It already looks like June is going to be flat to down based on the long term charts. We need a strong day tomorrow to change my opinion of what “likely” will happen in June.

If you recall in march I warned early that “we have likely seen the highs for march, and long term charts suggest a very negative March”. Right on Target. We made new lows on the SP in March, but not the Dow. Regardless of what happens tomorrow, outside of a huge rally, June appears to be sideways, at best.

Market Recap: Oil Clears $130.50 Spikes Lower, Stocks Rebound

Well, the market played out almost exactly as i was hoping - almost. The easier trade would have been a lower open and then an early rejection. We opened higher and then spiked even higher and made it very, very difficult to trade early on. I was gone when it finally made the low above my “critcal zone” for the market - the 1370.50 area.

I should have known the market would continue to rise later once oil cleared $130.50 as once that happened oil was going “lower before higher” outside of any dramatic news - period. I made this call on Thursday night about oil. Bingo right on target.

Going forward we HAVE to hold today’s low. If we clear it, I think the market is in big. big trouble. Loook to be long above today’s low, but if it clears I would strongly consider exiting.

The Strength In The Market Has Been Surprising

I have mentioned that i am normally skeptical of any highs or lows that do not have firm reversals, so it doesn’t completely surprise me that we are pushing higher as no reversal has been made recently. With that said, the market is completely ignoring reality - the economy is going to get worse. I think people are hoping the $600 checks being mailed out will solve consumer problems, it won’t.  The reality is that AT BEST it will simply stall them for maybe 2 months. Do not argue with the market, but understand that these moves higher are most likely not warranted by any sense of economic reality. Consumer spending is going lower, probably much lower, because they cannot service existing debt levels. That will not change with a $600 check when the average US consumer has a $10,000 credit card balance that most cannot pay. Not to be redundant, but this is a fundamental problem, NOT a cyclical one, as in the past downturns.

Here are the facts:

Consumer confidence plunging

Housing numbers are at record low

Consumer debt levels at all time highs

Home values are going lower

Inflation is grossly understated and is having a big effect on discretionary spending

Real wages have not budged in 10 years and are going negative

All, of this is NOT good and will not change anytime soon.

 So, take what you can, when you can….Jack be Nimble, Jack be Quick…. on the trigger…is still my motto here.

This Week: Slow Grind Likely

The “big” news was out last week, and failed to shake the markets even though the news pointed to a rapidly weakening economy. So now what? This week’s news isn’t as important, so more of the same appears likely. Until the market finally realizes the news WILL get worse, and that reality sinks in their brains, they will refuse to sell, IMO. Most traders are somewhat convinced that we have seen the lows, and if so, the risk of selling outweighs the risk of holding or buying. The market’s are not about reality - they are about relative performance. Money managers get paid to beat their opponents - NOT to make you money. If the market loses 10% and they ONLY lose 5%, they will likely get big bonuses. That is the simple reality of Wall St.

 With that said, this is still a trader’s market, IMO. The economy is getting worse, rapidly, and hope is not something to invest in. Let others hope, take the rally’s and let the “salmon swim upstream” after. 

 The market will likely trade sideways with an upward bias until financials release earnings next week. From what I have seen, we have likely seen FAR less than half of the write-downs - but nobody knows for certain. If that is the case, a bank failure at some point is not out of the question. I have been wondering about Washington Mutual going under for some time…. If Countrywide collapsed and gave customers higher rates, in general….WM has to be under pressure, I would guess. The big drop in WM on huge volume on Friday also “smells” funny… That is why I have mentioned on several occasions that if you want to be long financials, I would STRONGLY consider an ETF to avoid the possibility that you just bought the next Bear.

There are a lot of stock calls here…BUT

The reason I have not given many long stock calls here is that I am simply not a huge believer in this rally….The long term downtrend is still in play ( I am not a big believer in trends unless supported as I have mentioned) ….and the volume today or lack thereof, tells me I am not alone. The volume on the Dow was very, very low. If people actually believed in this, you would see far higher volume, IMO.

 The best and safest trades remain on the short side or to buy above critical low points…..and see if they hold. I would avoid the financials here like the plague or cancer, take your pick. But look to be long them above their lows.

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