1/21/11…quantative what?

…easing? Does Ben Bernanke know the mandate of the Fed? True, QE2 has been a rousing success in stimulating consumption…exactly what should not be encouraged at this point when personal savings are virtually non-existent! But not to worry because the breakdown of buying shows it is all by the wealthy…meanwhile the lower classes are struggling with higher food and energy prices. Already there have been food riots in South Africa…soon to come to a neighborhood near you?

Bernanke’s two mandates are stable prices and employment. That means controlling the bond market but not boosting stock prices as he himself said was an objective in a Washington Post op-ed last November…the market mavens obviously took him seriously. But as for his other mandates: where are the jobs and while he has kept short term rates low, he has failed miserably on his promise to keep LONG rates low even though by the end of November, the Fed passed China as the number one holder of U.S. treasuries! That is quite a move.

Despite being called a perma-bear…this bear is NOT going into hibernation…despite it being 15 below here in Excelsior, MN and more than -25 with the wind chill. Let’s review the main themes TB has had so far in 2011…all in the same vein:

  1. Don’t ruin your year on one month’s performance…yet that is where the betting money went…even with low volume in stocks (especially given global financial conditions). He also pointed to the stories on China growth or debt causing the market to go up or down according to the tone.
  2. Volatility is way to low and way too high in bonds as those reversing the profitable trade are taking away the bond bid…with help no doubt from the bond market vigilantes. Yesterday both VIX (S&P 500) and VXN (NDQ 100) volatility gapped up on the open and burst above the 40/50 day m/a’s for the first time since 12/2/10!
  3. While earnings growth is good…is it sustainable? P/e’s of 16x on the S&P 500 implied that growth is sustainable despite a true unemployment rate (underemployment) of near 17%!

This is what TB wrote yesterday:

“If you noticed the major indices were in the red all day…EXCEPT the Dow which waffled around even and closed down just 0.1%. Meanwhile the worst performer was the Russell 2000 Small Cap which plunged 2.6% (this should trouble you as it has been a strong performer as one would expect in a GROWING economy). This was followed by the Nasdaq Composite -1.5% and the 100 -1.1%…but wait…are these heavily weighted in tech and IT spending is going to the moon, Alice…the moon, right? The S&P 500 fell1% and even the highflying Dow Transports sagged 1.8%. This should give us pause on the strength of the economy and market…especially when the S&P 500 multiple is just under 16x. But the Russell 2000 was at 35x!!! The NDQ 100 was at 20x and the Composite 35x. Is this rational…or simply grossly-overpriced? You decide.

Meanwhile, the Dow is over 14x but that includes a 2.5% dividend yield and is not the Dow of old including so many tech companies…but also financials which were the first to rally and are now starting to pay the price. Morgan Stanley reported and also missed on earnings making four of five banks (two of which are not and you know which too), that couldn’t keep up the pace!

Looking at the Dow there were 3:1 declining led by American Express (8.6 Dow points), JPM (8), and only IBM offsetting with a whopping 38 point gain on the index…without which the Dow would have been down 50.

Still the volume was less than 1.09B shares, well below Tuesday’s 1.23B that was the highest since 12/17 but we waffled badly on Tuesday and it was evident all day…but the main thing is that we had a big move down, Dow excepted on slightly below average volume! Will some of the hedge funds be correct that the market will correct around the end of the month?…to the downside! Advance/declines on all exchanges were negative by about 3:1 and worse was breadth: NYSE -8x; Nasdaq -5/7x; AMEX -8.3x! How can it be this negative on BELOW average volume? Yet, despite the major indices being down all day (Dow only slightly up or down), new 52 week highs ran 350…down from the 400 to 600 we have been seeing (a rising tide…), but new lows ran just 42…down from three days with more than 100??? You sort it out and then decide…it’s your money!”

TB was not the only one to notice this and like TB it wasn’t conclusive, but yesterday’s act was quite similar with the Dow virtually flat again…this time accompanied by the SPX -0.1%, but the Russell 2000 was again off 1.1% and the Nasdaq Comp and 100 each -0.8%. Advance/declines at near -2x on all exchanges, and breadth also very negative: NYSE -1.3x, Nasdaq nearly -3x and AMEX nearly -4x! As noted, new 52 week highs which had been running 500 or so each and every day shrunk to 87 while new lows were steady at a low 75…but is this sending a message?

A friend sends TB a technical newsletter when he thinks it might be of interest and yesterday’s was no exception. It is the Street Smart Report by Sy Harding…a market timer and a consistently good one. He too noted Wednesday’s odd unchanged Dow and plunging Nasdaq and Russell 2000, and like TB it merely put up his antenna…could be a fluke. Of course, we now know that it did it again yesterday and the message is starting to jell. Here are some key points he made, TB’s comments in parenthesis:

  • While QE1 was a rousing success, he had the same take as TB on QE2.
  • While a ‘handful’ of major banks are prospering, 7,000 smaller banks are fighting to stay in business; more than 300 have fialed since 2008, and the FDIC’s ‘troubled bank list’ hit 860 in Nov. (remember these are the banks that make small business loans!)
  • With the (headline) unemployment rate at 9.4% and 14.5 million unemployed (excludes part-timers and discouraged workers), Bernanke says it will take five years to get unemployment back to ‘acceptable’ levels (if we can still issue debt. that is)
  • More than 1 million homes were foreclosed in 2010 and a similar amount will be in 2011 (in Existing Home Sales yesterday note that prices fell to below a year ago levels and most of the sales were: foreclosures!) Data released this morning shows FNM and FRE sitting on 242,000 properties – up five-fold in three years!
  • The second and third years of presidential terms have been best for stocks…there hasn’t been a negative 3rd year since 1940 (records are made to be broken and we have broken many in this market). Even so there have been scares…such as 1987, the 3rd year of Reagan’s 2nd term. Recovering from the 33% decline on Black Monday, which wiped out two years of gains, the market ended the year up just 2.3% (but if you bought at the wrong time!)
  • He is not predicting a 1987 style crash or a 1999 type major top, but we could see a 10-12% correction in blue chips, and 15-16% in the Russell 2000 and Nasdaq – at any time! (How about now? -10% on Dow would be to below 10,793 and the SPX to 1153, the respective 200 day moving averages!)
  • By any measure the market is overbought. Sentiment as measured by AIAA hade been in the 50% bullish ‘warning’ zone for several weeks and investment newsletters are 57.3% bullish well into the ‘danger’ zone. (Do not ignore this!)
  • What would cause a correction? The 8% Jan/Feb pullback last year was cause by attention drawn to Greece, despite strong Q4 earnings (see they don’t matter in the short term!), and the 16% pullback from Apr/Jul was more Greece plus Spain and Portugal and this despite more strong Q1 earnings! China raised reserve requirements six times last year and another 0.5% last week, and raised interest rates twice since October.
  • His seasonal timing model is still bullish…he firmly believes in sell in May and go away…until November… performance of this model is way above the indices (bear in mind that it is a trading strategy with short term gains and losses so there are major tax considerations).

One last thing as this could be an important date: the Irish elections were scheduled for November but the President moved them UP to March 11, at issue is growing voter disgust over guaranteeing all Irish bank debt…which is held mainly by British and French governments and banks and $8 billion by U.S. banks! IF they repudiate it, all bets are off for the stock market as we have the beginnings of another crisis on our hands. Historians recall that it was repudiation of war reparations that set the stage for Hitler to come to power and for World War II. Not saying this is going to happen…but it won’t be good for stocks!

So you decide…but TB isn’t going into hibernation…we have come too far too fast and that is never a good thing when crossing a minefield! TB

. . . - - - . . .    . . . - - - . . . (S.O.S.)

It is now five of six banks missing estimates as BofA posted a huge $1.24 billion loss on loans. Also, when TB pointed to JPM beating the bar on lower loan loss reserves, he did not mean to imply that it was cheating…instead it is revenue that should not be attributed to the quarter and furthermore will not be sustainable…meanwhile trading revenues are down everywhere…thin markets will do that!

Take your choice of opinions on the market but choose wisely…your returns depend on it!

Have a fun weekend…TB plans to stay warm!

TB

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries...as he sees it...and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Copyright TBD Capital LLC, January 21, 2011.

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