Monday, February 27, 2012

Time for a Stock Market Commentary

I think the stock market is reaching a near term top and possibly forming a triple (and declining) top dating back to 2000.  Stock market returns this year may yield a 0 to 5% gain with a risk of -10% to minus 15% decline during the year--probably ending mostly unchanged.
  • Oil prices are now the new Fed Funds rate since the Federal Reserve has reneged on it's duty to keep interest rates the same or higher than inflation.  Like Fed Funds rate, if the global economy picks-up, then crude oil prices pick up and that works to slow it  (like the Fed and Fed Funds rate is supposed to do).   
  • Be careful, Brent crude, more representative of world oil prices, is now $125 per barrel---only $25 less than a peak level that tipped the world into recession in 2008 and precipitated the last credit crunch.   Many key global economies are already slowing or in recession NOW!  This is the biggest risk now.  Rising oil prices are happening despite a weakening global picture.
  • US Corporate earnings are probably peaking out as much of the world is close to recessionary conditions now--in Japan, Australia, & Europe. China is slowing.  It's possible earnings will hold up and not fall much but corporate earnings are HIGHLY variable.  A slow fall of corporate earnings probably means slightly lower stock prices going forward.  This assumes that the US doesn't join the world's recession which would mean significantly lower stock prices.  
  • There continues to be a high level of risk from macroeconomic instability.  Investors will continue to want lower PEs to compensate for risk--meaning more pressure on stock prices.  
  • Here's the chart to show a possible triple top (and possibly declining peaks) of the S&P  Click for a larger chart.

  • Central bank balance sheets are exploding all over the world which shows an attempt at competitive devaluation of all currencies by all countries.  There is no backing of currencies by anything and therefore they are being manipulated by politicians. Click on the chart of central bank balance sheets as quantitative easing continue to buy outstanding debt.   (See my blog on What is Quantitative Easing? )  The problem is that stock markets are hooked on their opium fix and any sign that QE will end will hurt stock prices temporarily.

  • Politicians are not fixing the real problems, global imbalances continue, debt is piling up and credit quality is collapsing everywhere.  It's literally raining credit downgrades in Europe. The West is going to hell in a hand-basket!     
  • Governments are killing economies everywhere with statist, interventionist policies
  • Charles Biderman at TrimTabs, who focuses on money flows in and out of markets, has indicated that it's only corporate stock buybacks fueled by low interest rate corporate bond issuance that has largely driven the market higher since the market low in March 2009 as the retail investors have been selling stocks/mutual funds for years now.
  • Retail investors have been piling into bond funds and not stock funds. Negative real interest rates into the foreseeable future are hurting savers, retirees, pension plans, distorting markets and hurting the economy due to the extreme uncertainty that it's causing.  The Fed should raise interest rates right away to a more normal 2%.
  • The political leadership and administration of the US is at a new low.  Administration matters.
  • Inflation is 3% and short term interest rates are 0% meaning real interest rates are -3%.     Three percent inflation must not be enough for the brilliant PhDs at the Fed--they want higher inflation! They've said so! 3% inflation used to be crisis level of inflation in the late 1960s. So you can see how far we've devolved.

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