Hold on folks, the ride could get a bit bumpy for a while! It looks like we were correct saying that the stock market could be in the early stages of a "crash" - and we are sticking to that assessment. That "thud" the stock market hit a week ago last Friday, WAS something hitting the hull, and the market's "hull" has a hole it and taking in water. In fact, it was a strong enough "hit" that all three of the major stock indexes, the Dow Jones Industrials, S&P 500, and NASDAQ trend signals changed from an "UP" trend to a "DOWN" trend! This could be significant if this shorter-term 'weekly' interval MACD remains in a down-trend. If the markets recover significantly this week, that weekly interval MACD could reverse, and go back to an "UP" trend. But, that's a big "if". The point is that we are "on notice" that, for now, things don't look good for stocks and they could go lower. If they recover, fine. But, last week's signal changes are your "early warning" or "heads up", and tell us to be very cautious now.
We'll have to see how fast the boat sinks or if the hole is patched (government actions again) while underway, but there's a growing recognition that this may not be the only "hit" to the stock market hull. Sure, there are lots of smug soothsayers still trumpeting an economy "recovery", but their voices are sounding off-key and more difficult to hear. Recent moves in China to curtail lending (deflationary), and U.S. government moves to re-implement the much more restrictive Glass-Steagall Act (a "good" thing in our opinion), a rising U.S. dollar, problems with corporate revenues, have begun to take their toll. Then, a 'knockout' punch was delivered when news hit that support in the Congress for a re-appointment of Ben Bernanke as Chairman of the Federal Reserve was waning (see comments below). The week ended with the Dow Jones Industrials' worst week since March, 2009, losing over 435 points. Even gold and silver were knocked lower, due in part to: investors needing to liquidate precious metals positions to meet margin calls; central bank market operations; and also due to the rising dollar. In our opinion, this is merely moving gold from weaker hands, into the hands of those who know that, ultimately, when things get really bad, gold is the only exchange medium you can rely upon - period.
Another 'echo' from the 1930's depression surfaced last week. The government proposed last week the reimplementation of depression-era banking laws (Glass-Steagall) that separate commercial banking from investment banking (underwriting and securities business). This sent a cold, hard, shiver down the stock markets' back, sinking the Dow 213 points that day alone. While we think this would be a move in the right direction, the talk smells of politics, i.e. punish the banks for outlandish salaries, like seen at Goldman Sachs, after they, and other major money-center banks that were forced to take money under the government's tax-payer funded TARP program. Never mind that Congressional mandates created the problem in the first place, by paving the way for too-much housing construction and sales, ginned up by the Federal Reserves extremely low interest rates, to create the housing and debt bubble. The reasons are many, and it doesn't matter now (except to prosecutors!) and investors have to look ahead to the potential fallout and negotiate the coming financial crises.
Besides China curtailing credit, which is deflationary, more credit contraction came in the form of FHA raising the downpayment on home loans, and raising premiums to insure mortgages. Even though this is a step in the right direction, the FHA's moves aren't tight enough however, and won't bring back the 'conservative' lending needed at this time. Until lenders "get religion", defaults and foreclosures will continue to rise, "deflating" home values. Overall, the credit contraction is spreading, and reflects the 'deflationary' depression trend we've been warning about, and as seen back in the 1930's. As this trend evolves, more investors will finally notice it and position their investments, but you'll be ahead of the trend. Later, the media will catch on (by then it's too late though).
Speaking of the financial media, we've noticed that it is (finally) beginning to do some investigative reporting, despite the influence of the powerful monied interests on Wall Street upon the media. This shift could be important, and could finally focus the American public on the shennadigans in the capital markets, banking, and finance, but it also means that a harsher light could prove detrimental to long-held beliefs about markets, stocks, bonds, companies, and (we think) highly over-priced stock values. But, it's taking the press way too long, and a crash in the market could hasten their desire tell the real story. An example of them dragging their feet, is the recent populist anger to moves to "fire" the current Fed Chairman Ben Bernanke.
The battle over the Fed Chair's reappointment is looking like the country's most recent populist outcry, similar to the resounding message sent to Congress in September, 2008, when Americans firmly said "NO" to giving money to bail out the banks. At that time, Congress voted down the bailout bill, but then several Congressmen were specifically literally "threatened" that if they didn't pass that bailout bill our financial system faced collapse, and martial law would be declared. A similar full court press seems to be going on concerning Bernanke's reappointment. We know this could be a stretch, but we find it odd that the stock market is falling precipitously while: the bills and support to audit the Federal Reserve is gaining steam; Bernanke is losing support for a reappointment in Congress; Greenspan came out last week saying 'Bernanke should be reappointed immediately'; White House Press Secretary Robert Gibbs says essentially that Bernanke has to be appointed in this crisis; Senators Dodd and Gregg (Democrat and Republican) came out last week in a joint press conference saying that Bernanke should be reappointed; well-known Wall Street personalities all praise Bernanke's handling of the recent crisis; and then Warren Buffett said in an interview on CNBC last week, that if Bernanke wasn't going to be reconfirmed, "just tell me a day ahead of time so I can sell some stocks." Sorry to say, all this sounds a bit coordinated and far to 'coincidental' and appears coordinated. Bottom-line, the whole financial system stinks to high heaven, and something has to give. We think it will give way to the downside.
Another problem facing the American investor (and all people) is dramatically increased taxes and fees. Several states, especially California and Illinois, are in a severe financial 'cash-flow' crisis, meaning that taxes and other revenues are not sufficient to meet expenditures. That means expenses (programs and budgets) will have to be cut, and taxes will have to go up. Higher taxes is exactly NOT what the people, and the economy needs now; especially an economy that is over 70 percent consumer spending based. But, that won't stop local, state, and ultimately federal governments from raising taxes, fees, and any other revenue source they can, to keep the gravy train running.
Perhaps as an emphasis for all the above, last week we noticed that the baby-boomers favorite play toy, Harley-Davidson Motorcycles has fallen on bad times, reporting a LOSS for the fourth quarter 2009; it's first quarterly loss in over 16 years. This could be a sign that the baby-boomer's are growing up and putting away their toys, meaning the next 'big thing' will be selling off the toys, houses, and 'downsizing' their possessions and budgets. Remember, demographics say that whatever the baby-boomers do, it happens in a "big" way.
Bottom-line, we think it's time to 'hold-on tight" and the ride could get rather bumpy from here. As for stocks specifically, The stock chart technicals are still at extremely over-bought levels, and remain ripe for a pullback or crash. Watch for more negative news coming out over the next week or two, and then watch for the market's reaction to it. How the markets react will be important in the near-term, but we think the ultimate conclusion is set.
That's our opinion.
Take care, and all the best for your health and investment portfolio.
J.E. Rapp,
Editor-in-Charge
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