A bull trap building? That’s the serious question a year after a bear trap was sprung in-line with our call for the ‘fix to be in’ late in February 2009, looking for rebounds, as even occurred (rather strongly too) during the Great Depression of the 1930’s. Armed with historical and hysterical knowledge, we had a Fed stepping on the gas as never before, on top of panic-driven stimulus. It should be noted that the Fed today is doing something quite different, which is why in last Tuesday’s report to our regular readers I noted prices would briefly work higher, but that the Fed started ‘draining reserves’; a more significant consideration than remarks likely at the upcoming FOMC meeting.

That the stock market ‘grinds’ to higher levels is not a surprise last week or even in the middle of this new week ahead of Triple Witching Expiration. However we do not want to press upside expectations strenuously on a day-to-day basis; for a couple reasons. One; everyone will be watching closely to see hints of a firmer monetary policy from the Fed, and I suspect they’ll get them; veiled in an ‘exit policy’ strategy.

As to equities, which aren’t so cheap as the Street would have most believe based on ‘real earnings’, I know that on the first drop down the cheerleaders will encourage public buying; noting the shallowness of all dips that predated this scenario. And that may in fact work initially; but beware beyond. Recognize this market is increasingly due for corrective action; realize that it remains a seasonally strong time of year, and it seems reasonable to say, don’t insist that they play this out to the absolute max.

Every day we’ve reiterated everything outlined for weeks, where we suggested the S&P indeed WOULD surmount the 1150 area; then have two types of alternatives on a short-term basis. Clearly, due to institutional domination of this market, while it may not be a conspiracy or manipulation, but clearly is able to ‘control’ patterns to ‘grind’ prices higher, in absence of ‘emotionally natured’ traders who aren’t so disciplined to play by the ‘house rules’.

Given that a real host of folks using common sense have discarded the buy-and-hold forever approach with their experience of being killed twice in the last decade (unless they listened to our warnings of debacles, both in early 2000 and again forewarning a sort of ‘epic debacle’ was coming starting in early-mid 2007), it made sense to have a market move higher without many participants willing to come-in on the buy side. For sure in hindsight we wish we were more aggressive than just calling the low precisely last February and early March. Logically this move is over-owned and overextended.

The number of offerings and deals is supposed to instill confidence; actually concern is more of note; given that such details as unemployment worsening (not improving in the way the press suggested) in 30 states; and that firms never raising money (KKR is one that comes to mind) are in the process of doing so (let’s see, who is smarter at that point after such an advance; the buyers or the sellers; even if it takes some time to sort out). We could delve into technicals like standard deviation bands converging, or similarities of the RSI to what was seen after (comparison point reserved); plus a few others, but that’s not necessary. We could even observe the VIX (volatility) as it drives to modern-era lows (often preparatory to reversal action), though here it is unlikely to be the classic pop-and-flop pattern because of the institutional ownership.

Generally the financial press is minimizing the stark realities of our time with a single exception, in that (we’ll give credit where due) CNBC finally recognized a developing ‘budgetary crisis’ in one of our major cities; Miami. We warned you about Miami more than once in the last several weeks, and without prior knowledge of investigations by the SEC about corruption and mismanagement of municipal securities there (we’d also warned that certain risks were being built in the muni market, though calmed it a bit by noting how much money could be made by those who bought in Orange Co., California, after that debacle). To wit; we’d be careful (to be revisited in the future).

Furthermore; the Chinese property bubble and interest rate risk is growing as noted; plus Japan’s Q4 GDP grew at an annual 3.8% pace; lower than preliminary reports in the 4.6% range (not insignificant; and mostly pre-Toyota lowered production levels). It should also be noted that there is a ‘naked credit default swap’ crackdown in Europe; a fairly major story that is given short-shrift by the financial newsroom in Washington; oh, I mean New York (not to suggest that they collude on deciding what’s focused on) …as well as further strikes or civil disruptions in Greece which go beyond budget cuts.

Ironically; though we didn’t expect the market to stop just on a dime at ‘double top city’, we will go back ‘on alert’ for a trading-based reversal, due to various factors. Yes we have been suspicious for some time; but allowed for the rally to surmount the 1150 area, especially in the week before Triple Witching. Well, we got that. Now we’ll be more circumspect and commence looking for a complex broadening top of sorts.

Bearishness has abated . . . almost universally; as the market is ‘walked higher’ by a cleverly structured machine that has perpetuated strength beyond common sense, as fundamentals would dictate (and distorted the relevance of excessive PE’s also). Technically, there has been logic for this rebound, as a pre-Triple Witching Expiration firming thought feasible into the middle of last week, and as traders (were) ‘gunning’ for the well-watched S&P 1150 price level.

But it is an environment in which such little details such as ‘lower railcar loadings’ for a host of commodities, and revised ‘higher’ unemployed in 30 states (only 9 higher so that tempers the ‘spin’ on the original report as suspected would be the case), mostly get ignored or soft-pedaled (also typical) so that investors aren’t drawn to focus at all on the reality, and instead focus on the perception of a magnificent recovery. Frankly, my concern, fundamentally and technically, is based on reality. (More in the full text.)

There are sectors we have liked through this, and commodity-related and oil-related areas, as well as some techs, were at the forefront of that preference. From the start of the old move a year ago we liked even the financials and one auto (Ford); but not now. Meaning, holding some is not the same as entering the buy side into strength. I think this is mostly a waiting game and more of an intense battle (as we’ve outlined).

Dubious fundamentals. . . get masked by a ‘comfortable’ market advance, which for now has been able to absorb all contractions in stride. However over time labor pains eventually yield delivery; and for the market that will be a projected reversal. So even as we called for upside last week, by no means have we backed-off from believing the upside is excessive, and increasingly becoming dangerous; let’s be clear on this.

In the very long-run, Americans will realize that neither the Wall Street elites nor the politicians blaming the ‘excesses of free-market capitalism’ understand this era well. Most of them don’t know what ‘free-market capitalism’ is; and it isn’t making a world safe for corporate takeovers, or just shielding liability behind the corporate veil (we’ll all learn more about that during the course of the Lehman investigation and so on).

What has more closely occurred in the last decade or more, were political decisions of a type compelling companies to shift most of their operations overseas. I saw it as a degrading process that in the long-run would be Nationally destructive, as outlined since my consecutive long ago speeches on this, to the American Footwear Assoc. in Boca & Palm Springs; most were patriots but had no choice just to stay in business in a Nation where Government was orchestrating the destruction of their very survival if they tried to make it in the USA…all that was part of the ‘mutually assured economic destruction’ you never hear about, probably intended to prevent a new world war with unintended consequences that leveled the playing field alright; by decimating middle class America, which is what we warned of… sure niches remain; but it’s too limited.

Unfortunately I was proven right, as money printing and leverage substituted for lots of common sense, in an era where for awhile, cheap goods supplanted smart policy. By so doing our leaders squandered much of what the ‘greatest Generation’ fought for and achieved, in and after World War II; by savoring the fruits without worrying a bit about future harvests. My argument was that for a few decades, the US dynamic had opened the door (finally) for the vast middle class, which was the promise for so many years of our great Nation. The challenge is to politically redress the imbalance.

Wealth and innovation build upon themselves (still do where permitted in limited ways in the U.S.; although the impetus has been lost and must be regained; which requires first of all an understanding of how it was lost, and what’s needed to restore it, which is not FCC control of broadband by the way); and it must be implemented by leaders we have now if we’re to see it by 2020-2030; the years in which we are preliminarily targeting a new prosperity for the United States as outlined here since 2007 (clearly at the time we forecast that three years ago, and five years ago for real estate, we’d made clear that our call for an ‘epic debacle’ would fine an equity low much sooner. Moody’s just said it would be at least 2030 before real estate prices recovery to the prior peaks (so soon; why?); curious, but we were first to say it would be 2020-2030.

Stop the insanity I say. Put American interests at least on a par with foreign interests, and recognize that we cannot make progress by politically caving-in to every country, implied threats or not, that uses a mixture of carrot and stick to exploit us (while they call us the exploiters, which we aren’t). Foreign operations (US owned or otherwise), are rarely held accountable for wrongdoing, much less corporate espionage or worse. The ascension of a corporate or Federal culture over that of a middle-class culture, is part of what’s wrong. It needs to be rethought. It is essential to regain social balance.

Domestically what is really dangerous is the oblique risk of another financial shock. In this case not necessarily a hyperinflation the gold bugs drone on about, but simply all the basic unresolved (in some cases hardly addressed) issues. Whether sovereign or state debt; whether commercial real estate; a double dip against the odds proclaimed by those who are convinced we have a rousing recovery, which we don’t actually yet embrace; or something separate; you increasingly have overbought markets that are pumped-up, not only by controlled rebounds, but having used virtually all available or conceivable borrowing sources; the idea of the U.S. almost being blackmailed by the very sources that ‘bailed us out’, is not something to lightly dismiss. Now sure, like I’d said many times; we are in the catbird seat only because we owe so much and our Dollar (for which we rightly called last years decline, base and ensuing rally) is and is going to remain the ‘reserve currency’. Of course many blame us (without intelligent countering by our leaders), and not a serious word about industrial espionage. It is not that we aren’t impressed by what China has accomplished; but let’s get real here.

I have called this a controlled Depression since forecasting the break to occur three years ago; particularly on the ‘never reported’ waivers that allowed comingling of fund transfers across ‘firewalls’ set-up at the major integrated banks. We said that the Fed and Treasury would facilitate systemic stabilization of banks, but not much more. So I regret to inform you that we were and continue correct. It dovetails in that businesses and even municipalities (we know of two) who concurred with our specific expectation back then, circled their wagons, harbored their cash, and properly rode-out the storm.

Conclusion: stabilization efforts notwithstanding; overall recession and deleveraging conditions will prevail (not may prevail) through this year, and probably into next year as well. Intervening rallies in markets will occur (as occurred), of limited sustainabilty. In event other developments unfold that could truly change prospects; we’ll evaluate.

Three years ago I commenced projecting an ‘accident waiting to happen’; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now a market struggles with extended rebounds as this economy tries to restructure.

Though enormous efforts have avoided systemic disaster on the banking front; there is no equivalent rescue of the overall economy besides perception; nor restoration of engines for sustainable growth. People are adjusting to lower expectations; which will never be a favored approach to American life. Actually we don’t see it as permanently alternating the future; but we still have major adjustments to work-through. That’s the reason we warn about chasing rallies; not to mention major ‘commercial’ adjustments as are ongoing. And as I’ve said; there are fairly visible new storm clouds gathering.

Gene Inger,
Publisher
www.ingerletter.com