Saturday, March 27, 2010

How to Recognize When the Stock Rally Has Run Its Course

from Doug Kass:
A few weeks prior to the markets hitting a generational low a year ago, I created a watch list that enabled me to better gauge the bottom.
Now, nearly 13 months later and with the S&P 500 almost 500 points higher, it is time to focus on a new checklist of some potential adverse developments that could contribute to a market top and a reversal of investors' good fortunes since March 2009.

  1. Interest Rates: The yield on the 10-year U.S. note might climb to over 4% (now at 3.85%). A 4.00% to 4.25% yield would likely provide a tipping point for increased competition to equities and produce an interest (mortgage) rate headwind to the nascent housing recovery at a time when stock dividend yields have nearly halved and when a large phantom inventory of unsold homes is about to begin to enter the residential for-sale market.
  2. Jobs / Economy: A more sluggish-than-expected expansion in new jobs and the weight of higher taxes in 2011 might translate to a downturn in consumer confidence, reduced business fixed investment and a more shallow domestic economic recovery in the second half of this year.
  3. Retail: Cautious forward comp guidance in retail could reverse the February-March strength.
  4. Europe: There could be growing signs of weakness in the European economies.
  5. Credit: Over there, we might witness evidence of more sovereign (Spain?) crises, and, over here, we could see more U.S. municipal -- the universe is large! -- financial woes. Forced austerity measures would likely produce lower growth.
  6. Credit (Part Deux): Credit spreads might widen.
  7. Geopolitical: We could see a possible rise in geopolitical tensions or even another terrorist act on our shore.
  8. Monetary Policy: We might have a less dovish Fed in words (jawboning) and in action (through an increase in the federal funds rate).
  9. Tightening Abroad: It is likely that central banks around the world will begin to clench their monetary fist, especially in China.
  10. Protectionism, Trade and Currency Wars: Things might get ugly, especially on the U.S. / China front.
  11. Housing: A renewed leg down in home prices is possible as the spring selling season could fail to appear. (It hasn't gotten off to a great start.)
  12. Sentiment: We could witness the birth of a 5x to 10x levered bullish ETF, a burst in bullish investor sentiment, an expansion in hedge fund net long positions, a further drawdown in mutual fund cash positions, a meaningful increase in retail mutual fund equity inflows and massive outflows out of Rydex bear funds.
  13. Technical: Stocks could fail to respond to good news, suggesting that the sharp corporate profit recovery has been baked into prices. A breakdown in financials and/or transports could occur. Overseas markets might fail to make new highs, or we could see a further contraction in NYSE / Nasdaq exchange volume.
  14. Deflation: Industrial commodity prices could weaken.
  15. Speculation: We might see an increasingly speculative market for low-price issues.
  16. Underwritings: The emergence of a record syndicate calendar is possible.
  17. Wall Street: A substantial increase in Wall Street industry hirings could be announced.
  18. Dr. Doom vs. the Sunshine Boys: Dr. Nouriel Roubini could see green shoots, causing bullish strategists and money managers to demonstrate even more swagger. Reminiscent of late 1998, a sell-side analyst (perhaps the new Henry Blodgett) might raise his 12-month Apple (AAPL) price target to $375 a share, leading another analyst to top that target and move to $400 a share a week later.
  19. The Media: CNBC could throw another celebratory party. Time magazine might declare the death of the bear market on its cover or run a cover story offering a new bullish economic and/or stock market paradigm. Sir Larry Kudlow could have trouble finding a single bear to appear on CNBC's "The Kudlow Report." Record ratings might induce the management of CNBC to expand "Squawk Box" from three hours to four hours (6:00 a.m. to 10:00 a.m.) and add an additional anchor to join Joe, Becky and Carl.
  20. Dougie: Maybe I turn bullish.
 I could add a few, but don't have much time to do so. He didn't mention commercial real estate, public sector pension funds, falling demand for U.S. government debt, a second wave of mortgage/housing collapse, or bubble-like behavior. One bubble behavior is that when bad economic news is released, the stock market still moves higher!

Friday, March 26, 2010

U.S. Debt to Rise to 90% GDP

from Washington Times:
President Obama's fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation's economic output by 2020, the Congressional Budget Office reported Thursday.
In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president's budget would generate a combined $9.75 trillion in deficits over the next decade.
"An additional $1.2 trillion in debt dumped on [GDP] to our children makes a huge difference," said Brian Riedl, a budget analyst at the conservative Heritage Foundation. "That represents an additional debt of $10,000 per household above and beyond the federal debt they are already carrying."
The federal public debt, which was $6.3 trillion ($56,000 per household) when Mr. Obama entered office amid an economic crisis, totals $8.2 trillion ($72,000 per household) today, and it's headed toward $20.3 trillion (more than $170,000 per household) in 2020, according to CBO's deficit estimates.
That figure would equal 90 percent of the estimated gross domestic product in 2020, up from 40 percent at the end of fiscal 2008. By comparison, America's debt-to-GDP ratio peaked at 109 percent at the end of World War II, while the ratio for economically troubled Greece hit 115 percent last year.
"That level of debt is extremely problematic, particularly given the upward debt path beyond the 10-year budget window," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget.
For countries with debt-to-GDP ratios "above 90 percent, median growth rates fall by 1 percent, and average growth falls considerably more," according to a recent research paper by economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland.
CBO projected the 2011 deficit will be $1.34 trillion, not much different from the administration's estimate of $1.27 trillion. However, CBO's estimate of the 2020 deficit at $1.25 trillion significantly exceeds the administration's $1 trillion estimate.

Personal Incomes Falling

from WSJ:
Personal income in 42 states fell in 2009, the Commerce Department said Thursday.
Nevada's 4.8% plunge was the steepest, as construction and tourism industries took a beating. Also hit hard: Wyoming, where incomes fell 3.9%.
Incomes stayed flat in two states and rose in six and the District of Columbia. West Virginia had the best showing with a 2.1% increase. In Maine, Kentucky and Hawaii, increased government benefits, such as unemployment insurance and Social Security, offset drops in earnings and property values.
Nationally, personal income from wages, dividends, rent, retirement plans and government benefits declined 1.7% last year, unadjusted for inflation. One bright spot: As the economy recovered, personal income was up in all 50 states in the fourth quarter compared with the third. Connecticut, again, had the highest per capita income of the 50 states at $54,397 in 2009. Mississippi ranked lowest at $30,103.

But the Down closed higher by a hair!

Natural Gas Drops Through $4 Support Level

Thursday, March 25, 2010

Stocks Reverse, Dow Industrials Give Up 120 Point Gain

The Dow reversed from a 120-point gain, and the S&P 500 closed down. Bernanke set off the rally with a statement indicating the he would continue to artificially suppress interest rates.

Bond Rates Rising Rapidly On Sparse Demand

from AP:

WEAK DEMAND: Interest rates climbed in the bond market Thursday after a government debt auction drew tepid demand. Auctions Tuesday and Wednesday also saw lower demand.
NOT THAT INTERESTED: The auction of $32 billion in seven-year notes saw demand fall from the past two months. That means the government could have to start offering higher interest rates to attract buyers.
BERNANKE SAYS: Testimony from Federal Reserve Chairman Ben Bernanke affirmed the government's pledge to keep interest rates near zero for an extended period.

Wednesday, March 24, 2010

Fresh Worries Boil Over Future of EU

The Dollar is rising powerfully and the Euro is taking a being

Treasury Auction Trauma

That was one ugly auction. More worries of sovereign debt default in Europe. Both Greece and Portugal are in trouble now! The bond vigilantes are back in force today!

Tuesday, March 23, 2010

Wheat Reaches Multi-Year Lows, Corn Reaches 2010 Lows

Home Sales Continue to Sink... But Stocks Rise Anyway!

WASHINGTON (AP) -- Sales of existing homes fell for a third straight month in February, pushing sales down to the lowest level since last July. There is concern the fragile housing rebound is faltering, making it harder for the overall economy to recover.
The National Association of Realtors said Tuesday that sales of previously occupied homes dropped 0.6 percent in February to a seasonally adjusted annual rate of 5.02 million.
The weakness in sales depressed prices with the median home price dropping almost 2 percent from a year ago to $165,100.