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Are We Having a Blowoff?

Posted by Larry Doyle on November 16th, 2009 11:24 AM |

Blowoff“If you can keep your head when all about you are losing theirs…”

Retail sales rebounded strongly this month posing a 1.4% gain. Good news, right? In an attempt to provide a degree of sanity to what has become an extremely volatile report, let’s break this report down a little bit further.

Recall that our automotive sales have bounced around tremendously over the course of the last three months due to the Cash for Clunkers program. Auto sales soared in August given Uncle Sam’s handout. Once Uncle Sam shut that spigot off, auto sales dropped like a stone in September. In October, auto sales had a respectable bounce. All this said, there is no respected economist who doubts that the Cash for Clunkers program pulled demand forward. In the process, it has skewed the overall retail sales readings. What is the American consumer doing away from the auto sector? Let’s navigate. (more…)

November 14, 2009: Month to Date Market Review

Posted by Larry Doyle on November 14th, 2009 7:32 AM |

Do as I say, not as I do. Why? What do I mean?

The markets in general and equities in particular were once again supported by talk rather than actual economic actions. Who was talking? What were they saying? Very simply, communication from G-20 ministers last weekend indicated strong support for ongoing fiscal stimulus. That talk drove the equity markets 2% higher on Monday of this week. On the heels of that, during the midweek we experienced Fed-speak once again indicating a strong likelihood of keeping rates at very low levels for an extended period. Markets immediately reacted by once again ratcheting higher.

I have never been fully inspired by talkers versus doers, but these are unique times . . . so let’s collectively navigate the economic landscape. If you have any questions, please do not hesitate to ask.

ECONOMIC DATA

Economic reports and developments are carrying less and less weight currently. Why? Fed policies are not going to change. That comfort level has solidified the case for those who have sold and continue to sell the U.S. dollar short and use the proceeds to buy risk-based assets, primarily equities. That said, I am compelled to report significant data as I view my mission in helping people navigate the economic landscape, not strictly trade the markets.

Of note this week, the Federal Housing Administration is likely in need of an imminent bailout from Uncle Sam as defaults on FHA-insured loans show no signs of diminishing. This potential bailout has been discounted by FHA officials ad nauseam. They have no credibility.

The University of Michigan Survey of  Consumer Confidence plummeted to a level of 66% from 70. Consensus opinion had this survey bouncing back toward 72%. With no legitimate bounce or improvement in the housing or labor markets, I do not know why the survey would improve.

Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis: (more…)

“Nobody Has Ever Seen This Market”

Posted by Larry Doyle on November 12th, 2009 8:22 AM |

“I’ve seen this market before” is a very commonly used phrase by Wall Street professionals to compare and contrast different periods.

For example, when the Treasury yield curve is steepening or flattening, many market pros will project what will happen in different segments of the market based on discounting cash flows under the steepening or flattening scenario. Similarly, when credit spreads are in a widening or tightening trend, market pros will project how higher or lower rated investments will typically behave.

These projections are all based upon prior experience. The pros are utilizing a combination of market fundamentals along with investor sentiment to make forecasts. They will overlay their current forecasts against similar trends during prior cycles. Not that markets are ever perfectly symmetrical, but ‘having seen a market before’ is often a strong indicator of current and future price action.

Against this backdrop and given the challenging nature of the current market price action, I would challenge any market analyst or pundit who would utilize a similar approach today.

The simple fact is, ‘nobody has ever seen this market before.’ Why? Because this market has never transpired previously. Certainly, we have seen bull markets. We have seen low interest rate markets. We have seen accomodative Fed policy. We have seen bubbles. All that said, we have never seen a market in which global cross currents combined with ongoing fiscal stimulus have impacted markets to this extent.

In fact, I think one could make the case that the market is doing better as large parts of our domestic economy and the global economy are actually doing worse. While traditional schools of thought would view that correlation as perverse, the economic strains are compelling global governments to keep stimulus programs in place.

What is the result? A rallying market with increasing potential that the market develops into a blowoff. The irrationally positive nature of a blowoff is akin to a wholesale dumping of securities in a selloff.

Keep your head and stick to disciplined investing. Respect the price action, but do not get overly enamored with those analysts telling you what will happen . . . because ‘nobody has ever seen this market.’

LD






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