An Update From Dr. Weiss

Anyone who is familiar with this site, knows that I am a big advocate of Martin Weiss, whom I believe is accurate in evaluating the effects of our current fiscal practices. As we know, last week was a pretty critical meeting with Fed Chairman Ben Bernanke and congress. Since then, we have seen the market rally almost 500 points, which once again shows that investors are not picking up on the signs. Dr. Weiss outlines some of these critical signs and gives real, practical reasons why we should be a bit skeptical when feeling that we are out of the recession:


Martin D. Weiss, Ph.D.

In his testimony before Congress last week, Ben Bernanke lifted the Fed’s skirt and gave us a glimpse of the disasters now sweeping through the U.S. economy.

But there are four bombshells he did NOT talk about:

FIRST and foremost, what’s CAUSING the economy to sink? The stock market has not yet crashed. Interest rates have not yet surged. Gasoline prices have not skyrocketed. There has been no recent debt collapse, market shock, or terrorist attack.

So what is the invisible force that’s suddenly gutting the housing market, driving consumer confidence into a sinkhole, and killing the recovery that Washington was so avidly touting just a few months ago?

Bernanke won’t say. But the answer is clear: The recovery had very little substance to begin with. Rather, it was, in essence, a mirage — a dead cat bounce bought and paid for by Washington’s massive bailouts, stimulus programs, and money printing.

Put another way, the recession never really ended. Yes, we saw some growth in GDP. And yes, thanks to that growth, some companies are still reporting better earnings — the news that spurred a rally in the stock market last week. But at the core of the economy, the fires that started the recession are still burning intensely.

SECOND, Bernanke failed to point how that …

The U.S. Housing Market Is Now LOCKED Into a Chronic, Long-Term Depression

Houseing sector resumes worst collapse in U.S. history!

Housing starts — the most important measure of the housing industry — is still a disaster zone.

Beginning in January 2006, they suffered their worst plunge in recorded history — from an annual rate of 2.3 million to a meager 477,000 in April 2009. Thus …

In just three years, 79 percent of America’s largest industry, impacting more Americans than any other, was wiped away.

Then, despite a series of government agency programs to shore up the industry … plus $1.25 trillion poured in by the Fed to buy up mortgage-backed securities … plus a big tax credit for new homebuyers, housing starts perked up ever so slightly: They recovered to an annual rate of 612,000 in January of this year.

But this recovery was so small, it retraced just 7.5 percent of the prior fall. In other words,

Even after massive government efforts, and even at the highest point in their recovery this year, the housing industry recouped less than one-tenth of its historic three-year bust from 2006 to 2009.

Worse, the housing industry has now resumed its decline.

The most alarming factor: Widespread “strategic defaults” on home mortgages.

These are defaults by homeowners who can afford to meet their monthly mortgage payments, but have deliberately decided to stop paying.

They realize their home is worth less than they owe on the mortgage — transforming it into a dead asset they’re willing to give up. They know their bank, already overwhelmed with foreclosures, won’t get around to evicting them for as long as two years, allowing them to live in the house cost-free. They also know this tactic can give them tens of thousands of dollars in extra cash. So they’re defaulting en masse and getting away with it.

End result:

  • New supplies of foreclosed homes hitting the market as far as the eye can see …
  • Bankers who would rather cut their wrists than finance new homes, and …
  • A new slump in housing that’s worse than even some pessimists were expecting.

THIRD, despite his now-famous quote that this is “the worst labor market since the Great Depression,” Bernanke failed to reveal that …

Official Government Data GROSSLY Understates the Magnitude of Unemployment

Long-term joblessness worst ever recorded!

Bernanke did not mention that the percentage of long-term unemployed in America is the worst it’s been since the government began keeping records in 1948. Two facts:

Fact #1: A record 4.39 percent of the work force — or 46.2 percent of the unemployed — have been out of work for 27 weeks or more. That’s DOUBLE the worst level ever recorded and TRIPLE the peak level seen in five of the past six recessions.

Fact #2: On average, America’s unemployed have been out of work for 35.2 weeks, also the highest on record.

Bernanke did not remind Congress that, based on the government’s own broad measure, the true unemployment rate in the U.S. is not 9.5 percent. It’s 16.5 percent — or seven full percentage points more than the figure Mr. Bernanke likes to refer to.

This broader measure includes workers seeking full-time employment, but temporarily settling for lower paying part-time jobs. Plus, it’s supposed to also include “discouraged workers” — those who have given up looking for work because there are no jobs to be found.

Nor did Bernanke confess that, during the Clinton administration, discouraged workers were “redefined” to EXCLUDE those who had been out of work for more than a year — and that definition continues to be used to this day.

That makes absolutely no sense. If they’re out of work for a year, they’re discouraged. But as soon as they’re out of work for a year and one day, it’s suddenly assumed they’re happily going about their life?!

Thus, precisely when economists now recognize that one of the biggest challenges of this Great Recession is long-term unemployment … the Obama administration, both parties in Congress, and all U.S. government agencies continue to exclude the longest term unemployed from every single one of their unemployment statistics.

This could go down in history as one of the greatest deceptions about the true state of U.S. labor markets. And according to John Williams of Shadow Government Statistics, it’s big:

When you add these long-term discouraged workers back into the jobless count, you find that the real unemployment rate in the U.S. is actually 21.6 percent!

FOURTH, Bernanke failed to point out that all this is happening despite …

The Biggest Government Interventions of ALL TIME!

The full scope of the government’s interventions is now official:

In its July 21 Quarterly Report to Congress, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) tabulates the government’s bailouts, stimulus programs, and money printing escapades since the debt crisis struck in 2007, as follows:

Incremental Financial System Support

According to SIGTARP, at mid-year 2010,

  • The Fed has pumped in $1.7 trillion through its massive purchases of mortgage bonds, Treasury bonds, and agency bonds.
  • The FDIC has thrown another $300 billion into the pot, shutting down over 100 banks so far this year.
  • The Treasury has pumped in a net of $300 billion in TARP money (even after paybacks), plus another $500 billion in money outside of the TARP program.
  • Plus, several other government agencies have chipped in another $800 billion.

These official numbers are actually LARGER than we were estimating. We had the total pegged at $3.5 trillion (not billion), including the 2009 stimulus package.

SIGTARP has it at $3.7 trillion, excluding the stimulus but including a myriad other rescue programs — by the Federal Housing Finance Agency (FHFA), the National Credit Union Administration (NCUA), the Government National Mortgage Association (GNMA), the Federal Housing Administration (FHA), and the Veterans Affair (VA).

But no matter how you count it, some outstanding facts are absolutely self-evident:

FACT: The enormous magnitude of the government’s intervention FAR surpasses anything ever witnessed in the history of humankind.

FACT: It’s not working! Housing is still collapsed. Long-term unemployment is the worst ever recorded. And the recovery, already anemic, is aborting prematurely.

FACT: Most important, it’s winding down! Through mid-2009, the government intervention programs tabulated by SIGTARP were being ramped up at a furious pace — a total of $3 trillion overall.

So over the 12-month period from mid-2008 through mid-2009, we estimate they were running at the average monthly pace of about $160 billion.

But since mid-2009, they have been far slower, running at an average monthly pace of only $58 billion, or just one-third the prior level.

And right now, the pace of new funds injected into the economy through these government rescues are merely a trickle compared to their earlier rate:

  • No new stimulus is in the works.
  • No new TARP funds are forthcoming.
  • The Fed has wrapped up its bond buying splurge.
  • And the ONLY significant continuing programs are for housing — the one area where the government has admittedly seen the WORST overall results, according to SIGTARP.

Bottom line:

If you were counting on the government to prevent the second major leg in this great double-dip recession, don’t hold your breath. To the contrary, the primary CAUSE of the second dip is the government’s conspicuous absence from sectors where it was, until now, the biggest mover, shaker, buyer, and financier.

Your ACTION

With this rapidly shifting quicksand, you must NOT be lured by Wall Street’s siren songs. You must not get trapped again in vulnerable stocks, mutual funds, or ETFs. Instead …

  1. Greatly reduce your exposure to stocks, especially in sectors tied to housing, such as construction, home improvement, consumer appliances, and mortgage finance.
  2. Move the proceeds to cash and cash equivalent, regardless of low yields.

Good luck and God bless!

Martin

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"Unusually Uncertain Economy" -Bernanke

Bernanke economic updateFed Chairman Ben Bernanke graced us with his presence on Wednesday as Big Ben gave a formal economic update to the senate. Wall Street was not very pleased.

After opening the day in the green, just shortly after Bernanke's opening remarks, the Dow sold off quickly into the red over 140 points. It remained down under 100 for the remainder of the day.

So what caused the negative response. Well, quite a few things. First of all, investors are getting more and more impatient with the recovery. Here we are, well over a year into the so called "recovery" and we have seen just minor blips in the economy. Keep in mind, this is after enormous amounts of government spending as well as record setting Fed policies that are in place to help the consumer. With all of this, we have only seen a slight improvement and from how Bernanke sounded today, he does not see it getting much better anytime soon.

Bernanke said that the current economy is in a very "fragile state" and that plans are in motion by The Fed to take action if conditions worsened. He says that although we've seen in slight rebound in unemployment, now at 9.5%, he expects that rate to slow and remain above 9% for the rest of the year. Consumers did not like that.

In addition to that, he said that the housing market continues to be in a weakened state due to mass amounts of distressed and foreclosed inventory that is weighing on home values. Thus consumers will continue to be forced to tighten consumer spending, which will effect the overall economy. This is the devastating domino effect I discussed way back last year.

Bernanke said that inflation was not a current concern at the moment, which is pretty obvious, but he failed to address the issue of deflation, which would seem to be the more imminent beast at the moment. Despite many economists dismissing the idea of deflation, many Fed officials are quite worried about it. Also, when you look at fundamental data, deflation becomes a huge concern. It may have been a wise choice for Ben to dodge that subject.

At either rate, I expect this news to weight pretty heavily with investors. I expect overall momentum to remain down for the next week, which should provide a good short trading environment for the time being. I will be making some trades early tomorrow. Happy Trading.

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New S&P Technicals

S&P TrendsMarkets have had quite the rebound this week, being up over 4% just this week. Technicals and new key resistance points are moving with the market and we are beginning to see some interesting charts.

Intel helped markets rise by a very favorable earnings report, which I believe will set the mood for much of tech. Many analysts were pessimistic about Intel's performance, but they proved many wrong. So what will this entail for Apple when they report. Let's just say I think they are going to have a very good month.

Yum brand's stock fell today due to weak guidance and disappointing earnings for the fast food giant. They do say that they are beginning to see recovery in the US and that they see great revenue growth potential internationally in some of their new emerging markets, like China. However, the public was sold as their stock closed down.

Key S&P technicals are being formed as you can see from the rooftop chart above. New crucial technical points are a break at 1103. Even strong would be a break at 1129, which would most likely quickly put bears back into hibernation. We will see if investors are able to crack these new thresholds. If so, watch out. Happy Trading. (Chart from slopeofhope.com)

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A Flat Monday

dollar indexNot a lot of movements in markets today, which is typical as we get deeper into July and more and more go on vacation. There are some definite take aways though. The dollar index is making some big technical moves which could bode well for investing. Check out INO's latest video showing the movement of the dollar index and how there are some trading opportunities up and coming! See Free Video Here.

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Earnings Are Key - Signs to Returning Bear Market

retail earnings seasonThe market has had two consecutive days of pretty strong rallying, which has to make bulls feel a bit better at this point. However, it continues to hit resistance at strong technical levels and is having a hard time staying above 10,000. Just as any stale mate in the markets is, earnings seems to always be the key for the next momentum. Last quarter, it was earnings that bolstered up the already rallying markets. It may be harder this time around, has it will be hard to beat 1st quarter numbers. So we will see.

Claus Vogt, from Money and Markets, gave a great update of why bear market scenario looks optimal right now. For those that read technicals, it makes a lot of sense:

The stock market’s rise since the March 2009 lows was nothing more than a bear market rally. Yes, it was a huge rally, but not out of the realm of similar historical examples.

Low trading volume, still high valuations and lingering economic problems — especially within the real estate sector and the banking system — have been strong arguments for my outlook. And the history of burst real estate bubbles could serve as a blueprint for our current dilemma.

I’ve never departed from that assessment of what was going on …

In fact, over the past months I’ve regularly predicted that the March lows would finally be broken and the stock market’s valuation would decline. What’s more, they would go all the way down to levels seen at historical secular lows and hit single digit price/earnings ratios.

Now it looks as if the bear market rally is over and the next cyclical bear market has begun. I say that because my cyclical stock market model has given me …

Five Bearish Signs

Sign #1— Valuations never fell Valuation metrics never fell to undervalued levels. But they quickly rose to overvalued again, as soon as the stock market recouped a good part of its losses.

Sign #2— Money dried up The liquidity indicators turned outright bearish. Not just in the U.S., but globally, too. These indicators are especially important during this cycle, because the rally since March 2009 was mainly liquidity driven.

It was simply a reaction to monetary and fiscal stimulus never heard of before, aside from during war times. And with liquidity drying up the uptrend was on rented time.

Sign #3— Excessive optimism Sentiment indicators reached levels indicating high complacency and even extreme optimism. Some put/call ratios fell as low as during the heights of the 2000 stock market bubble.

And the cash level of mutual funds fell to a record low. Lower than in March 2000, and lower than during the summer of 2007, the two former record lows. Both marked excellent times to get out of the stock market.

Sign #4— LEI fell

The Economic Cycle Research Institute’s Leading Economic Index fell below the zero line in early June. This leading economic indicator (LEI) for the U.S. economy came in at minus 7.7 percent. If history is our guide, this reading is a clear recession warning.

Until recently the only component for my model that wasn’t bearish was the technical situation of the stock market. Typically, important turning points are accompanied by negative divergences in market breadth indicators, such as the advance/decline line or the number of stocks making 52-week highs.

But that changed last week when …

Sign #5— The technical picture turned the corner

The technical component of my cyclical stock market model turned bearish on June 30. Have a look at the S&P 500 chart below to see what I’m talking about.

SP 500 Chart
Source: Bloomberg

The market’s behavior since October 2009 looks like a well formed topping formation. Its lower boundary or neckline is the 1,040-1,050 area. The shape of the formation is a head and shoulders top, with the right shoulder having formed in June, accompanied by low volume, as it should be.

Then last Wednesday, the S&P 500 broke below this neckline. In doing so the topping pattern was finished with a clear technical sell signal.

This sell signal gets additional strength from the much oversold condition the market was in before last week’s breakdown took place, which is a sign of remarkable weakness. Normally a market as oversold as this one at least experiences a short-term bounce.

But that’s not all …

There is another strong technical argument signaling the end of the bear market rally and the beginning of a new cyclical bear market.

The upward trend of 200-day moving average of the S&P 500 has started to level off, also shown in the above chart. This moving average is a slow moving trend-following indicator. It won’t help you pick market tops or bottoms. But you can use it as a good sign post to tell you whether the cyclical trend is up or down.

And the 200-day moving average is not only a good indicator of the S&P 500 and most other major U.S. indexes, but also for the EuroStoxx 50 and the Nikkei 225 as shown in the two charts below.

Euro Stoxx 50 Index Chart
Source: Bloomberg

Nikkei 225 Index Chart
Source: Bloomberg

Indeed, this adds fuel to the overall bearish message.

It’s Time to Get Out of the Stock Market

The evidence that a new bear market has begun is compelling. And I believe this downturn can easily last until 2012 with prices going much lower than in 2008.

In my opinion, the prudent thing to do now is to consider selling.

Best wishes,

Claus

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BP - Forgive & Forget?

BP stock price I said last week that soon we would see an opportunity to re-enter BP as the stock has taken a huge beating throughout the oil spill clean up fiasco in the Gulf. Well, today, we saw it jump nearly 9%, as they announced that they are a week ahead of schedule in their clean up efforts. In my opinion, for the most part, BP has endured and absorbed most of the bad media from the spill. I see nothing but upside for them at this point of time, and that was reflected in their stock price today. At the end of the day, they are still a massive oil company. Let alone they are at risk of a buyout at this point as well. BP may bounce around as the clean up continues to go on, but I see a lot of upside from this time forward.


Trading was mixed throughout the day today, as news continues to come in both good and bad. Many feel that retailers are having a good month, however, home prices are coming in sluggish. We are also entering in an interesting time of the season. Historically, retail sales tend to be down for the next couple months until back to school and energy prices tend to tick down due to weather. Considering the recent resistance we've seen in markets, this may not bode well for Wall Street.


UNG has been on my radar as an overnight play. Lately, it has consistently trended as a day trading play, by starting high at early morning, only to close much lower. As this trend continues, I plan to play it rather aggressively as to take advantage of some of those short term gains.


Technically, this market is on the verge of selling, however, we know that technicals have been lying as of late. I still like to stay on their side. There are a lot more reasons to go short in this market than to go long, and I expect to see us well under 10,000 for quite a while. Happy Trading.

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Tomorrow's Employment Number Big Factor

unemployment ratesNerves are beginning to rise as the largely anticipated employment prepares to hit headlines tomorrow. Many economists are expecting a increase in the unemployment rate, which would be a tough blow after the strong numbers that came in May. For many analysts, a bad enough number tomorrow will be enough to convince them that indeed a "double dip" recession is at hand. Manufacturing and home sales already support the notion. The only thing missing is employment.

If the number does pan out to be negative, expect a violent reaction from investors, especially going into the weekend. Regardless, even if we do open up strong in the green from a positive report, I still expect the market to trail down by close, especially the last 20 minutes, so be on the lookout.

One element that has me divided about the number tomorrow is what we saw today. Many are privy to early viewing of this employment number, which is why we see negative results many time factored in the day before. Today's just slight down day is slightly leading me to believe that the number may not be as bad as many are fearing. So tomorrow will definitely be exciting regardless.

Despite having mortgage rates at record lows, home sales are struggling. With this being the case, we have to remember that we are in the peak season as well for home sales. I can't help but think that when the fall and winter months come, we shall see one big tidal waves of foreclosures come, which will directly effect prices. As of now, the bear in me is definitely making much more noise than the bull. Happy Trading.

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