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Most Americans know precious little about managing money, so when they are deceived into thinking they are artificially more wealthy than they actually are by way of deception disguised as “monetary policy,” they overspend and borrow and get themselves in too much debt. In too deep, they have little in the way of independence; in many cases they are totally dependent on lifestyles they almost can’t stand. In short, even though they are in the land of freedom, they become less free. People have only the time and inclination to form important opinions from sound or “bites” on TV, so they can’t give the necessary critical review to most important issues. When you have worked a full day and have to take care of a family and manage a house, it’s easier to form opinions based on what superficial information served up by those who would manipulate at the drop of a hat for their short term benefit or agenda. Keep it simple. What I’m seeing is a progressive trend toward a US that tells the world loud and clear, “Hooray for me and to heck with you ‘cause I just don’t have the time.” Donald Trump is a modern day hero here. There seems to be a growing feeling that the free market is always optimal. Yet is it? There is a symbiotic relationship between the stock market and most middle class citizens. When the stock market does well, citizens feel wealthy, they favor corporate America, they support policies that also favor corporate America, and they believe and respect the opinions of those who completely favor the “free market” and are opposed to any public assistance to the pubic. They spend in excess, borrow too much, and this is called “economic stimulation.” The typical attitude of many middle class Americans is, ”What’s good for corporate America and the stock market, is good for me. Hey, the stock market and my house are going up in price, aren’t they? America is the land of opportunity, isn’t it? Hey, if you are working in Wal-Mart, it’s your problem! Wal-Mart is a great corporation! Hooray for me, and …” The attitude of most Americans is that the US economy must be thriving because of the bullish stock market. They see and hear this on TV and other media, even though their first hand experience is usually otherwise. Our corporations are given the freest policies in the world and they make the most of it in the view of most Americans. What is good for corporate America is good for America. The general policy trend is for even more freedom in our free market. Mark Haynes, a financial TV personality, jokingly refers to Europeans as “socialists.” The not too subtle message is leave corporate America alone – what’s good for business is good for America, and the success of our stock market confirms his point on a daily basis. (Or so it seems.) There’s no time for critical review. Politicians give speeches full of rhetoric and few if any, facts. It’s the rhetoric that counts though. Government programs may gain or lose public support by their names only. Who in their right mind could take issue with a program called, “No Child Left Behind”? I recently heard a politician explaining why he supported eliminating a government program. What struck me at the time was the name of the program. Just as you couldn’t oppose “no child left behind,” you would have to be an idiot not to want to eliminate this other unfortunately named government program (sorry, I since forgot the program’s exact name.) Right and wrong is based on sound bites without critical review. You can practically sway public opinion with little more than the right sound bite. It is that way in the news as well as financial issues of the day. Without any serious critical review from the public, our media is suffering. Barron’s put out an article on the same day as Warren Buffett’s Annual Report, describing the case for Cisco as a “value stock.” This is the same Cisco that never paid a dividend, and produced only negligible gains in shareholder equity over the last 5 years. In the sound bite loving stock market, the softball article was good for a 5% stock market boost. Given the seemingly full support of shareholders, corporations can manage themselves with the backing (or better yet, apathy) of their shareholders. Managements run amuck with their compensation packages, options grants, and most unethically, manage their companies for the short term to better kite the stock price and unload truckloads of exercised options. Managements provide mid-quarter updates yet don’t provide any long term vision to their shareholders. It doesn’t matter as long as they “beat by a penny.” Managements rarely get called onto the carpet by the financial media until they get to the WorldCom or Enron stage. By that time it’s usually too late. How is the long term stock market judging this short term management behavior? If stock and bond prices were more soberly priced, the public would be more inclined to more soberly consider whether what’s best for corporate America is always best for America. Since the first technology bubble burst, the powers that be in the Fed and on Wall Street have attempted to stimulate the economy entirely on the backs of the American consumer to the short term benefit of corporate insiders selling shares of stock to the public. They did this by creating artificially low interest rates thereby stimulating middle class Americans to purchase energy inefficient vehicles and homes that are too large and also energy inefficient along with a lot of unnecessary chattel. And doing this was easy in a “pro-growth” corporation-loving, freedom-loving US. In short, money made people do things they didn’t want to do. Most US citizens feel they have a high on the hog life style “coming to them.” This macabre “stimulation” policy appears to be failing miserably, and its long term effects and dislocations may be devastating. The average US citizen uses twice the oil of the average socialist…oops, European. So who is more dependent on foreign oil, the US or Europe? How would it have been received by the public if our leaders would have alternatively attempted to “stimulate” the economy by (for example) building and refurbishing libraries, and public transit systems? And how would an attempt at regulating (limiting) large single homes on small lots and 8 cylinder engine vehicles been received in the halls of government and pubic opinion? Are there any US corporations that would have supported such long-term public benefit strategies with managements looking only to their next quarterly report and press release sound bite? These ideas have been (and would be) considered at least “liberal,” if not “socialist” in the public, government, and corporate circles. Besides, such policies do nothing for next quarter's bottom line and few people are looking beyond that. Instead, we take the view that the total unregulated free market is always best even if it requires that the free citizens must waste a gallon of gas to get a quart of milk. (Ok sorry, sound bite, but you get the point.) Of course, the US pro-growth pro-corporation policies must be working well in terms of financial wealth creation, aren’t they? The answer to this question may be too complex to clearly determine from economic statistics because there are too many variables and expert opinions involved. While others have attempted to decipher the stats, the best way to find out the answer to this question is to look to the stock market. In the short term, the stock market makes some pretty severe mistakes, yet in the long run, it always speaks the truth. So are US pro-growth strategies resulting in a pro-growth stock market? Surprisingly not at all! The underperformance of the US stock market is suggesting that the US growth strategy is not working as well as many believe compared to the rest of the world. As the charts below clearly show, after a period of market leadership that lasted from mid 1994 to 1999, followed by a period of neutrality until the first quarter of 2003, the US market is now being outperformed by the rest of the developed world. The distinct trend that was confirmed with a breakout of the blue trendline in early ’04 and has been in place for over 2 years is that the US stock market is lagging world markets. This warrants serious attention.
Examining the recent US market performance relative to other major markets also warrants serious attention. Similar to the charts above, when the trend is heading up, the US Market is the lagging market. Each chart depicts a foreign index divided by the Wilshire 5000, an index which encompasses the entire US stock market. Similar patterns exist if you use the S&P 500 as the US market. As you can see, the US is lagging most major markets in performance over the last year.
In all of these charts except Japan, the pattern suggests a bullish cup with handle pattern. This is an advance followed by a consolidation, and now most of these major markets seem to be breaking out to new high ground. (The Japanese market relative to the US is in a rounded bottom pattern which is also bullish.) An inspection of the technical of these major market charts suggests that outperformance of European and other world markets is something that the US should probably get used to, until the much-intact trend changes. The underperformance of US markets goes largely unnoticed in the media, yet it is likely to become more important in the future. When (and if) the world wide bull market in stocks ends, it is likely that the lagging stock market indices will fall the soonest. This is similar to the principle of evaluating stock industry groups. In a bear market, it is best to follow the strongest stocks because these will be the ones that advance the fastest when the bear market ends. Similarly, when bear markets begin, it is the laggards of the previous bull market that fall the soonest. This suggests that based on recent performance, the US will probably lead the next bear market downward. Are our free market policies working? Based on stock market performance, may be not as well as many people think! Today’s Market The stock market finished little changed with the Dow up 46, the S&P 500 up 2, the Nasdaq down 4, the Russell 2000 down 0.6% the S&P mid-caps little changed, and the Dow transports down 0.5%. Volume was lighter than yesterday’s. In the bond market the weekly job loss statistics were higher than expected – bad for the economy and good for the bond market (and stock market). As a result bonds rallied today, yet this rally did nothing for the interest sensitive homebuilders and home finance companies. Let us not forget the long term direction of the 10-year note by examining the long term chart of its yield. We are now just short of 2-years from the bottoming of the 10-year Treasury note yield bottom while commodities are breaking into new high ground. Typical inter-market relationships suggest that the stock market should be topping soon if it hasn’t done so already. Still, it would be prudent to consider that typical inter-market relationships can be modified by the smoke and mirrors presented by monetary alchemists - not forever though. Yet skyrocketing commodity prices, absurd stock valuations, and higher interest rates do not seem to be a formula for rallies in high P/E stocks such as those in the Nasdaq. Make no mistake; there is a lot of risk in the stock market – especially the US stock market.
That said, although shorting or taking bearish positions is another way to “skin a cat,” there is short term peril there as well. Take Cisco. Here is a stock that appeared to break into new low ground a couple of weeks ago, having almost decisively broken long term support. Was this rewarding to bears taking a short position? Not at all. The stock whipsawed bears, first slowly. For those who hung on to their positions without a tight stop, they suffered further damage on the Barron’s “Cisco, A Value Stock” article. Now that it is above its 50-day moving average, Cisco becomes appealing to another class of “investor.” While I was stopped out of a short position in Cisco (one half in the high 17’s, and the other half after the Barron’s article), I’m well ahead in short positions in Lear (LEA), and General Motors (GM), and ahead in Countrywide (CFC), NVR Homes (NVR), and Corinthian College (COCO). Since it now (seems) possible to make money in the intermediate term by shorting, may be this is telling that the character of the market is changing. However, there is still a lot of peril on the short side as there is a lot of money doing whatever it can to make a short term buck. If that means orchestrating a short squeeze, well then that’s what’s going to happen. I’m keeping my stops in, carefully placed, and tight, and not risking serious capital on any one side of the stock market. Oil was down over 50 cents today and oil stocks were hammered. It’s a bull market and you don’t want to lose your position, as I described 2 weeks ago. Let’s see if the former support, then resistance line becomes a support line once again and thereby supports oil in the low 50’s.
Gold and silver were little changed and the XAU and HUI were down. Head and shoulder measurement suggest we’ll see the dollar at $80, or less soon and this would be good short term for precious metals and precious metals stocks.
Have a great evening. Martin Goldberg
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