OUTLOOK
FOR WEEK OF MAY 28TH
by Stephen Tetreault
May 29, 2007
For what it is worth I'm still seeing some smart money folks selling into strength time and time again; a clear indication of distribution. I believe wholeheartedly that this market is in the process of building a significant market trading exhaustion topping event, similar to the trading tops seen in March and September of last year and during March-April of 2004, and most recently during may of last year. As such please take on LONG positions very carefully at these levels as the risk to being long at these levels is compounding every day we churn upward...I believe that we are days at the days maybe a week or so away from a major stock-market correction....
As I stated last week (and I was unfortunately wrong ) I believe this market is becoming exhausted and this intermediate to longer-term bull rally is in jeopardy yes we could and probably churn a bit higher but the risks to the downside far out weigh the potential limited upside in my opinion!! We have been embroiled in an extraordinary bullish trend, the indexes keep moving upward like the energizer bunny, as they just keep grinding out gains and last week was their first hiccup in a long while....they have churned higher despite negative breath and volume at times, and nevertheless the indexes continue to set fresh relative record highs at least once a week, even though in my opinion this euphoric frenzy is setting the stage for a significant correction, the bulls keep churning higher sending the new-bear-cubs into a frenzy, and many an old grizzly bears have been forced into early hibernation. The markets will face significant tests this week with the host of economic data to be released. We await to see if this bullish market tonality is sustainable whether investors/traders will think that this red-hot momentum rally is fizzling and whether to commit new-money here is still justified, after taking into the recent weak economic data (especially weak GDP), inflation running hotter than expected, and the long duration of this run with-out a correction. The $64,000 question plaguing markets as well as myself is, how much longer can we move higher with deteriorating fundamental and technical conditions. This latest rally phase began on 3/14 and so this leg is well into its 11th week. Thus far the advance has shrugged off conventional technical constraints such as extreme overbought conditions, and diminishing buying volume vs. high selling volume. **We must not rule out the possibility of the end-of-the-month window dressing as we head into June.
I continue to see negative divergences developing everywhere and these signals are flashing Sell-Signals, and as such one would think that I would be net short right here, but I'm not, I believe we are very close to a huge-shorting opportunity, and that my bullish friends should keep their respective stops extremely tight�Despite the possibility of one more push higher that may be in the cards to massaged economic data this week I believe that we will start to take PUT-Positions this week in the major indexes� We saw last week the possibility of a weekly key-reversal being posted as when indexes and especially stocks makes a higher high for the week but then closes lower than the previous week's close that makes for a very-clear bearish key reversal�however I want a tad bit more confirmation as I have been bloodied during the past several weeks heading into the path of this bullish freight-train. I am still a bit skittish and gun-shy of this giddy market folks�as my once reliable indicators signaling that that indexes or individual stock have topped out have not been as reliable as they use to be because of the constant stream of M&A, LBOs and rumor activity, as liquidity is still sloshing around. This past week the tape painted bearish key reversals for the DOW, SPX, Mid-Cap 400, Nasdog, the NYSE and the broad base Wilshire 5000 along with may other key groups and sectors. In other words, the selling pressure was across felt across a broad spectrum of the markets the only index to escape the so-called reversal signal was the Russell-2000. Why do I want to wait for confirmation, well its simple, the volume was lackluster and I have been bleeding from a bunch of paper-cuts of late. I've have written many times before that I believe that we are close to an exhaustion top, only to have been proven wrong several times of late despite the fact that the indexes have climbed so fast that I believe at the first sign of trouble most hedge fund and fund managers will be skittish about their positions; as most have been hanging long for this stellar ride during the past 11-weeks�and now I'm betting that many have their proverbial resting on the sell button and it will not take much for them to trigger the sell-off�historically (yes I know that they say its different this time) the markets are encroaching upon the weakest part of the year (between May and October) and most fund-managers (if they are not blinded by greed) are probably extremely anxious to lock in gains here so that they can come back in towards the latter part of the year to buy them back cheaper�I seriously doubt it (but I have been saying this for 2-weeks now) that most hedge/fund managers want to continue to chase this market higher at these levels
On the flip side�..this merger-mania and liquidity fueled rally could continue this week, so long as the host of economic news especially Friday's payrolls do not come in with disappointing numbers which could act like throwing water on this market-firestorm (if the numbers are better than expected it would be like throwing gasoline on the fire) that has rolled over everything in its path. During the past several weeks I have clearly underestimated the human propensity for greed, a very strong emotion; however I try not to discount the reciprocal emotion called fear (that extinct emotion right now) Simple high school physics taught me that every action has an equal and opposite reaction, (Newton�s laws of motion); so I want you to be aware and prepared for the re-introduction of the fear-principle into the markets in the days/weeks ahead. We have seen that crude and especially unleaded gasoline continues to surge to crippling highs, and now bond yields are also moving up as the 30-year bond yield is starting to drag on valuations, and a close above support at 5.055% would be a huge red flag being waved about ensuing valuation matrixes.
This holiday-shortened four-day work week sure has a strong economic release calendar which is crowded with reports on consumer confidence and the overall pace of economic growth. The biggie will be released on Friday. Economists are now estimating that 130,000 nonfarm payroll jobs were created in May, up from 88,000 in April. Remember when the recent April increase in payrolls came in as the smallest increase in more than two years (but the contagions were quickly ignored). If May shows some improvement, as expected, investors may be encouraged to remain pumping their monies into equities. This week�s price action will be very volatile with a lot of economic releases hitting the tape. Recently M&A along with record share buybacks (however I have seen little if any commitment to share destruction) and stronger-than-expected first-quarter earnings due in part to the falling-greenback and the lack of distinct corporate investing which has helped in large part to sustain this equity rally this spring (are these repeatable events?).
This Tuesday morning after a long weekend, investors will be greeted likely by with some M&A activity along with the report from the Conference Board on its index of consumer confidence; the expectations consensus calls for an increase to 105.0 in May from 104.0 from April; the April number was the lowest since last August, with that month's decline blamed on rising gasoline prices (have we not seen prices for gasoline continue to rise, along with other commodities such as life�s staples food? Later in the week will see revised data on the so-called health of our economy in the first quarter as revised GDP figures will be released on Thursday; after the initial report of growth came in a very mundane annual pace of 1.3%, we have seen that the median estimate for the revision has the growth rate even lower at 0.8%; have we seen the massaging of expectations again here folks? Will the number be a disappointment, or will it come in better then the lowered expectations and as such spark bullishness sentiment again ahead of the jobs-numbers due out on Friday? Please remember that the GDP data includes the core personal consumption expenditures prices index, or core PCE prices index, an inflation gauge that is carefully monitored by the Fed-heads so we will need to keep a keen eye on this component. This could be the piece of data that truly upsets the proverbial applecart as the revised data is not expected to show any change from the initial report of a 2.2%t increase on a year-over-year basis.
So far folks we have seen that excess liquidity in the financial system has continued to keep stocks moving higher despite skeptics like myself who are looking for a significant correction. There is an enormous amount of cash floating about looking for higher returns and with some additional positive news or the lack of any real damaging negative news, it might (key word) just keep flowing into the stock market this week as we head into the close of the month and the start of a new month. In addition to the payrolls report, Friday's calendar includes reports on personal income and consumer spending for April. Personal income is estimated to have increased 0.3% after a rise of 0.7% posted by the pro forma reporting fuzzy-math experts. Spending is expected to rise 0.4%, slightly better than the 0.3% rate posted in March. The ISM survey for May manufacturing activity is also due out on Friday and the ISM report is expected to show a reading of 54.0, down from 54.7 posted last month.
A changed paradigm on the gasoline consumer contagion
As I have written about many times during the past several years; and the contagion matrix bears a revisit as conditions have changed a bit�..Just how expensive is gasoline getting really getting for the average consumer in America�well lets switch paradigms (vantage-points) for a minute folks�lets look at want I will call a "gasoline affordability index," which provides an real-life comparison as to how much gasoline the average American worker can buy for every hour worked when compared over-time; this is an interesting matrix if you thinks about it. According to current stats the average prices at the pump will average about $3.00-3.25 a gallon (I believe gasoline can rise to $4.00 or better this year) this summer which means that according to a very basic and simple math formula we get the following data according to the labor department�s release on 5/15 (LINK)�The average worker will be able to buy only about 4.91 gallons for every hour worked ($589.90 average weekly wage for April 2007 divided by a 40-hour work week equates to approximately $14.75 per hour, now divide that number by a conservative $3.00 average national cost of gasoline per gallon)�now lets do a backward comparison�this figure is down considerable from the figures calculated with 2004�s years data as the average American could afford 8.85 gallons per hour worked last year when gasoline was trending $1.78 a gallon and what is even more dramatic is that back just 7+/-years ago the affordability ratio came in at 14.0 gallons per hour worked when gasoline was averaging $0.94-0.98 a gallon. Well I hope so far that I haven't sent you into a mass-depressive state�but as you can see from the data that the Average-American is working more than 2.85 times the number hours to buy the same quantity of gasoline that they did just over 7-years ago before the big-oil men came into power.
During the past 2-3 weeks, I have repeatedly been getting signals that are indicating that this recent bull-rally (or run away-train) declared the death of the bull market, and I have been dead-pan wrong as the euphoria and giddiness persists at levels I have not seen before�.since my forecast 2+ weeks ago that the market appeared to be topping the indexes have continued to churn higher as bullish momentum has still found the needed fuel (liquidity) such as fed-head interaction, as well as persistent M&A and private equity deals hitting the wires on a daily basis. Most so called economists and market guru�s like Kudlow and Cramer (hypsters extraordinaire the both of them) cry out daily that this is a different kind of rally, and that �this economic and Bull-run cycle is different this time� as this rally and robust economy (I bet most folks are scratching their heads each time they hear those phrases) could last for many years. Unfortunately these are the same numb nuts **along with a host of other perma-bulls anal-heads* who looked for more upside at the March 2000 highs {remember the chants back then that the Dow was heading to 15,000, SPX to 2500 and Nasdog to 7000} and they were also the same flip-floppers who said that there was more selling to take place at the October 2002 lows so forgive me if I sound so darn skeptical as even a broken clock is right twice a day, and their records at forecasting market tops/bottoms is down right pitiful in general.
As I write this report this weekend we are at what I am calling extreme-levels of bullish mania/euphoria {an exhaustion topping scenario} whereas in October of 2002, the selling frenzy reached what is know as capitulation exhaustion. I can remember back in late August early September in 2000 I took a lot of ridicule especially from my perma-bear friends for being bullish, I was a tad early but not very far off of the mark then folks. Now, I am once again accepting mockery, scorn and ridicule for my early (and incorrect) topping call, as I am suffering from being premature-bearish-mentality. It's easier to call a bottom then a top as irrational market-behavior/psychology always over-shoots, and extremes can be violent and over-extended; currently this bull-run/rally and the participants are suffering from a severe dose of no-brainer/no-fear mentality wherein they only see up-side for the indexes and the fear of a pull-back/correction never plays into their decision to keep buying at these over-valued levels.
You all know that I have been bloodied a bit’since I have been consistently charred/singed trying to broadly short these parabolic moves. The markets are embroiled in an arena of absolute-bullishness. They �the bulls� are showing no-fear; Greed and Fear, those usually pesky and extreme motivators, are alive and only the greed-component is selectively active in the minds of investors today. The record level of speculation in many stocks is not just a function of normal greed, but of an attitude expressed by a host of investors I have listened to of late; this current new-generation �Y� of market participants (the young 25-35 year old hedge fund managers) know no fear of the stock market; nor are they showing any respect for the business and stock market cycles. A significant number of investors today, particularly newer ones, are functioning with out their proverbial genes for prudence, caution and risk aversion. A rational investor/trader as I believe I am, can and often does get burned a bit as we tend to underestimate the exuberance of the masses at bottoms/tops, as we fully understand the premise of the markets which dictate the potential for both gains and loss, and as such the total absence of fear never comes into play for us. Hence we tend to underestimate the last 5+/- percent of the bull/bear-moves as our indicators do not catch (as they look at logical and unemotional factors) the extremes in despair/ euphoria which so often creates both the astonishing level of stock prices at lows and tops and the potential for astonishing losses by bulls/bears that refuse to take profits thinking that the trend will remain intact forever.
One of my favorites cartoon�s folks when I was a young man was the Roadrunner which featured the antics of a numb bloodthirsty and very persistent character called Wile E. Coyote who was obsessed with catching the Road Runner. And to the best of my knowledge the poor coyote never succeeded; day in and day out he got burned, crushed, flattened and blown. But his persistence did teach me an interesting lesson of physics that we can apply to markets particularly soaring ones like the current parabolic rocket-booster market we have seen since last October. In every episode, the coyote would invariably pursue his elusive quarry off of a proverbial cliff; and it became clear to the audience that the coyote was headed for a serious fall. The coyote; however, was blissfully unaware of his circumstances as he was oblivious due to his emotional blindness (trying to catch his prey) and it was a riot as he often broke multiple laws of physics (I learnt these lessons later) as the coyote continued to churn his feet, and due to cartoon magic he remained stationary as he was somehow levitating in the same spot, indefinitely free from all harm... until he did one thing; until he looked down and saw his precious state and what lurked below. After looking down, the impossibility (even absurdity) of his current state became extremely clear; and if you remember the cartoon as I do you would remember the shocked look on his puss; he would gulp, usually produce a hastily assembled placard featuring the phrase, oh, no and then fall like a rock into the void below; and sometimes to make matters worse a huge bolder would be following him down to smash him even harder at the bottom.
Well
folks this is exactly what happens at bubble tops I've seen it
before, throughout 1999 to early 2000 when people were paying
150-200P/Es for stocks based on silly ass metrics such as
"eyeballs" and �clicks� and we were told daily that
those high valuations would be easily be worked into as future
earnings would be fabulous and that these were the investing times of
our lives; so that we should buy-buy-buy and the bull-train that we
hopped upon a bull-trained on track to take us to the land of milk and
honey. The sound of the proverbial experts not once sounded any
caution nor did the so called great market guru�s warn the investing
public (their clients) of any forewarning of the perfect-storm looming
in front of this so called train�or were they so darn busy sucking
in the next herd of new-bag-holders�were they out in mass looking
for the next �herd� of sheep; or worse yet were they just plain
stupid and unaware of the perfect bear-market storm that was brewing.
We have seen of late that the global markets have also been in a
proverbial market mode�as just like the Shanghai Composite (SSE
Composite Index), India (BSE SENSEX) the Latin American (IBOVESPA SAO
PAULO) markets and in general the global markets Euro and even our own
have been running off the cliff just like the coyote for quite some
time now. The markets with out any-concern for valuations, and
sensibility continue to hit new highs almost everyday, despite the
economic warning, business cycle earnings and general geopolitical
uncertainty and a few of us conscious investors and traders have been
hearing the warnings as they continue to resound louder everyday
(I'm growing deaf from the thunderous roar). But most investors like
the numb-nut coyote never listen to reason; they are so blinded by
greed they only see the prey (money) they do not see the danger below
(the potential to be a numb-bag-holders like all of those in
1999-2000) Most investors today are far too engrossed in their pursuit
or riches�however they will be forced someday to look down and then
they will gulf very hard as they see the danger awaiting them, but it
could be to darn late for them to react to protect their pent-up
profits�as the proverbial plunge will catch most by surprise and in
denial that the top-is-in and when this unsustainable bubble
breaks�.hopefully the air is expelled gingerly�as if it pops, then
it’s a look out below scenario as the cries from co-called
coyote-investors that just discovered that they ran off a proverbial
cliff break will be a curdling and deafening cry, and those that do
not suffer from short-term memory lose will quickly remember what
happened in March of 2000�.
� The Nasdog fell off the cliff on 3/10/2000 after hitting an intraday high of 5,132, and its first stair step button came after 53-trading days when it posted a near-term bottomed at 3,042 after a whopping drop of 2,090 points in less than 53+/- trading days (can’thappen again right folks these are different times) All it took was a few so called coyote investors who looked down and panicked at the dangers below, then others followed by hitting the sell-buttons then another bunch then another and whoosh, we were in a cascading-water-shed event�the panic associated with fear due to the sickening plunge, was in full swing.
� The SPX fell off the cliff on 3/24/2000 after hitting an intraday high of 1,552.87 (we are close to these levels today), and its first stair step bottom came after 33-trading days (5/10/2000) when it posted a near-term bottomed at 1,375.15 a whopping drop of 177 points in less than 33+/- trading days�.buts its different this time right folks
� The DOW (the first culprit to crack) fell off the cliff on 1/14/2000 after hitting an intraday high of 11,908.50 (we well above those levels today) and its first stair step bottom came after 33-trading days (3/13/2000) when it posted a near-term bottomed at 9,670.07 a whopping drop of 2,238 points in less than 46+/- trading days�.buts its different this time right folks, this could never happed again as we are not in a bubble-mode, as professed on CNBC and the various hyping media bubblevision financial media channels.
The huge wave of bullishness has me very worried folks!!!!
Recently CNBC has been hyping only the bullish-perspective�as they carried stories like that of:
� Vernon Smith, a Nobel laureate economist, is so bullish on stocks that he's put money in small drug companies - investments he ��wouldn�t have touched in the late 1990s.
� Louise Yamada, a longtime Wall Street market analyst (her accuracy is quite questionable) however see was recently quotes in the wall-street journal comparing today's global industrial build-out with the post-World War II boom and sees the current bull market in the continuing to 16,000. The current industrial expansion in Europe, Russia, China (including preparations for the 2008 Summer Olympics), and the developing world compares to the U.S. domestic build-out of roads, bridges and factories from 1942 to 1966.
� Fritz Meyer, who develops investment strategy for AIM Investments, a $149 billion money-management group in Houston, sees stock gains stretching as far as the eye can see as there is so much cheap and easy money being injected into the system. However he doesn't understand inflation as he sees none�what a joke!
A decade-long bull market is a huge rarity folks. Historically, most bull markets have run their course in 40-50 months and as such this one is on its last extended legs. But just seven years after the great bull market of the 1990s came crashing down hard way to many some seasoned investors once again have been lulled into believing that the U.S. market is in the midst of another long period of gains because of global economic strength. Such a blatant disregard for the economic and business cycle, and the lack of domestic investment along with historic levels of deficits gives me a sick feeling folks.
Whenever there is a stock market bull-market that surges in a parabolic mode the hypsters invent New Era stories to justify these nose bleed levels�.this huge profit growth cycle due to the methods employed by chainsaw Al Dunlop, the crumbling greenback {The dollar's sharp decline could also have a damping effect, making investors shift heavily away from U.S. shares toward foreign stocks.} and the huge outsourcing and expense cutting (not demand growth) and rock-bottom interest rates that have supported the rebound in the indexes should soon revert to average historical levels or even worse as most of the gains were built on non-repeatable events.
These past weeks the bullish herd of co called experts credits the Fed-heads proverbial ��soft landing scenario�� their so-called interest-rate policy of slowing growth to a manageable pace while staving off the possibility of a recession. When stocks have dropped of late (May of last year and in February of this year), most experienced investors/traders like myself have been more than a bit surprised by the velocity of their recovery. This adds up to a special time in the stock market's history and that it is very-different this time according to the host of analysts being pranced about on bubblevision these days.
The recent current stock market rally parabolic as it is was built from the crumbling-foundation of one of the worst bear market for the Dow since the 1970s, and the worst for the SPX since the Great Depression; as during the brief 2000-02 bear market, investors fled stocks for gold, and other commodities, along with real estate and bonds. The Dow dropped a whopping 39% the SPX plunged a whopping 49.5% and the Nasdog fell-off the coyote cliff as it dropped a staggering 78%. We have also seen that this liquidity based (carry-trade) rally has strong participation from the foreign markets as well as many have rocketed even more than those of the U.S. since then, with Tokyo up 147% since the SPX bottomed on 10/ 9/ 2002, India up a staggering 392% percent and Shanghai up 268%. It is the overall global strength, and it is these developments suggesting that we are no longer the only strong engine of world growth, that has made many investors so hopeful that it will be different this time and to ignore excesses.
Maybe the limestone foundation of this recent rally is showing signs of cracking�On Wednesday, one of the world's most-respected economists (I do not share this opinion), former Fed-head Chairman Greenspam, said the Chinese market was heading for a "dramatic contraction." His remarks echoed earlier warnings from Chinese officials that a bubble was developing there. If the forecast turns out to be clairvoyant (or self-fulfilling), and the world's largest emerging economy goes into decline, the rest of the emerging market universe would almost certainly be pulled down into the cesspool with it.
I watched that the Russian markets did not react well to the news; as the RTS index dropped 3.8% in the past two days following his comments, bringing the one-month losses on the index to more than 9% (please take note). The recent drop in the Russian markets was enough last week (and this was before the Greenspam comments) to prompt a response from Vladimir Putin, one that he later appeared to retract after the backlash surrounding it as he had suggested at a Cabinet meeting this past Monday that government funds be used to bolster Russia's stock market, essentially calling for the state to manipulate prices. Though he basically backpedaled on his the remarks Thursday by saying blue chips might one day be subject to "careful" support, Putin's suggestions have "a history of being put into practice."
UN-Sustainable DEBT could drown our economy
The household debt service ratio (DSR) is at an all time high of 14.53 this is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt�.we have also seen that overall consumer credit according to the Federal Reserve increased at a continued rate of 4-1/2% in the first quarter of 2007�and in March consumer credit jumped to a high 6.75% or a staggering $2.430 trillion dollars. In my opinion folks this is a very disturbing and alarming trend that has been showing now signs of abating (though it should shortly) and it is a huge contagion to the well-being and economic infrastructure of the average American consumer. Our consumer debt, dwarfs that of any other country, and has all the makings of a mega "bubble" that the stock market grew into during the late 1999-2000. Why I am so concerned folks; well its very simple from my vantage point�.we cannot be the wealthiest country in the world and have all our countrymen be up to their proverbial necks (many now are over their proverbial heads) in a huge overburdening debt load. This unrealistic trend will act as a crippling force that will impact the vast array of consumers in the next economic downturn which I believe is less than 6-14 months away.
As this report indicates the seasonally adjusted levels of our domestic non-financial debt outstanding was a whopping $28.7 trillion at the end of 2006. Household debt came in at 12.8 trillion and non-financial business debt totaled 9 trillion. In my humble opinion we are quickly becoming a so-called "Plastic-Credit Card Nation: and the overall consequences of consumer's addiction to cheap and easy credit (as the average consumer is like a junkie) and the pushers are the usual players (banks, credit card companies, and large retailers along with various other hypsters that promote buy now/pay-later) could be staggering for the economy�the problem can be directly tied into the fact that credit cards have become the new "food stamp program" almost akin to a "lower-class entitlement" rather than an earned privilege. Current government figures show that three out of five families have credit card debt in excess of $25,000. What is alarming is that current consumer debt figures doesn't really accurately reflect the true distress that this huge debt load is placing on various segments of the American population. According to documented statistics "the real cost of borrowing on credit has more than tripled in real terms since the early 1980s.
In the old days, the best customer for credit (either to a bank or credit card company etc.) was someone who could pay off their loan respective loan, that is no longer the case as today the best client of the banking industry is someone who will never pay off their loan�I know that this sounds ridiculous, but its true because the respective client is more likely to incur significantly higher fees for the firms issuing the debt�.to put it in perspective folks the average household consumer debt translated into $2,400 a year in finance charges and fees; and this is just outrageous in my opinion and a looming disaster just waiting to explode. I believe as a direct consequence of our huge and burgeoning debt loads our standard of living will continue to slide on a downward slippery path people will have to work longer; and many multiple jobs and effectively, if this continues the average American will not have enough to retire on and will not be able to retire due to huge debt-loads.
© 2007 Stephen Tetreault
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Stephen Tetreault
T-Waves
Southern Maine, USA
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