SmartStocks - Page 6

According to the BIS (Bank of International Settlements), worldwide exposure to Portugal, Spain, Greece and Ireland is, get this, $2.6T as of Q1 2010. Every single major bank increased their exposure in these countries by about $109B or 4.3% in Q1 of 2010.

The biggest inflows we saw went into Greece, with a 54% increase in credit commitments. In retrospect, Portugal and Spain saw a 1.5% increase in net inflows, mainly due to the fact that banks increased their exposure to 'residents of that country' (i.e. banks increased their exposure in capital investment in those countries). Having that said, it is no wonder why central banks around the world are engaging in fierce money printing schemes; they (the central banks) want (and need) these inefficient (and dare I say insolvent) markets to continue to operate (or function) under the current system at all costs. Failure to sustain these countries has an obvious side effect - a potential 'domino effect' that could prove to be as corrosive (if not more damaging) that we saw unravel in late 2008.

The question that has to be asked going forward is, how further can central banks continue to sustain these countries (and banks)? At what point do people begin to raise the question of insolvency (the real problem at hand) and stop focusing on continuing to propagate these bloated markets?
Could we possibly be in for another meltdown in 5 years or less? Or are we out of the woods for the foreseeable future?

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An interesting dynamic took place yesterday that investors should be aware of; despite the U.S dollar gaining strength against all major currencies, the only major currency that the U.S Dollar lost ground to was the Japanese Yen. This means that the majority of investors were buying U.S dollars and selling other currencies (namely Euros, British Pounds, Aussie Dollars, etc), yet we saw a group of investors sell U.S dollars and buy Japanese Yens instead. In seeing this, one has to ask oneself, why is it that the U.S dollar lost ground against the Yen (the most sought our currency during a sharp market decline), in a day were risky investments such as stocks got clobbered? The answer is far less subtle than it seems. Remember what the Fed hopes to accomplish with this second round of quantitative easing (Hint: It has to do with the import/export market); the Fed is trying to do everything it can to revive the manufacturing sector (or export market) in the U.S. One way of doing it is by keeping (really manipulating) the U.S dollar low (lower). The most effective way of doing this is by keeping rates (or the cost of money) relatively low, to help boost sales (or profits) aboard. The problem the Fed faces by doing this is twofold - a) by just debasing the value of the U.S dollar, it does not guarantee a boost in exports. Why? Because people from other countries, although richer (if based on the appreciation of the currency alone) will have no incentive whatsoever to buy a product from the U.S because it is still economically cheaper for them to go out and buy the same product from a country like China or Mexico. Now the Fed obviously does not want (nor does it expect) the U.S to become the export market center of the world, it simply wants to create a small boost in exports to help revive domestic consumption (by essentially attracting investment into the United States). However, even if the Fed goal is to create a blip in the export market, a small boost in exports will not do a single thing to revive consumption in the United States because the problem is not making good or services cheap (or affordable or more attractive for consumers and foreigners), the problem is people simply cannot (and will not) demand the good or service (no matter how cheap you make it) because they don’t have the capital to buy it (all of this was due to the wealth transfer that took place between 2007 – 2009 which left the ordinary man without a dime); b) The Fed isn’t solving the issue at hand which is insolvency (or letting creditors assume appropriate losses). This means that no matter how low you debase the dollar, until creditors who made bad decisions are allowed to fail (and these includes the biggest banks in the world), nothing meaningful will ever change and the problem will simply continue to re-appear, just in a different form (we already saw this happen in the last two years - we’ve seen company bankruptcies morph into sovereign defaults!).

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For viewing purposes, I have included 6-month chart of the S&P 500/Yen relation below.


6-month chart of the S&P 500 vs. the YCL (ProShares Ultra Yen)

Recent discussions have been mostly centered on the European fiasco. Much attention has been placed on the growing debt burdens that these European countries carry. However as it stands now, Greece and Ireland are the only two countries, for the exception of Japan, that have a higher debt burden (that is increasing) in the entire world as a percentage (%) of GDP than the United States. Expectations are for U.S debt to reach but not exceed 99% of U.S GDP by 2011, implying that every new dollar created starting in 2011 will have a diminishing marginal effect on GDP, were essentially the marginal cost of each dollar created outweighs the marginal benefit of each new dollar created thereby suppressing growth. In the grand scheme of things, what does this mean? It means going forward we ought to be more worried about the Unites States debt problem than the European debt problem. Why? Because unlike Europe, the U.S is facing a) large sums of short term debt (the highest out of any country) that will have to be re-financed at a slightly higher short term future rate, b) foreigners own an increasingly larger sum of our total debt each year (nearly 50% YTD) putting at risk the overall credit worthiness of the U.S (i.e. the U.S. is more vulnerable to a crisis since it can be assumed that unlike domestic investors who will be patriotic, foreigners may demand their principal and interest at any time), c) the typical U.S consumer is far more entrenched in debt (or leveraged) than the typical European consumer, implying a bigger deflationary price effect across all asset classes , d) state budget imbalances continue to persist and are only getting bigger for most U.S states. Unlike European countries under the EU that can rely on the ECB to bail them out, each state in the U.S has to come up with the money to finance its existing debt (or economy) and thus cannot rely on the Federal Reserve to help finance its obligations. This ultimately means that higher interest rates and higher debt levels will be paid for later down the road and e) rising costs (specifically rising medical costs – i.e. entitlement programs) will put a burden on future growth.

For viewing purposes, we have included three charts that in part describe what we just discussed above. If you are seeking more unbiased market commentary, excellent stock and option picks and reliable predictions, visit smartstocks.org.







Source (for charts): seekingalpha.com

In the month of October, the NRA (National Restaurant Association) reported that the Restaurant Performance Index, an index commonly tracked by most investors to gauge the overall strength of internal demand (or lack thereof), increased to 100.7 to the highest level since 2007. Year-to date restaurant sales are up 2.6% with roughly 130K new restaurant jobs being created.

Now at first glance one might be tempted in interpreting this as good news, mainly because it shows consumers are not only eating out more, but they seem to be willing to spend more. However, how can that be when incomes haven't really budge much year to date (mainly because of price disinflation) and when expectations are for (real) incomes to remain little changed to decrease in 2011 - 2012? Could it be because people are taking out credit (i.e. taking on debt) to fund these 'night outs' and other luxury good/services (i.e. Ipads, HD TV's, etc)? Or is it because people expect to earn more later down the road and have thus decided to use credit to eat out more? Could it be because people have more money saved up (on the margin) since they've cut costs in other places? Could it be because food costs (according to the government) have not risen much YTD, and has thus allowed restaurant companies to cut menu prices in an attempt to attract or meet demand?

Furthermore, if people are eating out more, does it necessarily mean that consumption as whole is picking up? What about spending in other areas, how do they measure up with this up-pick in restaurant sales?


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According to the CBO (Congressional Budget Office), the U.S is set to close its output gap sometime between 2013 - 2020 depending on the level of growth that is obtained over the next few years. Now, before we delve into the intricacies of this chart, it is first necessary that we define what the output gap is. The output gap is the difference between aggregate supply (i.e. potential output) and aggregate demand (i.e. actual output). Put differently, the output gap measures how much slack there is an economy.

As it stands now, the U.S output gap is estimated to be around $890B, down from $1.1T in January of 2009. Expectations are for the output gap to shrink to $820B before we see a pick up in potential output. Having that said, the CBO expects the output gap to be closed by 2013 if U.S GDP (or aggregate demand) is assumed to grow at a 4.5% clip, by 2016 if U.S GDP is assumed to grow at a 3.5% clip and by 2020 if the U.S economy is assumed to grow at a 2.5% clip -a more realistic assumption in our view given how some of the wars that are being fought (and funded) overseas by the U.S, most notably Afghanistan, are expected to end in the next few years. This will of course hinder manufacturing and overall growth in the U.S, as the current war being raged in Afghanistan is estimated to contribute about a 1% to GDP.

........... having said that, it is now wonder why the Fed has engaged in this money printing scheme. It (the Fed) is seeing a lot of slack (as measured by the output gap and the unemployment rate, two data points that the the Fed vehemently focuses in on to measure the underlying strength of an economy) in the economy. The Fed believes that by increasing government spending, via money printing (i.e. the auction of bond sales), that it can increase GDP and narrow the output gap (classical Keynesian thinking). Now, for those of you who took physics, if there is one thing we all learned was that for every push there is an equal pull. By excessively saddling the system with 'more debt' (more debt being the term we loosely define), the Fed is increasing GDP in the short run (6 - 12 months out), but it is doing so in the most ineffective manner possible, and at the highest possible cost to the economy and ultimately, society. How so? By encouraging government spending (via bond sales), what the Fed is actually doing is aggrandizing the debt situation, and in the process, impairing global trade (i.e. making the trade imbalances bigger over the long run) because the value of the U.S Dollar is declining over time. Sure, this will help the U.S export market over the next 6 - 12 months, but the larger implications of this constant U.S dollar devaluation is that U.S goods will in effect become much less competitive in the long run. So what you will have left is a stagnant economy at best, with relatively high unemployment and inflation (if compared to income growth) and bigger debt to boot.


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Back in 1880's when commodity prices took a nose dive (thanks in large part to the overproduction of most agricultural products following the Civil War), farmers were saddled with a huge inventory build forcing many to cut prices and in effect, absorb all of the losses. The shakeout that the south experienced because of the depression, left many thinking if periods of extremes (such as a bubbles or/and depression) recurred in cycles.

Samuel Benner was able to come up with a system that allowed him to predict period of extremes using the infamous Fibonacci sequence. While conducting his study, Benner noticed that pig and corn prices moved in an 11 year cycle, with peaks altering every 5 to 6 years. Similarly, he noticed that cotton prices moved in a 27 year cycle with peaks reoccurring ever 11 years. With this set of data, Benner realized that each series of panics typically moved in 54 year cycles, with troughs following a 16, 18 and 20 year cycle. It was until the turn of century that AJ foster came up with a variation of Benner's model to be to determine when the Dow Jones Industrial Average peaked and bottomed. In his study, he noticed that markets peaked every 8-9-10 years while markets bottomed every 16-18-20 years.

To our surprise, the model that was initially constructed by Benner has accurately predicted almost every major market top and bottom since the 1893 depression. Of course the model has missed some bottoms and tops, but this is can be partly attributed to the fact that the economy has changed so much over the last 100 years with the institution of the Federal Reserve, but nevertheless, Benner and Foster created a framework that will allow us to get a much better sense on when to buy and ell the markets. If this model holds true today, it would imply that sometime in 2011 markets will correct in a meaningful way, ushering a 7 year bull run afterwards.

The questions that needs to be asked are - how useful is this model in today's market, but more than that, what other considerations must be assume, if we were to base our buying and selling decision off this model?

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With the Fed looking to extend its quantitative easing measures through the first half of 2011, it is no secret that investors expect markets to rise as a result. Now, although this concept is flawed by itself, mainly because nowhere in the Fed's statement does the Fed explicitly state that one of the goals of quantitative easing is to push stock prices higher, what consequences (if any) does all of this money (debt) printing have on the economy?

To help illustrate this point, below we've included a chart that shows the diminishing effects that each new dollar created (by way of the fractional reserve system) has on the price and on the value of money. As you can see, more money actually has a depreciating effect on price and the value of money, but more noticeably, more money leads to a decrease in the demand and in the quantity demanded! This means that the Fed’s main object with QE, which is to keep rates subdued in order to encourage consumption (i.e. increase demand for various good/services) is in fact not working. What does this mean going forward? Well besides the obvious that more money printing will do little if anything to encourage consumption, excess money printing leads to inflation (or more appropriately to the debasement of the currency in real terms). But wait, where is the inflation? According to the BLS (Bureau of Labor Statistics) the CPI is growing at an unadjusted 1.1% rate in November that is well below the Fed’s mandate of 2.5%. SO where is disconnect? Will we ever see actual inflation creep into the economy? What implications will it have on the economy and stock market? What sectors will benefit?

Note: Money is held (or has) unitary elastic demand sine money is interchangeable for any good/service.

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Below I have included a chart that shows the S&P 500 % change during the average 4-year Presidential cycle. As you can see, years 1 and 3 are by far the best years for the stock market since 1900 and correspondingly in the post-war era. Since 1900 the S&P averaged a 13.3% return each year of the first year of the presidential cycle with a 81% success rate (success rate being defined as the number of years that the S&P closed positive for the year). Similarly, the S&P averaged an 11.3% return each year of the third year of the presidential cycle with a 78% success rate.

In the post-war era (i.e. post 1945), the S&P 500 averaged a 21.0% return in the first year of the Presidential cycle with a 100% success rate, while averaging a 17.1% in the third year of the Presidential cycle with a 94% success rate. Clearly, probabilities highly favor a higher market in years 1 and 3 of the Presidential cycle, especially if you evaluate it form a post-war cycle (which we believe is more apropos given how the economy has radically changed post World War II). With Obama heading into its third year of his administration, we can expect markets to end higher by about 17.1%, cetris paribus (i.e. holding all else constant). However, with 2009 and 2010 begin the best back to back years in the history of the S&P and with valuations looking stretched on an EBITDA count, are markets going to follow the trend, or is 2011 going to be anomaly once is all set and done? What other variables must we include in our model to help us better predict what we can expect to see in 2011?

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Today the University of Michigan Sentiment index increased 0.3 from a revised 74.2 reading to 74.5, marking the third consecutive monthly increase. By category, business outlook increased 2.7 points to 67.5 from last month's reading of 64.8 marking the fourth consecutive increase, and business conditions increased 3.2 to 85.3 from 82.1, marking the third consecutive increase.

Historically, the Michigan Sentiment index and the S&P 500 have been correlated, but not to the extent one would imagine mainly because the S&P index is a more of a forward looking indicator while the Michigan Sentiment is more of a backward looking (or lagging) indicator. Nevertheless, it is helpful to study the relationship between the two, as it has provided investors with general ebb and flow (or trend) of the market. Having that said, there has been some divergences between the two which have coincided with major inflection points. We saw it happen in 2000, 2003 and 2009. Now, when these divergences are 1 standard deviation or bigger, both of these indexes tend to top out or bottom out, depending of course if the general trend is up or down. With the current standard deviation reading at 1.1, are markets about to set a top or can the markets continue to advance? What other variables must we include in our study to enhance our understanding of where markets are likely to head?

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HAPPY HOLIDAYS!

Thanks for sharing your results with the rest of the HSM community Bigcat. I encourage other HSM members that are subscribed to please post your testimonials on HSM at your earliest convenience

Now I am a poor sales man, that I admit, so I am not going to harp on how great my system is and how you are going to become an instant millionaire (in fact this will be my last post on this thread because some of the information I post from time to time on this thread is some of the same information I hand out to my subscribers, so as a service to my clients, I have decided that this is going to be the last post on this thread. If people are interested in the system I am confident that they will subscribe without me having to promote the site every now and then). Far from it, instead, what I can tell you that is that if you give my system a shot, I can guarantee that you will consistently grow your investments and in the process become a much savvier investor. Try my system for a month and you'll start to see the results tickle down.

Now, the commentary I am about to share with you I had reserved for this week's weekly newsletter but because I think it is such an important topic that all of you should be aware of, I've decided to post it on this thread. Keep in mind that this is just part of the commentary that I will offer in this week's weekly newsletter. In my daily and weekly newsletters I am much more thorough and offer other commentary on an array of subjects, all pertaining to the economy and market of course.

So if you are interested in more unbiased commentary, excellent stock and option picks and reliable market predictions, visit smartstocks.org

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The system was geared to help you navigate the markets, it is not a system that I am going to make millions of, so give it a shot.

Commentary:

We now want shift the topic of conversation and talk about the big misconception that the public has regarding GDP. According to the BEA (Bureau of Economic Analysis) real GDP grew at an annual 2.6% rate in the third quarter of 2010. Now at first glance it might seem that the U.S economy is moving along just fine well, especially with inflation remaining stubbornly below at 1.0% (on the producer side). Having that said, when you start to dissect the GDP figure and start to analyze each component, you’d see a completely different story. When you look at transfer receipts (or payments), you’ll notice that personal income has not increased much and are in fact down 4.5% from the previous peak. Now before we delve into the intracices of this point, let us define the term transfer receipts. As defined by the BEA, personal current transfer receipts are benefits received by persons for which no current services are performed. They are payments by governments and businesses to individuals and nonprofit institutions serving individuals. That means that personal transfer payments are not included in the GDP figure but since the recipients of those funds spend that money (i.e. it is recycled back in the economy), we can make assumptions on how it affects GDP since GDP is defined as the total volume of dollars that the economy produces in nay given year. With that being said, let’s move to the interesting part, the numbers. Personal income (which is directly tied to GDP) has surpassed pre-recession levels, implying that people have be spending more. Now, when we factor minus transfer payments, personal income is 4.5% below the previous peak (i.e. below prerecession levels). Transfer payments appear to be about $250 billion greater (in annualized terms) than what they would have been if the pre-recession trajectory had been maintained. What does this mean? It means that GDP has increased over the last two years in part because of the transfer payments that has taken place between the government and the unemployed or other groups that do not perform a service to the economy (i.e. that do not add any monetary value to the economy), and not because of increased consumption. Now, let us be clear. People are spending more than they did before, certainly more than in 2008 at the apex of the financial crisis, but the increase in GDP has not been solely fueled by the increased consumption, it has been mainly fueled by the increase in transfer payments between the government and the unemployed. Without the transfer payments, GDP would have been about $250B less in 3Q/2010 and for most of 2010 and the second half of 2009. There was a small increase in 1Q/2010 to about $270B and a spike in transfer payments in 2Q/2009 to about $300B above the trend line. In 1Q/2009 the GDP got a boost of about $150B of "extra" transfer payments. All the above are annualized amounts - the accumulated "extra" personal transfer payment receipts for 2008 estimated through year-end 2010 is approximately $569B. This comes from $87B in 2008, $226Bin 2009 and $256B in 2010.........

Continued.....

The problem going forward is that the transfer of payments (or more appropriately, this transfer of wealth, which remember is made possible because of the low rate policy handed down by the Federal Reserve since it made the cost of money negligible) has come at an enormous cost (remember that there is no such thing as a ‘free lunch’). How so? by inadvertently increasing the debt burden by an equal amount (or share). What’s worse is that if we were to view this using a present discount value (which in our opinion is more apropos given how each dollar that you hold today is worth less in the future as the number dollars chasing the same number of goods increases), then really the costs (i.e. the rising debt burden) far outweighs the short term benefits. In other words, the long term costs far outweigh the short term benefits, which if viewed from a subjective view, will put the U.S in a bigger pickle than before. This is yet another reason why were a very cautious long term and continuingly stress to subscribers not fall prisoners into all of the hoopla that is sold to you on a daily basis. Yes, things are improving, but not to the magnitude one would imagine.

Thank you all for your contributions/testimonials.

We are on Twitter! Follow us on Twitter @ http://twitter.com/#search?q=SmartSt0cks; Key word(s) to type into the twitter search engine – ‘SmartSt0cks’ (the o in stocks in not an o but a 0 (zero).

Also, let me remind some of you that we offer FREE commentary on an array of subjects at stockstoinvestin.org. Go check it out.

Like some of our subscribers have pointed out, if you are interested in the program, join our 1 - week FREE trial. Just send me an email, to the address shown on the website.

A reminder that every week we offer FREE commentary about the markets and economy @ stockstoinvestin.org. Make sure to stop by at least once a week and read our articles.  If you are interested in receiving more unbiased market commentary, profitable stock and option trades and reliable predictions, visit smartstoks.org

Quick reminder that we offer FREE articles (and article discussions) at our website - stockstoinvestin.org. Since I last posted on this thread, we have posted new articles on the site, discussing everything from the markets to the economy. Last two articles we wrote talked about medium term cycles (i.e. the 45 and 90-day cycles) and the 4 year cycle. Take a look!

 

Also, for those interested, check our stock and option trading website of smartstocks.org. We continue to post profitable trades, even in the face of a groggy market! I hope to see more of you join us!

Quick reminder that I offer a 1-week FREE trial. We just closed two trades for a gain - VHC (stock) for a 12% gain and SLV (option) for a 40% gain. Give it a shot!

Give yourself the opportunity to trade alongside me. Together we can navigate these unchartered markets. If you would like a full listing of our past trades, visit the web-page and click the 'previous trades' tab.

 

bigbull (David)

 

I've extended the FREE week trial to two FREE weeks for those interested.

 

Best,

David (bigbull)