Bear Mountain Bull

John Mauldin follows up last week’s great column with more thoughts on the ‘buy and hope’ strategy.

For once, it truly is different this time:

For the last 18 months there has been a parade of analysts, mutual fund managers, brokers, and their kin, telling you that stocks are a reasonable value “today.” And they trot out “data” (with lots of charts) which supports their position and then ask you to invest “now.”

“The stock market turns up six months before the end of the recession. This recession is already almost the longest, so now is the time to buy.” The bullish cheerleaders said that six months ago, they say it today, and they will say it in six months. One day they will be right. Care to make a bet?

Now let’s reread the last paragraph I quoted from Peter’s Financial Times article.

“… There is an even deeper reason to reject the long run as a guide to future investment policy. The long-run results we can discern in the data of stock market history are not a random set of numbers: each event was the result of a preceding event rather than an independent observation. This is a statement of the highest importance. Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical. There is no predestined rate of return. There is only an expected return that may not be realized.”

We are in a synchronized global recession. Yes, we will recover, but the causes are not those of the typical business-cycle recession. We are seeing massive debt deflation, deleveraging on a scale never witnessed, a financial industry that has to be rebuilt, and a housing industry that is reeling all over the world. We created a lot of excess in a number of industries. We decimated the savings of a generation that was hoping to retire soon, and now will have to work longer and save more.

This is not a typical recession. And for any analyst, writer, or pundit to trot out past historical data to demonstrate that the stock market is going to rebound at such and such a time and at such and such a pace simply ignores the fact that the future is unlikely to look like the past for at least the next 2-3 years. We are in a brand-new world, macro-economically speaking.

On Obama’s proposed budget:

Obama’s accounting magicians assume that the US economy is going to grow by 1.2% this year and 3.2% next year and at a blistering 4% pace after that. Since that is not likely to happen, the deficits will be far worse than projected. Since large taxpayers can see the tax increase coming, it is likely that they will shift behavior, and tax revenues will be less than projected.

Several analysts have noted that you could tax 100% of the income of the “wealthy” and still not balance this budget. While the bottom 95% may not see their taxes rise this year, you can bet they will see them rise in the future. While the US can run multi-trillion-dollar deficits for a few years, it cannot run them for long without serious consequences for interest rates and inflation. And when our entitlement program problems hit in the middle of the next decade? You can count on higher taxes.

Just as a fragile economy is ready to pick itself back up, a large series of tax increases will help slow it down and may push us back into recession.

Which brings me back to my earlier point. Buying a stock market index in today’s environment is as much a matter of hope as it is anything else. I readily admit you can make a case for individual stocks, but a large index is a reflection of the broad economy, whether in the US or Japan or Europe. The global economy is weak and likely to be so for some time. Just as Peter pointed out at the beginning of the letter, bonds have outperformed stocks for the last 25 years, and we may see that situation continue for another few years. We are in a period where you should be seeking absolute returns and looking for real value.

Worst year ever.

Update:   More on Buffett’s burps at Finance Trends Matter and The Market Guardian.

Larry McMillan’s weekly column was late to post this week — here’s his take as of Thursday evening (click here for column with charts):

The stock market has not recovered from the negativity surrounding last week’s breakdown below what had been a solid support level at $SPX 805-810. Selling picked up after that, culminating with Monday’s nasty selloff (a selloff that saw the Dow trade below the 2002 lows, to prices last seen in 1997). $SPX and QQQ are not at new lows, however. In fact, $SPX traded at almost exactly the same price it had in November, thereby creating — for now — a nearly perfect double bottom (too perfect?). So that level (740) on $SPX is support. Meanwhile, for the last five trading days, $SPX has probed the 780 area, but has been unable to break out above there. That is particularly frustrating for the bulls since there were signs that the market was extremely oversold, and thus a rally should have been forthcoming. Above 780, there is resistance at 805-820 — at the old breakdown area and also at the declining 20-day moving average.

The equity-only put-call ratios continue to be out of synch. The standard ratio is on a (weak) sell signal, and the weighted ratio is still belatedly clinging to a buy signal.

Market breadth was terrible during the decline and, by last Monday’s close, both was in an extremely oversold condition. Sharp, but short-lived rallies are possible (and likely) during such extreme oversold conditions. That was the major spur behind Tuesday’s large rally.

Volatility indices ($VIX and $VXO) were grudgingly working their way higher as the market declined. Then, this past Tuesday, when the sharp, but short-lived oversold rally occurred, $VIX was crushed. It hasn’t recovered since. Once again, this appears to be evidence of complacency, as $VIX never really spiked higher as would be the normal case during a sharp decline such as we’ve had this month. Technically, $VIX is neutral, with support at 38 and resistance at 53. A breakdown below 38 would be clearly bullish.

In summary, the signals are very mixed, but the support at 740 is extremely important. A lot of people are watching it. If it gives way, it seems self-fulfilling that a torrent of selling will sweep the market.

The S&P closed at 735 on Friday.

Another lousy week for stocks, hence a lousy week for most of the SPDRs. Only the Financials were able to post a gain, but looking at the numbers on the XLF, they have very little to brag about. And those Health Care stocks (XLV) — yikes:

The numbers as the market threatens to break down further:

Charts courtesy of StockCharts.com

Security Savings Bank, Henderson, NV
Heritage Community Bank, Glenwood, IL

It might have seemed like it at the time…

Calculated Risk reminds us:

The S&P 500 closed at 735 or so. The low in 1997 was 737.01.

Note: the S&P 500 was at 744 when Greenspan spoke of “irrational exuberance”!

The S&P edged below those November lows today, and the big blue arrow still points down.

We looked at the health care stocks yesterday, but I think they’re worth another look, as they’re being destroyed by our wonderful government’s plans. And lest we forget, three of those drug stocks are Dow components (JNJ, MRK, PFE):

More groups either at or near new low ground:

Charts courtesy of StockCharts.com

Meat Loaf had it wrong — two of three ain’t good. At least not when you’re talking about the big three indices undercutting their lows. We can now add the S&P to the Dow — only the Nasdaq is left.

‘They’ (whoever they are) managed to stave off what could have been a pretty ugly Friday after a very weak open, at least for most of the day. The indices were bounced back up off their probes to new lows in the morning, and managed to hover near flat for much of the day. But we asked at midday whether they’d be willing to ‘take ‘em home’, and judging by the late action, it appears ‘they’ were quite hesitant to do so.

For a while this morning, it looked at though we might see the Dow slip below 7000, as it tagged a low of 7033, but managed to finish only 30 points up off that low, and the S&P got smashed to new bear-market lows:

Treasuries were mixed, yields lower on the short end and higher on the long end:
6-month: 0.44%    2-yr: 0.99%    5-yr: 2.01%    10-yr: 3.03%    30-yr: 3.72%.

Internals never got much above the flat line, and then turned much lower by the close, and volume picked up. Advances/declines were 1 to 2 on the NYSE and 2 to 3 on the Nasdaq, with up/down volume 2 to 7 on the NYSE and 2 to 3 on the Nasdaq. No new highs, and nearly 700 new lows: highs/lows were 2/341 on the NYSE and 1/335 on the Nasdaq.

By day’s end, nearly all of the groups were red, and the numbers were not impressive: banks (-8.7%), airlines (-5.2%), brokers (-4.4%), defense (-4.2%), health care (-4.2%), health care products (-3.9%), biotechs (-3.9%) and housing (-3.8%).

Energy prices were mixed. Crude oil slipped to $44.76/barrel and gasoline drifted back to $1.28/gallon, while natural gas was higher, up to $4.20/mmBTU. The dollar index was higher again, up to 88.05. The precious metals got bounced around, but finished near flat, with spot gold at $942/ounce and silver at $13.08/ounce.

BMB Note:   As I said yesterday, shaky at best. And getting even shakier.

The morning probe of the S&P below the November lows was bought back up in the morning and held most of the day, but the poor finish took it right back down below those levels. It looks to me like this market remains awfully heavy. There seems to be a mighty struggle to try keep things here, but sooner or later, those holding it up might get tired. And if they lose their grip, watch out.

BMB is still of the belief that we’ll need to see some sort of ‘washout’ before this latest decline comes to an end — and it doesn’t feel like we’re anywhere near that yet.

They’ve managed to pop the indices off those early morning lows — a new bear-market low for the S&P — and move them back up to around the flat line. Ditto for the A/D lines.

The question is, will they be willing to ‘take ‘em home’ over the weekend?

We shall soon find out…

…for Starbucks — fuel pumps out front:

Professor Mano Misra, an ecological and chemical metallurgical professor at the University of Nevada, Reno came across the discovery by accident, when he left a cup of coffee out overnight. The next morning he noticed a ring of oil on the cup. After some research, he and a team of scientists found that coffee beans contain 10-15% oil by weight. After some research and development they were able to convert the coffee grounds into biodiesel. The scientists believe that the low cost of conversion coupled with the abundance of used coffee grounds, which could be collected from national coffee chains, the coffee biodiesel could be produced at approximately $1.00 per gallon. And according to these scientists, the new coffee biodiesel is actually more stable than corn and soy bean-based biodiesel.

According to a report in The Journal of Agricultural and Food Chemistry, producing biodiesel from coffee grounds is a simple technique and because there is so much coffee around, several hundred million gallons of biodiesel could potentially be made annually. And isn’t it better to recycle waste than recycle food products?

The Big Picture is not impressed with the latest gov’t/Citi dance — Citigroup: World’s Worst Investment to Get Even Worse:

Losers double down.

That’s the classic trading rule which the USA is about to violate in an enormous way. According to trading maven Dennis Gartman, one should “never, ever, ever, under any circumstance, add to a losing position.”

And yet that is what we are about to do.

Where’s Perot and that “giant sucking sound”?

…even further by one of the biggest (or should I say, ‘blackest’) of the black holes:

The U.S. government will raise its stake in Citigroup Inc. in the third attempt to bail out what was once the world’s biggest financial institution.

The plan will involve the Treasury Department converting as much as $25 billion of preferred shares into common stock, the Treasury Department said in a statement today. The government said it will make the swaps only if private holders agree to the same terms. The U.S. doesn’t immediately intend to inject additional money after channeling $45 billion to the New York- based company last year.

MarketWatch says:

Citi said Friday it’ll issue common stock in exchange for preferred securities, which will substantially increase its tangible common equity without any additional U.S. government investment. Citi will offer to exchange common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 a share. The U.S. government will match this exchange up to a maximum of $25 billion face value of its preferred stock at the same conversion price.

And I think I saw that the dividend would be eliminated for any preferred stock that isn’t converted to common — didn’t I see that on CNBC?

Bid/ask looks to have Citi opening somewhere under 2 bucks, in the $1.70 range.

We can’t forget about Fannie and Freddie. And you thought the carmakers lost big money.

Fannie Mae said late Thursday that it lost more than $25 billion in the fourth quarter, as the mortgage giant continued to be pummeled by slumping house prices and surging defaults.

The company, which was seized by the government last year, warned that market conditions could get worse this year. The company also said that its conservator, the Federal Housing Finance Agency, asked the Treasury Department Wednesday for $15.2 billion to plug a hole in its net worth at the end of 2008.

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For the whole of 2008, Fannie lost $58.7 billion, or $24.04 a share, versus a net loss of $2.1 billion, or $2.63 a share, in 2007.

I think the laws of physics have been changed. There are now a number of black holes that are clearly visible with even an untrained eye.

The Wall Street Journal did:

Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and “the wealthiest 2%.” Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That’s about 7% of all returns; the data aren’t broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% — about 1.65 million filers making above $388,806 — paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.

Note that federal income taxes are already “progressive” with a 35% top marginal rate, and that Mr. Obama is (so far) proposing to raise it only to 39.6%, plus another two percentage points in hidden deduction phase-outs. He’d also raise capital gains and dividend rates, but those both yield far less revenue than the income tax. These combined increases won’t come close to raising the hundreds of billions of dollars in revenue that Mr. Obama is going to need.

But let’s not stop at a 42% top rate; as a thought experiment, let’s go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That’s less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable “dime” of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.

Fast forward to this year (and 2010) when the Wall Street meltdown and recession are going to mean far few taxpayers earning more than $500,000. Profits are plunging, businesses are cutting or eliminating dividends, hedge funds are rolling up, and, most of all, capital nationwide is on strike. Raising taxes now will thus yield far less revenue than it would have in 2006.

Link via Power Line.

…with the bill.

Obama plans to go through with the idea of ’sticking it to’ the ‘wealthy’, as he calls them. To me, it looks more like a punishment of success.

President Barack Obama proposed almost $1 trillion in higher taxes on the 2.6 million highest- earning Americans, Wall Street financiers, U.S.-based multinational corporations, and oil companies to pay for permanent tax breaks for lower earners.

Obama’s 2010 budget proposal, released today, would reinstate the top two Clinton-era tax rates of 36 percent and 39.6 percent in 2011, up from the 33 percent and 35 percent the richest Americans now pay. It would raise taxes on capital gains and dividends to 20 percent for top earners, up from the 15 percent set by former President George W. Bush in 2003.

Spend a trillion, tax a trillion…

How long can we expect a small minority of taxpayers to put up with bearing a huge portion of the tax burden — before they flip the middle finger and walk away with their wallets? Or run, as the case may be.

Update:   Not exactly a ‘feel good’ intro paragraph from MSNBC.com:

President Barack Obama unveiled a multi-trillion-dollar spending plan Thursday that would boost taxes on the wealthy, curtail Medicare, lay the groundwork for universal health care and leave a string of deficits dwarfing any in the nation’s history.

I don’t like the looks of this one bit. How long ’til the next election?

As the indices try to hang on, the health care groups are melting down:

We mentioned the Transports yesterday, and the TRAN hit another new low today. That’s getting to be a daily occurrence, and here’s why — the truckers and the railroads have joined the airlines in their flight south:

Charts courtesy of StockCharts.com

Hmm. That little Tuesday ‘rally’ is looking pretty shaky already, isn’t it?

Stocks moved higher out of the gate, but then spent the entire day giving all of those gains back, with the selling gathering a bit of steam entering the final hour. That late thrust pushed most of the indices down to threaten Monday’s lows, with the Russell and the Transports already dipping below them.

The what-were-once-the-stronger indices, the Nasdaq(s) and the Russell, took it the worst — oh, along with those Transports, which continue to set new lows daily:

Treasuries were lower, yields higher:
6-month: 0.46%    2-yr: 1.08%    5-yr: 2.05%    10-yr: 2.97%    30-yr: 3.65%.

Internals turned from positive to negative as stock prices turned down, but volume was again lighter. Advances/declines were 4 to 5 on the NYSE and 7 to 12 on the Nasdaq, with up/down volume 4 to 5 on the NYSE and 1 to 3 on the Nasdaq. Not a new high in sight: highs/lows were 0/179 on the NYSE and 0/224 on the Nasdaq.

A lot of groups were green in the morning, but only a few left by days end: the banks (+4.8%) continue to get a bounce up off their lows, and were joined by oil services (+2.7%) and gold and silver stocks (+1.6%, bouncing up off morning lows). Leading the losers were the trashed-again HMOs (-10.4%), hospitals (-6.7%), health care (-5.1%), REITs (-5.1%), health care products (-4.4%), biotechs (-4.1%), drugs (-4.1%), steel stocks (-3.6%), transportation (-2.9%) and brokers (-2.4%).

Energy prices were higher. Crude oil ran up to $45.22/barrel, gasoline jumped even higher, to $1.29/gallon, and natural gas gained a few cents to $4.08/mmBTU. The dollar index was just a bit lower, to 87.65. The pullback in the PMs continued, but the metals bounced off their morning lows. Spot gold was back to flat at $945/ounce but silver slipped to $13.15/ounce.

BMB Note:   Shaky at best.

Much of the day, the indices were struggling a bit, but the A/D lines and groups were still holding positive, but that gave way as the afternoon wore on and things turned negative. For now, most of the indices are still holding up above those Monday lows, but just barely. If those lows get taken out, we’ll probably see the selling start to pick up again, and we’re right back to square one.

If nothing else, the recent bounce may have set up a few decent shorting opportunities, for those that are willing to take that side.

…on new home sales. Calculated Risk has the full story, and the ugly charts:

Errands to run today, for a change. So BMB will be out of the office much of the day.

Keep me posted on any new developments.

Update:   I lied — looks now like I’ll just be in and out.

Zombies defined, by The Big Picture:

A Zombie Bank is a financial institution whose liabilities outweighs it assets, making its net worth “less than zero.” ZBs continue to operate because of the implicit or explicit government guarantee — along with truckloads of taxpayer monies.

Consider the two biggest Zombie banks — Citigroup, and Bank of America.They have each received $45 billion in capital from the US government — far more than either bank is worth. Additionally, the US had guaranteed up to 90% of the bad assets each zombie is holding — $250 billion and $306 billion respectively.

The term comes from Japan’s lost decade following their real estate bubble. The Japanese kept their zombie banks alive, delaying the eventual recovery by a decade.

The reason I favor nationalization is that I hope we here in the US avoid a lost Japan-like decade from September 08 forward. Keeping these banks propped up with more and more taxpayer monies — the Obama Administration has proposed another $750 billion more in bank-rescue aid — is not the way out of this mess.

This is no surprise. Someone explain to me again why the gov’t should be pouring money into this black hole:

General Motors Corp. on Thursday reported another massive loss in the fourth quarter, burning through $6.2 billion in cash as the auto maker continues its push for more funding from the federal government.

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The Detroit giant reported a loss of $9.6 billion, or $15.71 a share, compared with a loss of $1.5 billion, or $2.70 a share, in the year-ago period.

And while we’re talking black holes:

American International Group Inc. Chief Executive Officer Edward Liddy is under pressure to convince taxpayers they won’t lose billions of dollars in the U.S. rescue of the firm after his plan to sell assets stalled.

…to the bailouts. Any of ‘em.

Given the choice between federal bailouts for the auto companies, the finance industry and financially trouble homeowners or no bailouts for any of them, 54% say no bailouts period.

Just 26% support bailouts for all three, according to a new Rasmussen Reports national telephone survey. Twenty percent (20%) aren’t sure which course is better to follow.

Investors, with their eyes on the financial markets, are even more strongly opposed. Sixty-two percent (62%) of investors say “no” to all three bailouts, with 24% who favor them. Twenty-eight percent (28%) of non-investors support the bailouts, but 45% are opposed.

Confidence as measured by the Rasmussen Investor Index hit a record low on Tuesday – for the second day in a row.

Chicago, Tulsa, LA, Tempe, and the list goes on.

Heaven knows, they keep giving us more fuel for protest.