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CAVEAT EMPTOR Stocks are down…buy. Stocks are up…buy. We are hearing the announcers on CNBC telling us it’s time to buy, no matter which way the market turns. Here’s a sample of what an experienced market professional is saying. Please read Sy Harding’s editorial. It may be very helpful when you hear the siren call from Wall Street…and put in the earplugs if you turn on CNBC.Don’t be envious of the guy next door… …Especially if he appears more well off than you, because appearances can be deceiving. Here is an article by Herb Greenberg. A very insightful piece on that neighbor who seems to have it all. In today’s society, appearances can be everything. In many cases, as I know very well, it’s all show and no go. I have seen bumper stickers that say, “He who dies with the most toys, wins.” Not in my book. Those toys(and the money to buy them) will be worn out long before he’s dead. Another warning. This time it’s from the NASD. The National Association of Securities Dealers, a self-regulating firm for brokers and broker-dealers, has issued a warning that margin debt, which is used to buy stocks has exceeded its prior all-time high.Total margin debt has soared to $321.2 billion in February, exceeding the prior high of $299.9 billion in March 2000. You may recall that the market hit its 2000 high on March 22, and in about three weeks slid into a 13% decline in the blue chips. The decline in the Nasdaq was a blistering 35% in that same period. In a rising market, debt can cause assets to grow faster, but in a declining market, debt can make assets shrink faster, too. The unfortunate problem is that investors are most careless after an extended rally such as the one we just had. As a result, they often add more debt, even as the market rally runs out of steam and returns start diminishing. The rules on margin debt even allow your brokerage firm to sell shares without your knowledge or permission to cover “margin calls” when the debt begins to exceed allowable percentages of your portfolio. An extremely dangerous place.
The Dow Jones Industrials did not make a profit in the first quarter. The rally this week may be labeled as a fifth wave, implying that the rally is now complete. Now the fireworks begin. The problem is that the normal end-of-quarter window-dressing that usually send the indexes soaring didn’t take place. All sectors of the market were hit by the decline, so it made things hard for the money managers to shift from “winners” to “losers.” At this point nearly all parts of the market are in lock step with each other, indicating that the computers may have taken over the market. This is what is believed to have caused the crash in 1987. At that time (1987) over 60% of the trading was what is called program trading. In the first six months of last year program trades accounted for over 64% of all trading in the New York Stock Exchange. Too bad the NYSE was allowed to stop publishing the percentage of program trades at the end of June 2006
The Nasdaq is still not “minding the gap.”
The Nasdaq 100 has spent two weeks and a lot of energy trying to close the gap in the market left on February 27th. Now time is running out for the rally, since it, too has completed five waves. We now have a completed head-and-shoulders formation in the Nasdaq 100 that spells trouble for the bulls. This implies a target for the Nasdaq 100 in the vicinity of 1650 or below. Time to buckle your seat belts. The bond vigilantes are back!
The bond rally is long over. Bond prices continue to fall as interest rates rise. In fact, the press is starting to repeat my earlier warnings that the Federal Reserve might have to raise interest rates, not lower them. The Department of Labor reported 180,000 new jobs in March. It’s too bad that they are not reporting the CES Birth/Death Model at the same time. It shows that 128,000 of those new jobs are fictitious…nor does the Department of Labor mention the estimated 2,000 illegal immigrants that are crossing our borders daily, looking for work. The housing index is looking weaker by the day.
The housing index fell again this week as the interest rate surge becomes more pronounced. The chatter is now about the alt-A market, which is a notch above sub-prime market of home buyers. What we have seen since the market drop in February is a huge reining-in of liquidity. In addition, April is the first month that will begin the sharp payment adjustments on the new alternative mortgages whose sales took off two years ago. Let’s see whether the mortgage woes are contained or not, Mr. Bernanke. The dollar “demise” may be coming to an end.
Two weeks ago I commented that I would have to re-analyze my position on the dollar due to the continued decline shown in the chart. Not a lot, but pretty relentless since January. A look at the longer-term picture gave me an insight that wasn’t evident earlier…a declining wedge. This could be very bullish once the dollar bounces from the lower trendline. That may have actually happened today (not shown). Gold is completing its correction?
A five-wave move is followed by a correction , which is a three-wave move in the markets. If my interpretation of the decline in February as a five-wave decline, then the rally is now complete with three waves up. Usually a corrective rally retraces a lesser percentage of the impulse, but second waves can be pretty strong. We’ll know very soon. In a recent article, the Wall Street Journal commented that investors now believe gold is a “haven” against the falling dollar and that there is less risk in precious metals today. Truly the sentiment is bullish. Here is another rally that is getting very stretched.
The potential for a political crisis in the Middle East, compounded by colder weather and refinery shortages has kept gasoline prices near all-time highs. Like gold and other commodities, the 2007 rally have challenged, but not topped, the 2006 highs. Admittedly, prices have been nearly “straight up” since January, but this is an unusually long session for a rally. The media doesn’t help, because they are also caught up in the bullish sentiment, too. But wave analysis suggests that the rally is nearly over and lower prices are straight ahead.
Abundant Natural Gas inventories still rising despite colder weather. The inventories of natural gas continue to rise, causing utilities and industry to moderate demand for increasing their own storage of natural gas. The U.S. department of Energy puts gas inventories at about 30% over the normal levels for this time of year. Believe it or not, a decline in natural gas from today’s levels may go lower than the lows of last September! The investment banks underwriting the (subprime mortgage) bonds ``aren't idiots, they're already laying off the risk of subprime loans on investors.'' April 10 (Bloomberg) -- The top Democrat and Republican on the House Financial Services Committee said investors in mortgage bonds should be liable for deceptive loans made by banks. Democratic Chairman Barney Frank of Massachusetts and Spencer Bachus of Alabama, the committee's highest-ranking Republican, said such legislation would discourage lenders from extending loans to people with poor credit histories by making it more difficult and expensive for the banks to sell the mortgages. ``More money was being lent than should have been lent,'' Frank said in an interview from Washington. Frank, who last month predicted that the House would approve such a bill this year, said growth in the market for mortgage bonds ``provided liquidity without responsibility.'' Folks, the mortgage bankers sold these subprime mortgages to home buyers, packaged them up with higher-rated bonds, insured them and sold them to the unsuspecting public as triple-A rated securities. These loan packages are starting to blow up in investors’ faces and no one knows who is carrying the risk. Does it look like the bankers will pay for their collusion? Not at all! According to the logic used in the House Financial Services Committee, it was the fault of the investors who wanted the higher yields! Regards, Anthony M. Cherniawski
The Practical Investor, LLC is a State Registered Investment Advisor
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