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There’s the old saying, “Beauty is only skin deep.” The Consumer Price Index for April had no beauty at all. In fact, the deeper you probe, the uglier it gets. “During the first four months of 2007, the CPI-U rose at a 4.8 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 2.5 percent for all of 2006. The acceleration thus far this year was due to larger increases in the energy and food components. The index for energy advanced at a 25.3 percent SAAR in the first four months of 2007 compared with 2.9 percent in 2006. Petroleum-based energy costs increased at a 40.0 percent annual rate and charges for energy services rose at a 9.4 percent annual rate. The food index has increased at a 6.7 percent SAAR thus far this year, following a 2.1 percent rise for all of 2006. Excluding food and energy, the CPI-U advanced at a 2.2 percent SAAR in the first four months, following a 2.6 percent rise for all of 2006.” What do these numbers mean? First of all, the seasonally adjusted numbers are there to put a little sugar coating on the real numbers, which were 5.7% for the first four months of the year. That, folks, is a 17.1% annual rate of inflation. Energy rose at an annual rate of 75.9% in the first four months of 2007. Food rose at an annual rate of 20.1% so far this year. So, if you don’t eat or drive, you only experienced a 6.6% inflation rate, which is still much higher than the Federal Reserve is hoping for. So, what does our press dutifully report? “Consumer Inflation Moderates Slightly.” So, what are these “dark pools” the press has been talking about? Lately there have been stories in MarketWatch and other sites suggesting large blocks of trades are done in secret and outside the purview of the general public awareness. They are called “dark pools.” This is the stuff of legends, where traders work in stealth and secret behind the scenes in order to get the ultimate advantage over their adversary traders. Often dark pools are managed by computer algorithms and are often associated with hedge funds that are trying to keep their methods a secret from their competitors. Dark pools are real. However, there are only so many shares of stock that can be traded, so the investment banks have stepped in with this new device to provide the larger traders with liquidity, reduced fees and secrecy. This is supposedly meant to give an advantage to the larger traders and hedge funds. It is also giving the regulators headaches, since much of the trading is done “off the books.” Do dark pools give traders an advantage? Maybe not. Having
said all that, I want to draw your attention to a book written over 80
years ago that sums up the situation very nicely, "One of the
things which first puzzles the novice in stock-market affairs is the
constant reference he hears on every side to some mysterious 'They.' He
hears traders say, 'They' are buying, 'They' are selling, 'They' made a
killing, 'They' are doing nothing. If one ask a trader to whom he refers
when he says 'They' he will probably reply, 'The big fellows.' If
pressed for a more specific answer he will say, 'The big men in New
York.' In reality, the great stock market swings are the result of
unseen economic forces, far beyond the power of any man or group of men
to control. For fundamentally the stock market as a game is not a game
between the big fellows and the little fellows... It is an unequal
contest between those who know the game and those who do not. (Emphasis
mine) Avoid being the greater fool… “The greater fool theory relies on one thing -- the assumption that there is somebody else out there who is willing to pay an even more reckless premium for stocks. That's what the market is thriving on at this point: the hope that there is an ocean of unsatisfied demand out there by short sellers or mutual fund managers who will be "forced" to buy. Unfortunately, the facts do not support that assertion.” Read John Hussman’s article. Investing takes the courage to follow basic principles, not hoping for a bailout when you’re wrong. The Japanese market has no “oomph!”
The current outlook for Tokyo shares is lower due to the U.S. Conference Board for slower economic growth in the U.S. Remember, the Japanese have kept their economy alive by exporting to a stronger U.S. economy. The anticipated slowdown in the U.S. economy may have a devastating effect on the Japanese economy. Well, maybe it is a bubble. But the measures appear to have little effect. It has not stopped hundreds of thousands of new investors from opening trading accounts. The government fears many of those investors could face painful losses if the market gains end, which could lead to unrest in some areas.” The Chinese authorities are bound and determined to stop this bubble. A collapse of the Chinese stock market will cause a little more than “unrest!”
“Dow Flirts with new record…
…but investors were stung by rising oil prices and weaker economic data. The only activity today was in very large deals. The Stock Market Crash Index is showing more cautionary indications than just a day ago. The pattern in the blue chips is what is called an ending diagonal, where stocks struggle into the final surge before declining. For those that are interested, keep an eye on the Crash Index. It may prove informative. Everything you need to know about the “Bernanke Put.” In his speech, Ben Bernanke absolves the Federal Reserve “of playing any role whatsoever in the subprime loan debacle, declares the subprime problem "isolated" from "responsible lending" and then waves around a gigantic put option just to let everyone know that, regardless, the Fed will step in and clean up whatever mess is left over.” Thank you, Kevin Depew, managing editor of Minyanville.com. Did I hear the words, “moral hazard” here? The “great freeze” is coming to real estate.
Will it be 20%? Or 30%? Or maybe even 50%. Listen to the current Socionomics audio for more details on the outlook for real estate.
In a recent article, Bill Fleckenstein (CNNMoney) wrote that lenders will, once again, require downpayments on residential real estate, filling the market with unsold homes and driving down prices. The chart to the left also suggests that the next decline may eclipse last years decline in real estate by a wide margin. “The weakening trend in the dollar is entrenched”… …according to the head of trading at Brow Brothers Harriman, a British trading firm. I get the impression from the interview that the dollar is hopelessly mired in a downtrend. My suggestion is just the opposite. Once the dollar clears the 50-day moving average, we’ll see a change of opinion by many experts. Not a recession hedge.
This timeless wisdom from Gary North came over a year ago. It was well worth reading then and is equally relevant now. What you are looking at is the end of an uptrend that did not reach the highs of a year ago when Gary first published his article. Good news: Gasoline inventories are increasing again.
These are perilous times for people who must drive. The Energy Information Administration reported Wednesday that gasoline stocks, while increasing to 195.2 million barrels last week, remained well below the average for this time of year.
A reversal in NatGas prices is overdue. Natural gas in storage is still over 20% higher than is seasonally normal for this time of year. The charts are saying, “Enough!” China is not far from the brink. So are we. According to Ty Andros, the amount of money being pulled from Chinese banks and invested in the market is not only staggering, it has now outpaced the parabolic bubble in the Dow Jones Industrials in 1929 and the Nasdaq bubble in 1999. The Chinese penchant for gambling has now gained full force. What happens when the savings are gone? Please make an appointment to discuss these strategies by calling me or Claire at (517) 324-8741, ext 19 or 20. Or e-mail us at tpi@thepracticalinvestor.com. Regards, Anthony
M. Cherniawski,
The Practical Investor, LLC is a State Registered Investment Advisor CONTACT
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