|December has started with a bang. Last Wednesday we identified a Sentiment Shift going on in the market. A week later, it seems like the sentiment has shifted back to the "market can only go higher" feeling that was prevalent much of the fall. Have things really changed? Only time will tell, but the first thing we should do is look back at what was causing the negative sentiment to begin with.
Here is an update on some of the things that caused the negative shift:
- Ireland -- Ireland got their bailout. It was not well received on Monday or Tuesday, but now that it is off the front page, the sentiment is that the European Central Bank (ECB) with the assistance of the IMF (including YOUR money) will continue to do whatever is possible to prop up Europe's failed banks. This may be off the near term radar, but there WILL be more countries that need bailed out. Greece & Ireland will look cheap compared to Portugal or Spain. The rally actually started as the ECB appeared ready to do their own version of TARP or QE, so over the short-term this could be BULLISH even though over the long-term it will only make things much, much worse. Remember, sooner or later somebody has to pay for it.
- Quantitative Easing -- experts like Bill Gross continue to discuss how what the Fed is doing will not help. Here is a link to his latest monthly outlook. I may relinquish my title of Mr. Sunshine to the Bond King, Mr. Gross. We do have to remember that the Fed is Targeting Stock Prices. Even though their first few weeks of QE2 POMO activity did not help stocks, this week we have seen big moves intra-day following the POMO activity.
- SEC Insider Trading Investigation -- we haven't heard much about the insider trading investigation going on this week. Just because it is out of the headlines does not mean it is going away. There are a lot of politicians, I mean attorney generals that love to find blame when people lose money on investments and this seems like an easy target.
- Tax Cut Extension -- so both sides met with the President this week to discuss options. I said in October that our politicians are playing a game of chicken with our economy by not getting the extension done. Letting all of the tax cuts expire will not only lead to an immediate reduction in take home pay in January, but will leave investors with some tough decisions with respect to capital gains. Do you ring the register and lock in the gains you've made and pay a known tax rate, or do you gamble that the capital gains rates will be left the same when the new Congress takes over in 2011?
- Unemployment Benefit Extension -- extended benefits expired yesterday. An estimated 200,000 people lost their benefits immediately and that number could hit 2 million by the end of the month. Like earlier this year when they expired temporarily, the longer this goes on, the more negative sentiment will become. This will have a short-term impact on the economy since these checks are usually spent immediately. Over the long run, they obviously have to expire since somebody has to pay for it. Look for at least a short-term extension to be part of a compromise on the Bush tax cuts.
- Election Results -- Congress is back in Washington trying to push through any last minute agenda items. The longer some of the items like #4 & 5 above are left incomplete, the more we will realize how polarized America has become. It is going to be a tough 2 years in Washington.
- Airport Security -- thankfully this has dropped from the headlines. Thanksgiving weekend came and went without any big incidents or protests. I think issues like this will continue to prop up over the next few years as one side believes government isn't doing enough and the other side believes government needs to back off.
- Foreclosure Mess -- although this has fallen off of the front page, this still remains a concern as nobody knows exactly who owns their mortgage, who can foreclose, and how much the banks will owe when it is all said and done. WikiLeaks is also promising a big release of insider documents from a "major" US Bank early in 2011. From what I've seen of the banking industry, this will not help America's perception of our largest banks.
- Wall Street vs. Mainstreet-- after the "Bailout Party" we discussed how our country has changed following the GM IPO. I continue to hear people say, Washington only cares about Wall Street. Yesterday the Fed dumped a ton of data regarding some of their "emergency" actions in 2008 & 2009. I will leave the analysis to the banking experts, but the biggest thing that jumped out at me was how much support the United States Federal Reserve gave to FOREIGN banks.
- Earnings & Valuation -- This has not changed. While the economy is improving, the leading economic indicators are all tracking well below the average recovery range. Yet somehow the stock market is tracking ABOVE the average recovery. This does not add up and shows how the market is pricing in a recovery far stronger than the one we are seeing. We continue to see deflation in the stuff we want, which is causing margins to shrink. Other companies have mentioned that the higher commodity prices are crunching their margins making their future earnings tougher to predict. Remember, the economy is growing -- just not at a pace fast enough to justify the current stock prices. When you factor in the Trillions of dollars that have been spent towards this lackluster growth, the future looks that much more bleak for stocks.
So there you have it. Many items have fallen off the top of the mind of Wall Street traders for the time being. Nearly all of the ten items could prop back up as problems at anytime because they have yet to be solved. December is typically a positive month for the market, especially when the market was positive for the year on November 30. With the help of the Fed, money could flow heavily into stocks the remainder of the month as hedge funds and other portfolio managers chase performance into the end of the year.
We remain in transition mode as the tug of war between performance anxiety/Fed POMO money and the long-term structural problems plays out. Tread carefully and do not let the short-term action determine your long-term decisions.
NOTE: Whenever we are in "Transition" mode, which basically means there is no clear signal on market direction, all new accounts are left in Money Market. They will remain there until we receive either a buy signal or a sell signal with our remaining trading systems.
We first received the "warning" signal on November 9, so all new accounts since then are being managed, but the allocation is to be 100% in Money Market. Once we exit this mode either way, those new accounts will be aligned with the existing accounts in either the Bullish or Bearish position.
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