Is confidence just a dream?

We have rising unemployment, declining real estate values, rising government debt, a record level of consumer debt, a doubling of foreclosures and bankruptcies,and the inevitability of rising taxes. Who is confident now? In the face of these facts we have a government that has helped us be confident. The drop in the headline consumer confidence index fell from 54.8 in May to 49.3 in June, presumably reflected this month's 15% surge in gasoline prices. Confidence remained well above February's record low of 25.3, but it has yet to recover to the level of 61.4 scene when Lehman's collapsed last September, let alone the levels normally associated with a healthy economy . It is possible that confidence will rise in the coming months. The case Shiller 20 city index suggested that the rate at which housing prices are falling has slowed. Meanwhile, employment has also started to fall more modestly and gasoline prices have stabilized. But confidence is unlikely to recover to the levels that were the norm before the recession. Households still need to reduce their debt to more manageable levels. That will be even harder to achieve if we are right in thinking that income growth will continue to slow in the coming months and years. Overall there is no doubt that confidence has recovered from the depths we saw earlier this year. But we have many issues still to contend with. For example, we still have not seen the inevitable effects of rising foreclosures in the prime real estate market still to come, over the next two or three years. Most of the refinancing and new purchase loans that were done in the real estate market in the years 2004, 2005, 2006 were five year adjustable rate mortgages that started with a teaser rate that would change dramatically at the end of five years. A significant portion of these prime borrowers could not afford their monthly payments under the adjusted rate of interest. This will inevitably spark a new round of foreclosures, but this time in the prime real estate market, which is significantly larger than the sub-prime market. It would be difficult for the government or so-called financial experts (cheerleaders) often seen on television to talk up confidence in what is clearly bad news. Today the S&P 500 completed the right shoulder of the classic head and shoulders formation with the bearish bias. We are looking at a perfect storm of both fundamental and technical data points that point to a correction in the markets, that could accelerate to the downside on any given day. This bias to the downside began in the first week of June, but it has been slow to materialize and follow through. Time will tell. Tell me what you think?

I love my sushi.

Japan by all accounts is the sushi capital of the world,

and I have my excuse to consider Japan. Foreigners have been piling into Japanese equities in recent months, helping the Japanese stock markets to rally nearly 30% since early March. Let the sushi times roll. With risk appetite now waning, the buying spree may not last. Japanese stocks are not as overvalued on an international basis as they once were. And there is growing evidence that Japan's economy is firmly on the fix. Indeed, I suspect Japan will grow faster than any of the major developed economies next year. The share of Japanese equities owned by foreigners at the end of 2008 was 23.6% according to the latest annual share ownership survey published by the Tokyo Stock exchange last Friday. While still high, that share represents a fall of four percentage points in the space of just one year. 2008 witnessed the greatest annual liquidation of Japanese equities by foreigners, since at least the 1970s. Last year's decision to unload Japanese shares was motivated by risk aversion after the collapse of Lehman Brothers, together with concerns about the impact of the strengthening yen.This concern was well justified as global trade and profitability of exporters was and is still a issue. Fortunately, the selling pressure has shown signs of ending. Of the major economies, Japan was the first to enter the recession and will probably be the first to lead us out of the world recession we are in the midst of today. With the US market, now clearly in the correction phase, we can expect to see 15 to 20% decline from current levels. This would only represent about half of the retracement of the recent rise from the March lows. Assuming there are no other unforeseen surprises for us in the markets. This decline should last most of the summer, if not all, and we should have a significant opportunity to buy stocks at a historically low prices. The trade that I'm now considering is therefore, (long, Japan and short, the US). With the recent rally in treasuries and the ongoing decline in commodities, the possibility of a strengthening dollar, would further boost exports coming out of Japan. Please remember, the strategies that I talk about are not to be considered as investment advice. All of these strategies have considerable risk of not working, and the potential for significant capital losses. These are strategies for experience, money managers only. Tell me what you think?

Is the economy and the market about to roll over.

The US auto industry collapse will have a profound impact on the budgets of the states. Auto sales generate significant sales tax revenue. Auto dealers also pay property taxes, to local economies. The loss of the sales tax revenue, which typically accounts for 33% of state tax revenues, and the closing of dealerships nationwide, will reduce revenues for the local towns and cities. This bit of bad news is on top of the ongoing reduction of state revenues because of higher unemployment rates and continued job losses. Most states, cities and towns are faced with the unpleasant choice of cutting services or cutting government employment. Or of course, what we would expect they will do, is raise taxes. Each decision will exaggerate the problem. Most small investors feeling the pressure of declining wealth and the prospect of unemployment have in recent months, began to invest in mutual funds at accelerating rates. Small investors have been investing in both equity and bond mutual funds. Even though both have returned negative returns over the past 12 months. What surprises me is the investments in the bond mutual funds which offer very little upside, little interest and a considerable amount of downside risk, given deficit spending by the federal government and the ongoing assault on the dollar by the Fed. This increased flow in mutual funds by small investors, is a contrary indicator. We may have reached the top of this recent run up in the market. Technically, as discussed in previous blogs, the moving averages for all of the major indexes have been rolling over on low volume. The downside risk in my opinion is increasing with each passing day. I do believe we have put in the lows in the market. However, we should expect a 10 to 20% retracement to begin at any time. As stated in previous comments, we should have an significant upside and the opportunity for above-average profits in the period that immediately follows the correction. Good investing.

Here comes a slow motion train wreck.

What goes up, must come down.

The S&P 500 over the past seven trading days, has displayed a classic triple top, when measured on a daily basis. With the various moving averages crossing negative and the S&P 500 drifting lower, it appears the market will correct, but to what levels?
I do believe the lows are in this time around. However, this correction, could and probably will approach the March lows. At the completion of this correction, we will have a once in a lifetime opportunity to buy the markets at historically low levels.
We are still in a secular bear market, which started in 1998 or 1999 and as history has shown us before. These periods of contraction tend to last on average, 17 years plus or minus. In other words, when all is said and done, tighten your seat belt. As we going down again. But for today's trading, and I want to emphasize trading, and not long-term investing. It is important to understand that the market will offer many opportunities to be long or short in our quest to rebuild our investments.
This trade, like all trades are just that, a trade. Please don't bet the farm. You may lose it. Many of the strategies that I will talk about in my blog will be similar to how a poker player plans out and assesses his opponents. The idea is very simply, play the odds that are most favorable to you. You have to know when to fold.

Do we hold or fold.

Today the S&P 500.

Over the past five trading sessions, we experienced fractional new highs above the January 6 high of 943.85 without experiencing follow-through to the upside. Given today's retreat off the highs, it is a distinct possibility of an reversal pattern to begin. The Mac turned negative on a daily basis. Giving the failed follow-through, the probability of a dramatic decline to take place has increased. Although it is normal for markets to take two steps forward and one step back before going to higher highs. We have been at this level before. January 6 at 943.85 comes to mind.
There are many experts on the various financial channels that believe we are in a bull market, and they could be correct. However, with rising unemployment, and declining real estate values, along with a credit crisis for small businesses. The economic engine for the US economy appears to be somewhat muted. All small businesses are experiencing a continuing credit crunch with lines of credit being closed and interest rates increasing further hampering the cash flow of small business nationwide. There is no compelling reason for small businesses to take risks or consider hiring new employees. The changing tax structure for small business and uncertain regulatory environment is a negative affect on risk-taking. Over the coming weeks, but especially the coming days we will have a much clearer picture to the direction the market will go to. Send me your thoughts?

We are going to fly or die in the market.