Monday, April 13, 2009

What is wrong with the U.S. economy?

I believe there is no fundamentals to support this rally, market was over sold and it need to correct itself . The only positive fundamental data is the ISM index(*1) which just shows some improvement ,but it is down badly.

Do you want to know what is wrong with the US economy?

1) Every day over 10000 houses add to the big stack of foreclosures. It's increasing not decreasing.
2) A record 1 in 9 U.S. homes are vacant(*2), which delay the housing market recovery and hurt the price of other houses on the block.
3) Obama's administration did not address The shadow banking system(*3) and commercial real estate issues therefore they will be the next shoes to drop.
4) Derivatives markets are the ticking bombs. The five banks with the biggest holdings of derivatives: JPMorgan, Goldman Sachs, Bank of America, Citigroup Inc., and Wells Fargo & Co. hold $206.2 trillion, or 97%, of the total, the derivatives market.
5) Credit market did not improve despite Bernanke efforts.
6) Banks are not willing to lend due to lack of liquidity and general weakening the credit market.
7) There is too much debt that cannot be paid include credit cards, car loans... that been scrutinized and made the situation worse.
8) There is no decoupling; whole world is in recession and there is no silver bullet.
9) P-PIP (Public-Private Investment Program) will be a failure due to relaxation of "mark to market". Please read my post about P-PIP " ".
10) They keep bailing out every body and Bernanke keep printing money, which will cause inflation on the long run.
11) Democrats stimulate package was a big joke. I call it "Democrats' wish list". It was anything except stimulate package. Here are two examples of what they did put in this package. Building a bicycle path in LA. Building environmental friendly golf courts!.
12) Unemployment on rise which makes the housing crisis worse ,and this vicious cycle will continue for months to come, this crisis didn't start couple months ago and will not be done in couple months, it takes time. When unemployment reaches the 10% or more it no longer a lagging indicator and becomes a leading indicator.I need to remind my readers that the real unemployment(U-6) is above 15.8%.
13) Banks used government's founds to buy other big banks therefore big Banks become really too big to fail.

Despite all these problems market could continue to go higher, but if one of these banks go belly up everything will fall apart.

At this point I don't know what is going to happen because nothings works, no technical nor fundamental, if it was based of technical we should get some sort of correction(+10% pull back), not 5 weeks of rally. All the technical indicators became over bought in intermediate term, but we are continuing to go higher! In bear markets we could stay over sold for weeks ,but indices could not stay over bought for a long time,they have to correct themselves. The only positive signs from technical stand point are the 20 & 50 Days EMA that are raising, and market keep making higher high and lower high.

Could we go higher? yes
Will be a sustain rally ? to be honest I don't know! I think this rally is over done, but we could continue to shoot higher, S&P could rally as high as 940-950 then roll over. If S&P500 manages to stay above 940 it could shoot to 1000. I cannot imagine S&P500 passes 1000 this year. If you made a nice profit, you should take some profits before it get too late. I would sell 25% of my positions ,and wait to see what is going to play out. No one knows if we going higher or not?

Government know all these problems therefore congress forced FASB relaxed the Mark-to-market accounting rules to cover up banks losses; (DON'T ASK DON'T TELL POLICY).They are hoping by hiding these lost banks could survive and raise in stock market help banks to raise capital by issuing new shares and everything eventually comeback to normal. Please read my post The end of the Mark-to-market accounting rolls, "The End Of Transparency Era "

I need the mention City group and GS announced that they are going to issue shares to raise capital. We will see if Bernanke's gambles will hit the jackpot!!!.

(*1) (ISM Index definition: A monthly composite index, released by the Institute for Supply Management, that is based on surveys of 300 purchasing managers throughout the United States in 20 industries in the manufacturing area and show the manufacturing production)
(*3) (Shadow banking definition:hedge funds, SIVs, conduits, money funds, monolines, and other non-bank financial institutions)