Bearish News

Don’t Fight The Bull Trend (yet)

In this era of quant-funds and flash trades, fighting the trend is more dangerous than ever. Toxic stocks like AIG, CITI, FRE, and FNM are rocketing upwards for no apparent reason. Who knows how high they can go? REITs are rallying like mad, despite an oncoming CRE tsunami. The market, or the forces behind it, want it to go up. So it will, for now. These are the fruits of loose money from the Fed.

We must ignore fundamentals and focus on the trend. “Mr. Skin”, a contributor at Bill Fleckenstein’s site, offers this:

A favorite quote: “He Who Knows What Everyone Knows, Knows Nothing” —”Everyone” knows that September is the “worst” month for the stock market. Right? Then why is it making new highs? – Simple: the MAJOR trend is up, as defined in several earlier posts. Another weird phenomenon is the tendency for “news-to-follow-the-trend”. Simply put, in a rising market, the perceived news seems to be “good”, thus reinforcing the trend. A similar pattern can be seen in a falling market. I believe this results from the “news” editors’ emphasis being influenced by either/or group think/vested interest on a personal basis.

I sense growing panic on the part of the “paid-to-play” community that “feels” underinvested in a rising market. Their bogey is “getting away” from them because many of the slower learners among the participants remain intellectually bearish. Problem is: the bearish case is well known but the market is rising despite that. For the paid-to-play, that’s what REALLY matters. Careers are at stake with less than four months left in those careers. Missing a chance to recoup losses from the past couple of years will get you fired if you are “paid-to-play”. Best advice: forget the chatter and “news” flow and simply watch the behavior of the market itself. If it’s “in gear” – either rising or falling – then get on the right side. Right now it’s “in gear” on the upside and likely to stay that way through year end. Next year could be a different story but until then such speculation is premature.

Fleck has a lot of respect for Mr. Skin’s opinions, so I always take them seriously. The current rally, irrational as it is, could continue for an extended period. Watch the trend, don’t fight it. I have some difficulty with this concept, as the fundamentals are clearly lacking. But it’s important to overcome this and realize just how inefficient and wrong markets can be. See More Bailouts and Inflation Loom from April for more.

[Guest post by Stefan Karlsson, Sweden-based economist. Visit his blog here.]

If you want to know why Japan, unlike China, is in a secular long-term decline you can look at population statistics.

At first glance, nothing dramatic seems to have happened. 5 years ago, the population was 127.7 million, now it is 127.6 million, not much change. But look closer and you will see some very dramatic changes. In 2004, the population below the age of 15 was 17.7 million, the population aged 15 to 64 was 85.1 million and the population aged 65 and over was 24.9 million.

In 2009, the population below the age of 15 had dropped 3.5% to 17.1 million, the population between 15 and 64 had dropped 4% to 81.6 million, while the number of people older than 65 had increased 16% to 28.9 million.

During the next 10 year, this trend will continue as the working age population is set to drop at an even faster rate. In the age group of 5-14, the population is 11.7 million, while in the age group of 55-64 the population is 18.6 million, meaning that the working age population will drop by an average of 0.9% per year.

This will not only mean fewer workers but also less capital equipment as people tap into their savings (including the savings in government pension funds) at old age. We have already seen the beginning in this drop in savings as the personal savings rate has dropped dramatically and as overall savings has also dropped significantly. In 1994, private and government consumption was 69.8% of GDP, a number that increased to 77.4% in 2008, meaning that the implied gross savings rate dropped from 30.2% to 22.6%.

See also Steve Malanga’s article on the subject.

[Visit Stefan's blog here.]

These bears don’t hibernate

Guest post by Naufal Sanaullah of Shadow Capitalism.

Confused about the market? Caught short this summer? Confused when to lock in recent gains after seeing your IRA get cut in half? Why not follow the big boys who were right both on the way down and back up?

Charles Nenner, former Goldman Sachs market timing analyst, uses cycles, technical analysis, and a macro approach to time myriad markets. He called for a 2007 market top at around Dow 14,300. In 2008, he warned of a 30%+ decline in equities and in February of this year, he called for a large rally to take us to S&P 1000.

Robert Prechter, founder of Elliott Wave International, uses Elliott Wave Principles, cycle theory, and investor sentiment to gauge market turning points. Less than three months before the all-time stock market top, Prechter issued a short recommendation and didn’t cover until February 23 of this year, days before the March lows, as he predicted a large bear bounce to S&P 950ish.

Bob Janjuah, RBS chief credit strategist, issued a “stock crash alert” in June of last year, predicting a market crash and credit event in September 2008. He then predicted a large “relief rally” early this summer.

So what do all these people have in common? Besides their past predictions?

Their current predictions.

Charles Nenner believes we have topped out and will be retesting lows. Prechter prognosticates a market top in August, beginning the next wave down of this bear market that he believes will cause the S&P to end up below 400. Janjuah predicts a sharp move down starting late August, possibly culminating in an S&P under 600.

Called the massive equities decline in 2008? Check.
Called the bear bounce in spring-summer 2009? Check.
Calling for another massive move down this fall? Check.

I called July 4 of last year the top of crude oil, May 20 a short trigger in equities, September 15 a crash trigger, and January 5 of this year a short trigger. I called for a bounce at Dow 6500, expecting a large sell off in mid-late April to continue the decline. I missed most of this rally, besides a few long positions here and there, so I don’t have the track record as the bears above. But you can bet their analysis provides confluence to mine. I called early August around 1015 to be the top. We will see how that plays out.

The outlook for homebuilders remains bleak, despite costly efforts to prop the market up. The two major efforts, of course, are a generous $8,000 homebuyer tax credit, and artificially low mortgage rates courtesy of the Fed. Without these supports, the housing market would have dropped much farther than it did. But it still ain’t pretty, and even government meddling has limits (for now).  Bloomberg:

The largest homebuilders are mothballing communities across the U.S., signaling they have little confidence that a market rebound is imminent. Builder shares have rallied 76 percent from the lows in November. They may fall more than 20 percent in the next four months unless home prices and property writedowns stabilize, said Anna Torma, a former Merrill Lynch & Co. analyst who tracks the industry at Soleil Securities Corp. in New York.

“Until we see job losses abate and foreclosures begin to decline, rather than increase as we expect, there is unlikely to be a catalyst for the builders,” Torma said. “It’s going to continue to be a challenging environment.”

Artificial Highs

So are we better off with the government propping up housing prices? In the short-term, sure. Nobody wants to experience the turmoil associated with a nasty depression. Beyond that? No. Assisting banks and distressed homeowners does not solve the core issue. In fact, we’ve already done too much inflating of housing prices: mortgage tax deductions, de-regulation, loose-money, Fannie, Freddie, etc. Kicking the manipulation up a notch is at best a postponement of judgement day, and adds to inflationary pressures.

Short Homebuilders?

Good short opportunities may be emerging here, but I probably won’t get involved. I had a nice short on Centex  a few months back, but lost on Toll Brothers. Too much inteferance in the market right now. Fundamentally-good shorts have gotten a hard squeeze recently, and that could continue or a while. Old sayings like “the trend is your friend” and “sit your ass on the sidelines, the club is doing as they please” offer sage advice here.

Inflation will be a major factor for homebuilders at some point, and should benefit those that survive. Debt will go down (relatively), and asset values will rise. Bottom line: if big inflation does hit, short equity is probably not a good place to be. The vast majority think inflation is at least a few years away. But who knows? It could happen a lot sooner than anticipated.

Disclosure: No positions in any companies mentioned.
This is NOT investment advice. Always consult a professional when making investment decisions.