Americans are an optimistic lot. I suppose that’s a result of your history and your having inherited a continent blessed. I started this blog because I was concerned that US citizens had a very optimistic view of the future whereas I see serious economic issues emerging. I havent wanted to post until there was clear evidence that my hypothesis, that the subprime mortgage market would cease to exist and that financial problems would spread to the Alt + and jumbo loans and eventually to the banks and of course, the stock market.

Now its time to start again and I’d like you to take a look at this site which records that 41 sub prime lenders have hit the skids in the last two and a half months.

Its time for Americans to think about the economic implications of the war and the Administration’s budget laxity.

Early but not wrong at all.

It was bearish early, but the markets haven’t seen much headway for a while. The final nail in the coffin for a bull market is merger and acquisition activity. The creation of credit and the hedging of risk does not represent a new paradigm, it represents a massive generational top in US stocks. Going forward, the only secure financial assets are those that do not carry a corresponding liability.

Hint: they are shiny and live in bank vaults. All the middle eastern markets have crashed and now that China has peaked out, a severe correction is in store. Look to the Asian markets today.

We try and tell you the truth in Market Mad. The fact is that the markets are Mad and the US market in particular is way overbought and overvalued. The stock market has had a great run over the last few months, but as the holiday season begins analysts are worrying that the traditional year-end rally on Wall Street may have already come and nearly gone. At Market Mad we agree. Mary Ann Bartels, technical research analyst at Merrill Lynch, wondered in a note to investors whether the tendency for stocks to climb in the last couple of months of the year had been rescheduled this year for September and October. We think yes she wrote. She also acknowleged feeling torn between what her charts have told her and what the calendar and history have led her to expect.  Market indicators suggest a 8% to 10% decline is the more likely scenario over the coming weeks. What is surprising is that these readings are occurring at this time of year when most years see a bullish year-end rally. 

  Last week trading volume had shrunk, which often precedes a price decline. Several sentiment indicators, including opinion surveys of investment advisers and measures of market volatility, show the sort of complacency that typically occurs near market tops.

Citi Issue Warning on Stocks

Analysts at leading US investment bank Citigroup have issued a dramatic warning to clients to be wary about the current state of the stockmarket.

Authored by analysts Adrian Blundell Wignall and Alison Tarditi, it warns that there are “similarities with the 1986-87″ period leading up to the last big stockmarket crash.
Blundell-Wignall is a former senior Reserve Bank staffer who left to become an investment analyst. He is considered to be one of the most highly regarded macro-analysts in the country.

The report suggests that we “pray” that companies globally restore fundamentals and that we can avoid major shocks. Greed has become a factor and comparisons with elements of the late 1980s come to mind,the report warns. It is concerned at “the cheering on of private equity deals that worry us”.There are worries about the health of the US economy, the valuations of takeover stocks in Australia -such as in the media and retailing, worries that the listed property trust sector is over priced and a concern and that China is slowing - but this is not being taken seriously.

In their lengthy report, contained in Citigroup’s daily circular to clients, the authors state that their key points are:

The market is getting expensive again. But the money is pouring into the equity market at rates that we have now revised significantly higher.
There are signs of excessive complacency about economic performance, and the cheering on of private equity deals, etc that worry us. One of our key fundamentals (US productivity) has wobbled.
There are similarities with the 1986-87 market in relation to exuberance and deal making; but what if we are only early in that process? In the absence of a shock, it could go on.
We think it is a time for caution play the ranges for now and pray that companies (globally) restore fundamentals and major financial shocks are avoided. Avoid stocks with abnormally high returns where signs of excess are apparent.
Also in the report:

Inflows into managed funds could be as high as $79 billion this year and $92 billion next year. Changes in super rules in the run up to 30 June 2007 as well as the creation of the Future Fund are responsible.

Compared to like issuance, there will be massive excess cash coming into the market in both years, and asset managers will benefit strongly (more than we previously thought)….

Moral hazard problems associated with private equity and the ready availability of liquidity, both here and globally, are driving up equity prices beyond reasonable returns, primarily in the Industrials. Greed has become a factor and comparisons with elements of the late 1980s come to mind…

The current period has some worrying characteristics in common with the late 80s and the LBO debacle: greed and deal flow are driven by…

Fees for private equity are related to deal size. Banks want to lend for the profitable business loan segment. Private equity benefits in the short run by inflated valuations of companies. Until one of the deals falls over, banks don’t have the incentive to impose tough loan-to-EBIT standards there is excessive willingness to lend.

Signs of excessive exuberance are present in the form of: “generous” success fees for new floats, associated with excess volatility; directors granting themselves in-the-money options related party fees and transactions with cross directorships involved….

If any deals here in Australia, or abroad, start to go bad, lending standards will tighten, and the secondary market in deals will dry up. If transactors then turn to the stock market for funds, supply and risk factors would be negative for the market. Despite the warning, the analysts do like resource stocks generally but are switching from some stocks into others in the sector.This is a bit at odds with the worries about China, but then China is still growing, just a little more slowly.

The European think tank Europe2020 express the view that activity in the bond and share market was driven not my fundamentals but by electoral politics. A good example of what they see as political intervention was the miracle revision of the employment figures which saw the publication of a very bad figure for job creation in September 2006 (51,000 whereas 120,000 were expected) coincide with an astonishing discovery that 800,000 had been created since the beginning of the year.

Combined with record bullishness not seen since December 1973 we should expect the market to roll over as the economy heads into recession. Market Mad says sell stocks for safety.

Get ready for the Global Systemic Crisis.

Hacking Democracy is on Google Video. On the eve of the election it might be worth remembering that the price of democracy is always eternal vigilance.

“This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence — economic, political, even spiritual — is felt in every city, every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military/industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”

“Another factor in maintaining balance involves the element of time. As we peer into society’s future, we — you and I, and our government — must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.”

RealtyTrac (http://www.realtytrac.com/), the online marketplace for foreclosure properties, today released its August 2006 U.S. Foreclosure Market Report, which shows 113,300 properties nationwide entered some stage of foreclosure during the month, a 22 percent increase from the previous month and an increase of nearly 50 percent from August 2005.  The report shows a national foreclosure rate of one new foreclosure filing for every 1,021 U.S. households, the second highest monthly foreclosure rate reported year to date.

Based on the Japanese experience we should expect that home prices will continue down for another ten years minimum, possibly fifteen. Prices will eventually return to 1996 values in real (inflation adjusted) terms.

Well, I have mixed feelings about this post, as an Australian, and an observer of US markets I know your political culture, well, its proud, so I worry how readers might react to this one.  

This is what’s been bothering me, lots of money has been buying stocks at a time when they are not only priced to perfection but are so at a time when considerable geopolitical and economic risk lays dead ahead.  

But I could only find one  site that backed what I’ve been thinking.  To quote:

Surprisingly, we are not the only ones that find the stock market’s action somewhat odd, for as savvy market observer Laszlo Birinyi recently noted, “It is very odd not to have had a 1% down day in any of the U.S. large cap indexes for so many months.” Obviously, we agree, and in last Monday’s missive we termed this an “eerie situation” and reprised Dr. Robert McHugh’s (www.technicalindicatorindex.com) observations, as paraphrased by me:

The rally since July has been almost entirely short-covering. We get one big move, about once a week, on buying panic, then no follow-up. . . . Get this: All of the progress of this three month summer/autumn rally, all of it, occurred in only 9 days of trading, and all but one of the nine was a short-covering rally. . . . Other than those 9 trading days out of 63 since July 14^th, the other 54 days of trading produced only 4% of the upside progress, and zero since July 19^th. ZERO . . .!

We went on to note that while we can’t tell if those nine sessions were all “short covering,” we did take the time to check Dr. McHugh’s insights and found them to be right on point. Amazingly, those nine sessions [7/19 (+212); 7/24 (+182); 7/28 (+119); 8/15 (+132); 8/16 (+97); 9/12 (+101); 9/26 (+93); 10/4 (+123); 10/12 (96)] accounted for 1155 of the Dow’s 1200-point gain from the July lows. Even more amazing is that on ALL of those nine trading days, according to our notes, the aforementioned “mysterious” futures buyers were at work with the attendant arbs’ action.

Almost on cue those “mysterious buyers” showed-up early last week, at 6:30 p.m., to be specific, and drove the S&P 500 emini-futures contract from 1375 to 1397 in only two minutes, as can be seen in the following chart.

Only one party could be responsible for this buying. 

I note that the October 13^th edition of the Wall Street Journal had an article titled “Paulson Pulls for U.S. Markets,” which implies it just may be the the work of the Plunge Protection Team (PPT) . . . aka the President’s Working Group on Financial Markets that was created in 1988 by President Reagan under Executive Order 12631.

Now that could mean that your new Treasury Secretary, Mr Hank Poulson is using a crisis management tool to frame your majority party’s Congressional re-election effort with an appearance of stock market optimism.

For a nation that defines one of its key virtues as liquid and transparent markets, this seems a terrible shame,  one I must bring your attention to.

 The Elephant in the pit looks like it belongs to the G.O.P. 

Market Climate

As of last week,  stocks were characterised by unfavorable valuations and moderately favorable market action. Short-term, the market remains overvalued, overbought and overbullish,  a combination that has historically made stocks vulnerable to negative short-term returns even when market action has been favorable.

Adding to the general impression of an overextended stock market, we note that corporate insiders of stocks traded on the NYSE ramped up their selling activity last week to 7.81 shares sold for every share bought. On the Nasdaq, the insider sell/buy ratio shot up  to 6.36. Both ratios have more than doubled over the past few weeks. One wonders, if corporate insiders have so little optimism about their own shares, why should investors?

Some reasons why this is not a new ‘bull market”. Although it may be bull of a rarer kind. In no particular order.

1) Absolutely record person debt.

2) A negative savings rate for US consumers for the past two years, something only seen last in the Great Depression.

3) A record trade deficit of more than $800 billion a year, getting near one trillion soon.

4) An imploding housing price bubble, with soaring foreclosures, record inventories of unsold homes on the market and skyrocketing delinquent mortgage payments.

5) Wages not keeping pace with inflation.

6) A record disparity between the rich and the poor.

7) A record budget deficit, when the cost of the wars in Iraq and Afghanistan are added in (they are not in the budget figures) and the underfunding of entitlement programs is factored in.

8) Record underfunding of pension plans.

9) A dead airline sector (airlines drifting in and out of bankruptcy), a near-dead auto sector (GM and Ford are firing tens of thousands of workers, shutting down dozens of plants and have corporate bond ratings below JUNK!) and a soon to be dead real estate sector.

10) Manufacturing in the U.S. is shrinking drastically and now accounts for only 10 percent of the economy.

11) An economy completely dependent on the accumulation of massive amounts of debt in order to keep muddling along.

12) In the past five years, more than eight million Americans have filed personal bankruptcy.

Sorry guys, your doomed.

While the DOW has managed to crawl to a new high in nominal terms, the S&P 500 remains well below its record high as does the Nasdaq. If the DOW was a ordinary “market cap” weighted index it would sit at about 80% of its previous high. If we were to measure the index’s and take into account inflation, the DOW would only be about 60% of its previous high. My view is that this is as good as its going to get, the vast proportion of stocks will be absolutely killed in the coming months, and the decline should start about election day or before.

My name is Kevin and I’ve spent the last six years working out whats going on with the US stockmarket.  I’m not selling you anything so I’m in the unique position of  being able to tell you the truth,  as best I know it. No deliberate deception anyway.  This is an incredible time to be following the markets and I’m gratefull for this opportunity to share what I know.   I try and post every day.  OK. Lets get on with the show.