Monday, April 19, 2010

Out on a Limb

We have significant clarity in the stock market, if my Elliott Wave count is correct.

The decline we saw Friday and which will probably resume today or tomorrow is a wave iv of v of 5. The other alternative is that the top is in and we see a significant drop from here.

In other words we've got one more wave up in the stock markets to moderate new highs, but we are days to weeks from a significant top. A steep and ugly correction should unfold over the summer and into the fall. This is true whether we are in a bear market bounce (which is what I believe) or a new monetery inflation-driven bull market (which I think is bull.)

By significant drop, I mean a real possibility of a retest of the bear market lows of March 2009, even under the optimistic scenario. If we are in a new, fiat money inflation-driven bull market, this will be your chance to dive in and ride the elevator up.

Either way, now is not the time to buy stocks. Complacency is at an all-time high. The S&P is sitting right at its 60% retracement mark, which is a significant Fibonacci ratio in Elliott terms.

Below is a relevant article by Dr. Steve Sjuggerud


Be Careful Now: Record Optimism in Stocks
By Dr. Steve Sjuggerud
Friday, April 16, 2010

"Be fearful when others are greedy, and be greedy when others are fearful."
– Legendary investor Warren Buffett, one of the world's richest men

Now, my friend, is a time to be fearful.

It is the opposite of a year ago. Back then, it was time to be greedy – and we were...

Almost exactly a year ago in DailyWealth, I wrote an extremely bullish story, called "The Great Rally Before the Great Inflation."

At that time, investors were downright scared. But I said stocks would have one of the greatest bull runs in history. What I wrote turned out to be exactly right. But today, things have changed...
I believe we're near the end of that great bull run. Take a look at what I wrote a year ago for perspective... then let me share with you where I think we are now.

From DailyWealth, April 24, 2009:

Stocks could rise dramatically over the next 18 months or so. I believe stocks could have one of the greatest bear market rallies in history.

...The market is telling us the bill for the government spending isn't due yet. Risk is subsiding... And the recession will possibly end sooner than anyone thought.

...I spent the last two issues of my newsletter, True Wealth, recommending speculative positions in stocks good for 12 to 18 months. I expect we'll see rallies of 50% in all the things I've recommended.

...What we're seeing now will turn out to be one of the greatest bear-market rallies in history. I know the bill for the government spending will come due some day. But for now, as long as Bernanke is juicing the economy and keeping interest rates at zero, stocks can run. Take advantage of it.

We took full advantage of that opportunity in my newsletter, staying invested for a very long time – even after the market had soared by record amounts. But times are totally different now...

Since the March 2009 lows, U.S. stocks have nearly doubled. The price of oil is up over 100%. The price of copper is up over 100%. The list goes on.

It's just gotten silly. And NOW investors are ridiculously optimistic... AFTER the 100% gain.

Folks, the time to buy was BEFORE the 100% gain!

In March 2009, investor sentiment was at an extreme of pessimism. THAT was the time to buy.

To put specific numbers on it, "Dumb Money" confidence, as measured by my friend Jason Goepfert of SentimenTrader, hit a low extreme of 21 in March 2009. Today, it sits at 75 – it hasn't been higher than that in years.

After weeks and weeks of a "safe" bull market, investors are downright greedy these days.

Don't fall for it.

To succeed in investing, you must do what Warren Buffett advises: "Be fearful when others are greedy, and be greedy when others are fearful."

It's been years since the "Dumb Money" was greedier than it is today. Trade accordingly.

Good investing,

Steve

Sunday, April 11, 2010

Municipal Bonds Pt 2

A little while back I wrote a post explaining why high interest municipal bonds are not a good deal right now. This post assumes we're in the nascent stages of an economic recovery, which I don't believe to be the case. I think we're in the economic equivalent of a dead cat bounce (i.e. even a dead cat will bounce if you drop it from a great enough height.)

I know two people who have been approached by their "investment counselors" (i.e. salesmen) with recommendations to buy some sort of high-interest muni bond product. One even promised tranched debt (just like the mortgage-backed securities, I might add.)

Let this be a lesson. These people do not have your best interests at heart generally, and even if they do, all they know is what the boys downstairs in the boiler room operations tell them.

Awhile back I had one of these investment counselors. He was a good friend, an honest man, a Christian. He would not have attempted to steer me wrong or take advantage of me. He also worked very hard to sell me Enron stock about 12 months before it collapsed. Not his fault. He was just trying to sell what he'd been told to try and sell.

Next 'Big Crisis' Is Unfolding in Muni Bond Market
Commentary by Joe Mysak

April 9 (Bloomberg) -- Look to municipal bonds for the next big disaster.
That’s the advice of Richard Bookstaber, a senior policy adviser at the Securities and Exchange Commission.

Writing on his blog this past week, Bookstaber said the next big crisis looked a lot like the last big crisis, in housing and credit.

Conditions in the municipal-bond market match almost exactly the conditions that existed for the blowup that sparked the worst recession since the Great Depression, he said.

I would agree with him up to this point. What he then predicts seems rather unlikely to happen.
The muni market is leveraged and opaque, in terms of pension obligations. It is a big market, and problems can “go systemic,” he writes. Much of the tax base, things like toll revenue, is already mortgaged. Once a few municipalities default on their debt, “there is a risk of a widespread cascade because the opprobrium will be lessened.”

Finally, those investors who seek salvation in geographic diversification may be disappointed, just as those in the housing market were. That’s “because similar methods of leveraging were being employed throughout the country.”

Bookstaber is a serious, smart fellow, a hedge-fund and Wall Street securities firm veteran. What he says can’t be dismissed as the usual headline-grabbing bloggery hysteria.

Los Angeles, Detroit
Bookstaber also works for the SEC. So he may have some special insights (he noted that his blog post is his personal opinion and not the views of the SEC or its staff).

As if to punctuate the man’s arguments, the city controller of Los Angeles this week said it might go broke in a month; the mayor called for nonessential services to be shut down for two days a week. The Citizens Research Council of Michigan, an independent research organization, released a report on Detroit, and said it might be helpful if the city reorganized under bankruptcy protection.

There’s a lot of bad stuff going on in Muniland right now. Because tax revenue tends to lag behind economic recovery, there’s more gloom on the horizon. The question for bond buyers is whether “things can go systemic,” as Bookstaber puts it.

I don’t think so.

Nor do I think that bond investors are well-served by ignoring the imminent perils their market has to navigate. Perhaps I have received one too many e-mails from readers complaining that I somehow do a disservice to the municipal market by publishing facts about unfunded pension liabilities, rising default rates, and public officials who are looking into the possibility of Chapter 9 bankruptcy.

Default Record
Still, systemic? Really? What would that mean? The $2.8 trillion municipal market is enormous. First there’s the number of governmental units, including things such as school districts and authorities: 89,526 at last count, which was in 2007. There are probably more today.
So how would you quantify “systemic” default? If we say only half of the governments sold bonds, that’s about 45,000. The figure is probably higher, though, because so many small issuers sell bonds once every few years.

Is systemic, then, 10,000 defaults? Maybe it’s 20,000? The record year in recent history for defaults was 1991, when 259 bond issues either failed to make debt-service payments or violated covenants, according to the Distressed Debt Securities newsletter of Miami Lakes, Florida.

During the Great Depression, from 1930 to 1939, 4,770 municipal-bond issues defaulted, according to George H. Hempel’s book “The Postwar Quality of State and Local Debt” (1971). More than 60 percent occurred in the South or the Midwest.

Inconsistent Condition
I don’t buy the idea of a mass meltdown. The municipal market is too specific and too particular. It resists categorization and generalization.

Not all states and localities are alike, when it comes to their budgets or pension liabilities. Some are on the brink, others are courting disaster, and still others are managing. Tax revenue and investment returns are already coming back.

What will we see instead? It will be bad enough. There will be more defaults, yes, and possibly a few high-profile bankruptcies that will shock the system. The really bad news will probably be concentrated in a number of states, the same way most of the housing collapse was.

The best thing about these “crisis” calls is that they focus states’ and municipalities’ attention on their pension shortfalls and their intractable public labor unions.

The backlash against ever more lavish public pensions has begun, and it won’t be pretty.


(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net Last Updated: April 8, 2010 21:01 EDT