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06/26/2009 After the Close

Despite a late rally attempt, the major indices closed mixed.

Several of you pointed out that we had missed the big news from yesterday ... the death of Michael Jackson and Farah Fawcett and the impact that their passing would have on the American economy. I sincerely apologize to each of you on behalf of Lewis McLain and myself. Also, we have updated our trip commentary and you can find it by clicking here.

Today's volume swelled on account of the Russell 2000 rebalancing so do not believe that institutions are jumping back into the fray. For the week, only the NASDAQ was in positive territory with the NYSE Composite, DJIA and S&P 500 in negative territory. Apparently, efforts at improving portfolio performance are meeting with some resistance.

Zack's had an interesting article today on the plunge in commercial real estate including the following chart which shows the comparison between residential prices and commercial prices. Clearly, the road ahead could be mighty bumpy.

>> Your subscription will expire in 946 days on January 31, 2012 <<

Market Musings

of 15Market Musings Commentary

6/29/2009http://www.stratinv.net/Sub/Musings.php

The tenure of Chairman Bernanke as FED chairman would appear to be less than secure given the tone of the hearing on the Bank of America/Merrill Lynch transaction. Perhaps, former Treasury Secretary Paulson, Fed Chairman Bernanke and BofA Chairman Ken Lewis should have to face criminal indictments as to fraud and violations of anti-trust provisions. The regulator's concern of systemic risk to the financial system seems to be the catalyst behind all the deception ... yet, they are unable to prove that it was there ... they only surmised it was. Of course, all of them do not believe in the capitalistic system or they would have let institutions fail and never had the toxic assets on the FED's books to contend which not really threaten the solvency of the FED and the U.S. dollar.

The end result of the "to big to fail" syndrome is that the U.S. economic system could fail.

The personal income and spending data was hyped today as being a major improvement. However, if one looks under the hood, you find that government stimulus payments made all the improvement. In actuality, private wage and salary disbursements decreased $12.4 billion in May, compared with a decrease of $0.7 billion in April. Goods-producing industries' payrolls decreased $12.9 billion, compared with a decrease of $12.2 billion; manufacturing payrolls decreased $9.8 billion, compared with a decrease of $4.9 billion. Personal income from the private sector which pays taxes is accelerating to the downside; which means tax receipts are plunging. Transfer payments which cost the Treasury are exploding.

Casey Research has looked at the widening gap between revenue and expenses for the federal sector and the result is not good as shown below:

Note that Casey Research is using a deficit of only $1.8 trillion and does not include all the off-balance sheet numbers which could easily take the GAAP numbers well in excess of $6 trillion.

The Treasury managed to sell its $104 billion of 2, 5, and 7 year Treasury notes this week. However, how much was really purchased by foreign investors and not the FED. FT Alphaville this morning reports the Treasury secretly changed the rules behind the reporting of the demand of these auctions "But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids,



putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners." This could indicate that the FED might be purchasing a significantly larger amount of Treasury bonds that previously disclosed.

There also appears to be some problems at the COMEX with its reporting of both gold and silver inventory holdings. The numbers just do not add up on a daily basis and it has to make one wonder whether the auditors are doing their job. Even the Huffington Post smells a problem:

"What does it all mean? First, there are indications that the seller side of futures contracts (such as Deutsche Bank in April) are having a difficult time making good on their commitments. Second, the information reported by the Comex regarding physical inflows and outflows is looking more and more like a convenient fiction. Third, there is some doubt as to whether there is gold in inventory -- as there absolutely should be -- to match existing warehouse receipts. Fourth, the Comex warehouse is one of the most secure forms of gold investment in the world. If they can't be trusted, what does that say about ETFs, pooled accounts, futures, forwards, options, and all the other forms of "paper gold" out there? Fifth, if it becomes clearer that there is no physical supply to meet physical demand, the dollar price of gold could go much higher. "

We made no changes in the portfolios today.


Quarter end gaming started today!

The economic news continued to disappoint investors but the market was gamed higher as portfolio managers were trying to improve their results. The majority of today's Musings was prepared by Lewis McLain as I spent most of the day watching others attempt to fish and getting little or nothing for their efforts. Photographers pay less to the charter boat captains and get the same boat ride.

Stock markets have a good day, but volume was slightly under the most recent 20-day averages.

It was a heavy day for economic news. The stock markets responded nicely with an almost identical 2.1% rise in the three charts above. The last 15-20 minutes ended with a lift instead of a swoon as has been the case recently.

Let's examine some of the economic news that is best characterized as not-so-good-but-within-expectations.

Quarterly GDP percent change, annualized was minus 5.5%. That's not good, but better than the revised negative 6.3% for last quarter. The GDP price index was 2.8%, exactly as expected. Actually, the stock market would find it hard to rally on the bad-but-better data in the table above and the two charts below.



So it must have been jobless claims that provided good news, huh? I don't think so. New claims were up 15,000 jobs to 627,000. That was enough to cause the 4-week average to flatten instead of continuing the modest drops of the last few weeks. Continuing claims also were higher.



Well, was it an increase in corporate profits in the latest revision to the 1st quarter data? The Y/Y measure is down 21.8% compared to being down 22.0% last month and compared to a negative 36.4% in the fourth quarter of 2008. But we're heading in the right direction. If sustained, we might be pleased in a few quarters. It is a little early to celebrate anything other than the direction.

Buyers took on $27 billion of 7-year T-Notes today with a coupon rate of 3.25% and a yield of 3.329%. The bid/cover ratio was 2.82. Econoday reports "the intensity of demand at this week's auctions is raising talk that official buying may be involved. Treasuries moved to session highs following the results."

So, why were the stock markets so robust today in terms of value? Could it be that some investors might be realizing that the natural cycle (stimulus money has not really been felt yet) is working its way through the mire, that the businesses excesses are being purged from the system (layoffs and expense cuts abound), that the strong will come out even stronger, that profit margins will improve and, in the end, the market will rise with more realistic values in the future? We'll see if the outlook is improving in front of fundamentals (or



contrary to fundamentals) if the University of Michigan Consumer Sentiment breaks 70 tomorrow.

Or was it just gaming quarter end prices? The lack of volume concerns me about the extent of institutional support for today's move.

With gas prices rising, will consumer sentiment continue to improve? In my opinion, the massive debt overhang and increasing deficits at the state, local and federal levels will cause interest rates to rise in the future shutting down any recovery from "green shoots." We may well be headed for a double-dip recession if not worse.

We are just beginning to see the implosion of commercial real estate prices and the toxicity of the loans in bank and pension portfolios which will have to be written down to reflect current values. The credit card delinquencies and the increasing level of defaults in the so-called prime mortgage market will also act to dampen the smoke and mirrors that the media and the Ministry of Truth have been feeding the masses. I believe that the trend may be down from here.

Chuck Butler writing in the Daily Pfennig today notes that the IMB has agreed to issue $300 billion of SDR's, 10 times the amount currently outstanding. He speculates that this might be one way the Chinese can reduce their exposure to U.S. dollars without it being exceedingly obvious. Per Chuck "China had called for a new reserve currency, replacing the dollar with SDR's (special drawing rights), which would be a basket of currencies. This news received a ton of publicity... But one thing that didn't receive a ton of publicity was the fact that President Obama agreed at an economic summit in London that SDR's should now be used to help stabilize the balance sheets of nations struggling to combat the current crisis."

We added VIT and SYNA to the Conservative portfolio this morning hoping for a short-term bounce. There were no other changes in the portfolios today. Tomorrow we will be headed on the Alaska Marine Highway through Prince William Sound from Valdez to Whittier so tomorrow's Musings might be delayed.


The FED failed to excite.

After the FED announcement, the market barely moved as investors found little in the report to help their current perception of the economic malaise. Although advancing issues and volume were dominant, overall volume was still lower than yesterday. That does not suggest to me a strong market despite we are nearly at the end of the quarter and portfolio managers might want to boost share prices.

Today's Musings by Hank Muilvihill:

After the FOMC statement, with rates unchanged, sellers quickly attacked the morning stock market rally and drove prices down. Nothing unusual about that, but what happened next was not what we usually see.

Let’s set the stage for our readers. Here is how it usually goes. Today was a FOMC day. We usually



get 8 of these per year. These days are like sporting events for market participants worldwide. Oh we love it, on FOMC days. All attention is fixed on the U.S. Federal Reserve. The days before have been filled with anticipation and concern, heavily driven by media commentators. The day is here. What will the FED do? Comes the appointed hour, and trading desks fall silent, waiting. CNBC, MSN, Bloomberg, Yahoo, Blackberry viewership spikes. The minutes pass, until, finally, the statement is released. Traders snap back to their screens, place their bets, the program trades kick in, the talking heads offer opinions, and the post-statement game is on. It’s hard to imagine how the rhythm of global finance could do without the spectacle provided by the FED on these days. That’s why I started FED FRIDAY®, as a forum to discuss the actions of the FED, and what those actions mean to market participants. Now, thanks to Fred, I have another forum to share some insights; this Strategic Investing Daily Musings newsletter.

It is common on FOMC day to see an opening direction in the markets, often leveling off as the 2:15 EST time of the statement release draws near. Following the release of the statement, it is common to see a sharp move against the trend, followed by a snap-back resumption of the trend. What we saw today was unusual in that opening trend did not strongly re-assert itself. I smelled a good old-fashioned PPT effort in the last hour, in order to assist the major indices to a slightly higher close.

The current zero percent Fed Funds rate remained unchanged, as expected. What was in the statement that spooked the Bulls today?

Below is the entire statement:

The new items are what FED watchers look for. “Resource slack” is new. What that means is global over-capacity in almost everything. This global excess capacity is highly deflationary, and will act as a damper on earnings across all sectors.



I can’t leave this FOMC statement without commenting on the FED’s openly declared intention to purchase long-dated securities. Please understand that this is in no way “normal”. This is a drastic admission that markets are not functioning, and that the FED must be the buyer of last resort. That is not quite what they are supposed to be doing. Lender of last resort, perhaps. But not buyer.

Until March of 2009, FED watchers had long suspected the central bank was directly intervening in markets other than the short term money markets where they were supposedly restricted to playing. It was controversial when Fred, I, others, and most notably Michael Bolser of www.interventionalanalysis.com would point out the strange market actions originating from Caribbean accounts, and hitting the futures markets, usually at 3:00 EST. What strange buyer was that?

Well, they’re out in the open now. Who knows what else the FED is buying?

Keeping track of how the FED’s zero percent is influencing inflation:

Lewis McLain sends the following chart:

We will examine the re-flation trade in a future Musings. Today, the dollar was strong against resources. That is not an inflationary signal, especially on a FOMC day.

There was an additional major eco-item today, Durable Goods. These figures were stronger than expected.



From the Small Boat Harbor in Valdez, Alaska, we are posting today's Market Musings, thanks to Hank and Lewis. We made no changes in the portfolios today although the number of A+190 stocks rose to seven in this evenings screen.


Waiting on the FED again.

More evidence keeps piling up that the rally is over. Volume was lower today as the market awaits the FED tomorrow. Declining issues were greater than those advancing although advance volume was higher as the market ended mixed today. Hank Mulvihill wrote most of today's Musings.

After the 2 year Treasury auction went better than expected, buyers came back and the markets moved higher.

The major release for today was Existing Home Sales. As with many economic releases, it pays to take a couple of minutes to study the data. How is it presented? Oddly, as annualized numbers, although this is in fact a month-to-month survey.

Econoday wrote: “Existing home sales weren't that bad in May, up a sharp 2.4 percent but to a 4.770 million annual rate that is below expectations for 4.850 million. Supply is down which is good news, at 9.6 months vs. 10.1 in April. Prices also firmed, up 3.8 percent in the month to a median $173,000 though the year-on-year decline actually deepened slightly, at -16.8 percent.



Data are steady from region to region with the Midwest leading the month. Of note, Realtors report a steep drop in the proportion of distressed sales, at about one-third of all sales vs. half in prior months.”

Note the sales figures in the above chart are annualized, not monthly, figures. The actual number of homes sold last month would be these monthly figures, divided by 12.

Fred's comments: What the media conveniently forgot to mention is that once again, the previous months data was revised downward just like the previous four months. This adjustment made the figures look better, of course. Year over year, May sales were down 3.6% from May 2008, and 1/3 of this year's sales in May were foreclosures.

Today, we also had economic news releases concerning retail sales. The week-to-week sales numbers were “clouded” by weather-related factors, and not easily interpreted for trends. We believe retail sales will be a key “tell” on the status of many areas of the economy. The chart below is for XRT, the S&P Retail Index ETF. The Retail Index chart closely resembles the S&P 500 itself.

We also call attention to the 900 level on the S&P 500 chart shown below, where the 50 day and the 200 day simple moving averages are now touching. In the past, when the 50 day average moved above the 200 and remained there, a new bull market was usually confirmed. At this time,



with the STI 8 x 20 having turned negative, and the Bullish Percents turning down, we suggest prudent investors should watch awhile before acting.

Gold Bugs had a good day today, trying to keep the uptrend intact.



The World Bank spoke and the markets went south.



Perhaps, the rally is over. The dearth of A+190 stocks although SYNA regained the list suggests that the market environment is not healthy. We have been in cash in the Conservative portfolio for almost a week and today SPY was sold from the Aggressive portfolio on a hard stop. It is not a wise man that steps in front of a raging flood and that is what happened today. Much of today's Musings was written by Hank Mulvihill as I traveled from Haines, Alaska back into the Yukon Territory and then spent the night in Tok, Alaska.

From Hank:

It was supposed to be a quiet day as no major economic indicators were due to be released today in the U.S. But the World Bank announced that it believed the world recession will be deeper than previously forecast. This sent equities and commodities into a tailspin while flight to safety boosted Treasuries significantly. The Dow and S&P dropped 2.4 percent and 3.1 percent, respectively. Techs, small caps, and mid-caps pulled down the overall equity market even more sharply as the Wilshire 5000 declined 3.2 percent for the day.

Treasury yields fell with the 2-year note and 10-year note decreasing7 basis points and 9 basis points to 1.14 percent and 3.69 percent, respectively. The dollar generally firmed, up about a cent against the euro at1.3861 and up about 1-1/2 cents against the pound sterling at 1.6347. Commodities fell sharply with oil ending at $66.93, down $2.62.

Investors are waiting for the FED at 2:15 EST on Wednesday. Does anyone really expect a change from QE, Quantitative Easing? Not likely, with the continuing Great Recession.

With all of the newly-generated FED cash in the system, many people are wondering why we are not experiencing inflation. Many people are hedging against rising rates by purchasing TBT, and precious metals. However, an explanation may possibly be found by looking at US job losses, with consumers slowing spending, thus far absorbing the large increases in the money supply.

But the Fed's strategy does not seem to be working as discretionary income remains in the doldrums and people are being more careful about their spending choices.

The STI indicators for both the S&P 500 and the NASDAQ turned negative after today's trading. This suggests that caution is indeed advised and that perhaps, short plays will prove to be the place to be in the next few weeks.



It is 4 a.m. here in Tok and it has been light enough to read by all night. Sure glad for the heavy curtains that block out the outside noise and light in the Main Street Motel with its satellite link. The last 200 miles of roads in the Yukon Territory are under construction and my white truck is now multi-colored brownish.

Today's market action and the upcoming FED meeting suggest that prudent investors be extremely careful.


Who's afraid of a triple witch?



The markets closed mixed today. Apparently, the triple-witching day failed to cause much change in direction of this range-found market even with the huge increase in volume. Advancing issues and volume were substantially greater than their counter-parts but in the end the markets failed to show much movement. Could it be an indication of a tired market? The spread between the high and low marks in today's range is the low for 2009.

The result of today's move was a 2.6% decline for the week, the first decline in five weeks. During the past few days, the decline in the number of IBD stocks that merit an "A" rating in the Accumulation/Distribution rating is also suggestive of a tired market. For the past week, we have not had a single new stock added to the A+190 list. The explosive life in the market since the March 12 follow-through day can clearly be seen in the number of "A's". However, the decline the past week is also fairly dramatic.



I find it simply amazing that our main-stream media and our elected members of Congress are not totally shocked by the proposal for financial reform advocated by the Obama Administration and the FED. To give essentially a private corporation the power to oversee its own affairs and without any effective oversight from the electorate suggests a feudal society at the very least. Our republic is poised to topple if this regulatory reform is enacted as promised by the Democratic party by the end of the year.

With a massive $104 billion of 2-4-7 year Treasuries to be auctioned next week and a two-day FED meeting ending next Wednesday, it would not surprise me to see market intervention by the FED and/or the Treasury in both the U.S. dollar and interest rates.

The yield on the 10 year U.S. Treasury closed at 3.79% . The U.S. dollar index also closed at 80.31.


� Fred Richards

Strategic Investing

This issue of Market Musings is a feature of the Strategic Investing website.� It is for the education of our subscribers and does not constitute a recommendation to buy

or sell any particular security.

Charts are courtesy of IBD®, Daily Graphs Online®, Halkin Services, Martin Capital, Kitco.com, GM Bolser, Stockcharts.com, Econoday, Prudent Bear and/or Big Charts.

All rights reserved. © 2001 - 2009 Adrich Corporation

Last updated - January 24, 2009



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