Today's Market
by Dr Invest

I know, you want to make an apology. That's alright, the "Bull Mentality" is not over yet. The "talking heads" are already pretending that this is just a "temporary pull back" and a "buying opportunity". Now, they say, is the time get that money out of bonds and cash, so you can get your portfolio in stocks. Listen, they have been saying this for months now.  Others are saying, well a little reduction in QE is needed and it really won't affect the stock market, so investors have no need to get fearful of a major market pull-back. Really?

Today's sudden dive is symptomatic of market reality. The financial community has been dependent upon this Central Bank stimulus and is bloated with profits and bonuses from churning your investments. Removing the punch bowl means that the financial community will have to face up to the reality that we are along way from economic health.

Please... I mean, Please go to PBS.ORG and get the latest video: "How Retirement Fees Cost You Money". http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/how-retirement-fees-cost-you/  This video by FRONTLINE will make you cry, when you see the pain people have gone through with their investments. The only honest voice I heard was Jack Bogle who started Vanguard. You will also find the video on YouTube.com.

There are many, many, many investors who have ridden the market to the top, and like previous investors, they falsely believe that the market will continue its climb. Our memory is short-lived. Since 2000, the market has been a wash-out. Since January of 2000 until now, the DOW has returned 32.33%. If I conservatively count that as 13 years, the average return is 2.4% annually. When you add the estimated 2% average annual CPI (inflation rate by government standards), you would have made .4% annually. I have been very kind in my analysis, because many of you are being charged 1% to 2% investment fees by your financial adviser. This means that while you puff up and talk about all the money you made this year, you are forgetting all the money you lost in past years. Your investment is underwater.

A Market Near Collapse

ECRI at businesscycle.com shows in their charts what we already know, uncertainty is in the market. Bernanke's new suggestion that QE may be tapered, raises further uncertainty. ECRI published the chart below, writing:

Despite surging prices for homes and equities, consumer spending is contracting, registering its biggest monthly decline since September 2009. Quite simply, the wealth effect is rendered moot by languishing incomes. 

No wonder yoy U.S. import growth has also plunged into negative territory, whether or not oil imports are included. In recent decades, this has happened only during U.S. recessions. Notably, unlike data for GDP and jobs, imports data are not revised substantially, long after the fact. 

Some are surprised that inflation has failed to take off despite massive amounts of quantitative easing. The explanation is simple: recession kills inflation. 

As a result, core inflation – defined as yoy growth in the Personal Consumption Expenditure (PCE) deflator excluding food and energy – has now dropped under 1.1%, to the lowest reading in its entire 53-year record. 

Meanwhile, yoy growth in the headline PCE deflator has dropped to 0.7%, its lowest reading since October 2009, and far below the Fed's official 2.0% target. This inflation measure has never been this low except during or in the immediate aftermath of recession.

The bottom line: for all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009.



Last fall, ECRI called that the U.S. was in a recession. Only later, did the Fed admit that we were in period of contraction. (notice the careful use of words)  By January, the Federal Reserve became committed to its QE 3. Though there are some encouraging statistics, other statistics are in further decline. The above chart shows that beginning in 2012, an unusual anomaly rose in imports, with imports reporting uncertainty whether they would move up or down. Ranging around ZERO on the scale, imports have clearly turned down. When you look at all other examples in the chart above, where  U.S. imports DEFINITIVELY turn down, it has been indicative of a recessionary period.

Can we then, CONFIDENTLY declare a recession. NO! But a continued decline U.S. Imports makes an investor lose his nerve, as a shadow of possible recession extends itself over the present market.

Observations

If you are in the market, determine how much you are willing to lose and put a stop-sell on your investments. If you are thinking about getting into stocks, rethink this idea. Yes, I know that stock brokers/advisers are excited about how much their clients are going to make by moving into stocks, but are you sure that now is the time? If you are sure that now is an excellent buying opportunity, then confidently make your purchases.

Other than TIPS, I have been largely "out of the market". I did not return to stocks in January because all the fundamentals pointed to a declining economy. In spite of Federal Stimulus, I did not see the fundamental changing. Even today's economic fundamentals are questionable. Home sales have grown, but it is largely INVESTORS who are buying homes. Rising interest rates are excluding first home buyers. Lower unemployment is encouraging, but many of these jobs is work for unskilled laborers and part-time labor. This is hardly the things the American Dream is made of. Further cuts to the budget will automatically be enacted this fall.

Today's 206 point decline in the DOW is a sure indicator that many investors are unwilling to lose their gains. The 14% climb in the DOW since January is not likely to be followed by another 14% climb in the DOW for the remainder of the year. What is more likely, is a decline like we saw last year. The DOW could decline 14% and then start over climbing toward the end of the year. It is also possible that  the DOW could simply slide 30% or 40%. I would anticipate a mid-summer decline, that would be seen as a buying opportunity by the financial community; the market would continue rabid buying, ending with a strong contraction/recession in 2014.  In the last four years the market has grown 91%, adding the contraction period, we can divide 91% by 6, giving us an average annual gain of 15%. I can feel comfortable keeping a cash position for another two years and still see great gains after the stock market hits its down cycle and then returns to an up cycle.

(note: the above article is for entertainment purposes only and not to be used as investment advice.)