Predictions 2011, Part 1

Before commencing with the annual predictions of where everything is supposed to go in 2011 - up, down, sideways or otherwise, a quick recap of the market on the first trading day of the new year is in order.

As expected, traders - con men all - made sure 2011 got off to a roaring start, with a gap up at the open sending the Dow Jones Industrials up almost 100 points moments into the session. While the gains were outsized as compared to recent run-ups, trading volume remains a viable concern, both short and long-term. Today's volume, while a 60% improvement over those of the last week, is still averaging a size that were the stock market a real roller coaster, volume couldn't get on the ride due to being too short.

It should also be pointed out that the estimates made here - wholly on anecdotal presumptions - have now been duly christened by some valuable researchers - Smithers & Co. - which notes S&P listed stocks some 73% overvalued as of December 10. With the S&P up another 2.5% since then, this data suggests that the stock market is headed for a crash of epic proportions. Based on measurements that ceased functioning around the time of Ben Bernanke's Jackson Hole speech last summer (where he first mentioned QE2), many stocks could experience declines of 50% or more in coming months.

Naturally, nobody is talking about valuation, since the Fed and Wall Street have famously destroyed all methods of honest price discovery and computers are doing most of the trading these days, but stocks are already wickedly overpriced and heading higher. Notice how silent Bernanke is concerning the markets, with no "irrational exuberance" kind of talk. The Fed is desperate to get the moribund economy off its back and the banks back to health. Destroying the currency through money printing and the markets through wild speculation via HFT computers are the only games in town now, and destined to fail spectacularly.

The daily charts and the massive monetary infusions (a $7.8 billion POMO today) tell the entire story: stocks ramp up in the morning, closing off gains for all but insiders, then meander lazily to an insignificant close. This pattern has been the most prominent over the past four months and continued in grand style today.

Dow 11,670.75, +93.24 (0.81%)
NASDAQ 2,691.52, +38.65 (1.46%)
S&P 500 1,271.87, +14.23 (1.13%)
NYSE Composite 8,043.96, +79.94 (1.00%)

As expected, advancers overwhelmed declining issues, 4948-1661. NASDAQ new highs: 296; new lows: 6. On the NYSE, there were 375 new highs and only 2 new lows. These numbers, if not there already, are at extremes and shorting would normally be child's play were it not for the unusual state of US equity markets, pumped daily with new money. There will be an unwinding, but it may be very slow and gradual, killing one's patience and probably most profits. The best position remains cash and equivalents, gold, silver, rarities, arable land and tools of trades.

The continued low levels of trading indicate that individual investors have not returned to the market and some may stay away permanently. If a large enough segment of those fleeing stocks and bonds is made up of Baby Boomers at or nearing retirement, it could spell doomsday for Wall Street, though with approximately 10,000 Boomers retiring every day, the fresh influx of pension and Social Security monies could induce a good deal of foolish speculation, much of it by retirees not secure enough with their monthly take even though it's more than enough upon which to exist.

NASDAQ Volume 1,809,840,875.00
NYSE Volume 4,730,662,000

The front-end crude contract seems to have hit a wall at $92. Anyone with a functioning brain realizes that pushing gas prices over $4/gallon will kill any recovery or chance of the consumer-led economy doing anything but stalling around as fuel prices steal from all other spending. Still, the verdict on the oil barons is still out and their game will continue. $100 or higher for crude could happen, but it seems only sensible that driving and energy use would be curtailed severely by cash-strapped consumers. Oil finished at $91.55, up just 17 cents on the day.

Gold and silver were sporting nice gains until about 2:00 pm, when they turned radically lower, about the same time the Obama administration announced that 13 select drillers would be allowed to resume deep-water drilling in the Gulf of Mexico, halted in the wake of BP's Deepwater Horizon gusher last year. Gold was last seen down $7.50, at $1414.10. Silver lost 23 cents, to $30.68.

And, for the most absurd trade of the day, Bank of America (BAC) rose 85 cents, to 14.19 (a gain of 6.37%) on news that the bank had agreed to a $4.1 billion settlement with Fannie Mae and Freddie Mac to repurchase soured loans issued by Countrywide (purchased by BofA in 2008) the GSEs had backed.

And, now, on to Fearless Rick's Fabulous Preview of 2011...

Soothsayers of antiquity were revered and honored, but in the crowded world of today, there's no shortage of predictions, prognostications, and outright guesses on what the future will bring.

Most predictors are amateurs, not skilled in the art of actually hanging on a limb, due to fear of being wrong. Fearless Rick knows no such fear, having been wrong so often that it's become a fixture to some degree. What is presented here is not so much a final saying on what, where and when some events may occur, but rather a proximate attempt to use experience and empirical values to arrive at a kind of whole world experience.

The dominating theme of 2011 will be VALUE. The pricing of assets will be challenging due to a continuation of monetary policies which may or may not be alleviated by fiscal controls expected from newly-minted Tea Party Republicans in congress. By Spring, the US government will be approaching the debt ceiling and a battle over whether or not to raise it will begin in some form. The betting is that it will be raised again - out of necessity - but Republicans will issue stern warnings or attempt to tie the vote to more austerity measures. The rhetoric on Capitol Hill will be more raucous than ever, but eventually, the Tea Partiers will be put into line by the status quo centrists who prefer slow death rather than the pain of an operation to actually address the greatest concern of our day, the burgeoning federal debt.

It may be difficult to assume that the world will not end, nor will the existence of the Federal Reserve, in the present year though it will not be without significantly-large challenges. Despite indications from our runaway stock market, the US employment situation is not going to get materially better in 2011. In fact, even using the greatly-flawed BLS figures that get trotted out the beginning of each month, the Obama administration will have no option other than to take its lumps and admit that the economy is just not recovering at all. By June or earlier, the "official" unemployment figure will be over 10%, and shock waves will reverberate throughout the affected areas, mostly the South, Southwest and West, prompting more give-away programs from the administration and certain congressional factions.

Pressure for another stimulus bill will be large, spurred on by liberals who cannot get too much of a free lunch, but will ultimately be small, if passed at all. Stimuli has become a permanent factor in federal government, though, so some free money will certainly flow from the seat of power.

Residential Housing is going to be worse than ever, with prices falling in areas that weren't hard hit the first time around. With banks lending only to the super-clean credit risks there will be a continuing glut of houses on almost every local market. Coupled with interest rates that should moderate, overall activity will be at a snail's pace, similar to what was seen in 2010. Knowledge of local markets may result in windfalls for some, misery for others, especially those in homes with Alt-A or 5/30 or 5/20 mortgages that are resetting in 2011 - a motherload of them by Spring. The expectation is for residential housing prices to drop another 6-10% during the year, with larger decreases in the NorthEast and MidWest.

(TO BE CONTINUED)

Pausing to Catch a Breath; Markets Bounce to End Dismal Week

Like the punch line to the old joke, "What are 500 lawyers lying dead at the bottom of the ocean?", gaining 125 points the day after the Dow Jones Industrials had just lost nearly 400, is... well, a good start.

However, the internals don't quite match the enthusiasm some may hold for the headline numbers, and, when the indices tumbled out of bed this morning into a ditch, they set new intra-day lows. Further, the whole thrust of today's gallop higher seemed a little out of place and probably had more to do with options expiration and covering short positions than anyone wants to admit.

It was a nice end to a really bad week for equity investors. All of the major averages ended up well below where they began the year, hugging their respective 200-day moving averages, or, in the case of the S&P 500, nestled comfortably below it. Obviously, whatever market worries caused the collapse of the past four weeks, those conditions are still present, and possibly getting worse.

For instance, Europe's $1 Trillion bailout is being called TARP a la EU, likened to the US version unveiled at their height of our own crisis back in the Fall of 2008, and many are saying it isn't enough. The US economy, hailed as the best of a bad bunch, isn't doing very well with real estate markets stuck in a funk and unemployment remaining stubbornly high; China is purposely slowing their own growth (they may not have to; slack global demand may do them in), fearing inflation; oil continues to spew from the floor of the Gulf of Mexico, fouling the Southern coastline and threatening to destroy one of the great ecosystems of the fragile planet; state governments are just beginning to come to grips with austerity measures to combat their own fiscal deficits.

Is there anything good? Well, the price of gas is coming down gradually, but other than that, no, there's nothing good about a financial system teetering on the brink of implosion, the governments of nations nearing collapse, ecological disasters, politicians more focused on being re-elected than actually fixing things and the most corrupt insider game of high finance being played out on Wall Street.

Maybe the entire system needs to be flushed. Maybe an upheaval of the old guard might just lead to better days ahead. Maybe it's time for the rich and greedy to come to understand that impoverishing the entire planet isn't going to necessarily result in their own enrichment.

Today's little bump higher is, as usual, suspect, in that the rally came off an early, deep decline. Within minutes of the opening bell, the Dow was down 145 points, the other indices in a similar fix. The turnabout had all the earmarks of our old friends at the PPT, rushing to the rescue of financial markets which had apparently taken all they could handle. No matter the cause or underhandedness surrounding the Friday push to higher ground, stocks tumbled back into negative territory in the final hour. Technically, the indices made all of the day's gains in the last twenty minutes of trading, so, no, we're not buying it, nor should anybody.

Dow 10,193.39, +125.38 (1.25%)
NASDAQ 2,229.04, +25.03 (1.14%)
S&P 500 1,087.69, +16.10 (1.50%)
NYSE Composite 6,775.45, +122.45 (1.84%)

While advancing issues beat up decliners pretty handily, 4622-1938, new lows overwhelmed new highs for the third consecutive trading session, 295-87, and once that indicator flips in one direction or another, it's usually in it for a long haul, which can last anywhere from 4 to 20 months. Volume was abnormally high, owing to the idea that many shares were being parceled out of options and many short positions covered. Beisdes, it may have taken the insiders boosting stocks a bit more heft than they originally planned. Selling pressure didn't subside. It was just temporarily replaced by coordinated buying.

NYSE Volume 9,276,994,000.00
NASDAQ Volume 3,366,007,500.00

The first day of trading in the July futures contract for crude oil resulted in some price spillage, down 76 cents to the adjusted level of $70.04. Gold continued to retreat, losing $13.10, to $1,175.70, as did silver, down a relatively benign 6 cents, to $17.63.

The final week of May and all of June will be interesting to observe (meaning: do not trade this market) as investors will continue to focus on the issues in Europe, financial regulation and some potential pre-warnings from companies whose fates have turned from rosy to thorny. But, call me a tree-hugger or whatever you like, I have a feeling that the oil spill in the Gulf will dominate the news in a very ugly manner.