September 2010


The Markets

We remain in a trading range with the last month testing both the top and the bottom of the range. It is now working on testing the high side again. Both the Industrials and Transportations are now above their 50 day moving averages. The Industrials are below their 200 week MA which continues lower prices as a possibility while the transports are above all their moving averages. The percent of NYSE stocks above their 200 day moving averages is now 57%, 1% below where it was last month but 24 points above the July low. The daily new 52 week highs and lows have more new highs now. The weekly highs and lows have 3 weeks of highs now on the NYSE but not the NASDAQ. This not a healthy market but its likely to have an upward bias for now. The markets remain uncertain. Trade cautiously or wait. Be cautious and defensive for now. Review your shopping list and be ready to trade. If you don’t trade, a good percentage of cash is good.

The daily new 52 week highs and lows have more new highs now. The weekly highs and lows have 3 weeks of highs now on the NYSE but not the NASDAQ. This not a healthy market but its likely to have an upward bias for now. The markets remain distorted. Trade cautiously or wait. Be cautious and defensive for now. Review your shopping list and be ready to trade. If you don’t, a good percentage of cash is good. It’s still early to judge the market’s direction for the year but we’ll go with the cautious side for now.


Opinions and Thoughts

From Robert Prechter of Elloitt Wave International in the August 9, 2010 issue of BARRON’S:
Many people are expecting inflation and a fall in the Dollar because of too much money being printing. He said a bigger contributor to inflation has been the relentless expansion of borrowing. Deflation results from a contraction in the quantity of outstanding debt.  Despite the Fed’s monetization of $1.5 trillion since 2008, imputed M3-a key measure of money and credit supply-has turned down. In deflationary times, people are desperate to obtain money. Banks don’t lend freely with falling asset prices like today and  there aren’t many qualified borrowers to help credit expansion. The engines of inflation have been curtailed because of new legislation, regulation and reserve increases. People haven’t experienced deflation much but are now. Positioning for deflation means avoiding traditional investments, especially risky debt and keeping maximum safety in cash equivalents in safe institutions. “Shed market and institutional risk and you should get through deflationary unscathed”


  

                                                        

Sector and Morningstar Comments:
The different areas went down during the month and came back to about were they were. The odd note is large growth is lower than last month while large value was up. 
Investment Notes:                                   

The markets apparently still haven’t finished the year long rally in long term down trend but we still doubt any new highs for the year. The bias of the market is up but IBD’s accumulation/distribution is still in distribution for the NYSE, S&P 500 and Industrials. The Dow could rally again to the 10,700 area this holiday shortened week but it’s likely to stop there again. Art Cashin last said week that the market was building up for a big move but he didn’t know which way yet. We agree. Bond funds are topping out and short ETFs on treasuries are basing. We would think an event could be coming in the interest rate/currency area. To us the current rally appears to be a short covering type rally only to fail when the 401 (k) money dries up again this week. But the bias of the market still remains up. We continue to shop the market for income value so we can buy anytime as well as sell. We look at gold and utilities to trade. We continue to suggest having  25%-30%  cash in portfolios. This is a religious holiday season and this is still labor day week so the markets aren’t likely to settle on a trend until next week.  It’s a time to wait and see.


 



Heard in the Village


“As General Motors goes, so goes the country.” That was a saying that was true for years. The villagers hadn’t thought about that until they saw the quote recently and began thinking. Self serving unions, self serving and disconnected management, increasing healthcare and pension  costs along with debt drove GM into bankruptcy. Then they thought about what Washington has legislated and regulated in the last year. 

The unions run the Democrats, Washington is disconnected from the country and financial rationality, they passed the healthcare bill that nobody understands and is expensive, Social Security is insolvent and they are increasing debt at an extremely fast pace. The villagers didn’t see much difference between GM’s recent past few years and the country’s future. The villagers still don’t understand how you cure a huge debt problem by going deeper into debt. The Federal Reserves compounds the problem by buying long term mortgages and debt that will go down in value as interest rates go up because of a falling Dollar.

As the Feds buys debt, it injects money for economic growth which is likely to get stronger and create demand that forces rates higher. Many thought GM was foreshadowing the future of the country. To them, that meant we would be going through tough times for years. It also meant that the future after a few more years would be bright again. To comfort the pain of tough times, they started to talk about ways to invest in gold and silver. Gold has considerable upside potential if the Dollar weakens or as China backs it’s currency with gold and becomes an alternative reserve currency. India and China citizens are buying gold in large amounts now as well.