Obama Victory, Market Sell Off

Congratulations to President Barack Obama and all of the politicians who were elected by the American people last night. In the end, although my candidate did not win, Democracy was and is always the big winner. As you know, I hardly ever use the word “hope” when discussing investing, but in this case, I do hope we somehow see congress and the president at least genuinely attempt to work together on a bipartisan basis. I don’t know a single person who wants four more years like the last two in DC.

I am going to be on FOX Business’ Markets Now at 1:30pm est today discussing the election results and its impact on the stock market and economy.

In yesterday’s Street$marts, (http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20121106.pdf) I made the case that an Obama victory would see market upside and a Romney victory would see weakness. And that whatever the move was, it should continue into next week. So what’s going on today and why the sea of red in the stock market and the Dow now under 13,000?

Stocks traded higher on Monday and Tuesday. Some say it was Romney, while others say it was Obama. To me, it’s irrelevant. You can see that last night from 5pm to 10pm, the S&P 500 futures (an indicator of the overall stock market) traded lower as the results were announced. After Obama achieved 270 electoral votes for reelection, the S&P 500 futures turned around and headed higher until almost 6am. So when I woke up and saw the green, I thought the market would open to the upside.

That was until the European Central Bank’s Mario Draghi made negative comments about Germany’s economy weakening. From there, the futures fell sharply straight to the U.S. open at 9:30am and have continued lower ever since. Was Obama’s reelection the cause of today’s carnage or was it the ECB? In the grand scheme, it doesn’t really matter, but given the weakness in the financials and materials and relative strength in consumer discretionary stocks, it certainly looks like Europe is the bigger driver than the election.

stock market reaction to election

I would look for the weakness in stocks, on balance, to continue into next week before another attempt at a meaningful bottom begins for a year-end rally.

New Highs Now or More Weakness First?

In the last Street$marts, I opined that the stock market should see at least another new 2012 high this year, but that we were long overdue for a pullback and a 2-8% decline should begin shortly.

So far, all we have seen has been a 3% decline and many folks wonder if new highs are next.  I think the healthiest thing would be for stocks to decline below the levels we saw last week and then mount an assault higher.  That would set up a much better foundation for a rally and perhaps begin to fix the canary problem with the semiconductors and transports.

FOX Business & Employment Report Update

I am going to be on FOX Business’ Markets Now close to 1pm est on Monday, hopefully discussing some of the items below.

After a string of weak but positive employment reports, Friday’s data were “better than expected”, but still not strong enough to keep pace with population growth.  And when you dive into the details of the report, according to John Williams of Shadow Stats, you see the normal “seasonal adjustments” accounted for a significant number of jobs created. 

What continues to amaze me is how many “experts” think this recovery is anything other than normal following a financial crisis.  As I have said for three years, the economy we are living through right now is what typically happens after a systemic meltdown.  It’s lukewarm, tepid and any other adjective you want to throw in.  If history continues to guide us, the real progress on the jobs front will happen on the other side of the next recession, which I happen to believe will be mild given the almost $3T in cash on corporate balance sheets and how lean corporate America has become.

The markets reacted very favorably to the news on Friday, but Europe and our futures were already in rally mode before the employment report was released.  With the disappointing lack of news from our Fed and the ECB and the positive jobs report, the Dow ended last week almost exactly where it began the week.  As I mentioned in the last few Street$marts, there are a few key indicators to watch for clues to the next big market move.

On the positive side, high yield bonds are making new highs and the semiconductors are trying to step up and lead.  But the Dow Jones Transportation index, S&P Mid Cap 400 and Russell 2000 Small Cap need to get into gear for this rally to last much longer.  We also need to see less defensive sectors outperform the market.  For a while now, it’s been consumer staples, utilities, REITs and biotech, not your typical healthy bull market leadership.

Could the Dow reach up to visit its 2012 peak?  Sure.  But unless something changes dramatically, I think it will be your typical summer selling opportunity in a presidential election year more than anything else.

3 Indicators That Can Tell You the Market’s Next Move

On Monday, I was in the city spending some time with my friends at Yahoo Finance.  As always, I thank them for their hospitality and Jeff Macke for the engaging conversation.

http://finance.yahoo.com/blogs/breakout/3-indicators-tell-market-next-move-115923205.html 

With the volume and velocity of information out there, trying to get a read on the stock market is like attempting to get a sip of water from a firehose. Thankfully Paul Schatz of Heritage Capital has three ways to check the health of the market and durability of its trends. They don’t work every single time but Schatz says these are great “tells” as to whether or not what’s happening from day to day is reality or a mirage.

1. High Yield Bonds (HYG)

More commonly known as “junk bonds,” high yield corporate debt has been one of the favorite plays for investors who want decent cash flow with slightly more safety than stocks. Historically low rates on U.S. Government debt have made junk bonds an attractive way to play in between bonds and equity.

That’s why junk is the canary in the coal mine according to Schatz. Risk appetites should be relatively consistent across the board. In other words, if stocks are rising, corporate debt should be moving higher as well.

“If the market rallies and high yield does not participate that’s worry sign number one,” says Schatz.

2. S&P 400 Mid-Caps (^MID)

The S&P400 is a measure of stocks not quite big enough to make the cut for the S&P 500 (^GSPC). Companies this size tend to be hit harder by economic fluctuations than those with larger balance sheets or more lines of business. This makes the mid-caps a way to gauge the real health of the earnings environment for corporate America.

“Traditionally in bull markets mid-caps lead,” Schatz says. When the S&P 400 isn’t leading, or at least playing along with a market rally, it’s time to take profits.

3. Dow Jones Transportation Index (^DJT)

As would be expected, the Transports are a collection of 20 American companies in the business of moving things from point A to point B. Railroads, airlines, and trucking basically. Even in a virtual age most traders regard the Transports, or “Trannies” as a good gauge of underlying economic activity.

By market tradition, real bull markets only come when both the Dow Jones Industrial Average (^DJI) and the Transports are breaking out together. At the moment there’s little risk of either happening, but Schatz suggests traders stay on the lookout.

“If the Dow Jones Transports can take out the April highs I think it’s a straight 5 – 10% shot higher,” he says. Though he concedes it’s a “long way to Tipperary” before they do.

Summer Rally, Pre-Election Sell-Off

http://www.newsmax.com/StreetTalk/Heritage-Capital-stock-rally/2012/06/27/id/443591

The stock market will experience a summer rally, followed by a sell-off in the fall right before the election, Paul Schatz, chief investment officer of Heritage Capital LLC, told Yahoo.

Schatz said the first half of the year had a few unique twists, but it has been fairly typical for election-year market indices.

“It’s been an interesting first half,” he said. “We were vertical for a while and then we gave almost all of it back and now we’re kind of treading water in no-man’s land.”

Schatz predicted we already had a springtime low.

“The early June lows are going to be the lows for a while,” he told Yahoo.

“We will rally and peak some time at the end of July to the end of August. Then we’ll have the traditional sell-off before the election, postconventions.

“Stocks already had the summer declines we saw in 2011 and 2010,” he stated. “It’s rare when you see it three years in a row. … I don’t think it’s anything near what we saw last year.”

After the election, Schatz expects a year-end rally.

“So many of the bogeys for the market are known, everyone is worried about the same thing — the fiscal cliff, the euro, Greece, Spain, Italy — they’re all on the table now,” he added.

Schatz predicts that the problems in Europe will loom for the next several years.

“They’re going to get their act together this decade. It may take three, five or seven years to get their act together, because the alternative is nonexistence,” Schatz noted. “I mean Europe won’t exist. I’m not talking about the euro, I mean the continent.”

Europe will take its “sweet time,” but will be fine in five to 10 years.

“We’ve been underweight Europe forever and will stay underweight,” he added.

Regarding the fiscal cliff, Schatz said, “When push comes to shove, the lame duck Congress comes in, they make the middle-class tax cuts permanent, they extend the upper-class tax cuts for another six, 12, 18 months and let the next group worry about it.

“But I don’t think they’re going to solve that now,” he added. “There’s no impetus, there’s no catalyst for it.”

By the end of the year, Schatz predicts that the S&P 500 will be “1,400ish” and says he will keep an overweight position in biotechs.

Meanwhile, the so-called “fiscal cliff” looming at the start of 2013 with planned tax increases and spending cuts may begin to push the U.S. into a recession as early as the second half of this year, Bank of America’s top U.S. economist Ethan Harris tells Fortune.

Last month, the Congressional Budget Office warned the fiscal cliff could cause GDP to shrink by 1.3 percent in the first half of 2013, even as many economists are betting the politicians in Washington will cut a deal to avert the worst effects of the measures.

Harris says the fiscal cliff will begin to make itself felt long before it actually takes effect. Corporate earnings will slow in the second half and job growth may drop to nothing by October, pushing the United States towards the brink of another recession.

Read more on Newsmax.com: Heritage Capital CIO Expects Summer Rally, Pre-Election Sell-Off
Important: Do You Support Pres. Obama’s Re-Election? Vote Here Now!

Can You Trust the Experts?

One story related by Peter L. Bernstein in “Against the Gods: the remarkable story of risk” was the experience of Kenneth Joseph Arrow, an American economist and joint winner of the 1972 Nobel Memorial Prize in Economics.

Some officers had been assigned the task of forecasting weather a month ahead, but Arrow and his statisticians found that their long-range forecasts were no better than numbers pulled out of a hat. The forecasters agreed and asked their superiors to be relieved of this duty. The reply was: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”1

Philip Tetlock, a psychologist at the University of California, Berkeley, has literally spent a lifetime looking at how well experts in their field do with respect to their professions. Over a period of 20 years he collected the predictions of 284 people who made their living “commenting or offering advice on political and economic trends,” including journalists, foreign policy specialists, economists and intelligence analysts. By the end of the study, Mr. Tetlock had quantified 82,361 predictions. How did the experts do? The vast majority of the predictions were worse than random chance. Post graduate degrees offered no advantage. Famous experts tended to do the worst.

Where did these individuals go wrong? According to Mr. Tetlock the main reason was overconfidence. Convinced that they were right, the experts ignored evidence suggesting they might be wrong. Another important bias is that most experts find it very difficult to make a negative prediction. Fear of “crying wolf” may be part of the reason, but there is also a desire to please the audience and be re-elected, or asked to speak again. Another important cognitive bias, Mr. Tetlock points out, is that most of us find it very difficult to change our minds.

Overconfidence and “confirmation bias,” where experts ignore evidence suggesting they are wrong, are of particular concern to investment advisers. With the financial security of our clients at risk, we can’t afford to become “prisoners of our preconceptions,” as Mr. Tetlock puts it. This is one reason why active management relies heavily on non-emotional, technical and quantitative analysis and mathematical relationships within the financial markets. Our goal is objectivity and discipline, checking our ego and emotions at the door.  The most important information for an active manager is not where the market has been or where we believe it is going, but where it is today.

By setting very specific investment rules as to when an asset will be purchased or sold, or when it is safe to be invested in equities or bonds or a specific sector, or when a defensive posture is better, our goal is to avoid letting our biases and emotions influence our decisions. I may be right in my belief that the market will recover from its current malaise, but to base a client’s portfolio on that belief ignores the consequences of being wrong. What if I am right on the market’s direction but completely wrong on the duration of the problem?

Active management is risk management. As with all tools to limit risk, it can also result in lost opportunities if conditions change quickly. But without risk management, without basing investment decisions on where the market is today, the risk of a major drawdown impacting the client’s future increases.

1 Against the Gods, Peter J. Bernstein, page 203.

Stocks Hit with the Ugly Stick

Stocks got hit with the ugly stick on Friday after continued worries in Europe led to overnight weakness and then the market got thumped by the horrid jobs report.  Gold and treasury bonds were the only bright spots.  Did gold just see “THE” low or “a” low?  We will tackle this in an upcoming Street$marts.

Stocks should be in the early stages of the bottoming process.  It’s too soon to offer how long it lasts, days or weeks.  But the market is now stretched to the downside, calls of the end of the bull market are making their way around and investors are becoming overly pessimistic.

Gold to $2000 and Beyond

Here is the second video I did with the folks from Yahoo! at their beautiful new studio in the city.  Anytime there are bold statements on gold, people come out of the woodwork to comment.  And I would be surprised if they aren’t at least 100 comments by the time you read this. 

One of the great myths is that gold goes up when there is inflation. I think the 1990s is the perfect example of why that isn’t true.  A better statement would have been that gold goes up anticipating inflation…

http://finance.yahoo.com/blogs/breakout/easy-money-low-rates-gold-2000-end-134943224.html

If you bought gold nine months ago at a record high and have since seen the price decline by 15% or $300 an ounce, you’re not the unluckiest investor alive, you’re just a little early.

“This is not a pullback, this is a full fledged correction,” says Paul Schatz, President of Heritage Capital in the attached video. “We’re shaking out every weak-handed holder possible.”

His case for owning gold is three-fold but also comes with the self-disclaimer that he’s “not a gold bug” that reflexively sees the precious metal as the answer to all investment questions.

First off, there’s the fundamental backdrop that the world is full of accommodating central banks right now, least of which is our own Fed. As Schatz says, “the ECB (European Central Bank) is just getting started.”

Add in super low interest rates and just enough inflation and we find ourselves facing so-called ”negative real rates of returns” and you’ve got an environment where something like gold, that protects purchasing power, should do well.

There’s also a timing and technical component to Schatz’s bullish call on bullion. As much as he thinks it would be ”nice” to see gold bottom out around $1500, he’s counting on a sharp snap-back to the previous high of $1900, that will ultimately break through psychological resistance of $2000 by the end of this year or early 2013.

“Once we exceed the old highs in the $1900s, we certainly go to $2000 and that sets the stage for the next run” he says, pondering the next high-water mark, “Is it $2200? $2300?”

“I don’t think the secular bull market in gold is over,” Schatz concludes. “I think you have years left in it.”

The Fed, QE and Earnings Season

I had a great time with the folks at Yahoo! yesterday in New York in their brand spanking new studio.  We tape three fairly controversial segments and Matt Nesto knew exactly how to bait me just right!  Here is the first piece.

Enjoy!

http://finance.yahoo.com/blogs/breakout/move-bernanke-qe3-115057583.html#more-13067

In case you missed it, The House of Mirrors has officially taken the place of The Earnings & Fundamental Palace on Wall Street. I say this at a time when the aspirations and way forward for the U.S. stock market appear to be in direct conflict with what is normally perceived as being in the best interest of the country.

Worst unemployment print of the year, stocks rally.

Job creation craters, stocks rally.

Of course, even casual students of the market can see right through this bad-is-good charade and know the answer to this riddle lies right at the feet of Ben Bernanke, the Chairman of the Federal Reserve and key holder to the vault where so-called “QE3” is being stored.

“It is amazing but it seems that people are just going to invest when the Fed is going to stand behind and backstops them,” says Paul Schatz, President of Heritage Capital in the attached video.

But before you get too far ahead of yourself on the QE3 bus, you must realize that it’s going to take a whole lot more drama than a 4% dip to get Bernanke to deliver the goods. By my math, which is based on the prior three rounds of easing, the S&P 500 would have to erase all of the year’s gains, or drop 10 to 12% before the Fed can be expected to act.

Like most investors, Schatz is of the mind that it’s not a matter of ”if” but “when” it’s going to act, and has been calling for multiple QE’s since the first one was floated in 2008.

“We’re well on our way to a $5 trillion Fed balance sheet,” he says.

And it’s not just the Fed, Schatz says, Central banks from around the world are engaging in unprecedented easing programs, so much so that Schatz facetiously calls “ink” his best idea given the amount of it that will be used to print.

“The ECB is just starting. They’re going to go into the trillions and trillions in the next couple of years,” he says, describing the ensuing environment as a ”rent to own” market that will be full of volatility and opportunity.

“Four to eight percent pullbacks can and do occur at any time,” he says, calling them healthy, regular and something that should be bought, as long as the market has the QE-backing it so badly craves.

What Keeps Me Up at Night

Here is the latest Street$marts.

http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20120405.pdf