The Great Debate: Bearish Call On October
We're not going to probably ever be able to leave the Great Stock Market Debate as there will always be a bullish and bearish argument to almost every situation. However we are going to leave it for a little while after this week. Today we begin by excerpting a bearish argument from Bert Dohman who is a contributor for Realmoney.com and writes his own newsletter the Wellington Letter. Bert is arguing for a chilly October but I think he also manages to summarize most of the Bear's positions. We're going to follow up in the next several days with a final synopsis of the Bull's argument. Finally you'll get my reading on the markets, where I think we're going and how we intend to position our client accounts. I hope to finish this sometime next week for publication.
From Bert Dohman via Realmoney.com {highlights are mine}.
.....We see many headwinds for the stock market. When Congress is in session, the stock market has historically underperformed by a wide margin. This time the effect should be even more negative, because of all the adverse legislation coming up for vote. The two biggest are health care and "the carbon tax."....
....The "carbon tax," also known as the Markey-Waxman bill, is one of the most destructive tax programs proposed by any major government in recent history. It would impose a huge tax of trillions of dollars on most economic activity in the U.S. while our competitors abroad, such as China and India, continue to pollute and laugh all the way to the bank......
In addition, the significant looming tax increases on Americans, both on the national and local levels, will be a great impediment in getting entrepreneurs to start businesses and create jobs. In fact, small-business owners will decide the struggle is no longer worth it, and they will reduce their workforce.....
....The "carbon tax," also known as the Markey-Waxman bill, is one of the most destructive tax programs proposed by any major government in recent history. It would impose a huge tax of trillions of dollars on most economic activity in the U.S. while our competitors abroad, such as China and India, continue to pollute and laugh all the way to the bank......
In addition, the significant looming tax increases on Americans, both on the national and local levels, will be a great impediment in getting entrepreneurs to start businesses and create jobs. In fact, small-business owners will decide the struggle is no longer worth it, and they will reduce their workforce.....
....Until now we had expected economic growth numbers to be strong late this year because of the easy comparison to the same period last year. Therefore, those numbers will be very deceptive. The big, smart traders will use any buying from the public to sell into. After all, the stock market has rallied on fumes, hopes and expectations. It will be the typical case of "selling on the news."
Furthermore, any economic strength will arouse fears of Fed tightening.....Therefore, strong economic numbers may be greeted with a stock market decline.
Economic growth comparisons will be less favorable next year. The various stimulus programs are expiring or have expired. One is the "Cash for Clunkers" auto program. .....Then we have the tax credit for buying a home. The expiration in November is causing a rush to buy now. In a number of states, the foreclosure moratoria are expiring, which will accelerate the foreclosure avalanche. The government's mortgage modification program is being overwhelmed by the deluge of increasing defaults. Now it's not just subprime -- prime mortgages and jumbos are seeing accelerating defaults. And the biggest problem with any temporary stimulus is that it borrows from future activity as consumers move up their big purchases to take advantage of the incentives.On the technical side, the summer part of the rally was caused by easy manipulation of stock prices by the big trading operations in a low-volume environment. The smallest and fundamentally worse stocks had the biggest gains. The astute analyst Rob Arnott calculated this: starting in April and using stocks in the Russell 1000 index, stocks over $50 a share had a five-month gain of 22%. But the stocks below $5 had gains of 116.9%. Whenever the low-priced stocks lead a rally, you know it won't last and is just short-covering. The worst stocks logically have the highest short positions.
Stocks are extremely overvalued, more so than at the 2007 bull-market top. And jobs aren't coming back. The consumer is 70% of the economy.
Now traders are back at their desks after the long summer rally. They see that bullish sentiment is extremely high. That's bearish. They will find today's ludicrous prices appetizing for selling and short-selling. Additionally, mutual fund managers have bought the past several months just because stocks were rising, not because they thought stocks were bargains. But the smart money is using the strength to sell. This is called distribution, something we have noticed for the past several weeks even as the major indices went higher.
The bulls tell us that there are trillions of dollars "on the sidelines." Well, it's about the same amount as one year ago, just before the crash. Betting on that money coming into stocks is a sucker bet.
Sentiment among analysts is now at the most bullish levels since the bull-market peak in October 2007. .... When everyone is on one side of the fence and totally complacent, the market is usually close to changing directions.
Finally, we have the fact that the major indices are now close to the point of the start of the global panic of October 2008. In any market, once it gets back to the start of the last plunge, there is huge resistance and the rally is likely to end.....
The bottom line: Today's stock prices reflect the most optimistic and euphoric scenario for the future. I believe reality will return to the markets in October. The fairy tales of a "great recovery" will diminish. The inevitability of much higher taxes and possible trade wars to please the labor unions will sink in. The ability of the U.S. leadership will come into question.......
Furthermore, any economic strength will arouse fears of Fed tightening.....Therefore, strong economic numbers may be greeted with a stock market decline.
Economic growth comparisons will be less favorable next year. The various stimulus programs are expiring or have expired. One is the "Cash for Clunkers" auto program. .....Then we have the tax credit for buying a home. The expiration in November is causing a rush to buy now. In a number of states, the foreclosure moratoria are expiring, which will accelerate the foreclosure avalanche. The government's mortgage modification program is being overwhelmed by the deluge of increasing defaults. Now it's not just subprime -- prime mortgages and jumbos are seeing accelerating defaults. And the biggest problem with any temporary stimulus is that it borrows from future activity as consumers move up their big purchases to take advantage of the incentives.On the technical side, the summer part of the rally was caused by easy manipulation of stock prices by the big trading operations in a low-volume environment. The smallest and fundamentally worse stocks had the biggest gains. The astute analyst Rob Arnott calculated this: starting in April and using stocks in the Russell 1000 index, stocks over $50 a share had a five-month gain of 22%. But the stocks below $5 had gains of 116.9%. Whenever the low-priced stocks lead a rally, you know it won't last and is just short-covering. The worst stocks logically have the highest short positions.
Stocks are extremely overvalued, more so than at the 2007 bull-market top. And jobs aren't coming back. The consumer is 70% of the economy.
Now traders are back at their desks after the long summer rally. They see that bullish sentiment is extremely high. That's bearish. They will find today's ludicrous prices appetizing for selling and short-selling. Additionally, mutual fund managers have bought the past several months just because stocks were rising, not because they thought stocks were bargains. But the smart money is using the strength to sell. This is called distribution, something we have noticed for the past several weeks even as the major indices went higher.
The bulls tell us that there are trillions of dollars "on the sidelines." Well, it's about the same amount as one year ago, just before the crash. Betting on that money coming into stocks is a sucker bet.
Sentiment among analysts is now at the most bullish levels since the bull-market peak in October 2007. .... When everyone is on one side of the fence and totally complacent, the market is usually close to changing directions.
Finally, we have the fact that the major indices are now close to the point of the start of the global panic of October 2008. In any market, once it gets back to the start of the last plunge, there is huge resistance and the rally is likely to end.....
The bottom line: Today's stock prices reflect the most optimistic and euphoric scenario for the future. I believe reality will return to the markets in October. The fairy tales of a "great recovery" will diminish. The inevitability of much higher taxes and possible trade wars to please the labor unions will sink in. The ability of the U.S. leadership will come into question.......
Smart money managers will raise cash. They realize that top-line growth in the corporate sector just isn't returning and that recent profit improvements are merely due to cost-cutting. You can't cut your way to prosperity. "Official" unemployment will rise to double-digit levels, although actual unemployment is already approaching the 20% area. Congress will consider the stupid idea of a second stimulus plan even though the first one did nothing. It means more of our money down the drain and flowing to those who are well connected. There are easy solutions, but they would never be considered by the current Congress.
Markets are psychological. After six months of euphoria, we will now start seeing the flip side.
Markets are psychological. After six months of euphoria, we will now start seeing the flip side.
**Long ETFs related to the Nasdaq, S&P 500 and Nasdaq 100 for client accounts.
posted by CR English at 8:47 AM
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