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HOME OF "PICTURES OF A STOCK
MARKET MANIA"
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March 17, 2010
Alan M. Newman's Stock Market
CROSSCURRENTS
Alan M. Newman, Editor
Excerpts from our March 15th issue
Rationales & Targets
We’ve heard from some quarters that there is a
sizeable contingent gripped with fear about prices. However, the
overwhelming majority of analyses we view are rosy scenarios and bullish
forecasts from here as far out as you might imagine. The persistency
of the gains over a period of one year have translated to a widespread
acceptance that the upside is still the path of least resistance.
It’s all too easy. However, the obstructions that once provided fears
have not gone away. Not only are they all still in place, they remain
quite significant. Continued growth in GDP is going to require solid
job growth somewhere along the line, but not yet in evidence. Almost
one in ten mortgages are now seriously delinquent and rates are likely
to rise. Even if Congress can extend jobless benefits to the 5 million
whose benefits expire by June, how long can the government continue to
pony up? Stack the fundamentals up against rising margin debt and
near record low cash ratios for mutual funds and it certainly appears the
only sizable contingent is wildly optimistic. Let’s face it, holding
periods are often measured in microseconds nowadays. We could
turn on a dime.
It's all About Jobs
A few days ago, it was reported for the umpteenth
time that the Senate was taking up the subject of extending unemployment
benefits, which have already bee extended more than once. We remember
when benefits extended only 26 weeks. In some states, those out of
work can remain out of work and get benefits for 99 weeks. Interestingly,
the proposed new bill does not address any ideas for increasing job creation,
just plugging the dike. And after listening to the administration’s
continuing intense focus on healthcare change, we can only wonder if we
have lost our way. Why is job creation not the number one priority
for our nation?
The broader measure of unemployment known as U-6
ticked up 0.3% to 16.8% in February. “U-6” includes everyone in the
official rate plus “marginally attached workers,” those who want a job
and those who are employed part-time only because that’s all they could
find. When the U-6 stats converge towards the official rate, er are
likely seeing improving confidence in the labor market and the overall
economy. February pushed the convergence in the opposite direction.
Things are better now than they were at their worst but that’s not saying
much. As far as we’re concerned, it’s all about jobs.
It's Very Different This Time
Our last issue was published only a few days before
the Investment Company Institute updated fund inflow statistics for January.
Our publication schedule is not all that flexible but the weeks since have
afforded an opportunity to come up with two very fresh perspectives that
grace our pages today. We’ve presented the chart at lower left page
three before but never with the startling dichotomy now in view.
Even as the mutual fund cash-to-asset ratio bottomed in both March 2000
and July 2007, accompanied by massive peaks in price, the trend of cash
dollar reserves in funds was still rising. From a year earlier
into the March 2000 top, fund cash reserves had risen 25% from $143 billion
to $179 billion. While the trend is not quite as clear for
the move to the July 2007 top, the sideways blip for several months was
nevertheless only a brief phenomenon as reserves continued to rise another
24% in only four months. Today is another matter entirely.
Fund cash peaked at roughly $277 billion in November
2007, with the Dow trading at 13,372 and the S&P 500 at 1481.
Since that point, while the major indexes were cut in half and during the
stupendous rally from the bottom exactly one year ago, cash dollar reserves
have consistently fallen. In only twenty months, cash has plunged
by 37%. Total cash reserves now stand at $172 billion, the lowest
since September 2004.
Another perspective [not shown in
this excerpt] illustrates cash reserves in dollars versus the S&P
index (roughly four-fifths of the value of the stock market). Here,
the divergence formed by the upwards path of prices and the downwards path
of actual cash is startlingly visible, as clear an example of opposition
as one might imagine over the life of the chart.
As well, when we measure fund inflows over rolling
four month periods, we obtain an excellent picture of potential support
for prices. That measure shows time is running out for the bulls.
January and April are by far the best months for inflows. Typically,
by the time April ends, funds will have received more than half of their
entire annual inflows. In contrast, inflows for the four months into
what we expect to be an October bottom are less than one-third what we
see from January through April.
At this juncture, we are baffled by any bullish
analysis we run across. While we are not anywhere as bearish as we
have been in the past, since most of the damage we previously forecast
has already occurred, there is every reason to expect stock prices to languish
at best. Our favored scenario remains a conclusion to the bear market
this fall. To be precise, we believe a new secular bull market will
commence October 23, 2010. This new bull market will not resemble
any you have seen in your lifetime. We expect it will be very difficult
to make money and most of whatever you make will be depreciated by the
ravages of inflation. If this all sounds just too crazy, bear in mind that ajusted for inflation, the
Dow traded higher as far ago as June 1997, close to 13 years ago.
More of the same to come.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS
since the first issue was published in May of 1990. Mr. Newman is also
a member of the Market Technician's Association
and has been widely quoted for years by the financial press, media, and
other newsletters and has written articles for BARRON'S.
The newsletter is published roughly every three weeks and focuses on economic and stock market commentary, often covering controversial
subjects. Several proprietary technical indicators are usually featured
in every issue accompanied by current interpretation. Broad samples
of our work can be viewed at http://www.cross-currents.net/.
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