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.          
 

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.

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. 

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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