bear or bull fall letter 2012

7/30/2019 Bear or Bull Fall Letter 2012

1/14

BEARHAT OR BULLHAT Bearhatorbullhat.blogspot.com

BearHat or Bul lHat

"Remember, democracyneverlastslong.

Itsoonwasts, exhausts, andmurdersitself.

Tereneverwasademocracyyetatdidnot

commitsuicide."John Adams

The Fiscal Cliff is closeat hand. Will Congress get it

together or will they just kick the

can down the road? Fiscal Cliff

is a word we are seeing more

and more in the news, but what

is the Fiscal Cliff? Fiscal Cliff is thepopular shorthand term used to

describe the conundrum that theU.S. government will face at the

end of 2012, when the terms of

the Budget Control Act of 2011

are scheduled to go into

effect.(From About.com) Bush-era tax cuts, payrolltax relief, and emergency

unemployment benefits will all

be cut, plus you will have cuts

across the budget due to the

wonderful job of the SuperCommitteeor The NOT so

Super Committee. Then you

will have health care reform

taxes kick in. The major problem in allthis is now the economy is

starting to show signs of life, and

it will be hit with higher taxes

and a reduced stimulus. At least

we will still have the Fed

pumping money into the

market! Thanks Uncle Ben! Now congress will mostlikely come up with a Super

Committee idea (because they

have worked so well in the past)

and just buy time. Nothing will

be done until after the election

Lets hope whomever loses willbe willing to work with the other

side. Another key issue is weare about to hit the debt ceiling

once again. It will be one more

issue for Congress to work out.

The last time we raised the debt

ceiling, it was not so fun for the

markets and business across the

United States. Now one can see

why some are worried as all thisis coming to a head at the end of

this year. There are many issues

for Congress to fix in less than

two months after the elections.

Sadly it feels like Congress is

playing Russian Roulette with a

fully loaded gun.

FALL 2012


2/14


INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 2012As educated investors lets look at probable

scenarios done by Goldman Sacks.

Looking at Exhibit 1, there is a strong

chance the S&P-500 index will take a hit. Like

we saw during the debt ceiling crisis, Congress

lost the faith of many investors and they will

most likely be taking their profits before the

Fiscal Cliff hits. One other key reason the

markets could be in a sell off, is taxes will be

going up across the board next year and many

investors will be looking to sell this year into a

lower capital gains tax that is currently in place.

Looking at Exhibit 2, it shows us the olds of

probability of an agreement. Please come to

your own conclusions.

2

Exhibit 3 shows the effect of fiscal drag on

GDP growth. GDP is currently growing at a

snails pace and with the hits from the Fiscal

Cliff, GDP will go negative. This will be a

major drag on stocks. Exhibit 4 shows that the

Federal Debt Ceiling will be hit early next year.

Looks like in early February.

There are many head winds going into early

next year and that is not including what is

happening to other economies over seas.

Investors have a right to be a little worried.

There is a large amount at stake and the effects

of the Fiscal Cliff could be very negative if

Congress and the President can not come to

terms. As an educated investor it would be wise

to have in trailing stops on current

investments.

The Fiscal Cliff is one of the many reasons

I am concerned about the markets. The

markets are coming to a major cross roads. We

will see new market highs or new market lows.

Quantitative Easing (QE) has a majorrole in the markets but is it really helping or just

more drugs for the market?


3/14


I. QUANTITATIVE EASING (QE)UNINTENDED CONSEQUENCES?

What is QE?

Short answer: Its an unconventional monetary tool used

by central banks to stimulate the economy.

INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 20123

Quantitative Easing (QE) is something the

markets have come to know very well since

2009. Is it good or bad? Well in the short term

QE has been nothing but a steroid for the

market (See chart below), but are there

unintended consequences? As one can see, QE

has been the S&P-500s best friend.

The main reason for QE1 was to get

interest rates lower for housing. To help

households across the United States to

refinance and start building home equity once

again.

Now QE has moved rates to historic lows

and helped the S&P-500 jump to 4 year highs

and the markets just got QE3 near those highs.

Are the markets set to make new all time highs

now because of QE3? Possible in the short

term but the effects of QE will hurt the

consumer more and more, there are many

unintended consequences.

Lets look at some other charts and you can

decide.


4/14


INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 2012Unintended consequences of QE1 and

QE2 have been the price of gasoline and food.

During QE1 gasoline prices jumped 30% and

food prices jumped 7% . For QE2 gasoline

jumped 37% and food prices jumped 22%.

Due to the rumors and impactions of QE3,

gasoline and food have risen 19% through the

end of the 3rd quarter. Why does this matter?

Most Americans are having a very hard time in

the current economy. A direct result of higher

gasoline and food prices is the less fortunate

have to seek government aid. For example,

Food Stamps and Disability. (See chart below)

As one can see there is a strong link with the

influx of QE and increase of those who need

government aid. Now take the number with a

grain of salt. The economy did take a major

down turn in 2008. However every time a QE

has been implemented, food and prices go up.

4

QE1

QE2

Why is it such a big deal that food and

gasoline prices are going up? Two words, THE

CONSUMER. Many forget that the United

States economy is 70% based on the consumer.

Much like early 2008, with high gasoline and

food prices, the consumer started to pull back.

Could this happen again? Very easily as the

economy is based and supported by the

consumer. If the consumer hurts, the economy

will hurt. It is just an unintended consequences

of trying to re-inflate the housing market.

Sticking with the consumer we should look

at the effects of QE on their Hourly Earnings

and the Consumer Price index. Now we know

(from the charts above) QE is the markets short

term best friend, but how does the consumer

feel about QE?


5/14


INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 2012Looking at the direct effects of QE on Real

Average Hourly Earnings is pretty negative.

When a QE is released, hourly earnings take a

pretty steep hit. Why is this happening? The

wages are paid in US dollars. When more

money is pumped into the markets from the

Fed, more dollars are created and the cost of

goods based in US dollars will increase. Now if

they are actually being printed is up to debate,

however dollars are being put into the system,

mainly by computer.

It looks to be the same story when it comes

to the Consumer Price Index. When QE is

pumped into the system, prices climb. It is just

that simple.

Now the question is how long can this last?

How much longer can the consumer keep on

spending? QE1 helped the markets for 11

months, QE2 and Operation Twist only had an

effect for 6 months. How long will QE3 last? I

believe it will all come down to the price of oil

and food.

5

Why oil and food? Oil is what the world

runs on. Most importantly it is the key driver of

global trade. If global trade slows down,

companies will be forced to make cutbacks

which will hurt employment. If unemployment

is high as well as the price of food the consumer

will suffer.

Now the consumer is hurting, however thestock market is not. But why is the stock market

doing so well? Remember the Fed has kept rates near 0.

This hurts income style investments like bonds

and treasury bills (safer investments). Why is

that important? Looking at the Baby Boomers

who were in safer investments are now being

pushed into the stock market because they need

a higher return on their investment to live off

of. Currently we have around 10,000 baby

boomer retiring each day!

This is just one more unintended

consequence. from the Fed. By keeping interest

rates at all time lows, they force people into

risker investments like the stock market. Risk isOK when you are young but when one is

looking to retire, risk is the last thing one needs.

This can all work out as long as the stock

market holds up, which it could in the near

term. However, if the market sees any type of

crash we could have another major headache

for the American people.

'00 '04 '08 '12

0%

1%

2%

3%

4%

5%

-1%

-2%

-3%

0%

1%

2%

3%

4%

5%

-1%

-2%

-3%

Real Average Hourly Earningsy-o-y percent change, monthly

Source: Bureau of Labor Statistics. Through August 2012.

QE1 begins

QE2 ends

QE2 begins

QE1 ends

'00 '04 '08 '12

0%

1%

2%

3%

4%

5%

6%

7%

-1%

-2%

-3%

0%

1%

2%

3%

4%

5%

6%

7%

-1%

-2%

-3%

Consumer Price Indexy-o-y percent change, monthly

Source: Bureau of Labor Statistics. Through August 2012.

QE1 begins

QE2 ends

QE2 begins

QE1 ends


6/14


7/14



It is not doing well at all. Looking at the

Household Net Worth in the chart below, it has

not seen the recovery that the stock market has

and that is a major problem. Without any

growth in the Household Net Worth it is very

possible the recovery is just hot air and that can

be very dangerous when it comes to the stock

market. As we saw in 2008, it is very easy for

people to start to panic.

Why is Household Net Worth important? It

comes down to the simple truth, if American

households are doing well. Its the economy will

continue to do well, it is just that simple. Muchof the recovery we have seen in the stock

market is due to the high injection of money

from the Fed forcing people into stocks. If we

start to see Household Net worth go positive,

that will be a sign that the recovery and

inflation are taking hold. That is what the Fed

is trying to do at the current time.

If we see Household net worth continue to

go down, that will be a sign of deflation. No

matter how much money the Fed pumps in,

deflation can still take told. Mainly because

assets will be going down in value just like in

2008. Now lets take a look at a few charts to get

a read on how the internals of the jobs market

and another major bubble getting ready to pop.


8/14



Looking at the first chart below titled

Outlook for Hiring Deteriorates Significantly,

it looks pretty bad in the hiring department.

Why is it starting to drop off ? It come back to

the Fiscal Cliff. Many companies do not know

what is going to happen early next year,

therefore they are at a standstill.

Jobs, it is the key ingredient when it comes

to building a strong economy. If the job market

starts to dry up once again, the economy will

fall back into a recession.

One market that could fall apart due to the

lack of jobs would be Student Loans. Now

looking at the chart below titled Student

Loans, one can see that there is over $900

billion in student loans.


9/14


INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 20129Currently the default rate on Student Loans

is 9.1%. If the job market does take another

downturn, that rate will jump much higher.

Lets rewind to 2007. This little thing called

Sub-prime loans were starting to see

defaultsrates jump. The Sub-prime market at

that time was 1.3 trillion. Defaults started to

come in over 14%. We were told by the Fed

that Sub-prime would be contained. We all

know how that worked out...

As one can see we are starting to see a

similar pattern. Large amounts of loans are

starting to default once again. This will be a

major issue if the economy does not pick up

and those with student loans cannot find work.

The next step is defaulting on payments. It

would not be as bad as the Sub-prime mess but

it would be a major headwind on the United

States. It is just something to start watching.

To sum up how the United States is doing,

Streettalklive.com put together a wonderful

chart. As one can see in the chart below all four

areas are pointing down. This is a very bearish

trend that needs to reverse very soon or we

could end up in another recession.

Much of the current downturn in the

United States is due the Fiscal Cliff and we

need to see that fixed ASAP. Many business

owners are very worried and that is why they

are not hiring. We must get jobs back in this

country.

It is starting to look like the recovery was

just hot air fueled by the Fed, but we will know

soon enough and the charts should give us a

heads up on which way the economy will move.


10/14


III. CHARTSBEAR OR BULL

Can Andrews Pitch Fork And Other Charts

Give Us Some Insight To Where The Markets

Will Head Next?


Andrews Pitch Fork

The Pitch Fork is a method I use to actively see where the markets could be heading. The

Pitch Fork acts more as a guide line and sends warning signals if a line is broken no matter if you

are bullish or bearish.

10

The current pitch fork is a bearish fork (the red fork). The market looks like it could be topping outfor the moment and keep in mind that is with QE3. In the past QE1 and QE2 put in short term

bottoms. Is it different this time around? If the markets break below the1300 level the 1100 level

would play as major support. The bear fork suggests that the markets could be in for a hard time

ahead and lines up with the Fiscal Cliff. For you bulls, the larger green fork is also still in play. It

states we have major support around the 1380 level. The bull fork would be broken if there is a

major close below 1250. This is why I believe the markets are at a major cross roads.


11/14


INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 201211Now it will all come down to what fork takes

hold. Whatever fork does take hold it will take

the markets to new highs or new lows.

Personally with all the head winds and the

Fiscal Cliff ahead there is a great chance to the

down side. We can look at one more chart that

could give us an early sign.

It is the New York Stock Exchange. Ticker

NYSE. The Dow Jones also know as the

DOW-30 has 30 stocks in it. The SP-500 has

500 stocks but the NYSE has 3796 stocks in it!

Therefore, it gives us a much broader scope of

the over all market.

Looking at the chart below we can see the

NYSE is coiled like a spring. If the green line is

broken the bulls will be very happy because

most likely the market will see new highs. It

would be a break above the 8,750 level. For the

bears to be happy they have to break the 50 and

100 day moving average which will play as

support for the bulls. Then they will have to

break the red line at the 7,750 range. Whatever

side is broken, it will play a major role in which

way all the markets will head. We will know

what way that is in the coming months.

Currently a lot of economic data is pretty

bearish. I believe that is due to the large

amount of unknowns. You have the elections

and the Fiscal Cliff. It is always much more

difficult in business to have unknowns.

Hopefully congress and whomever is elected

president will not let us down and fix the

problems at hand.

Now due to the fact it is a spooky time of

year with Halloween being right around the

conner. Lets take a look at some SPOOKY

charts!


12/14


13/14


INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 201213For the last chart below it is more realistic

and spooky. It looks at Manufacturers New

Orders. Now one would think that new orders

would be not going down but up because of the

holiday season.

This is alarming but I believe it all comes

down the the Fiscal Cliff again. No one wants

to have high inventories in an economic slow

down, like they did 2008. Another reason I am

worried is we have not seen this much

downturn in new orders in a very long time.

Remember, the United States economy is based

on the consumer, therefore manufacturing is

not our big growth engine. If new orders are

not coming in, business will be forced to thin

their workforce. If the workforce is light,

consumer spending will come down and that

will hurt the United States.

All three of these spooky charts we looked

at can change their outlook. We just need to

see growth in the jobs market and the Fiscal

Cliff to be solved.


14/14


IV. TWO PATHSBEAR OR BULL

Who will win the great battle ahead?


Much of the data looked at during thisletter has been more on the bearish side. A

large amount of the data is on the downward

slope due to the Fiscal Cliff. The debt ceiling

mess brought the markets down at a forceful

rate in 2011. Now you have the debt ceiling

once again, plus tax cuts expiring, and theSuper Committee cuts coming across the board.

The markets could be in for some hard times.

To be on the safe side I would make sureone has in trailing stops in place on current

investments. It is just a way to lock in profits. It

does not cost anything and it is just like wearing

a safety belt. Safety belts keep you safe and

trailing stops keeps your investments safe. If the

market continues to go up the stops follow to

lock in your gain. I would recommend talking

to your investment advisor about them.

Looking at the SP-500 the lines in thesand are the 1404 level and the 1380 level on

the short term. In the longer term the 1250

mark will be the line in the sand for the bulls

and bears. If the 1250 level is broken in the

SP-500 I would start to be much more bearish. If the United States does slip intoanother recession I would be worried that Fed

and QE will not be able to save the day again.

If the Fed keeps pumping a high amount of

money into the system, oil and food costs could

be the tipping point and the consumer could

pull back at a forceful rate like we saw early

2008.

As we saw in the charts, QE is the stockmarkets best friend but not the consumers best

friend. I am not sure how long a market can

last just on QE and government stimulus.

Seems like just hot air but that is why I useAndrews Pitch Fork to give me guide lines on

where the market is headed.

The market is looking at two paths. Ifthe bears win most likely we will see new market

lows. There is a lot of market moving events

that are about to take place. If they turn out

more positive the markets could be off the new

highs. We will just have to see how those events

turn out.

Be safe and best wishes.

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bear or bull fall letter 2012

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