4/17/11

Looking for a Near Term Top

Helicopter Ben's second debt-monetizing program (QE2) is supposed to end in June 2011. The market, and precious metals especially, seems to be pricing in a third quantitative easing program.

And that is the general consensus. The most common views range from Bernanke can't stop printing money because if he does everything will collapse to he'll stop for a little while before the fake economic numbers take a dive and he's forced to start up the printing press again. Less common is the view that since the US dollar is the world's reserve currency, Bernanke can print as much as he wants.

Whenever there's a set date by which some major market supporting activity is supposed to conclude (e.g., 2008 Summer Olympics in China, QE1, etc) the market tends to go up with investors thinking something like, "it's safe to buy [until the set date]." Usually, at some point before the expiration of the market supporting activity, people decide to sell ahead of everyone else. The market logs a top when the sellers outnumber the buyers. In the case of the Chinese Olympics, for example, the top in Chinese stocks was reached at the end of April 2008, a full quarter earlier than the "safe to invest before August" mantra insisted.

So, QE2 is supposed to end in June. Will investors start to sell before that date? I think it's quite possible. Another possibility is that they'll continue pricing in QE3. If that's the case, whatever the Fed announces in June (QE3 or no more QE) will likely produce a sell off if one hasn't already occurred by that time. Of course, this comes with the often repeated caveat that the market will do what it wants regardless of the could'a, would'a, should'a.

To the above speculations I'd like to add the following.

Zero Hedge reports on NYSE leverage: In February 2011, "total Margin Debt jumped from ($46) billion to a massive ($57) billion. This is the third lowest net worth reading ever reported by the NYSE. Only the ($67.8) billion in May 2007 and ($79) billion in June 2007 are worse, and confirm that everyone is levered to the gills at virtually the same level as when the market was at its all time highs." As of writing, March 2011 figures aren't available. They'll be published here.

After a bounce, the Baltic Dry Index has resumed its course downward since the end of March. The index, which tracks worldwide shipping prices of dry bulk goods, is regarded as an indicator of future economic activity.

Copper, another early economic indicator, may be turning over, according to Goldman Sachs (GS). Goldman should in no case be blindly trusted, the thieves that they are, but they do occasionally dispense accurate information to their clients. That the economy is much worse than we're told and that copper prices are perhaps too high might be gleaned from an indirect source: people are now stealing the metal to make money. Another indication of the same thing is that the nickel, the $0.05 denominated US coin that is composed of 75% copper and 25% nickel, as of April 15, 2011, has a melt value of $0.068. That's 36% higher than its face value.

With the first quarterly reports coming out last week, the earnings picture isn't all that rosy either. Alcoa (AA), Bank of America (BAC) and Google (GOOG) all disappointed.

Company insiders started selling in January, continuing in February and March. On the other hand, retail investors, otherwise known as bag holders, have been buying.

Oil is over $100 a barrel, and gas prices in most areas in the US are over $4 a gallon. While Morgan Stanley says this isn't bad for the economy, one may wonder just how long this "wealth redistribution" can last given that rising oil prices are like an additional tax on the public, which must drive or use public transportation to get to work, if they even have a job. Oil prices don't just affect the price at the pump. Most of the goods that are moved from place to place (pretty much everything we buy in the store) incorporate transportation costs in their price. We also pay more for things packaged in or made out of plastic, which is made out of oil. Our economy runs on oil.

Finally, the market hasn't had a significant correction in quite some time. Add to this the overwhelmingly bullish investor sentiment. "Only 15.7% of investors are bearish--the lowest reading in 20 years."

Maybe the market will never go down again, but if there were ever a good time to sell in May and go away, it is now.