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For What It’s Worth

S&P 500 Index Annotated

I wanted to do a postmortem on the stock market action for the past few days and examine the annotated chart we’ve been following here on the blog for the past few weeks.

Fortunately, Mary Lynn Foster from Connect FM 95.3 asked me to do an interview on this topic, so I thought I’d share some of the notes I took during our conversation. If you aren’t listening to Mary Lynn and her broadcast partner Diane Ducey, my recommendation is to turn off Rush Limbaugh and switch over to their FM Talk Radio program for lively discussion on current events impacting your life here in Champaign County.

My notes on Mary Lynn’s question were kind of sparse so they are just shown mostly as discussion topics below and the answers I gave may not follow my notes exactly, but what I’ve reprinted below catches the essence of what we discussed.

Mary Lynn: The stock market numbers were down for a few reasons yesterday…so I thought we could address them.

Disappointment in Bernanke

Mark: Investors had planned on some new version of Quantitative Easing being announced by Bernanke coming out of the Fed’s meetings this week. They got Operation Twist, but it was much smaller than they had imagined it might be ($400 billion seems like a small number these days given the trillions we are in debt).

This was coupled with his statement that the US economy was significantly softer and that the slow pace was due to more than the temporary impact of the Japanese Tsunami scared people into a mass exodus from stocks over a two day period.

From my perspective, Operation Twist won’t really impact things much. At current levels, interest rates do not inhibit growth. What is keeping growth at bay is fear of the unknown – CEO’s are not willing to invest in new people, plants or equipment when the regulatory climate is so anti-business.

Layers and layers of new regulations – from health care to environmental to financing to labor relations – currently have no rules written to guide business. It’s no wonder that CEO’s won’t expand given the uncertainties that surround them.

We are also probably witnessing that we are at the point of diminishing returns relative to monetary policy and a change in other government policies relative to regulation, taxes and spending is needed.

Mary Lynn: Risks of a Global Recession

Mark: The news coming out of government statistics is definitely negative. However, you really need to look at what they are not telling you.

Take China for example, they have purposely been trying to slow their economy to fight inflation. But they want to slow it to 8% economic growth, which is still a very actively growing economy. Brazil and India are much the same position.

If you look at individual companies and what they are saying, things also don’t look so bleak. Nike reported earnings last night and they were blockbuster. They said that they see growth in all areas internationally. The same reports came from Deere and BHP Billiton, the world’s largest mining company.

There is one chart I watch for signs of international economic activity, particularly in Asia, is the Baltic Dry Index. This is a chart of shipping activity, and it has been on an upward trajectory over the past few months. If we were headed into a global recession, there would be a slowing of economic activity that would show up in this indicator first. Companies do not buy and ship raw materials or ship finished goods if they do not have the business to support it.

The same goes for railroad shipments here in the states, and there is no decline in raw materials or finished goods being transported by rail.

Mary Lynn: Frustration with D.C. Gridlock

Mark: The divisiveness in government is not good for the stock market or for economic activity. Gridlock will not fix the regulatory deluge coming out of Washington – in fact, many of the government agencies are going around congress and issuing rules that impact business in a negative way.

There needs to be a reasoned debate on the issue, all the facts weighed, and then sound law written, but that isn’t happening right now.

This leads to uncertainty and a perception of a lack of leadership, neither of which is good for companies making plans for the future, consumers considering large purchases, nor investors committing funds to the market.

Mary Lynn: Worries about Europe

Mark: Last week, Treasury Secretary Geithner stated that there would be no more Lehman Brothers – the bankruptcy event that froze credit worldwide and nearly totaled the world’s financial systems. I believe that what he means is that the United States and the European Union will not allow that to happen again, no matter what.

They will allow other things to happen that can be painful – forced mergers of weak banks into stronger ones, forced austerity on the weaker economies that are so far into debt that they have no choice to cut back services and entitlements.

The real problem here is that you have the French banks who stretched for yield and bought the sovereign debt of the countries who are in trouble because it paid 16 100ths of a percent more than the debt of Germany or the Netherlands. It’s not completely their fault since the banking rules clearly state that sovereign debt is risk free and they don’t have to allocate capital toward it. However, the banks in Germany, the Netherlands, Finland, Austria, and other like-minded countries did not invest to the same extent in the debt of Greece and similar countries.

Now, those countries are being forced to rescue their less fiscally irresponsible cousins. The voters in Bavaria and Lapland that worked hard and saved their pennies are not happy to see them go to pay for Greek salaries for people that worked a fraction as hard as themselves.

It will take years for countries like Greece and Ireland to recover – but Ireland faced up to their problems last year, raised taxes, cut services, recapitalized their banks, forced bank debt holders to realize some losses, and they are in better shape now than before. Eventually, they will see economic activity begin to pick up, followed by employment and they will be able to reduce tax rates as a consequence of it.


As far as the graph goes, you can see that we clearly broke through the bottom of the uptrend defined by the two green lines based upon investors disenchantment with the results of the Fed’s recent meeting.

The good news is that you can see our pink support line definitely held strong. This makes a third retest of the August lows, known as a triple bottom. The chart pattern we are looking for here is called a Triple Bottom Reversal and we won’t know for sure its in place until the market moves higher again and breaks through the resistance at 1205 on the index (you can see that coincides with the blue horizontal line that marked as the 50% retracement of the move from the May highs to the August lows). If we get this, in technical terms this is very positive for the market.

For what its worth, what we have going for us is that we are about three weeks away from earnings season – and I believe you will see a positive earnings season with many surprises to the upside (maybe not of the magnitude of the past two quarters, but still nicely positive). This could be the catalyst to move the market higher and into the target zone defined by the pink box and complete the Triple Bottom Reversal pattern.

Given the estimates for worldwide economic growth being reduced I have lowered our target level just a bit for the market between now and year-end. I think there are still enough positives out there based upon the statements from Nike and other corporations seeing growing business worldwide that we will see positive GDP growth in the US and the developing world, which should be enough to keep things moving forward.

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