The Dow Jones Industrials & the economic recovery that never was

The U.S loves to dictate rules and enjoys pointing a finger at nations it deems that are not playing fair. In reality, the truth is that the U.S is the one that does not play fair, it says one thing and does another. For example, it talks about free markets and how it has the welfare of its citizens in mind.  How it has done a lot to stimulate the economy since the great recession of 2008.    Let’s examine each of these points one by one

The Dow Jones Industrials and the economic recovery that never was
US Markets are Free

Our response to this delusional statement is tell us another joke. Any shred of freedom was eviscerated once the Fed first flooded the markets with several rounds of QE and then purposely held interest rates at ultra-low levels for a record period.  This has triggered the one of the biggest corporate debt binges of all time.  Corporations now have decided to borrow money and use these funds to boost earnings.  This money is not invested into the company or to purchase capital goods or to do anything that improves the bottom. What they are doing is buying back huge numbers of shares and thereby artificially boosting the EPS.  Modern alchemy at its best, we addressed this scheme in detail in an article titled  Share buybacks just another WallStreet Scam

 

The US has the welfare of its citizens at heart

This is another Joke. If the government cared about its people, 75% would not be leaving from paycheck to paycheck. The number of individuals on food stamps would not continue to soar and the average salary (when inflation is factored in) would not be lower than it was 10-years ago.  Finally, the Fed would not be punishing savers and rewarding speculators by keeping rates low for such an inordinate amount of time.  In this article titled Oops we did it again, we covered the issue of why we expect this period of low interest to last for a very long time.

Stimulating the economy

If by stimulating the economy they mean running the printing press then they have done a splendid job. However, if looks at things through a clear lens, then the Fed and the government has done a pathetic job of stimulating the economy. All they have done is to create the illusion all is well by providing corporations with easy access to hot money. This hot money is then used to repurchase shares or indulge in other speculative activities that create the illusion all is well.  This illusion will end as soon as the supply of hot money is cut.  As long as it is easy to raise debt as is the case now as interest rates are so low, then this strategy will work.  The problem is that this strategy allows many companies that should have been bankrupt long ago, a second lease on life as they now have access to funds they would not have. As evidence of this look at how much time was spent over the possibility that the Fed would raise rates by a pathetic 0.25 basis points.  If the economy were improving, then a Fed hike should have been seen as a positive event as it indicates that business outlook is improving.

 

How to do you play the market under such conditions

As we have stated over and over again, volatility was expected to rise and is still expected to rise even more going forward.  The year started off with a bang, and the volatility is showing no signs of ebbing.

As volatility is set to soar to levels never seen before, one had to understand that the market will surge upwards then pull back strongly; this is what volatility is all about.   Read the following excerpt

The biggest losers on the day: airlines, major insurers face tens of billions of dollars in claims after last week’s attacks, as well as financial services, travel and hotels, and retail stocks. The biggest winners: defense and security stocks. “I understand it’s tough right now. Transportation, business is hurting, obviously the market was correcting before this crisis. But the underpinnings for economic growth are there,” Bush told reporters at the Pentagon.

“Companies can buy back their own stocks, and that is something that I hope companies will do, and I hope that they consider strongly,” says former Labor Secretary Robert Reich, who is now a professor at Brandeis University in Waltham, Mass.  Still, it will be a tough task to get the exchange up and running full-steam, say experts.  Full Story

Reading this article one would be inclined to say that the author appears to know what he is talking about. However, if you clicked on the link, you will note that the article was written years ago when the Dow was trading slightly below 9000.  Fast forward and the Dow industrials have actually doubled in value since this article written, minus the current pullback.  If they were wrong then and a host of other times, what makes today any different from tomorrow. Will the markets now crash and burn? We think the markets are more likely to end the year on a higher note than crash to new lows.  The naysayers have been waiting for this crash for a long time and had they listened to their own advice; they would be bankrupt several times over. Instead, you find out that these naysayers are doing rather well, which means they sell information to their subscribers or clients that they do not act on.

 

The game plan should be short and simple

Very strong pullbacks should be viewed as buying opportunities; investors should make a list of stocks they would like to own. When the markets pullback strongly deploy money into a list of strong blue chip stocks; while the markets are pulling back now, compile a list of top stocks you would like to own.  A simple understanding of trend analysis would be helpful.  In a follow-up article, we will provide everyone with a list of the top sectors based on relative strength. We will also provide a list of the top 10 stocks in the market.

 

Sentiment analysis

No bull market has ever ended when the crowd was worried.  Our own sentiment indicator illustrates that the Crowd was far from Euphoric before the correction started and the crowd is now moving into the anxiety and gloom and doom camp. Under such a scenario it is hard to envision a market crash.  The number of bulls has dropped has dropped dramatically and the number of bears has spiked up in the past two weeks.

The psyche of the average trader has taken a beating, so it is likely that this correction will end up being the most severe correction since 20111. However, rather than setting the path for massive crash, we believe this correction will be setting the foundation for a strong bull run.

 

Other articles of Interest:

BBC Global 30 index signalling higher Dow prices 2016 (Dec 22)

Share buybacks Wall Street scam (Dec 16)

Global warming; greatest scam ever  (Dec 13)

Splendid stock returns without 50/50 stock bond portfolio  (Dec 12)

How to win in any market: 9 rules for success  (Dec 11)

How to achieve above average gains in the stock market (Dec 10)

The NYSE Index is signalling higher prices for 2016  (Dec 7)

Gold on the verge of a breakout rally? (Nov 24)

9 ways to build wealth in the stock market  (Nov 24)

China stock market reforms and long-term outlook   (Nov 24)