The Holiday Season and the MARKET!

We here at Brotelli Investments always enjoy the Holiday season.  I had the chance to go back to St. Louis last week for Thanksgiving. Spending quality time away from the markets with family and friends is very special and not done enough throughout the year. As for the markets, we sit at a very key level at just under 1188 in the S&P 500 and just over 11,050 in the Dow Industrials. The market will soon be making up its mind on a Christmas rally going into next year. With the dollar overbought and stocks looking strong we may be set to test the highs of the year heading into 2011.
Happy Holidays everyone!

Another LOOK at Housing

 

Demand

Supply

Price

I found the three charts above to be VERY interesting. With supply near its all-time highs and demand near its all-time lows it’s safe to assume that prices have only one direction to move and that’s lower. We will be watching the housing index ($HGX) closely heading into early next year as a dip in the index to new yearly lows would almost surely lead to another recession in the US economy. 2011 here we come...

Thinking of INFLATION...

I found the chart below to be very interesting. If the US follows the path of Japan it looks as if inflation will be very low for a long time. I think it will depend on the housing market and if we double dip next year.

Only time will tell.

Stress Tests: Round 2

See the link below for more information from the Wall Street Journal on the Fed's new round of stress testing for the banks.

http://online.wsj.com/article/SB10001424052748704648604575620732161392908.html?mod=WSJ_hp_LEFTTopStories

The main part of the article I read was:

“The Federal Reserve will require all 19 banks that underwent stress tests during the height of the financial crisis to undergo another review of their capital and their ability to absorb losses under an “adverse” economic scenario.

The Fed, in guidance issued today, said all 19 banks must submit capital plans by early next year showing their ability to absorb losses under a set of conditions to be determined by the central bank.

The request is part of the Fed’s effort to step up supervision at the nation’s largest financial firms.”

To me, the Fed is clearly seeing something that Wall Street does not.  I think they know the housing market is now rolling over again.  Ben Bernanke has implemented QE2 in case he needs to buy some mortgage backed securties to shore up the credit markets.  He wants to avoid a repeat of Q4 2008. 
That’s a good thing if you ask me.

LOOKING for a TOP!

Here we are in the middle of November and the equity markets are still hanging in overbought territory at just over 1200 on the S&P. We at Brotelli Investments continue to wait for confirmation of a top. We feel a strong break of 1200 will mean a correction has begun. Until then, we are watching the US Dollar index ($usd) to see if a bottom can form along with the commidity index ($crb) to see if a top is complete. Finally, we will be closely watching the housing index after the weak data we posted last week.

Until we see evidence of a top as stated above, the market will continue to rise as the bulls are in control.

Housing

Some bad news out of the housing market yesterday as Zillow, a leading online real estate marketplace, released their third quarter report and it largely echos what was released in Monday's Clear Capital Report, the housing market looks to be double dipping. Home values fell an average -4.3% in the third quarter. Stan Humphries, the Chief Economist at Zillow, says the housing market decline is likely to surpass the Great Depression’s decline and that prices are unlikely to recover before next summer.

See links:
http://www.zillow.com/blog/research/2010/11/09/it%E2%80%99s-going-to-be-another-long-hard-winter-in-housing/

http://www.clearcapital.com/company/MarketReport.cfm?month=November&year=2010

We here at Brotelli Investments believe housing still remains a simple supply and demand story.  The overhang of inventory is crushing meager demand and the mortgage mess is not helping matters as shadow inventory is pushed further into the future as banks have trouble with foreclosures.  If you thought the housing crisis in the USA was behind us you might want to think again.  We believe housing set the credit crisis in motion in 2007 and it could pose a very serious risk to the economy in 2011. We will be watching the housing index ($hgx) to see how it performs over the next few months to tell us what is going to occur.

Market Thoughts and QEII

Is the market overbought at S&P 1,225? I think so. A correction may be closer than it appears. We just have to wait for the dollar to find a low.

Ben Graham once described the stock market as follows:

“In the short run it’s a voting machine, but in the long run it’s a weighing machine.”

The votes are in and they are unanimous, so far.  Equity investors are voting that QE will do something to improve the economy.  However, that does not mean it actually will do something for the economy.  I believe there is no fundamental reason for equities to sustain gains due to the Fed's second quantitative easing program.  That is not the same as saying that equities can’t move up here even more in the short-term.  Equities move for any number of reasons in the short-term – many of which are entirely irrational. If QE somehow results in economic recovery down the line and we get back to full employment I will have been proven wrong (and I will happily admit as much because after all we will all be in a better place).  At that point, the market will have weighed the facts and concluded Ben Bernanke was in fact correct to push for higher asset prices.

The very idea of this as an economic strategy is frightening to me.  If QE actually works then there is no need for fundamentals.  Why does anyone get up in the morning and go to work?  We can all just go out and open a Scottrade account and let Ben pour money into our accounts.  Unfortunately, that’s not the way economics works.  You would have thought we would have learned this after two bubbles in less than ten years, but no.  Here we go again.  Some of this appears like common sense, but as Mark Twain once said: “Common sense is not so common.”  Personally, I wish it was this easy.  I wish the Fed could just press a button and make economic growth occur, but that would be beyond naive to believe. 

Place your votes in the short-term.  But don’t forget you could get crushed by the weighing machine in the long-term.