GENERAL INTEREST

 Keeping the Good News in Perspective Leonhardt

The Coming College Education Bubble Forbes

Emerging Markets Briefer - December 2010 Danske

MARKET WARNINGS

Market Is Overbought, Overextended and Overvalued Comstock

 

After an 86 percent gain in 21 months the market looks overbought, overextended and overvalued.  Furthermore, despite  the implementaion of QE2 and the passage of the tax compromise, the economy is not likely to grow fast enough to to be self-sustaining. Although the combination of QE2 and the White House/Congressional compromise on the tax extension issue is being touted as the great elixir that will spur economic growth we think that growth will be subdued and temporary.  Indeed QE2 is already looking like a failure in its early stages.  No matter what the "experts" say now, it was chrystal clear from the get-go that the Fed's intention was to lower long rates, not raise them.  As it stands today the sharp rise in the 10-year Treasury bond is likely to further weaken an already dead housing market by enough to offset any additional growth that QE2 could have provided.   Furthermore, the combination of QE2 and the big projected increase in the budget deficit caused by the compromise tax bill has helped spur another jump in commodity prices that will reduce real consumer income and negate much, if not all of the intended boost to consumer spending.   In addition economic growth will be tempered by: 1- the temporary nature of the stimulus, 2- continuing high unemployment, 3- a moribund housing sector, 4- the dire condition of state and local finances, 5- a lack of readily available credit and 6- the ongoing fragility of a banking sector that is still loaded with toxic assets that are significantly overvalued on banks' balance sheets. 7- Another major headwind to growth is the ongoing need to reduce household debt to normal levels after the credit binge of recent years.  Consumer credit excluding student loans continued its year-long slide in October, falling by $32.5 billion, and the unwinding has barely started.  Although consumer spending has perked up recently, we note that a national survey indicated that the percentage of people saying that they used their credit cards over the Thanksgiving day weekend was the lowest (17%) in the 27-year history of the survey.   According to major credit card companies, the use of personal credit cards dropped 11% in the 3rd quarter from a year earlier.  Does all of this sound like a consumer ready to spend freely?  We think not. 8- As if all of the above weren't enough, the chances of financial and economic crises overseas, particularly in Europe, China and Japan are exceedingly high.  The turmoil in the European Union is not a temporary crisis that will be cured with the wave of a wand.  A number of the weaker EU nations are basically insolvent, and their debts, sooner or later will have to be restructured.  The New York Times and Wall Street Journal recently highlighted the exposure of German, French, British and Spanish banks to the debts of Greece, Ireland and Portugal.  The IMF has warned that if the EU doesn't come up with a permanent solution the EU economy could go off a cliff.  Meanwhile the austerity measures being imposed on the troubled countries will be a drag on the EU economy for some time to come.  As for China and Japan, we'll leave that for future comment.    In light of these problems we believe that investors are overly optimistic.  An 86% market rise in 21 months has already discounted a lot of good news----some of which will not happen.  The market looks overbought and overextended, and is showing signs of an imminent top with:   1- lagging breadth, 2- a lower number of new highs, 3- overenthusiastic sentiment, 4- higher-volume down days and 5- a more frequent number of late-day selloffs.  At this juncture we think that potential upside progress is limited while downside risk is high.

Sentiment has taken turn for the worse Hulbert 

Investors cautious as volumes wind down  FT

Breadth Remains Weak BeSpoke

Now Bullishness Is At Its Highest Level Since 2007  Pragmatic Capitalist

 

"Investors are beginning to feel more confident in the economic recovery and believe that equity prices have but one direction to move."

CURRENCY WARS

Loonie may be in 'death grip,' Carney should act: CIBC G&M

Dollar Rises After Moody's Downgrade of Ireland AP

Gold: Currency Wars and China ING

The Dollar Threads a Needle Browne

China faces exchange rate dilemma Reuters

MARKET & GOLD MANIPULATION

Stocks Up 17% Since Bernanke Disclosed QE2 Disarms Fed Critics BL

AUDIO / VIDEO

QUOTE OF THE WEEK

"Gold as money is incompatible with unlimited majority rule and scoffs at the idea that money is just 'credit'. It negates any rationale, however farfetched, for the existence of central banks. It precludes 'fractional reserve banking' or any other method of debasing its utility as a medium of exchange. Last and most important, it SEVERELY curbs the power of government to interfere in the lives of its citizens. No assembly of national “leaders” brought together to “modernize” a financial system will ever agree to its use as money. But let one nation anywhere implement it, and the lid blows off."     William A Buckler Publisher: The Privateer