BEAR HAT OR BULL HAT

Spring 2013

Bear Hat or Bull Hat

Spring 2013
IN THIS ISSUE

Glass Bull or Iron Bull?

The markets have been climbing to new highs on a weekly basis. There is almost no sign of any pull back! The markets do not care if it is good news or bad news. It seems any news is a reason for the markets to jump. To me its starting to feel much like 2007, for a few reasons: savings rates are at all-time lows, debt is climbing on short term based loans, and large cap companies earnings are starting to peak. It feels like we are at a great party that no one thinks will end. All that could change and the market could just keep climbing, more booze (Q.E.) could show up and the party will keep on rocking. One thing I have learned from my love/hate relationship with the market is one has to adapt. The market is pretty much a living substance and will change periodically. One has to learn to accept that and move with the trend and no matter what have trailing stops in on all your market positions. It is no different than wearing a seat belt or a helmet. Only do this if you care about locking in profits. The current market has been a Bulls best friend thanks to our good friends at the Federal Reserve. It has been an all-out hunting season on the Bears, and Ben Bernanke has been supplying the Bulls with ammo. Now there are a lot of strong Bullish charts out there and we will cover them, however I just do not see how this stock market party can keep this up. The markets could keep rallying for a few more months or even another year. And the flip side is if the real economy starts to gain traction, WATCH OUT BEARS. Dow 16,000 would just be the first milestone, but there is a lot that has to happen for the Bullish case to play out.
There is also a Bearish case which we will look at as well.

Charts
We will take a look at charts from all over the globe. These will range from demographics, stocks, big picture on Small Business, and unemployment. Page 2

Coming Trend in China?

With the coming change in demographics in China, can we look and see what took place when other countries experienced the same shift in demographics? Page 13

Do we have a Glass Bull rally or an Iron Bull rally? Look at the charts and makeup your own mind.

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Charts
Charts are always fun and interesting to look at. It can help take the emotion out of investing. Here we will be looking at many different charts from all over the globe. Below is a list of charts that will be covered: Small business outlook in the U.S. (Study done by NFIB Research Foundation) U.S. Economic Activity and the Federal Reserve Overview of Gold, the Dow Jones and Student Loans Unemployment in the Eurozone

Small business
Small businesses are one of the most important aspect of any strong recovery. Many forget that small business are the key element for a stronger and healthier economy. The pulse of the small business community can either confirm or question how strong a recovery is. Here are some truly amazing facts about the small business community. (Research done by Business Insider) Small businesses employ 57% of the countrys private workforce Small businesses create 13x more patents per employee than large patenting companies One third of small business rely on credit for financing 60 to 80 percent of all new jobs come from small businesses Small businesses pay 44% of U.S. payroll If a small business cannot resume operations within 10 days following a natural disaster, it probably will not survive Small business seem to be just more than the back bone of the U.S. They are very important to the economy, however they are very fragile in hard times. Lets take a look at how small business are feeling in the U.S. (Study done by NFIB Research Foundation)

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Now the chart above titled Outlook for Business Expansion does not paint the best picture moving forward. It shows us that small businesses are not looking to expand. Why could this be? The chart below titled Not a Good Time to Expand helps us understand why the outlook is poor. The political environment is the reason why!

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Expansion does not look to be doing so hot at the moment. A large amount of that is due to Washington, There are two other key major components to Small Businesses we must look at. Sales and borrowing provide a good insight on if, or when, Small Businesses will be looking to hire more employees. If sales are doing well that means the real economy is also doing well. Remember that 70% of the U.S. GDP is based on the consumer. If sales are going up, borrowing is likely to increase for expansion. Expansion means more employees which would be a direct effect for a stronger and healthier economy.

From the look of the chart above Single Most Important Small Business Problem sales have started to head lower once again. The chart below Regular Borrowing Activity also does not paint the best forward looking picture for Small Businesses in the U.S.

BEAR HAT OR BULL HAT

Spring 2013

Sadly from the study done by the NIFB Research Foundation does give investors a reason to be concerned about the overall economy. However, it seems the stock market does not care at this time. Sooner or later reality will catch up but, which reality? Currently there are two realities. On one hand you have the stock market which is booming and on the other, Small Businesses are having major red flags across the board. Remember small businesses do not do well in hard times. They tend to quickly go under. Hopefully we start to see a turnaround in charts above. Now lets move on and get a bigger picture of the U.S. economic activity.

U.S. Economic Activity

To get a good read we will be looking at the big picture or as some call it the 30,000 foot view of the economy. This way we can see if a new trend is taking place or if it is just a small blip on the radar. After our look at the economy we will see what our good friend Ben Bernanke and the Federal Reserve have been up to. If one recalls we looked too see if the Federal Reserve would keep up with Quantitative Easing (Q.E.) and the probability of the market hitting new highs was only a matter of time. The question is will they keep it up now that we are at all-time highs? To get a read on economic activity we will cover: Employment All 3 manufacturing indexes Durable Goods Rail road traffic Internet coupons

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Small

The chart above presented by Streettalklive.com shows us that employment moves in cycles. This does not mean our current employment cycle has peaked. This is just something to watch because from the 30,000 foot view it is starting to look like a new down trend could be taking place. The chart below shows that us the economic activity can be directly correlated with Q.E. and due to Q.E. 3 activity has been upward. However it seems Q.E. can only pump up activity for a short time before the market needs another shot from the Federal Reserve. Now it can be argued that this is not a healthy sustainable solution but if an investor wants to make money they are being forced to play by the rules of the Federal Reserve and leave logic aside.

business

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The second chart from Streettalklive.com points to caution. It shows that trends of the past are starting to reappear. One thing this chart does not show is in the past two recessions we did not have the Federal Reserve watching the markets back. The chart below shows us Weekly Intermodal Rail Traffic. Rail traffic gave investors a red flag back in 2008 before the big fall, which is why I watch it very closely. Currently rail traffic is starting to slow but this is not a sign of a trend at the moment. If rail traffic does start to contract for consecutive weeks, then that would be a major red flag like we saw in 2008. It is something to watch closely.

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Now why do I look at the Internet Coupon Index? Due to the U.S. GDP being driven by the consumer, it seems very logical to watch how the consumer is doing. The chart below shows us the offers for coupons and the demand for coupons. If this was a stock investors would be jumping up and down, however we see demand on both sides going through the roof! When a company offers coupons they usually do this when sales are weak and need to increase demand. Consumers usually look for coupons when times are hard and they are trying to stretch their budget. Or companies are just being nice and offering bargains and more consumers are moving to couponing. That is something for you to decide.

Federal Reserve
The Federal Reserve has had the markets back ever since it started with Q.E. the first time around. Back then the Fed was buying U.S. bonds to lower interest rates to help home owners and increas borrowing. Today the Federal Reserve is buying 40 BILLION DOLLARS a month in the overall market. It is just not buying U.S. bonds anymore. They are also buying securities in the stock market. Now this may sound all well and good but it clouds the vision of investors across the board. It brings the question to mind are we in a true recovery or another bubble brought to us by the Federal Reserve? Lets take a look at a chart that brings that question to

the forefront.

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The chart above makes me feel as if it is truly a Fed driven rally. As their balance sheet increases the market continues to rally. We can see this trend very clearly with the Feds balance sheet on top of the S&P 500. This works great for the Bulls as long as the Fed keep buying bonds and securities here in the U.S. The only concern is what happens when they stop buying up assets? Most likely they will not stop their Q.E. anytime soon, but when they do it will be very interesting to see what this multi-trillion dollar experiment brings.

Overview of Gold, Dow Jones and Student Loans

Here we will use the Andrews Pitchfork method to give investors some guidelines on the Gold market along with the Dow Jones. We will also take a look at a few charts from the past that were able to give investors warning signs that the market was topping out. But take those with a grain of salt. In my last letter, we looked at the bubble forming in the student loan department. There will be a few charts to give us an update on how they are doing.

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One of the most popular ways to trade gold is through the ETF (GLD). The chart above shows the GLD is in a Bearish fork. Any break above 150 for the GLD would be short term Bullish. Any break below 125 on the GLD would be very Bearish. The chart below looks at the Dow Jones 30. It is currently in a strong Bullish fork. Any break below the 14,500 level would be short term bearish. A major break below 13,500 would be very bearish!

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The chart above relates to the cover of BARRONS financial newsletter. It seems every time BARRONS gets super bullish the market takes a mean turn the other way. With their new Dow 16,000 cover will the market take another turn the other way? We will know soon, but the last two times the market did not have the Fed pumping in 40 billion dollars a month. So we will see in time. Remember this is more of a fun chart you should take with a grain of salt. The chart below is more concerning. Student loans are becoming the biggest type of loans starting to be in serious delinquency. If you recall in the last letter I showed that the student loan bubble is far bigger than the subprime bubble we saw in 2008. Lets just hope the job market starts to pick up and grad students can start paying back those loans, or we are in trouble!

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Unemployment in the Eurozone

Below are two very important charts when it comes to the Eurozone. Chart A shows us that the Under 25 Unemployment rate is sky rocketing across the board. This is very key in the matter of riots and crime. When young adults do not work there is a much greater chance that they will get into trouble. When we saw the rate pass 50% in Greece in 2010 we saw many more riots and more trouble for the Eurozone. In Chart B below it shows that even now the European Central Bank (ECB) is buying up bonds to help bring interest rates lower. It is not effecting unemployment at this time. I would keep an eye on the Eurozone because as we saw in 2008, every country is connected due to the global market. If the Eurozone starts to fall again, we will feel it here in

the U.S.
Chart A

Chart B

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Coming Trend to China?

China is a growing giant and the worlds factory. Lately we have seen China in the news for its large and vast ghost cities. Some are calling it the biggest real estate bubble ever. That is a major concern but there is another reason China could be a ticking time bomb. Most surprisingly many do not see it coming. It is demographics that could be the Achilles heel for China. In the past we saw demographics change in areas like Japan and Korea. We will have to see what happened to the growth that took place. We will look at the charts and you can make up your own mind. Chart Presented by Morgan Stanley

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Looking at the chart presented on the previous page titled China: Demographic Trend Is Turning it is very clear that change is coming in the land of China. The key to this chart is to look at Chinas dependency ratio. As one can see that level is starting to fall and will continue to fall far into the future. What does this all mean? If you look at the chart below titled Japan and Korea one can see that as soon as the age dependency moves down so will GDP. Now this is a very concerning trend that looks to be taking place in China right now. Keep in mind, this is demographics. Not a stock market bubble or a housing bubble. A change in demographics is something no Central Bank can hold off or change. The future for Japan, Korea, and China looks pretty worrisome, demographically speaking. There could be a way out this dark hole but none have been presented at this time. From the charts presented by Morgan Stanley, Caution is a word I would use when investing in these areas. Trying to fight demographics is like trying to say winter will not come, it is a losing battle and one should not try to be a hero.

Chart Presented by Morgan Stanley

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Summing It All Up
We have seen a large amount of data and it can be mind numbing and confusing. From the data we have looked at that took place in the U.S. it seems the economy, small businesses and the consumer are not seeing the recovery the stock market believes is happening. But then why are stocks going up and up if the economy is truly not in a recovery? It comes down to an unintended consequence from the Federal Reserve. Remember when the Fed pushes interest rates lower by buying U.S. treasuries they are killing the yield on safe investments. When interest rates are at all-time lows, safer investments like bonds and treasuries pay almost no yield. Due to the fact the baby boomer generation (about 79 million of them) are retiring more and more every day are looking for safer investments and being moved to fixed income. Fixed income needs a higher yield. This cannot be found in the bond or treasury markets because interest rates are at all-time lows. Therefore investors who seek a higher yield are being forced into riskier investments like stocks. You also add the Fed buying 40 billion a month across the board in the market you can see why stocks are going up. There is a high demand for yield due to fixed income. This is all wonderful as LONG AS THE FED IS THERE. It could be very ugly when the Fed stops buying the market. There is a small chance they will do it before the end of the year but most likely they will continue. Every time they have stopped with Q.E. in the past the markets have dipped. The Fed can keep the market going as long as nothing overseas takes place. Asia and the Eurozone are starting to look concerning once again and I do not know if the Fed can keep the U.S. market going. It could be far too much. If we start to see the economic data in the U.S. turn around, then a true Bull market could be under way and we would have an iron bull market. On the flip side if the Fed stops their buying program and there is no real recovery in the economy, then we would have a glass bull market and it would shatter into pieces. I do not see Ben Bernanke exiting anytime soon, but his term is up at the end of the year, and we do not know who will replace him. There are still a lot of caution signs in the market but investors have to move with the trend in the stock market and currently that trend is bullish. Investors need to respect that or get trampled by the bull. That trend could change, remember our 14,500 line in the Dow. A break below there would start to be worrisome, but as long as the stock market holds that line who knows where it will go. Keep stops in place on your investments because one day the bear will be back will with a vengeance, but who knows when that day will come. Now on the following page I leave you with a chart. All investments follow this chart and I will leave it up to the reader to choose where they think we are. Best wishes and safe investing

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This is an interesting chart that is also great to put in your investment folder. It is a reminder that trends do change. Investments will have Paradigm rises, but they always return to the mean. Do not let yourself get stuck in the Bull trap.