Professor’s Comments December 20, 2013

Posted by OMS  at December 20th, 2013

Markets were flat yesterday with the Dow rising 10 points to close at 16,179.  The  NASDAQ and S&P were both down 12  and 1 point respectfully, with the SPX closing at 1809, still under its recent high of 1813.  Volume on the NYSE was moderate,  coming in at 105 percent of its 10 day average.  There were 186 new highs and 90 new lows.

Gold had a bad day yesterday, falling over 40 points to close under 1200 (1194).  And Apple, AAPL, fell 6 points to 544.  It was only about a week ago that I was talking about how AAPL was hitting its target of 575 and needed to fall back.  BTW, the DMI on AAPL is now negative.

Anyhow, I didn’t see much change in the pattern or my indicators which are still mixed.  So because of this I want to share a few comments I received from students during the past few days.  I think you’ll find them interesting.

For the past few months, there has been a lot of talk about the housing market’s recovery.  And yesterday, Emeritus highlighted a housing stock for the Honor Roll.  So when I received an email from a student involved in the housing market and mortgage market, it peaked my interest.

 For obvious reasons, I have removed the name of my student and the company he works for. However you should know that his company is one of the largest lenders in America.  You would definitely recognize the name. Here’s the email:

“Like most responsible adults, I prefer facts to opinions.

Real life experiences explained carry much more weight with me that opinions or predictions.

I originate mortgages for XXXX.

I’ve been at it for 20 years.

The last 4 months have been some of the lowest production we, as a company have produced in recent memory.

Our national volume forecast for 2014 is almost an exact match for 2008.

Remember 2008? 40% of our loan officers left the business for lack of production in 2008.

We’ve laid off about 30% of our processors and underwriters in the last 6 months.

This doesn’t help and is a good indicator of what the guys in the ivory tower predict for volume next year.

At the local level, it ain’t pretty.

My production has been lousy by my standards, yet I’ve been number one out of 12 loan officers each of the last 4 months. Hmm.

In order for my branch to declare a “good month” we must close 13 million per month.

Last month we closed 3 million.

Last evening I watched the beginning of the CBS Evening News, (CBS being the one network that offends me the least of the big 3) Scott Pelley gushed about the “resurgence in the economy” and the “vastly improved” jobs market.

Happy Days are here again!

I turned the news off.

Looking back on last evening, I realized that I was a bit agitated the rest of the night.

I wonder why.

I’m getting sick and tired of being lied too.

Hank, thanks for “listening”.

Why have so many American adults become sheep?”

At Fed Chairman Bernanke’s news conference on Wednesday, there was a lot of happy talk about the economy and how the government statistics show that a recovery is well on its way.  But after reading my student’s email, my take away is that the Fed’s stimulus program (QE 1-4) has failed miserably.  It did not create jobs.  Jobs that give consumers the confidence to borrow money to buy houses where they can live and raise a family.  All the stimulus program did was create mountains of debt and pump up the stock market.  It was great for Wall Street, but didn’t do anything for Main Street. The debt created will have to be serviced by you, children, our grandchildren and me. Debt that will take away from America’s growth.   Debt that will weaken our military.  That’s because approximately 60 percent of the money the government takes in from taxes must go to service this debt.  What’s left is used to pay for Social Security, Medicare, and the Military.  Right now, the government is not taking in enough money to pay its bills, so it has to borrow even more money to keep all these programs operating.  And this borrowed money creates even more debt.

Why am I talking about this today?  Well it will have an impact on stock prices in the future. Not now, but at some point in the not too distant future.  It has to. You can’t keep printing money out of thin air and expect good things to happen. If the printing continues, at some point we will see the day when almost all of the money the government takes in goes toward servicing the debt.  There won’t be much left to pay for anything else.  If you believe that a strong military is required for a strong nation, there is much to worry about. The way military spending is being cut, we won’t have much of a military in a few years. I’m seeing the exact same thing happen in America that I saw occur in Great Britain about 30 years ago.  They used to have a powerful military.  Now it’s better left home.  It won’t win much anymore.  If we maintain our present course, we’re going to be just like them.  Hapless and fearful of any fight.  Yeah, we’ll still have a bunch of folks in uniform.  But trust me, the way the military R&D budgets are being cut, our service men and woman won’t have the best technology in their weapons systems to win the fight.

Early next year, Congress will meet again to discuss the debt ceiling.  Many Americans will dismiss these discussions, or worse, listen to the news media that will try to paint anyone who tries to reduce spending as some type of nut.

But they’re not.  Representatives who concern themselves with reducing spending are only trying to get our country back on track again.  If we can reduce the unrealistic spending on entitlement programs, then we won’t have to borrow so much from others to keep the government running.  And in a few years, we might actually have a surplus that can be used to pay off the debt.  With a lower debt, we won’t have to spend so much money on interest.  There will be more money left over to create jobs, and expand the economy.  And this will get the housing and car markets growing again.

The above email is not the only one I can share with you.  I have many

This past week, a friend of mine stopped by the house to say hello.  My friend owns a used car business.  He told me a story very similar to the email I posted above.  He used to employ 5 people a few years ago.  Now it’s just him. So add these 5 people to the 30 percent that were laid off by the bank, and you start to see a trend developing.  It’s not pretty.  He told me about one of his customers who was returning his car.  My friend asked why?  Was it broken?  If so, he would be happy to fix it.  No the customer said, it wasn’t broken.  It was a great car.  He was returning it because now that he lost his job, he couldn’t afford the payments.

Cars and housing used to be a big part of the American economy.  And now, just from the real life experiences of two students, we see that both housing and car sales are suffering.  The day before yesterday, we saw Ford report poor earnings confirming my friend’s real life experience.  Then yesterday, the National Association of Realtors said sales of previously owned homes fell 4.3 percent last month to an annual rate of 4.90 million units. It was the lowest number since last December and the third straight monthly drop.  Even the government said it was the worst number in years.  Hmmm?

Like I said, I just wanted to share some of this with you.  It’s something to consider before buying into any market with mixed signals.  Even though the market is making new highs, this is NOT a healthy market.  A healthy market is driven by a growing economy.  An economy that is creating real jobs, not made up, fudged numbers.  An economy where stock prices are going up because the companies are growing and have real worth.  Not because newly printed money is being thrown at their shares.

I hope that by sharing these real life experiences of fellow students, you will have a better perspective about what’s going on in the real economy.  Hopefully, the next time you hear some talking head on TV telling you about how things are improving you will take pause. 

My student’s point about becoming a Nation of sheep is a good one.  Sheep don’t lead; they follow.  And when they follow leaders that are taking them in the wrong direction, it always has consequences.

I hope you think about some of this today as we wait for a change in the signals.

That’s what I’m doing,

h

Not sure of the terminology we use? Check out these articles

The Hockey Stick Pattern
The Creation of Waves and Trends
FAQ

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