Secular Bear

That's right, the stock market is in a secular bear market. If you read my blog, you have heard me reference this in other posts, but not actually go into detail on the topic. This post is way over due and now let me share with you they "why" of the whole equation.

First of all market tends to go in long large cycles lasting approximately a third of a century. In other words, a market cycle lasts about 33 years. In that cycle, although bull markets and bear markets last about the same length of time, bull markets out gain the bear market losses.

I believe we entered a bear market in 2000. In that 7 years, the S&P is down 4%, the NASDAQ is still down 50 freacken percent, and the DOW is up a modest 9%. These are absolutely horrible gains for a 7 year period.

Lets look at the last major bear market which occurred in the 70's. I would love to show you the graphs I am looking at right now, but I don't know how to do that being my computer savvy is quite limited. Anyways, I'm looking at a graph of the DOW 30 superimposed from the 70's to the present. The action in the graphs is strikingly similar. With this graph, the peaks of 1973 are almost exactly the peak of today's graph. What happened in the following couple years? Well, the DOW lost approximately half of its value (somewhere between 45%-50%).

One thing that the talking heads on CNBC argue is that the p/e ration and overall dividend yields are still rather low, running at around 16.7x for the p/e and 2.4% for dividend yields. Well the numbers in 1973 were all too similar at 18.7x for p/e and 2.7% for yields earnings. Another very strong similarity to the lead up to the market decline of the 70'2.

Obviously the markets eventually recovered and pushed stronger. I would like to talk about an important point. In 1966 the DOW 30 was trading near 1000. In 1983 we were trading near 1025. Knowing inflation, can you imagine if the DOW was trading at in and around 12000 a decade from now. Wealth will be destroyed and we will see a lot of retirees with a whole lot less money than they expect going into retirement. Don't forget that retirement costs are rising at around 6% per year.

I would like to note a few important items in closing. Secular bears are long periods of sideways trading. If the DOW corrects 45-50%, it would put the DOW 30 at approximately 6500-7000...wow. Remember that secular bears historically run between 16-17 years and we are only 7 years into it. The amount of wealth that will be lost will be massive due to high levels of inflation. In the same period that the DOW corrected in the 70's gold nearly tripled, and gold stocks followed suit. You DO NOT want your money in the general stock market right now.

More Than...Less Than...

I'm going to give you a two for one in this post. The first is from yesterday, second is from today, but I they are definitely intertwined.

"Purchases [of new homes] dropped 3.9% to an annual pace of 848,000 last month. Economists had forecast they would rise to 985,000."

"Consumer confidence in U.S. drops more than forecast as fuel prices climb."

First off, some of the drop in consumer confidence might be partially attributed to high prices at the pump, but most likely, they are attributed to the recent volatility in the market and even more on declining home prices.

The supply of unsold home rose to a 16 year high. This supply, along with tightening credit standards, continues to push prices of homes down. One thing that you can always hear the talking heads on CNBC talking about is the amount of money lost in the market correction. I don't have the exact numbers but they say $100 billion dollars lost in equity markets.

What about the amount of money and liquidity that's being taken away in declining housing prices? It's rather important to note that a lot more people own homes than own stocks. Homes are often the only investment of some consumers. These declining home prices are leaving the consumer pinched because they can no longer take equity out on their homes.

Last year the savings rate in the United States was -1%. People spent more money than they made. Even Bernanke said the economy can ride consumer spending to moderate growth. So much of that consumer spending, which accounts for 70% of GDP, is due to their ability to take out equity on their homes. Those days are coming to a home, and expect the number of folks with negative liquidity to rise.

Uranium Update

With the flooding at the Ranger operations, we have seen, and will see, a stronger pinch to an already tightly supplied market. This past week, the wasn't much noise in the uranium price.

I don't expect that that quietness to hold. In the coming week, a U.S. producer is putting up 100,000 pounds of U3O8 for sale at a sealed bid auction. I expect the bidding to be aggressive as buyers look to get there hands on U3O8 at a fixed price. This auction might be the push that gets us into triple digits here. Stay tuned...

Fed Update

It seems, through some clever wording, that the Fed is gradually changing there stance on the economy and the future of the Fed Funds Rate.

They almost had me fooled...not. From the very beginning, I have said that the Feds saying that inflation is their main concern is a joke. It should be their main concern, but it isn't.

You can very clearly see the game that they are playing. Remember, that the Feds are a real spin factory. Their real concerns are keeping public credibility, rising equity markets, and keeping the bubble alive. All three of these things are impossible at this point.

The equity markets are rising. True and great, except not really. They are not rising on the wings of an enormous amount of liquidity. Liquidity in the form of the Yen and Swiss Franc carry trade, and the huge global growth in the mentary base. There has never been a bubble in the history of the world that hasn't collapsed, and this is the biggest bubble yet. These stock gains aren't based on anything that is real and, no matter what the Feds do, they will correct. I expect this correction to be sharp and near 40-50%.

The housing bubble still has a long way to go before it has "bottomed out." Housing prices usually rise at 1-2 points above inflation. They don't double in 6 years. Before I found a true interest in economics, I figured that it was impossible for housing to deflate. All you have to do is go to Detroit where you can buy a house for the same price as a new car to realize that that's not true.

Bloomberg and CNBC have loved the increase in housing starts. They say that it shows confidence in home builders. Who cares about home builders, how about home buyers. The last thing the housing market needs is more supply. As lending standards begin to tighten at all levels, prime included, expect home prices to continue to drop. Expect the U.S. consumer spending to fall of the face of the earth as they can no longer use their homes as a credit card. With the fall of consumer spending comes the fall of GDP growth. Like I said earlier, all bubbles pop.

Pardon my language, but when "shit hits the fan," expect the Federal Reserves' credibility to fall like the housing market. The main goals of the Federal Reserve, in actuality, are impossible to achieve. At best they can post pone what is to come, only making it worse. Expect a cut or two in the Fed Funds Rate in the coming twelve months. This will be disastrous for the economy and the USD, but great for gold. The reduced rates won't last too long before the feds will be forced to raise the rates higher to obtain some economic stability.

What have the Feds actually been doing and saying? Well, the haven't been doing much but they have been saying a whole lot. They are ever so careful in their wording. They originally said that inflation was their main concern. Well how can you cut interest rates, which is what they'd like to do, if inflation is running wild. In the most recent FOMC meeting, the Feds stayed away from discussion about housing and sub-prime and inflation, instead focused more on the moderate growth looking ahead. Basically, but not really mentioning it in a strong context, they unofficially said it wasn't their main concern. That was step number one. Today Federal Reserve Bank of Philadelphia President Charles Plosser said, "Inflation and inflation expectations are likely to be lower and more stable." WHAM, just like that, it's no longer the number one concern of the Feds.

If your saying, "Hold up a second here, it doesn't work like that...does it?" Well, that is a great question and the answer is yes it does and no it doesn't. The public believes it...for a period of time. What happens when the CPI numbers, and new wage numbers, and all of that good stuff comes out next month, and its higher? It might be a slam to their credibility, but probably not. The general public will take it stride, and if the Feds are good at one thing, it is spinning the data to the general naive public.

For me, the Feds never had any credibility in the first place so I don't really care what they say. I know what they are thinking. If you think they all those Ph. Ds in economics sitting over there don't know the dire circumstances of our economy today than your kidding yourself. I promise you that the objectives of the Federal Reserve are NOT in the best interest of the U.S. citizen. Protect yourself from the inevitable, and protect yourself from the Federal Reserve, buy gold.

The Boiling Cauldron

It looks like the heat has been turned up on the boiling cauldron that is the middle east. This mourning, at about 10:30 A.M Iraqi time, Iran seized 15 British sailors and marines who were conducting a routine boarding operation in Iraqi waters.

The British ship was conducting a routine check of a merchant ship when it was surrounded be Iranian vessels and escorted into Iranian waters. Tony Blair, as expected, has called for the immediate return of the soldiers and ship.

This news comes on the eve of a United Nations Security Council vote of a draft that would freeze assets of an Iranian state owned bank. The draft would also include a halt to some exports. Coincidence, I don't think so.

As a result of this incident, oil is trading in and around $62.50 /barrel. We can expect to see little incidents like this cause a spike in oil prices, but let's look at the big picture. What happens if Iran were to capture some U.S. or Israeli soldiers. Believe me when I say, we are BEGGING for an excuse to invade Iran. Iran has inadvertently attacked the U.S. by supplying arms to local insurgents, and the same story goes for Hezbollah and Israel. The cauldron is boiling and don't expect it to cool down anytime soon.

Gold Update

Gold has broken out above its resistance of $660 /oz. This is a very positive technical break through. In the coming months I expect gold to push to a new multi-year high. It appears that the excess liquidity in the market has been flushed and the price is in the hands of the bulls now.

I'm not completely ruling out one FINAL small correction back to the $640 level, but I say the odds are against that happening. I would like to note a couple items of importance regarding the gold market right now. Precious metals have seemed to follow the general stock market up and down over the past month or so. It will be very important for this correlation to be broken before gold can move higher (remember I'm quite bearish on the stock market over the coming years.) I'm most confident that the correlation will be broken. People have temporarily forgotten that gold is a flight to safety when the markets are in turmoil. In the market declines of the 70's, gold tripled in price. I don't see any reason why history won't repeat itself now.

The Next OPEC

The title of this post actually has nothing to do with OPEC. Maybe I should have entitled it "The Next Cartel," because that's exactly what's on its way. This cartel has nothing to do with crude. We are talking about natural gas here.

Although the countries that will be involved aren't finalized yet, some of the mentioned ones included: Russia, Iran, Qatar, Venezuela and Argentina. Although the actual impact of such a cartel is impossible to tell, we could see pump and heating prices go through the roof.

The date for the cartel to commence is set for April 9. I believe it is also important to note that like OPEC, the majority members of this cartel will be enemies of the United States. It is just another example how the allocation of energy commodities is potentially the ultimate weakness for the U.S.

Believe me when I say that anything Russia can do to hinder the U.S. and strengthen its stance against the West, it will do. To throw a few statistics as you, Russia has the largest natural gas reserves in the world at 48 trillion cubic meters. That is 27% of the world reserves. This cartel would hold 73% of the world reserves and 41% of the world production of natural gas.

It is important to note that natural gas contracts are generally long term. When this cartel organizes, it probably won't be able to have a huge initial market effect, but it will eventually wiggle its way into a stance with a much stronger market influence.