Justifiable Irrational Exuberance……. Volume 1, May 2, 2016

It will be Revolutionary, but it’s going to take a Revolutionary change of perspective.  It’s time to give back our financial system to the American people, the people it was built to serve in the first place. It would be revolting to let the Frank Abagnale’s of Wall Street keep it.

Our financial markets have been hijacked by Wall Street and we need to give back the backbone of our countries financial prosperity to those who will use it responsibly.  Investing in stocks and commodities in this country used to be for regular hard working Americans.  When the New York Stock Exchange was officially opened in 1792 and similarly with the opening of the Chicago Board of Trade in the mid 1800’s these broker houses were for farmers, small business owners and regular Americans.

The REVOLUTION starts with us by voting with our dollars.  Warren Buffet who some refer to as the Greatest Investor or the “Oracle” of Omaha has said that one of the keys to his successful investing is that he does not invest in things that he does not understand.  And that is the point, the Wall Street Money Machine has created ever increasing numbers of new investments, new derivatives on those investments, even derivatives of derivatives if you can believe that.  In fact one of the primary causes for the financial crisis in 2007 that lead to the very memorable market crash was that the financial interments that were being created and allowed to permeate the banking system and the entire financial system were just too complicated for regulators to understand and they could not keep the regulations updated well enough or fast enough to prevent the unbelievable risk exposure that was ballooning throughout the financial system.

 So I go back to my original point, only invest in things that you do understand.  If you work with a professional and he or she can’t explain the investment so that you truly understand it, pass on it.  By voting with your investment dollars the volume of capital flowing into these super complex derivatives and overly complicated speculative investment vehicles will start to disappear.  The alternative is to just wait for the next financial crisis to flush out all the irresponsible investment and hope you don’t have any of them in your portfolio.

Wall Street belongs to us, all of us.  It’s not just for the privileged few or the Ivy League educated, it is for the American people like you and me.  The financial system in this country was built for the regular American people, regular folk taking our hard earned money and investing it in building a better country for our children and the generations to come.  That is what Wall Street is supposed to be doing, but it seems as they may have lost their way.  So let’s throw those irresponsible investments into the Boston Harbor like so many chests of tea and keep our hard earned dollars safe by investing in things we can understand.

Weekly Economic Recap

First-Quarter GDP Inched Higher by 0.5%... The slow growth rate missed expectations of 0.7%, and follows the disappointing 1.4% fourth-quarter 2015 growth rate. Companies are reporting falling earnings for the fourth consecutive quarter, and GDP is struggling to reach 2% annualized growth. This one seems obvious. We’re not moving toward escape velocity, we’re slowing to a standstill. With equities back near record highs, warning signs are flashing all over the place. Now is the time to be exceptionally cautious in the stock market. Federal

Reserve Holds Rates Steady, But Leaves Open Possibility of Raising Rates in June… The Federal Open Market Committee did not change interest rates, but their policy statement noted that the stable U.S. economy can withstand measured rate hikes The Fed wants to raise rates so that it appears to take a normal stance on interest rate policy, but if we fall into recession soon, officials will have to immediately reverse course.

U.S. New Home Sales Inched Higher in March, Up 5.4% over Last Year … The pace of new home sales reached 511,000 last month, well below the consensus estimate of 522,000, but still above February’s number. First, it was housing starts and permits, then existing home sales, and now new home sales. All of these metrics posted disappointing results for March, which is supposed to be the start of the brisk selling season. It could be that a lot of activity occurred in the warmer-than-normal winter months, thereby draining March of some of its power. It could also be that prices finally reached a point where few buyers want to jump in. If activity remains muted for the rest of the spring, then it would encourage sellers to lower their prices, and could start a downward trend, especially if our economy hits a bump in the road or two.

Durable Goods Orders Increased 0.8% in March, Missing the Estimate of 1.6%… Orders are down 2.5% over last year. Stripping out aircraft, durable goods orders excluding transportation fell 0.2% in March, and are down 1.4% for the year. Weak durable goods orders, particularly excluding aircraft, point to weakness in business investment. So far, companies are choosing to return capital to shareholders instead of making big bets on future demand. Unfortunately, investors don’t have any better use for the capital than companies do, so the cash ends up recycled in the stock market, driving up prices, even though earnings are down and GDP growth is anemic.

The Bank of Japan (BoJ) is Now One of the Top 10 Investors In 90% of the Stocks on the Nikkei 225 Average… Through its QE program, Japan’s central bank has become one of the biggest investors in the country’s stock market. In the U.S. and Europe, central banks only buy bonds. But in Japan, the BoJ can buy a wide range of securities, including exchange–traded funds (ETFs) that own equities. The BoJ’s QE has gone on for so long, and is so big, that the central bank’s ETF investments now put it in the top 10 of investors in almost every stock on the Nikkei 225. As time goes on, the BoJ will buy more ETFs, and hold an ever-larger share of the equities outstanding. It’s hard to see a good ending for this. When countries own private companies it’s called nationalization; whether or not they pay for it is immaterial. The government will be able to exercise control over management decisions, dictating how funds are spent. This distorts the profit motive of companies, and eventually effects efficiency. But none of that really matters. The Japanese are on a monetary policy trajectory that should end with a massive explosion, blowing up the yen and devastating their financial markets. The only question is, when?

BoJ Leaves Monetary Policy Unchanged… The decision surprised the markets, sending the yen higher and crushing the Nikkei stock index. When announcing the decision, BoJ official Kuroda explained that the recent move to negative interest rates needed more time to work. I think this translates into: “Our last move failed miserably. We don’t know what to do next, so we’ll sit on our hands until we think of something smart.” The central bank has few choices, but holding pat isn’t one of them. As the yen strengthens, Japanese exports suffer, which drives down profits and pushes inflation lower. Expect Japan’s economic growth to stall as prices turn lower. Eventually the BoJ will have to do something to weaken the yen.

Unilever Sells $1.68 billion of Bonds at Very Low Rates… One tranche of the debt matures in 2020, pays zero interest, and was sold slightly below 100%, earning investors a 0.08% yield. Ever since the ECB announced it would buy corporate bonds along with government bonds in the latest round of QE, corporate bond yields in Europe have plummeted. Investors desperately want to get their hands on bonds ahead of the ECB, hoping that when the central bank starts buying it will drive rates even lower.

Next Week – The first week of May brings a report on factory orders and a couple of other lesser announcements, but the focus will be the U.S. Employment Situation report on Friday.

Market Recap and Analysis for trading:

Last week the market moved very close to the expectations I had going into the week for a downside move after violating the bottom edge of the longer term uptrend on the daily chart.  The market moved down to my first pivot point of 2075 early in the week and started its sideways move through Tuesday and Wednesday until we got to the FOMC Announcement where I expected the market to end up at 2090 which it 19 minutes after the Fed Announcement.  From there I expected the market to move to the downside to the 2050 area and over the course of Thursday and Friday the market moved to the downside just past my downside target of 2050 reaching 2046 before turning back to the upside in afternoon trading on Friday.

This week 2045 is a strong support area and 2090 will be a key weekly pivot point.  As of this writing Monday after regular trading session has ended the market has already moved up strongly off the 2045 area to 2078 by end of trading Monday.  Moving forward I am looking for a pull back to about 2065 for an entry for a long trade to finish off the move back up to test the 2090 area which should act as strong resistance if we reach that area this week.  If the move down to 2065 turns out to overrun that area we may be looking for more short signals.  If the market breaks down below the support area at 2045 the next target to the down side is at 2033.  This week we will be following our indicators closer since we don’t have the benefit of a well-established uptrend or a major event on the calendar.

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