Sunday Aug 22nd

JUST IN FROM SINGAPORE…..

There’s some troubling signs that’s signaling an equity market crash, or best case scenario a correction, this fall. First, economic data has been horrendous, with leading indicators like the LEI, and the July unemployment figures was atrocious, also the June unemployment figures were revised and looks even worse than first reported. Unemployment is holding steady at 9.5%, but the real unemployment rate U-6 is hovering around 17% and climbing. The recent economic rebound was entirely due to Obama’s stimulus and the FED’s QE. The stimulus has run it’s course, no more gov’t money for the Cash for Clunkers program that’s saved Ford from major losses, and given a lifeline to GM and Chrylser. The FED hasn’t pledged QE II, only that they’ll keep their balance sheet the same, buying more Treasuries once the ones they have on the books mature. The plug has been pulled on the stimulus and QE lifeline given to the US economic recovery. Banks have been reloading their balance sheets by playing the steepening yield curve during the financial crisis and the recovery, borrowing cheaply from the FED, and loaning it back to the US gov’t at a higher interest. This game has been played many times before by the banks to fix their balance sheets.

The stellar profits reported by companies during the current earnings season is attributable to one thing, cost cutting. The profits aren’t real or sustainable. Most companies have stocked up on inventories during the recovery, and have had huge layoffs and implemented other cost cutting measures. That’s why companies are reporting better than expected profits, but many have missed on revenue. Revenue growth has slowed, and with a double dip recession looming, companies may employ more drastic measures, laying off more employees, and causing the unemployment figures to shoot up.

With high unemployment and pay cuts, along with option ARM mortgages resetting this year, a second wave of foreclosures is about to hit the housing market. Option ARMs were very popular during 2005-2007, offering teaser rates, where homeowners in some cases only had to make a low monthly payment on the interest and not the principle. Now, someone’s principle loan of $500k has now jumped to $700k, and with rates resetting they’ll be hit with a higher monthly mortgage payment this year. Since many homeowners are now unemployed or taken pay cuts, they find themselves in an impossible situation of having higher payments when their mortgage debt is higher than the value of their home. Many will either walk away and let the banks foreclose on their property or negotiate an agreement with the bank to short sale the house.

Many Americans have awaken up from their debt spending craze the last couple of decades and now realize they can’t rely on their homes anymore for credit/cashflow. Americans have finally started paying down their debt, becoming frugal consumers. You might not hear these stories with friends in New York, or even some of my friends back in California (mainly SF, or affluent LA), but the vast majority of Americans are struggling to make ends meat, consumer spending is dire, and retail will be hit hard in the fall. Many more retail chains will be declaring bankruptcy in 2011, which brings the most feared event for the crisis…. the collapse of the commercial real estate market. When empty stores line main street and department stores are vacant in big cities, that’s when shit will hit the fan.

Now, on to Europe. The bailout of Greece, Spain and other Club Med states may cease if the constitutional courts in Germany find that the bailout breaches the EU constitution. German professors have taken the case to the courts, arguing the bailout violates EU laws and the Treaty of Lisbon. The Germans are unhappy about the bailout, and have attached draconian stipulation clauses to the bailout. German led austerity measures imposed on Southern Europe will cause a deflationary trap, leading to the destruction of wages, shrinking consumption, lost tax revenue, higher public debt. It’s a debt deflation trap, a repeat from Europe’s 1930′s austerity and deflationary traps. The prosperity of the last couple decades has been borrowing from the future instead of tax revenue, and now the future is smacking them in the face. The austerity measures are suicide for Southern Europe, which will force one of two outcomes: Either Club Med states like Greece, Spain, Portugal or Italy pull out of the Euro project, or Germany does, either way it’ll signal an end to the Euroland Project.

Now, on to investing. Do your homework, never listen to friends or family. I’m speculating a big correction in the market for the fall, but that’s just my speculation based on research and following the charts, trends, etc. How to profit or protect your money when the stock market goes lower? You can either short the market, short selling of stocks is the traditional method but the danger is you may lose more than your initial investment (it’s probable). Or you can place put options, which is a derivative, buying contracts to short sell, but not obligated to actually buy those contracts if it doesn’t work out (sounds illegal or iffy, but it’s perfectly on the up and up, and used by fund managers/investment banks). Or, during volatile times in the market, you can implement a “strangle strategy” option. You’re essentially betting that the market will move aggressively in either direction, to the up side or down side. I’ve used the “strangle option” on many financial stocks during the crisis and made out like a bandit. Most of the time I recommend buying long term options expiry dates, 6 months to 1 year, but if you’re sure on a trade and willing to let the dice roll for higher profits, then go for it. Options are an insane derivative to play, you could literally increase a $1000 initial investment to $10k if stocks move 40%-70%. Of course you could very easily lose all of your initial investment, that’s why I would caution on only using no more than 10% of your portfolio on options trading. During a downturn, investments in commodities are stable, like gold (but be careful if we fall into an economic deflation, I was big on gold years ago, but it might be forming a temporary bubble), or bonds (though many are crying that the bond market is forming a bubble).

Look at technicals and charts, they’re your best friends in investing. I always look to Jordan Kotick or John Roque, two chart technicians. Many of the analyst who predicted the sub prime crisis and financial crisis also are sounding the alarm bells for a double dip in the US economy. They claim a “head and shoulders” pattern is forming which would signal a return to bear territory for stocks.

Recently, technical analyst have sounded off that the Hindenburg Omen has been confirmed. When it has been confirmed in the past, over 70% of the time a downturn in the market has followed, and every major crash like the Crash of October 1987 was preceded by the Hindenburg Omen since 1985 (I know the name sounds like a joke, but a lot of market analyst take it seriously).

Or, just invest with a fund manager, great fund managers who return profits for their clients in up and down times include George Soros, Warren Buffet, John Paulson, Julian Peterson of Tiger Management, Paul Tudor Jones of Tudor Investment, and James Simons of Euclidean Capital.

Oh, definitely look to the upcoming wave of foreclosures for some bargains. Imagine buying a couple houses near your city for 10k-20k a piece and just living off the rent. There’s always investment opportunities, and some of the greatest are in economic turmoil. The Great Depression wasn’t depressing for everyone, some on Wall St made a huge killing, and it was one of the greatest transfers of wealth, where the wealth of the working class was transferred to the wealthy. Hopefully that’s not the case this time, but protect your wealth and assets.

Tagged as: bj dohrmann, supercrash