Bear Market - Summary for July 2nd 2008

I titled tonight’s market summary "Bear Market" as the official declaration that the United States market is now in a bear market.

We do not know who came up with the 20% figure for the declaration of a bear market, but we already knew we were in one, no question about it.  We were among the first to say we were entering a bear market back in November 2007. We are proud of our analysis and of our calls on the market and economy. But, we are sad that so many people are losing money, even those who understood the implications of a bear market.  They just sat watching their investments losing money, month after month.

This brings me to tonight’s main topic: the public perception of the stock market. Most people own stocks because they have 401K savings plans, IRA’s, pension plans, mutual funds, and so on. Their only knowledge of the stock market is what they see on the nightly news and in the quarterly statements that are mailed to their homes. These people have been witnessing significant declines, as a whole, in their savings. But, they just leave it and keep saying that it will eventually come back. They may even call the bank that holds their 401K or IRA and ask what they should do. The banks will give them a typical statement such as "fluctuations in the market are normal, good time to add to your positions", or some other line of crap. Banks and financial institutions DO NOT HAVE YOUR INTEREST AS THE NUMBER 1 PRIORITY. Their priority lies with their firms and keeping capital in their accounts. This is how the system works, period. This is not a conspiracy theory, it is the way the system works. When it comes to money, it all comes down to keeping more of it for yourself. A bank or investment firm makes THEIR money from leveraging against the money you give them. If you take your money away from them, then you reduce their earnings capability.

Last year I published a letter on our site that was sent to a relative. The letter was from a bank that handled investments for their clients. In the letter, the author stated that the market was simply going through a normal correction, and that you should "turn off the TV and go read a book". Yep, that is what the bank actually advised their clients to do. They wanted them to remain ‘in the dark’ to what was going on in the world and not to worry. The bank clearly wanted to make sure that their clients did not cash out their investments. Even back then we were becoming aware of the problems that banks were having with capital, and the need to get more of it. So what did this one particular bank tell their clients.. they told them to "not worry", "this is a normal correction", "everything will be fine", "turn off the TV and go read a book or take a nice walk". In other words, don’t educate yourself on what is happening in the markets, leave your money with us, and give us more. Like I said, banks and financial institutions do not have YOUR interest as top priority. The money you invest with them means more leverage for themselves, regardless if your investment loses money.

"Official bear market", that is what was said on the major news shows tonight. Now a growing number of average American citizens, who have some sort of savings tied to the stock market, are becoming worried. They have witnessed the declines in their statements for many months now, but now it is on the TV.. "official bear market". Now they start to wonder if they should pull their money out of the market. The older the person is, the more afraid they will be, as they have lived through the damage of a bear market before. The younger generation, not being experienced with the markets, thinks that they don’t need to be worried and may just leave everything alone.

The older a person is, the more money they are likely to have invested, or otherwise tied to the stock market. And the older and more experienced people will want to protect their money.  So with the stock market "bear" declaration being one of the top stories of the day, it is likely to create a new wave of selling in the markets, as these people cash out their investments before they lose any more. It will not happen overnight, or all at once, but over time we will be witness to more and more average investors pulling their money out.

I can assure you that all across the United States there are banks and financial institutions biting their finger nails, taking stress pills, and downright afraid of what is to come. For they KNOW that a bear market making the headlines on the major network news will bring more people to their doors wishing to cash out their investment portfolios. And they are already putting together a strategy of how they will convince their customers to leave the money alone, and with them.

Banks are already facing a capital reserve crisis never before seen in history. The chart below shows how much money banks have had to "borrow" from the Federal Reserve in order to meet their mandated capital reserves requirements. It is a scary image.

 

 

 

 

 

 

 

 

(Source: St. Louis Federal Reserve)

Banks are doing everything they can right now to get more money from the general public. Everywhere you look now you see advertisements for high yield CD’s, free business checking, $500 for opening a new savings account, etc. The banks are not doing this because they are just overflowing with money and they want to share it. NO, they are doing it because they need capital, badly.

For those of you who have been with us since last year, you have made money while others have lost substantial amounts. You realize that we are a minority, as most people just watch their investments go to pot. But, Lisa and I have worked VERY hard to help you protect what you have, and to even make more in a declining market. Lisa and I have grown our own portfolios by very admirable amounts while most have lost much. And our long time readers have done well also and we are so glad for that.  Teaching capital preservation methods is important to us.

Today’s sell off was a surprise to just about everybody. The market is extremely oversold, and yesterday’s rebound mid-day set the stage for a technical bounce in the markets. That bounce got shoved off the cliff with the news that an analyst feels General Motors (GM) could be facing bankruptcy and because crude oil continues its unrelenting climb upwards. As I am typing, crude oil hit another all time high in foreign trading, reaching $144.32 per/barrel.

I said last night that extreme caution needs to be taken on any bounce play, and that risk remains very elevated. Today showed just how much risk is still present and that it could go over a cliff at any moment. The Dow set a new yearly low (closing price), as did the S&P 500. But, in the case of the S&P 500 it is still a hair above the pin lows from mid March. So this creates an unusual condition where one index is clearly poised for much deeper declines (short term), and another is near support which could be enough for a technical bounce (short term). Long term the picture remains unchanged, all indices have much lower to go.

A bounce is still on the table, so extreme caution is still strongly advised for anyone wishing to play a rally when it appears. I said that I would not be holding any positions going into the holiday weekend. I need to clarify that by saying "long positions". I still have my long - term bear ETF’s, along with my gold (GLD) long position (which I’m still holding and has worked wonderfully), and my Apple short. But, I will not keep any swing trade longs in the event of something major happening over the extended weekend, which may have a substantial impact on the markets next week.

For those that don’t recall, I added to my GLD position on May 29th. See the GLD chart from May 29th here.

I am working on charts now and will post them separately.

It is official, we are now in a bear market

Well, official in the sense of those who use the 20% threshold as a determination for a bear market. Irrespective of the 20% threshold that some people use, we have been telling you we were in a bear market for a very, very  long time. And bear market rules apply. I hope all of you read the market summary last night, it was very important.

The bounce got washed out today with an analyst downgrade of General Motors and a statement that bankruptcy is a possibility for the company. And oil, the black gold has continued to ramp to all time highs again. I said last night that the market remained on the edge of a cliff, and it would not take much to push it over. And today oil and GM sent it over.

There will be much more tonight in an expanded wrap up. Be sure to check in later tonight.

Updates For Today

4:05pm Market Close  Well, some of those shorts did cover, but then the longs sold the heck out of this market.  Bounce, shmounce, whaddya gonna do?  This is why Chuck said not to count on a bounce.  Quickest way to separate a trader and his money, thinking he knows just what the market will do in the short term.  It happens to all of us at some point. Long term, I feel comfortable saying "Welcome to the Bear Market".  Tomorrow is the ECB rate decision and the non-farm payroll numbers.  More tonight!

3:02pm  This from the headlines (told ya they were going to be coming out of the woodwork):

POLICE HAVE SHUT DOWN MOST OF LAX AIRPORT, THERE WAS AN EARLIER TV REPORT OF AN EARLIER ARREST AND SUSPICIOUS PACKAGE

2:45pm  CNBC reports that strength in Lehman (LEH) is being attributed to report that LEH is to issue stock to retain key employees, a sign the "take under" rumors from last week are not true.  Whatever.  I don’t believe LEH and I sure the heck don’t believe anything out of CNBC.  But, that’s the headline.  OneBeacon Insurance Group (OB) has filed a $1B mixed securities shelf. And, NBC is reporting that a man tried to enter the World Bank building in Washington, D.C., claiming he had explosives.  Poor guy, doesn’t he know they haven’t any money, either?  Nuts are going to start coming out of the woodwork.

12:45pm  Bounce?  Well, kind of, but then it just disappears.  It’s hard to have a meaningful bounce when oil prices won’t fall.  The USD/JPY keeps breaking down and everyone is nervous about the ECB’s interest rate decision tomorrow.  Will shorts cover today before the nonfarm payroll number tomorrow?  Probably a few, but it seems more traders are selling before the half-day of trading that ends the week.

10:36am  Crude Futures are all over the place with the inventory numbers out: 

DOE CRUDE: -1.98M V -1ME;  GASOLINE:  +2.1M V UNCH. EST.;  DISTILLATES: +1.26M  V +2ME;  UTILIZATION:  89.2% V 89.2%E
*API Inventory:
- Crude Inventories:  -1.28M
- Gasoline:  +103K
- Distillate: -10K

10:00am  May Factory Orders:

*MAY FACTORY ORDERS:  0.6% V 0.5%E
-prior revised from 1.1% to 1.3%

June ADP Employment Change

JUN ADP EMPLOYMENT CHANGE: -79K V -20KE, SERVICE-PROVIDING SECTOR: - 3K(FIRST DECLINE SINCE NOV 2002)
- Prior revised   from +40K to +25K
Nonfarm Private Employment Highlights - June Report:  
- Total employment            -79,000  
- Small businesses             +7,000 
- Medium businesses         -35,000 
- Large businesses             -51,000  
- Goods-producing sector:  -76,000  
-
Addendum:  — Manufacturing industry:     -44,000

Jan 2008     Feb 2008  Mar 2008  Apr 2008  May 2008  Jun 2008p           
Total nonfarm private    116,071   116,053   116,056    116,069    116,094    116,015               -79 
Goods-producing           22,064      21,993    21,915      21,864      21,825      21,749                -76 
Service-providing           94,007      94,060    94,141       94,205     94,269      94,266                 -3
Manufacturing                13,789      13,748    13,690        13,663      13,636     13,592                -44

The Challenger Job Cuts data:  virtually unchanged at 46.7% vs 46.6% y/y.

Futures turned back down on the ADP data, but S&P futures are holding at around 1289-1290.  It’s early