We got short ahead of the election and I told you regardless of the outcome the market would decline. Monday I told you to get short. If you followed my advice, you are making money. I don’t advertise on my blog and your reviews are all that keep me motivated. Please post a review on Investimonials. It would mean a lot to me – thanks.
Yesterday, the market took a breather and prices momentarily stabilized. Major support at SPY $138 failed on Wednesday and the selling pressure is heavy.
The fiscal cliff is weighing on the market. President Obama is meeting with Senate leaders this morning. The tone will be positive and stocks will try to rally on the news. However, the statements will lack substance and Asset Managers who want to reduce risk will sell into strength.
We have very quickly shifted from risk-on to risk-off mode. Even if politicians find middle ground, taxes will go up and spending will be reduced. We’ve been partying for decades and now we have to pay the bill. Anyway you look at it, pain lies ahead.
What most people don’t realize is that 100% of our tax revenue is spent on entitlement (Social Security and Medicare) and interest on our national debt. We can tax rich people into oblivion and it won’t matter. We can cut expenses down to the last nickel and it won’t matter. Politicians need to reform entitlement.
Baby boomers are just starting to retire and this problem will explode in coming years. Instead of paying into Social Security, they will draw from it. Social Security is already paying out more in benefits than it receives from workers each year. As baby boomers age, they will need more health care. Entitlement is political toxin and politicians (both parties) have avoided reform for decades. Now the problem is so big that it will topple our economy.
When you start cutting benefits that have been promised to millions of people, you get riots. This week over 1 million people in Spain, Italy and Greece protested. Union workers are on strike and they don’t like the cuts. This movie is coming to a theater near you.
Growth in China is slowing down and Europe is officially in a recession. Our economic releases the last few days have been dismal. Initial jobless claims spiked to 439,000 yesterday and that could be a warning sign. Domestically, consumers are tapped out. The US spent $800 billion in stimulus and we have little to show for it. The average baby boomer has $50,000 saved for retirement. The go-go spending days of the past are gone and I don’t see an economic catalyst.
Corporations are the only ones with money. They have been prudent and they have been paying down debt over the last decade. They are not going to hire until they see an increase in demand. Obama approved 6000 new business regulations in the last week and they want to see how all of this will play out. Companies also do not know the impact of Obamacare. It will be phased in over the next few years and businesses will keep headcounts to a minimum.
The backdrop is very gloomy. We were able to avoid a financial crisis four years ago. We threw the kitchen sink at the problem and the recovery was brief and shallow. I sense that we are heading for a prolonged recession.
It’s Friday and we are heading into one of my favorite holidays of the year so I will end this gloomy commentary.
The market has tested the downside this morning and it will wait for comments from Washington. I expect to see lots of smiles and constructive statements. The market will rally into the news and then the enthusiasm will fade. Wall Street wants concrete evidence that a deal will get done. Until that happens, the market will drift lower. Look for selling late in the day.
It is expiration Friday so we can expect a little added volatility. If stocks continue to push lower, we could see momentum gain speed as traders have to adjust.
I am long puts and I will scale out some of my positions today, Monday and Tuesday. I would like to reduce my risk exposure by 50% heading into Thanksgiving. I have big profits and I want to protect them.
China and Europe will release flash PMIs on Thursday. That could weigh on the market Friday. Retail sales have generally been soft (down .3% in October) and we will have Black Friday results the following Monday. If politicians don’t get their act together, that is when we could see the next wave of selling.
I still believe the market has plenty of downside. Here is a word of advice, don’t be afraid to take profits on short positions. There will be plenty of promises from Washington and we will see short covering rallies. They will give you a chance to get short again.
Gradually take profits over the next few days. That will make your remaining position easier to manage.