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Does This Look Like The Setup For A Big Drop To You?

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July 07, 2011 – Comments (36)

This current rally makes no sense to me. I'm seeing a lot of macro headwinds, yet the market is headed up. I suspect a bunch of big banks are going to get zorbo'ed really hard when the PIIGS end up defaulting. I suspect that the debt that the Chinese local govs have run up will eat up most of their currency reserves. I suspect that commodities will fall as demand drops. The ECRI is predicting a slow-down and their track record is pretty good. Hiring is picking up, but slowly. People's personal balance sheets have improved, but aren't solid yet. The next big invention (whatever it is) hasn't reached mass conciousness yet. So I don't see a lot of reasons for wild optimism right now. 

None of this is a prediction of Gotterdamerung, by the way, but economic softness for a while. And softness is really only valuable in toilet paper.

In real money I'm mostly sitting on the sidelines. I don't understand things so I'm not playing. 

36 Comments – Post Your Own

#1) On July 07, 2011 at 11:30 AM, portefeuille (99.60) wrote:

Gotterdamerung

Götterdämmerung

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#2) On July 07, 2011 at 11:32 AM, portefeuille (99.60) wrote:

http://de.wikipedia.org/wiki/Götterdämmerung

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#3) On July 07, 2011 at 11:36 AM, portefeuille (99.60) wrote:

http://en.wikipedia.org/wiki/Ragnarök#Etymology

http://de.wikipedia.org/wiki/Ragnarök 

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#4) On July 07, 2011 at 11:52 AM, davejh23 (< 20) wrote:

I don't know if we'll see a big drop, but I agree that there seems to be little upside from here.  Forward EPS estimates are already high, so there's probably zero chance of significant beats.  Bailout discussions in Europe will be in the daily headlines again in just a couple months.  I wouldn't be suprised to see stocks stuck in a sideways range for a while now...years maybe.  If stocks rally hard later this year, I believe it will set us up for a huge crash.  If upcoming Q2 earnings fail to impress, we could see a pretty sharp correction considering we were on our way to a real correction before the dollar tanked and stocks soared last week.

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#5) On July 07, 2011 at 12:15 PM, Teacherman2 (< 20) wrote:

An interesting question, and one I hope more people are asking themselves.  

This market reminds me a lot of the summer of 2008. The moves just don't make a lot of sense. Up periods, down periods, sideways periods, and all with no apparent reason.

I'm wondering how much a lack of alternatives for the available money is driving this.

I think a lot of the "pros" are just getting caught up in worrying what the other "pros" are going to do, and try to act on that, rather than on meaningful information.

It goes up and people get excited, it goes down and people get scared.

There are of course stocks that have a reason for their movement, at least for the shorter term, but a lot of them just seem to feed upon the market movement and go with it; in whatever direction it is moving.

Wish I had a subscription to next weeks newspaper that was delivered to my doorstep each morning.

I expect it will continue to "waffle" throughout the summer ( in the absence of some major event, either real or imagined ), then have a fairly strong upward movement toward the end of the year.

There will, however, be a day of reckoning, with a very strong correction. Perhaps when people start to wake up to how really inflated some of these stocks are, especially the "social media" stocks.

That's my two cents worth, which is worth about that much, or maybe a little less.

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#6) On July 07, 2011 at 1:13 PM, Valyooo (99.46) wrote:

The move makes sense to me:

1) Car companies are hiring like crazy, so the Japan situation must be getting better.

2) Oil prices have come down significantly.

3) The middle east situation is slighlty more calmed.

4) Stocks are very cheap compared to historical norms.

5) We have extremely high unemployment, yet earnings keep growing.  So either you think we will hit 20% unemployment, or you think earnings can only go up.

6) QE2 is not over, but the bond buying is, and guess what?  No monster inflation or high interest rates, so that's fine.

There are plenty of alterntive assett classes with some great opportunities: EM funds, high income, REITs, MLPs, PM's....everything but government obligations and mid to low yielding bonds looks not too bad to me.

IMO, everybody that lived through 2008 is always expecting another huge crash, and they probably will feel that way for a long while.  And once they stop feeling that way, that's when another crash will occur.

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#7) On July 07, 2011 at 1:15 PM, Valyooo (99.46) wrote:

However, I do expect the social media website bubble to pop as soon as facebook IPO's.  I don't really expect NFLX to get hit as hard as LNKD, P,  SINA, RENN, etc

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#8) On July 07, 2011 at 1:16 PM, Valyooo (99.46) wrote:

Also, the Eurozone is a disaster right now...but it's not like it was somethign that was hard to predict from the get-go, so this should have been priced in for years already, so I am not too worried about a liquidity crisis.  I will be worried when Germany finally says enough is enough.

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#9) On July 07, 2011 at 1:29 PM, portefeuille (99.60) wrote:

the Eurozone is a disaster right now.

not really. 

-----------

ECB raises interest rates

... 

Let me now explain our assessment in greater detail, starting with the economic analysis. In the first quarter of 2011 euro area real GDP posted a strong quarter-on-quarter increase of 0.8%, following the 0.3% increase in the last quarter of 2010. Recent statistical releases and survey-based indicators point toward a continued expansion of economic activity in the euro area in the second quarter of this year, albeit at a slower pace. This moderation reflects the fact that the strong growth in the first quarter was in part due to special factors.

The positive underlying momentum of economic activity in the euro area remains in place. Euro area exports should continue to be supported by the ongoing expansion in the world economy. At the same time, taking into account the present level of business confidence in the euro area, private sector domestic demand should contribute to economic growth. However, activity is expected to continue to be dampened somewhat by the process of balance sheet adjustment in various sectors.

In the Governing Council's assessment, the risks to this economic outlook remain broadly balanced in an environment of elevated uncertainty. On the one hand, favorable business confidence could provide more support to domestic economic activity in the euro area than currently expected and higher foreign demand could also contribute more strongly to growth than expected.

On the other hand, downside risks relate to the ongoing tensions in some segments of the financial markets that may potentially spill over to the euro area real economy. Downside risks also relate to further increases in energy prices, protectionist pressures and the possibility of a disorderly correction of global imbalances.

... 

-----------

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#10) On July 07, 2011 at 1:32 PM, chk999 (99.97) wrote:

Porte, sorry for writing it the wrong way, but I really hate putting in the diacriticals.

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#11) On July 07, 2011 at 1:35 PM, ag77840 (23.59) wrote:

Pause and consider this:

Does anyone else consider that the average rate of unemployment in our country will only go up due to advancements in robots, automation, and information systems? I believe that America is going to have to accept increased unemployment as a trend, not a deviation.

Also, there is no "war on terror" to be won. Religious warfare has been raging since biblical times. There may be a slight lull right now, but I do not believe this relative peace will last long. I don't think 9/11 will be the largest attack we will have to witness in the 21st century (unfortunately). One thing remains the same - demand for oil will only go up for the time being, and supply shocks will send the price surging. I have invested accordingly. 

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#12) On July 07, 2011 at 1:37 PM, chk999 (99.97) wrote:

4) Stocks are very cheap compared to historical norms.

This one I don't buy. Margins are way at the high end of the range and margins revert to the mean. So EPS is probably at the high end of its range. If you look at stuff based on PE10, it isn't cheap. 

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#13) On July 07, 2011 at 1:40 PM, portefeuille (99.60) wrote:

ECB raises interest rates

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#14) On July 07, 2011 at 1:40 PM, MyunderratedLife (89.97) wrote:

Wish I had a subscription to next weeks newspaper that was delivered to my doorstep each morning.

So do I...

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#15) On July 07, 2011 at 2:50 PM, JakilaTheHun (99.93) wrote:

Chk999,

I'm absolutely baffled by this market charge, as well.  A lot of people were caught off guard by the rally in 2009, but valuations were exceedingly low at that point, so it didn't really take much to start "exceeding expectations" dramatically. 

Admittedly, valuations are "low" in China and Europe on one level right now. But only if you assume that China's banking system is functional and the Eurozone is a sustainable entity.  Otherwise, valuations are still inflated.

But really, what perplexes me is why this rally is happening right now.  If valuations are "cheap" (and I don't agree that they are, but let's go with that line of reasoning), why did the market only suddenly discover it now? 

The rally started upon rumors of pushing Greek debt maturities back, but none of the underlying issues associated with the Eurozone crisis, or even Greece in particular, have been dealt with in any substantial way. 

I'm really baffled by this. 

I'm holding the highest amount of cash I've held in awhile.  It's now about 20% of my portfolio.  I've also dedicated a substantial chunk of my portfolio to high dividend stocks such as mortgage REITs and utilities.  

Maybe the market will keep charging upwards, but I can't find any basis for it, so I'd rather play it conservatively and collect some dividends.  If I lose out to the market, so be it. 

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#16) On July 07, 2011 at 2:54 PM, portefeuille (99.60) wrote:

it's just a normal rally (see this post), hehe ...



enlarge

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#17) On July 07, 2011 at 3:16 PM, TheDumbMoney (45.05) wrote:

"If valuations are "cheap" (and I don't agree that they are, but let's go with that line of reasoning), why did the market only suddenly discover it now?"

In my insigficant view, the rally may have started because of a QE2 catalyst.   1) a bunch of people finally realized the "end" of QE2 was not a huge immediate deal, and got out of cash; and 2) some institutions rightly or wrongly started to rotate into stocks and out of bonds becaue of anticipated worry about interest rates rising in the next year.  Separately, starting about last week people started to decide that the "soft-patch" was just that.  But I really think the end of the expansion of the Fed's balance sheet was a catalyst. 

The next big hump will be the resolution of the debt-ceiling, which WILL be resolved.  Everybody will hem and haw and proclaim oh-the-horror and then something will be crafted that allows each side to save face and it will close a bunch of tax loopholes and cut a few trillion in spending (or spending growth at least) over the next ten years, and everyone will proclaim victory and go for a barbecue, and we won't have to think about the debt ceiling again until after the 2012 election.  Or, the thing will get bumped a month or so with a temporary fix and then they'll do it.

P.S. -- In real life, if interest rates do rise, won't a lot of REITs be hurt by that, both substantively in terms of how they fund, and in the sense that there will be more and better opportunities for yield?

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#18) On July 07, 2011 at 3:39 PM, JakilaTheHun (99.93) wrote:

P.S. -- In real life, if interest rates do rise, won't a lot of REITs be hurt by that, both substantively in terms of how they fund, and in the sense that there will be more and better opportunities for yield?

Depends on the REIT, but the short answer is "yes." 

Some mREITs are well hedged enough so that they won't suffer all that much.  Some even benefit with higher rates. But others (particularly some agency REITs) will do poorly in a rising rate environment. 

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#19) On July 07, 2011 at 3:41 PM, JakilaTheHun (99.93) wrote:

But this is all to say ... maybe I'm not betting on significantly rising interest rates here in the US.  At least, not just yet.

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#20) On July 07, 2011 at 3:53 PM, chk999 (99.97) wrote:

Jakila, I'm glad to see someone else is baffled too.

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#21) On July 07, 2011 at 4:00 PM, Momentum21 (73.37) wrote:

Most rallies should not make sense on the surface...maybe the selloff didn't make sense...who knows really? 

It is way too hard to try to aggregate the variables in play, arrive at a thesis and then put a timeframe on it. It is definitely fun to try but a low probability bet I think. 

I follow Porte's chart... : ) 

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#22) On July 07, 2011 at 4:00 PM, Momentum21 (73.37) wrote:

Most rallies should not make sense on the surface...maybe the selloff didn't make sense...who knows really? 

It is way too hard to try to aggregate the variables in play, arrive at a thesis and then put a timeframe on it. It is definitely fun to try but a low probability bet I think. 

I follow Porte's chart... : ) 

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#23) On July 07, 2011 at 4:00 PM, Momentum21 (73.37) wrote:

Most rallies should not make sense on the surface...maybe the selloff didn't make sense...who knows really? 

It is way too hard to try to aggregate the variables in play, arrive at a thesis and then put a timeframe on it. It is definitely fun to try but a low probability bet I think. 

I follow Porte's chart... : ) 

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#24) On July 07, 2011 at 4:00 PM, Momentum21 (73.37) wrote:

Most rallies should not make sense on the surface...maybe the selloff didn't make sense...who knows really? 

It is way too hard to try to aggregate the variables in play, arrive at a thesis and then put a timeframe on it. It is definitely fun to try but a low probability bet I think. 

I follow Porte's chart... : ) 

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#25) On July 07, 2011 at 4:05 PM, davejh23 (< 20) wrote:

"4) Stocks are very cheap compared to historical norms."

By what measures?  Looking at operating earnings, cyclically adjusted P/E ratios, Q ratio, and other measures, stocks are currently overvalued by 40%+.  Add in the fact that investor leverage usage is near all time highs, and mutual fund cash levels are at all time lows (bubble levels for both), and it seems wise to at least be cautious here...just about anything could trigger a crash.  I'm not arguing that you should be sitting in cash, but that caution is certainly warranted...stocks could rally another 20%+, but it will not be on fundamentals and it will lead to another crash.

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#26) On July 07, 2011 at 5:27 PM, rfaramir (29.36) wrote:

"Setup For a Big Drop?"

Yes.

I don't know how big is Big. I don't know just when. But that's how it feels to me, too.

The dollar is firming up a little, but the Fed is not ending its purchases, just cutting them down ($60-110B/mo down to $25B/mo, right?). So it will feel like a strengthening dollar, but the money supply should still rise, just more slowly.

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#27) On July 07, 2011 at 7:18 PM, awallejr (81.43) wrote:

This is a bull market. And as a bull market it is doing what bull markets do.  I suggested people buy in May and stay.  I know I did. 

I don't care about the puny country of Greece, tho the Germans might.  I am annoyed with Congress playing chicken with the debt ceiling, but I do expect a down to the wire deal will be made.

Last couple months' soft numbers I submit had more to do with the disruption to Japan from the tsunami.  As long as profits continue to grow so will this market.

You can still buy undervalued yield stocks, Mlps, bdcs, reits, etc.  Anyone not listen to Cramer and buy CSCO when it was under $15?

We are no where near the frenzy of the dot.com bubble and our banks, to their grumbling, are being forced to remain healthy, and corporate America really has stabilized themselves. Even the average household has cut down debt and raised savings.

Our problem is growth now.  But I'd rather see 2% growth than negative 12 %.

The biggest play will be the changing demographics.  I think that's where job growth will occur.  Businesses that cater to the aging.  And you will start seeing attrition which will start absorbing unemployment.

 

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#28) On July 07, 2011 at 8:01 PM, valuemoney (99.99) wrote:

No, my bet is the market is going higher. By no means is the market expensive. Plus the things are getting BETTER not worse. The market crash has happened already. The path is up now. Sounds simple? It is. I can give numbers but I wanted to over simplify it. If you're out of the market right now and trying to time another small dip that doesn't work well. Stay in the market until it gets WAY overvalued again. That won't happen for another 10 years I would bet.

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#29) On July 07, 2011 at 8:02 PM, dragonLZ (99.32) wrote:

The next leg of this bull market has just started. Many of tech and oil-and-gas stocks will double in a fairly short period of time. Also, watch BAC and GNW get to $15 in short order (roughly 50% gain from today's prices).

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#30) On July 07, 2011 at 8:20 PM, Momentum21 (73.37) wrote:

And you will start seeing attrition which will start absorbing unemployment.

Facts like this are rarely given the play they deserve. The "headwinds" always carry more weight.

Sorry for the multiple posts.  

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#31) On July 07, 2011 at 9:01 PM, valuemoney (99.99) wrote:

DragonLZ is right about the financials. They are way undervalued at these levels. If you don't believe me believe Bruce Berkowitz. He knows more about financials than all of us combined.

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#32) On July 07, 2011 at 9:06 PM, valuemoney (99.99) wrote:

And if anyone wants to try and time the market. A S&P week ending price of 1490 to 1500 would be my best guess to get out then try and get back in at lower price. Thats if one follows charts.

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#33) On July 07, 2011 at 10:07 PM, rofgile (99.33) wrote:

The market can go much higher, if commodities get cheaper.

 -Rof 

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#34) On July 07, 2011 at 11:19 PM, awallejr (81.43) wrote:

I'd be careful with BAC and other larger commercial banks.  They still need to go through a few years of pain since a lot of their "foreclosure inventory" really is unsaleable. They have to write those loans off probably 99 cents to the dollar (land always has some value) and they will do that over years.

Also Jamie Dimon is correct in arguing that the new financial regs will cut into bank profits.  C is probably concentrating move overseas for that exact reason.  Better profits to be had there. 

BDCs are your better play.  They have been recovering and increasing their dividends.  See http://caps.fool.com/Blogs/banks-or-bdcs/578607 for a list to look at.

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#35) On August 08, 2011 at 9:32 AM, ElCid16 (95.74) wrote:

dude, nice call with this blog.  You gonna make some "longonly" picks soon?

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#36) On August 16, 2011 at 7:16 PM, chk999 (99.97) wrote:

Yeah, chk999longonly is going to get more attention. I decided to change the method a little so that picks are added only after a number of new 52 week lows, not after an early one. I might even go to the second week after the last new 52 week low. The idea is to miss the continued down after the first 52 week low.

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