The majority of analysts now say that the stock market just has a “soft patch,” which is temporary and provides another great opportunity for buying stocks. The “soft patch theory” was also used by these people in 2008 just before the meltdown, and we saw the “soft patch” theory used again the past five months to explain the renewed economic weakness.

But the stock market has been under “distribution” since mid-February. Distribution is when the big, smart money sells to the unsophisticated, myopic participants in the markets. The evidence is that every decline in the market since that time has occurred on rising volume, while the market rallies have occurred on declining volume. The financial sector has been declining since its peak in mid-February. You can’t have a bull market without the financial stocks participating.

The Washington debt ceiling scare is like a Kabuki theatre. All the participants on both sides get a lot of free TV time. That brings more financial contributions. A debt default is impossible. There is more than enough money coming into the government every day to pay interest on the debt, social security, benefits for veterans, etc. Furthermore, Congress has many alternatives to get out of this.

So don’t fall for the story that the stock market is weak because of the debt ceiling. There are much more serious problems, like European sovereign debt, China’s imploding credit bubble, etc. Of course, once they announce some type of agreement in Washington, the market will have that one last pop to the upside. But that may not last more than a day or so. It may be your last opportunity to find the exit.SUBSCRIBE

THE MARKETS AND THE ENDING QUANTITATIVE EASING (QE2) IN JUNE

 by Bert Dohmen, June 25,-2011

The $600 billion dollar QE2 program of the Federal Reserve is ending in June. What will the consequences be for the markets? Let’s look at history.

Last year when the first QE program stopped, it was followed by the stock market plunge in May and June, along with commodity prices (except for the precious metals).  T-bonds soared as a flight to safety.

 The flash crash of May 6 last year was the beginning. Will we have another flash crash? Not likely. However, when the Fed takes the foot off of the accelerator, liquidity is withdrawn. And that’s bearish.

Look at what happened in early 1937 when the economy was recovering and the stock market had had a big upmove for several years. The Fed felt they could stop stimulating. When they did, the DJI plunged 50%.

Yes, when you are on drugs, it hurts to stop, so the experts say. That also applies to stocks.

A member of the FOMC, Richard Fisher, chairman of the Federal Reserve Bank of Dallas said this about current Fed policy. He is making sure he will not get the blame for the bad consequences of QE2 and potential QE3. He said in a speech:

“I do not, however, feel that further monetary accommodation will speed the process. It might well retard job creation, should it give rise to inflationary expectations, or worse, imply that, having, suffered the slings and arrows of popular and political contempt as we went about doing what we did to save the financial system, we have now been compromised and become a pliant accomplice to Congress’ and the executive branch’s fiscal malfeasance. I am wary of those risks. More...

PREDICTING THE FUTURE                      

by Bert Dohmen, June 22,-2011

Years ago, a wise person said, “predicting is very difficult, especially when it comes to the future.” Well, in our business, people expect us to predict. Let’s see what we predicted about six weeks ago, now that we have the benefit of hindsight. This is what we wrote in the WELLINGTON LETTER of May 9.

WHAT’S AHEAD:

We now see important trend reversals in all the markets:

1.  STOCK MARKET:  This got to be a very “crowded trade,” with hardly a bear to be found. We wrote that last time. We now have sell signals on the most popular sectors of the market. The pundits tell you that the “unemployment claims” on May 5 shocked the market and caused the decline. No way. This is big money selling ahead of the ending of QE2. The end of $7-8 billon daily injection of money into the financial system will cause a painful hangover.

WELLINGTON LETTER subscribers know that this “distribution” (the smart money sells to the naïve money) has been going on for about two months. The new highs in the major indices seen during that time were manipulated, as seen by the low volume on rallies and the higher volume on the days of declines.

2. THE U.S. DOLLAR:  Bearish sentiment on the dollar has gone to an extreme rarely seen. Everything but the funeral has occurred. Shorting the dollar seemed to be the low risk trade for every analyst appearing in the media. It became a very “overcrowded” trade. Now that will reverse.

Just a few days ago general expectations were that Europe (ECB) would raise interest rates. Now the head of the ECB denied that. He has obviously seen the specter of a potential “double-dip” recession. Together with the increasing sovereign debt problems in Greece, Portugal, and Spain, the Euro is once again a high risk currency. The first step is always to “reschedule” the debt, which means postponing the maturity. Thereafter, when more money is required, the only solution is to “restructure” the debt, which is basically a benign default. That means that the creditors will have to write off hundreds of billions owed them.

Portugal just got a $115 billion loan, which is huge for such a small country. They think it will tide them over for a few months. So Portugal will be next, then Spain. Bigger than the direct debt problem to those countries is the problem of debt “restructuring,” i.e. write-downs of tens of billions of dollars by the large European banks. The banks will have to replenish their capital. As a result, the Euro should now be shunned.

If we are right, once the dollar rally gets going, there will be billions of shorts in the dollar to be covered. More...

SIGNS OF A MARKET TOP

by Bert Dohmen, May-16-2011

Our work strongly suggests that the disguised “distribution” of stocks since mid-February is now becoming more visible. This is so reminiscent of the top in 2007 when the big, smart money was exiting while the public was being lured into the markets with false stories of eternal prosperity.

Last week we saw sharp “momentum” declines in some of the hottest market areas. The biggest loser was silver which plunged about 31%. Gold was down 7%, oil is down about 17%. Basic materials and agricultural commodities also plunged, along with many of the popular stocks. The only question, is just another “warning shot”, or the real thing?

Our last issue (April 18) we headlined:  “WARNING FLAGS ARE FLYING”

We continued in that issue: 

The latest money manager survey shows that there is a huge change on their outlook for the emerging markets. In December, 71% were bullish; now on 51% are bullish on the emerging markets. The survey was made in the first two weeks of March. That was before the Japan catastrophe.

However, domestically there is a virtual capitulation of the bears. They have given up on the market ever going down again. Ever! That’s typical of market tops. Investors Intelligence, which monitors the sentiment of investment advisors, shows in their latest survey that the percent of bulls has increased to 57.3% from 51%. That’s a huge jump and now is at levels seen at important market tops. And the bears have plunged to 15.7% compared to 23.1%.  That gives you a difference of 41.6 between bulls and bears, which is well above 40, which is considered the “danger” zone.

It’s reminiscent of January 1977 when we started the WELLINGTON LETTER. At the time, Investors Intelligence showed only 3.8% bears, a record low. My indicators showed that an important top had formed. I wanted to put my prediction of a bear market in writing and started this publication. Because there were virtually no bears to be found, the Wall Street Journal couldn’t be choosy and put an item about my forecast in the “Heard on the Street” column. Thank you, Gene Marcial. And that’s what launched my business as the DJI started a 15 month bear market. It was painful for the bulls.  More...

THE MOST DESTRUCTIVE TAX:  INFLATION                           

by Bert Dohmen, April-28-2011

 “Real” wages (inflation adjusted) have been declining for 30 years or more. The labor unions tell us this while making the point that the rich have prospered at the same time. That the only thing we agree on with them. However, their insinuation is that the rich have taken the money from the laborers. The truth is that the inflationary policies of the Fed have made many people poorer, while the smarter people have learned to protect themselves and even profit from the inflation. Yes, inflation is the great, silent tax.

The Fed continues to shovel an unprecedented amount of liquidity into the financial system but that is doing little to fuel economic growth, except in the way of prices for consumer necessities. The Fed must hope that eventually some of that money will be used to grow businesses and jobs.

But apparently there are no inflation concerns at the Fed. Federal Reserve Vice Chairman Janet Yellen said the increase in food and fuel costs will only have a temporary impact on inflation and don’t require an adjustment in monetary policy. 

Bloomberg quotes Yellen:  “The surge in commodity prices over the past year appears to be largely attributable to a combination of rising global demand and disruptions in global supply. These developments seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy.” More...

BUBBLES!