Saturday, May 29, 2010

Deflation Is Real Today

Investopedia explains Deflation as declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies, individuals, and possibly governments.  

Deflationary periods can be both short or long, relatively speaking. Japan, for example, had a period of deflation lasting decades starting in the early 1990's. The Japanese government lowered interest rates to try and stimulate inflation, to no avail. Japan’s zero interest rate policy was ended in July of 2006.

Let’s share a test to see if we can figure out if we have deflation in the United States. Can you answer yes to any of these questions?

Has the price of a single family home declined for several years?

When you adjust the return for the S&P 500 for inflation for the last 10 years has the return been negative?

Has the Fed Funds interest rate fallen to near zero percent?

Are mortgage interest rates now the lowest in your life?

Are CD interest rates the lowest you can remember?

Are money market mutual funds paying the lowest interest rate ever?

Do we have factories being closed?

In the unemployment rate high?

Have personal incomes gone down?

Have individuals defaulted on their loans?

Have companies defaulted on their loans?

Have property taxes gone down?

Has Wal-Mart reduced over 10,000 items in their stores?

Are there more and more deals, lower prices everywhere?

I don’t know your score but mine was 14 yeses for 14 questions. For some reason people are ignoring what is going on around them today and spending more time worrying about tomorrow. 

We just had a very scary month with the volatility of all the markets, stocks, bonds, commodities and currencies that reminds us of the Fall of 2008. The return for the month of May is on track to be the worst May since the mid 1960’s.  For people to ignore what is happening and to focus on what might happen next month or next year puts them in great peril. 

If in fact the Fed is on hold, as some now project till at least the middle 2011, I think longer, how long can people hold out making decisions with the money they have in money market mutual funds paying zero? What will investors do if in the first quarter of 2011 money market mutual funds start closing down and returning the money to shareholders?

Many people who are on the sidelines, in money market funds do not realize the price they are paying. Not only are they not earning anything but even with low levels of inflation they are losing money. Click on the link below to see the impact of the deflation on the real rate of return with money in a money market mutual fund.

I realize that in times of volatility it feels good to have a high percentage of assets in cash but you pay a very high price keeping your money there and many people have too much in money market accounts. Last fall you may remember that I conducted a seminar for people near retirement. I asked why people kept so much of their money in money market funds at close to zero return, the answer was then was that earning nothing is better the losing money. The chart shows that having money in the money market fund is in fact loosing money to inflation.

Tuesday, May 25, 2010

FLASH It is different today


It is 4:30 in the morning on Tuesday May 25, 2010. Today is my 42nd wedding anniversary and the world if waking up to a different place.  The advantages and disadvantages of writing a blog is you have a public record of what you predict. Some time ago I suggested that I felt the S&P500 could fall to the 950 levels, As of this morning we could break the 1044 level and if we do then I think 950 is a certainty. I suggested last fall that the dollar would rally and it has and I also felt that the yield on the 10-year T Bond would break 3%. This morning the yield stands at 3.12%. The yield on the 10-year is now lower than the prime rate. I predicted that the price of crude oil would fall to $50 as of this morning it is at $68 and at a major inflection point. As you will see in a moment you will understand why I think $50 is still viable as a target.

What is all this movement is the stock and bond markets telling us about the outlook for the US and global economy? I think we are setting up for a period of global deflation. We along with the majority of the world have already experienced deflation in the in our real-estate markets, decline in prices. The return for the last 10 years in the S&P 500 is negative. Is there a difference between deflation and price declines?The last shoe to drop is the flatting in the yield curve. I do not expect short rates to fall any further, it is hard to fall below zero we did for a short time in 2008, but as the world sees the idea of global deflation as a reality the long end of the yield curve will fall.

As we finally understand that as I said in my last blog that the Fed is on hold for and extended extended period of time, then income assets will be in great demand over growth assets. For my clients the short position in the S&P 500 has helped dampen the decline. It is possible that we may hit the 950 levels within the week and then I would expect a bounce. 

We must be cognizant that the chickens are coming home to roost all over the world and we as a nation and a world are going to have to make some serious decisions about our economies and what is important to us and what we can afford. I’m not saying that it will be easy but many things will have to change.


Saturday, May 22, 2010

A New Thrill Ride for Great Adventure

In the release from the most recent Federal Reserve Open Market Committee meeting on interest rates the Fed said, “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” A great deal has changed in the world from their release of April 28, 2010 that will, I believe, extend the extended period.

In less than four weeks the world has changed, we are no longer focusing on national health care, but questioning if the EURO will survive. The events of Thursday May 20, were driven by the release of the jobless claims data. The data showed that first time claims increased by 31,000 new people who filed for state unemployment benefits. The economists were actually looking for the number to decrease and when the government was asked about the change they said, “There are no special factors to explain the latest week's jump.” In other words they had no clue as to the reason for the increase in claims.

The European central bank is trying to stabilize the EURO but in many respects is trying to swim upstream. A great deal of focus is on Greece and the other PIIGS (Portugal, Ireland, Italy Greece and Spain) countries who are having problems with the level of debt and their inability to control government spending. What Europe is trying to do is cut budgets and reduce debt to get all the member nations to balance their checkbooks.

Several things are happening at the same time all over the world and it may be hard to follow all of them so let me try to give you some focus. Many American companies do a significant amount of their business in Europe. When the dollar was weak the translation of Euros into dollars inflated earnings of these companies because of the strength of the European currency. Over the next few quarters these companies may well report lower earnings because of the decline of the Euro. It will be hard for the stock markets to return to previous highs as long as earnings are under pressure. So watch earnings and look for comments from companies on the impact of currencies.

Other countries around the globe have significant economic relationships with Europe and those economies will suffer with reduced demand from Euroland. The second largest exporting country to Europe is China, so as demand shrinks from Europe look for global GDP to come down including China.

The European Central Bank and other governments are expected to spend almost $1 trillion dollars to fix the problems in Greece and other countries. With the Global central banks being accommodative for an extended period of time I just do not see how interest rates will rise. The Fed is looking at almost 10% unemployment in the United States and the jobs data this week could have an impact on the employment report on June 4.

My original thought was that the Fed would be on hold till November 2011. Given the problems in Europe that have the potential to spread around the world and possibly to the United States, I think the Fed will be on hold for an “Extended” “Extended Period” of time that could be for several more years.

The markets have been concerned about the resurgence of inflation with all the debt that has been issued around the world. I have serious concerns about the resurgence of deflation. For those investors who were looking for their money market mutual funds to start paying interest soon, I just do not see it happening. It is possible that if things do not change for the better by year-end, I think we will start seeing money market mutual funds closing and returning money to investors.

We have a new thrill ride for Great Adventure theme park, it is called, “The Global Economy.” This thrill ride will drop you, spin you, and turn you inside out. The Global Economy may well take money out of your pockets.

Dan Perkins

Friday, May 21, 2010

Flash will 1044 on the S&P hold?


The 52-week high for the S&P 500 is 1219, while the 52-week low is 869. In a normal correction it is reasonable to look for a magnitude of down of 15% to 20% for a serious correction. A 15% decline would take the S&P 500 to 1044 while a 20% decline would take the S&P 500 to 975.  The low for the day as of the time I wrote this flash was 1073.
I would not be surprised to see a further move to the downside to test the 1044 level and then a strong rally off of that level. I still believe that, as I said in my earlier flash that we will test the 950 to 975 range sometime this summer.

I know it is hard to believe, but there is still to much hope in the market. Each day we go down with no upward momentum people will become more and more pessimistic till we have the final blow off when people say “sell me out”. The hardest thing to do is to sit and watch the market grind itself down every day. As I have written many times in the past, we can’t let our emotions get in the way and right now and perhaps for a few more days emotions control the market. 

We have been trough times like these before, they are no fun, but we made it through before and we will do it again.

Monday, May 17, 2010



Oversold rally stalls as market remains in correction mode

The decline in the EURO and the pound is driving global investors out of the EURO/pound and into Gold, Dollar and Treasuries. As of this note the EURO was trading at $1.23 off of its low of $1.2235 and the pound was ta $1.44.71 again off its low of $1.4253 over night. I had foretasted last year that I expected the EURO to fall to $1.25 and the pound at $1.50 before their was a significant reversal. I do think there will be a reflex rally in both the EURO and the Pound with prices up to $1.30 and $ 1.55 range respectively.

I see a new near-term low being set in both by year-end 2010. I would not be surprised to see the EURO in the $1.05 to $1.10 and the pound in the $1.25 to $1.35. These levels, if attained, may not be the final bottom in the currencies.  If your plans call for going to Europe this year later might be a lot less expensive than now.

What is driving the decline is a falling confidence not in the EURO but the economy in Europe. The central government is giving money away to stem the tide and they will be force to cut short-term interest to close to zero to try and stimulate their economy(heard that before).

Key levels to watch on the S&P 500

People want to ignore the May 6 inter day low of 1065 on the S&P 500, I think that is a mistake. I think it was a precursor of what is to come.  What we now know is that the trade was not the pushing of the wrong key is was that buyers stepped away from the market and the computers took over control to try and provide an orderly market.

Last week's rally stalled below the 50-day moving average. I see resistance near 1175 on the upside. As I said last week I do think we could test the 950 by mid July and given the recent market action I think I'm more convinced that we will get there. I see nothing coming out of Euroland to change my mind.

One quick thought about gold. Some of the Gold Bugs are saying that Gold could go to $1,500 to $1,800 by the end of the year. I have written about the risk of buying gold see my Blog Site Keep in mind that the rise in gold, I think is tied to the EURO. Any significant reversal in the EURO will see a reversible in Gold.

As much as our Government Leaders want us to believe that everything is OK, hear  Europe has its own problems that won't effect us, remember this statement,"The problem in the mortgage market is contained and is not going to affect the rest of the economy."


Thursday, May 13, 2010


FLASH 6/6/2010

The market hit its most recent high on April 23. From that high the S&P 500 is off 12.5% with its low today. I warned earlier this week about buying the dips. I heard stories of people who went in on Wednesday and committed a significant amount of cash to buy. I'm not saying that the investment won't be rewarded, but it will take longer to get back to positive territory. I talked about three issues weighing on the market. First, was the ADP employment report of neutral at best, second, jobless claims having disappointing numbers today, and the employment situation tomorrow morning. The jobless expectations were lowered yesterday to 180,000, from 200,000. Two other issues that were on my mind were the election in Britain and the problems in Greece. The market declined the most today, at least so far, when the live pictures were broadcast on TV of the riots in the streets in Athens. There is an important message to Washington from what is happening in Greece. People are affected by the changes the politicians decide to make, and sometimes they do not like what the government decides on their behalf.

I think the jobs number could disappoint and the sell off could continue. I'm look for a number off about 20% on the S&P 500 before we start up again. This time cash can be a place to go and stop losses, but you will not earn anything on your money.

90 day T Bill yields 10 basis points.


Is the “Wolf Pack” in control

For at least the last 12 months regardless of the number of jobs lost or gained the market went up on reporting day, the first Friday of the month. The string was broken with this past Friday’s employment report. We had the best job creation number in almost four years and the markets, at least for Friday, ignored the good news, sold off and closed down for the day, the week and are now negative for the year to date. Some of the questions on people’s mind are: is the long market run over and is it time to take money off the table? Did people suddenly decide that all the insurmountable issues around the world can not truly be solved and we are  in for another global depression?

Over the weekend the IMF and the European Central Bank agreed to make available almost 1 trillion dollars to deal with the problems in Greece and to try and stave off problems in Spain and Portugal. I found the term interesting that was used this past weekend to describe what had happened last week and what was going on around the world. The “Wolf Pack” was on the loose and wrecking havoc in every part of the world. People who are reacting to the economic problems of the world are now the “Wolf Pack.”

There is no question that a week like this past week has many people nervous, if not outright scared, about what comes next. I have written to you several times about market psychology. When the market goes up people are happy and feel more positive and optimistic about their prospects for the future. In some respects in up beat times people are more interested in taking risk. When we go through a week like last week, especially when it includes a day like Thursday when the market dropped 1000 points in 20 minutes, confidence goes out the window. Now we add a sinister “Wolf Pack” to the mix and people start to worry that enormous power is now in the hands of predators of the financial markets.

This week our astute Congress is going to have hearings as to why the market dropped almost 1,000 points in such a short time on Thursday. For the moment the Congress is not going to investigate the 143 points down on Friday or the 250 points down on Tuesday and they surely will not want to ask about the almost 400 point rally of today. I would be very surprised if anybody from Congress will ask any questions of the 600 point move from the low on Friday to the intraday high on Monday? Look for the question. Who stood to gain in this volatility?

Do you think that anybody in the Congress will bring up the concept of the “Wolf Pack”? Will “Wall Street” be seen as the bad guys because they caused the problems with their Flash and Program Trading practices? Will we get cries for more regulation in the financial markets to stop this volatility? I fear yes we will not only get the cries, but possibly amendments to the financial reform bill working its way through Congress right now.

The market went down because of concern that Greece and other European countries had budgets that were out of control. People wanted more and the government said, “we can do that for you”, and the people said, “yes I want that.” Investors were looking for leadership and positive direction in solving the problem. They waited till they just couldn’t wait any longer. Investors had profits and to protect their profits they just said, “sell me out”.

The result of this weekends round of talks and agreements is that the world is taking on an additional $1 trillion of debt to feed the “Wolf Pack”. The problem with these solutions is that the “Wolf Pack” will want to eat again.  Yes, it is nice to have a 600 point rally, but remember the “Wolf Pack” may be asleep in its cave with its belly full of profits, but it will need to feed again. So while it is sleeping it is planning its next attack.

I said in my FLASH to you last week that I was looking for about a 20% correction that would take us to the 950 to 975 levels on the S&P 500. My guess is that the “Wolf Pack” will want to feed in late July or early August.

Dan Perkins