May is in the Rearview Mirror

May is in the Rearview Mirror


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May is now in our rearview mirror and so on the calendar it's upward and onward into the first weeks of summer.


We had a good week with the Standard Portfolio gaining +1.1% and the Ultra Portfolio gaining +2.4%.  Our precious metals positions continue performing well last week as the markets battled their way through the current trading range.


Last week moved us away from the "Red Flag Flying" mode in which we would have confirmation of lower prices ahead.  New strength came into the markets and many ETFs switched back to positive momentum indicators.  The trends are turning up again, at least for the short term, and it will be interesting to see if they're sustainable to the upside going forward.

Strong sectors remain Commodities, Precious Metals, Oil, Media, Banks and Finance.


The View from 35,000 Feet.


The markets continue powering higher in the face of continuing bad news.


Here’s a compilation of recent developments:


In the minutes of the Federal Reserve's April meeting, a significantly more bearish outlook emerged when compared to the January opinions:

The Fed said they expect:

  1. Real GDP will contract this year
  2. Unemployment will increase
  3. GDP will be a -2 to -1.3% for 2009 then a positive 2 to 3% for 2010
  4. Unemployment will stay above 9% through 2010
  5. It will take five to six years to achieve a longer run path of growth

David Rosenberg, former North American Chief Economist for Merrill Lynch, who's one of the best observers around, in my opinion, said:


  1. The rally since March has been a "gargantuan short covering rally"
  2. He sees  "no revival of consumer spending in 2nd Quarter"
  3. He thinks consumers are entering a "new era of frugality" and that the   markets could retest the March lows.

Mohammed El-Erian, the Number 2 man at bond giant, PIMCO, says that his firm is girding for the "new norm" of 2% growth versus the 3-5% that we're used to.  The last time we had a decade of 2% growth was the 1930s.


So far in this bear market we have witnessed the following negative outcomes:

  1.  Biggest loss of household net worth on record
  2.  Record home foreclosures in April, the second month in a row of record highs.
  3. 1 out of 374 houses in America is in foreclosure
  4. We have a 10 month supply of unsold new homes and builders report that 6 months would be more the norm and that the excess needs to be worked off before meaningful growth can resume.
  5. The Case/Schiller Housing Index last week declined -18.7% on a year over year basis, the steepest drop in the 21 year history of the index.
  6. Household debt is 27% of net worth, the highest on record, compared to 11% in 1959
  7. Government debt is now $6.36 Trillion, a record, and equals 13% of GDP.  Secretary Treasury Geithner wants to reduce it to 3% of GDP and one can only wonder, "How?"
  8. Bill Gross, head of PIMCO, said it was likely that the United States will lose its AAA credit rating in the next few years.
  9. The United Kingdom was downgraded by S&P from stable to negative, the first time that has happened, and shows that even developed nations are being forced to reassess and reduce their debt loads.
  10. Continuing unemployment claims were at 5.79 million, up 110,000 from last week and up 116% from a year ago
  11. Commercial real estate could be next shoe to drop with SP warning of downgrades in that sector and more stress on banks as malls and commercial debt holders default on loan.
  12. 65 to 75% of subprime loans that have been modified are forecast to be back in default within 12 months
  13. Mortgage defaults are now spreading to prime loans because of job losses and people with good credit being unable to make their payments.
  14. From April, 2008, to April, 2009, the U.S. government experienced a 34% decline in tax revenues due to job losses and subsequent lower tax revenues which will further balloon the deficit.
  15. GDP was revised to a "better" -5.7% for 1st Quarter, the first 2 consecutive quarters of more than 4% declines since 1947
  16. Fitch lowered California's credit outlook from stable to negative and so the Golden State joins the United Kingdom on the sovereign nation credit watch list.
  17. 25% of subprime loans are in foreclosure
  18. 6% of prime loans are in the foreclosure process and this category represents the largest percentage of new foreclosures
  19. One in eight homeowners are either behind on their mortgage or in foreclosure

So looking at the technical indicators, we still see some cracks in the bear market rally, although we had renewed strength last week and starting out on Monday this week.  But last week on a fundamental level, the bad news became increasingly glum and storm clouds do seem to be gathering across the horizon.

Expect a volatile week ahead.


The Week Ahead:


Monday: April Personal Income, April Personal Spending, April Construction Spending, May ISM Index 


Tuesday: April Pending Home Sales, May Auto Sales


Wednesday: April Factory Orders, May ISM Services Sector 


Thursday: Weekly Jobless Claims


Friday: May Non Farm Payrolls, May Unemployment 



Sector Spotlight:


Weekly Leaders: Hong Kong, Oil, China


Weekly Laggards: Bullish Dollar,


To get a Complimentary Special Report from Wall Street Sector Selector, click here:

Wall Street Sector Selector

All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.

Posted 06-01-2009 10:07 AM by John Nyaradi