Between a Rock and a Hard Place

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Last week we went through a composite list of all the recent bad news on the economic front and this week, Ben Bernanke went to Congress and laid out the problems that lie ahead.  Our country truly finds itself now between "a rock and a hard place," and we'll discuss that in greater detail in a moment.

It was another volatile week in the markets with interest rates gyrating wildly and 1-2% moves in the index remaining a commonplace event.  Our metals positions declined as they corrected after a quick run up and we launched the Magnum program with one position.  The dollar rebounded sharply from recent lows and the market seemed unsure how to react to Friday's better than expected employment report, shooting higher at the open, only to end up very mixed on the day.


Also the S&P 500 crossed its 200 day moving average represented by the red line.  This is typically thought of as being the demarcation point of long term uptrends, and so many are calling this the beginning of a new bull market.  And, of course that could be correct.


But the bars are bunching up around the 940 level and on Friday, one would have expected a sharp move up from the lower unemployment reports but that didn't materialize because of concern over impending inflation and rising interest rates.


And so the country and I are between a rock and a hard place.  We'll discuss the country in a moment, but for us the dilemma is, do we sit by and watch the market go higher, or do we try to enter now on the long side only to see it correct sharply downward?


By all measurements, the market is vastly overbought and so it's a dangerous time to enter new long positions, but the fear of getting left behind is always on everyone's mind.  Our positions outside the SP have helped us reclaim some of our earlier losses on the year, but we still have a lot of work ahead to reach our goals for the year. 

The situation is a dangerous one, and here's why:


The View from 35,000 Feet


GM went bankrupt on Monday and unemployment went to a 26 year high of 9.4% this week.  Retail sales reports were disappointing and Bernanke forecast a tepid recovery later in the year in his testimony before Congress. 


More chillingly, he said that current deficits were unsustainable (no kidding) and that the Fed would not monetize the debt and that the recent rise in interest rates was due to the rapidly exploding Federal deficit and the projection that higher interest rates would be required to attract buyers for all this new debt.


He said we must reduce the deficit and so here's the rub.  The only two ways to do that are to raise taxes or cut spending, and either one of those options could easily kill off the fragile "green shoots" recovery that's suppposed to be underway.  And that's the rock and the hard place.  If we raise taxes or cut spending, the recovery gets stunted, and if we don't, rising interest rates will do the job for us by stifling business growth and home buying.  So, it's hard to see a clear way out of here to smoother waters ahead.  And that's why the markets ended so mixed on Friday.


9 stocks dropped for every 7 that rose, the 37th bank of the year was seized by the Feds on Friday and 10% of Americans qualify for food stamps.  Futures contracts show 70% odds of a Fed interest rate hike by November, up from just 27%, oil continues its rise and acts as a brake on economic growth, and so by any measure, these are not good times.



The Week Ahead:


Tuesday: April Wholesale Inventories, 


Wednesday: Crude Oil Inventories, Fed Beige Book, May Retail Sales 


Thursday: Weekly Jobless Claims, April Business Inventories


Friday: University of Michigan Consumer Confidence Index 



Sector Spotlight:


Weekly Leaders: Industrials, Oil, China


Weekly Laggards: Taiwan Index, T Bonds, Japanese Yen


On Friday, I drove my 16 year old to school for the last time, as later that morning, I picked him up and took him to the DMV to get his driver's license.  I'm sure you can remember getting your driver's license, as I can, and the sense of freedom and adventure that comes with that major rite of passage.  It was a landmark day for our family, and after he passed with 100%, he dropped me off at home and I took a picture as he drove off solo and back to school.  He disappeared down the hill and around the corner, and in just an instant, my little boy was gone.


Wishing you a great week wherever you may be. To get a Complimentary Special Report from Wall Street Sector Selector, click here:


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 06-08-2009 12:36 AM by John Nyaradi