This current Notes on the Stock Market entry authored by Chris Lau was sponsored by ProfessionalStockTraderLive.
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Citigroup last week reported its expected weak earnings, announced it was selling its prized asset, and also split into two. One business would be focused on commercial and retail banking, and the other would be on brokerage, retail asset management, consumer finance and troubled assets. In other words, the good part of the company would be split from the bad part.
Bank of America also obtained additional capital support from the U.S. government, in which potential losses would be limited to $118 billion.
Instead of rallying, the two stocks traded down on the day. The market trading activity has also deteriorated. Most significantly:
- VIX (volatility also known as "the fear index") peaked to 55.16 from 36.88. This increases the odds for more wild market gyrations. There is greater likelihood that the market bottom reached in November will be tested again
The investment thesis - Sector Avoidance - that was made several months ago remain:
- Avoid the financial sector
- Avoid the real estate sector (most especially REITs)
- Accumulate gold
- Weekly volumes moved back above average for the major indexes but the fact that this occurred on falling prices is bearish (but major support levels continue to hold for the time being)
- Gold is forming a bearish rising flag pattern accompanied with steadily declining volume as is silver
- Average earnings are now down 60% versus Q4-07, versus off 48% last week. This compares to a drop of 62% for Q3-08 versus Q3-07.
- Initial estimates put the 2009 deficit around $1.2 trillion not including any new spending initiatives by Obama, means that the sale of Treasuries to finance the deficit will need to grow to at least $100 billion per month. Add the latest stimulus package of another roughly $1 trillion and the realistic estimate for the 2009 deficit swells to approximately $2.2 trillion which translates to a need of $183 billion in Treasuries per month just to pay the bills on Capital (Matt concludes that the appetite of foreigners to finance this debt is falling)
Here are some bullet points from his short but powerful history lesson.
- When Roosevelt took office, unemployment hit nearly 25% and within his first 100 days in office, he created “an alphabet soup of new agencies that mandated actions or controlled public spending and impacted private capital flow.”
- At first his New Deal appeared to be working as unemployment slipped to 14.3% but then the country entered a second depression in 1937 with unemployment soaring back to 19% in 1938.
- FDR’s New Deal spending programs were compounded by a spate of new taxes “that crushed the innovation, risk taking, and growth plans of entrepreneurs, corporations and investors.” In the decade following the initial stock meltdown in 1929-30, the top marginal income-tax rate was pushed from 25 to 79%, corporate income-tax rate doubled from 12 to 24%, an excess profits tax and undistributed profits taxes piled on plus a dividends excise tax and a new 2% Social Security payroll tax. This Levey says, “forced the allocation of money away from the private sector.”
- “As economist Henry Hazlitt wrote back in 1946, New Deal programs prevented the creation of the types of jobs which have the multiplier effect of successful businesses.”
Accumulate TBT or short TLT. TBT is a bear ETF for the US 20-year Treasury.