October,High,risk,for,the,bull business, insurance October: High risk for the bulls

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Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 st1\:*{behavior:url(#ieooui) } /* Style Definitions */ table.MsoNormalTable{mso-style-name:"Table Normal";mso-tstyle-rowband-size:0;mso-tstyle-colband-size:0;mso-style-noshow:yes;mso-style-priority:99;mso-style-qformat:yes;mso-style-parent:"";mso-padding-alt:0in 5.4pt 0in 5.4pt;mso-para-margin:0in;mso-para-margin-bottom:.0001pt;mso-pagination:widow-orphan;font-size:11.0pt;font-family:"Calibri","sans-serif";mso-ascii-font-family:Calibri;mso-ascii-theme-font:minor-latin;mso-fareast-font-family:"Times New Roman";mso-fareast-theme-font:minor-fareast;mso-hansi-font-family:Calibri;mso-hansi-theme-font:minor-latin;mso-bidi-font-family:"Times New Roman";mso-bidi-theme-font:minor-bidi;}Article by Bert Dohmen, Sept. 30, 2009 OCTOBER: HIGH RISK FOR THE BULLS The above was the headline of the Sept. 14 issue of ouraward-winning WELLINGTONLETTER. As they say in Washington,it's still operative.  Here are some of the headwinds we seefor the stock market. When Congress is in session, historically the stockmarket underperforms by a wide margin. This time the effect should be morenegative, because of all the adverse legislation coming up for vote. The twobiggest are "Health Care" and"the Carbon Tax." If these two pass, say good-bye to any substantialeconomic recovery over the next ten years. Even worse, it will show clearly thedirection of a once great nation as itcommits economic suicide. Interestingly, the health care plan wouldn't takeeffect until 2013.  The "Carbontax", also known as the Markey-Waxman bill, is one of the most destructivetax programs proposed by any major government in recent history. It wouldimpose a huge tax of trillions of dollars on most economic activity in the U.S., while our competitors abroad, such as China and India, continue to pollute andlaugh all the way to the bank. The program is "reverse Robin Hood,"with everyone paying and the proceeds going to a few.  In addition, the significantlooming tax increases on Americans, both on the national and local levels, willbe a great impediment in getting entrepreneurs to start businesses and createjobs. In fact, small business owners will decide the struggle is no longerworth it, and they will reduce their work force. If our politicians would getout of their limousines and talk to small business owners, they would see that thistrend is accelerating right now.  Until now we hadexpected economic growth numbers to be strong late this year because of theeasy comparison to the same period last year. Therefore, those numbers will bevery deceptive. The big, smart traders will use any buying from the public tosell into. After all, the stock market hasrallied on fumes, hopes and expectations. It will be the typical case of"selling on the news."  Furthermore, any economic strengthwill arouse fears of Fed tightening. We already hear economists suggesting thatthe Fed has to withdraw the stimulus, and possibly hike interest rates, inorder to prevent inflation. To us, that's like worrying about a blizzard in theSahara. Therefore, strong economic numbers maybe greeted with a stock market decline. Next year economic growth comparisonswill less favorable. The various stimuli programs are expiring or have expired.One is the "cash for clunkers." Those who bought a car with thisprogram will suddenly find they can't make the payments on the additional$20,000-30,000 of debt. Furthermore, the sales borrowed from future sales.  Then we have the tax credit for buyinga home. The expiration in November is causing a "rush to buy" now. Ina number of states, the foreclosure moratoria are expiring, which willaccelerate the foreclosure avalanche. The problem with any temporary stimulusis that it borrows from future activity similar to the "cash for clunker." In the housing sector, thegovernment's mortgage modification program is being overwhelmed by theavalanche of increasing defaults. Now it's not just subprime, but primemortgages and jumbos are seeing accelerating defaults.  On the technical side, the summer partof the rally was caused by easy manipulation of stock prices by the big tradingoperations in a low volume environment. The smallest and fundamentally worsestocks had the biggest gains. The astute analyst Rob Arnott calculated this:  starting in April and using stocks in theRussell 1000 index, stocks over $50 per share had a 5-month gain of 22%. But the stocks below $5had gains of 116.9%. We alwayscalled these low priced stocks "cats and dogs." Whenever they lead arally, you know it won't last and is just short covering. The worst stockslogically have the highest short positions. Stocks are extremely overvalued, moreso than at the 2007 bull market top. And jobs aren't coming back. The consumeris 70% of the economy. Where will he get the money when he doesn't have a job? Now traders are back at their desks. Theysee that bullish sentiment is extremely high. That's bearish. They will find today'sludicrous prices appetizing for selling and short-selling. Additionally, mutualfund managers have bought the past several months just because stocks wererising, not because they thought stocks were bargains. But the smart money isusing the strength to sell.  This iscalled "distribution", something we have noticed for the past severalweeks, even as the major indices went higher.  The bulls tell us that there aretrillions of dollars "on the sidelines." Well, it's about the sameamount as one year ago, just before thecrash. Betting on that money coming into stocks is a sucker bet.  Sentimentamongst analysts is now at the most bullish levels since the bull market peakin October 2007. S&P futures traders are more bullish than at the 2007 top.When everyone is on one side of the fence, and is totally complacent, themarket is usually close to changing direction. Then we have the fact that the majorindices are now close to the point of the start of the global panic of October2008. In any market, once it gets backto the start of the last plunge, there is huge resistance and the rally ends. There are more signals which wediscuss in the WELLINGTONLETTER.  The stock market has closelycorrelated with the price of oil over the past year. The connection is theappetite for speculation. Thus, when you see oil plunging, and the dollarrising, it's time to get out of stocks for awhile.  BOTTOMLINE: Today's stock pricesreflect the most optimistic and euphoric scenario for the future. I believe realitywill return to the markets in October. The fairy tales of a great "recovery"will diminish. The inevitability of much higher taxes and possible trade warsto please the labor unions will sink in. The ability of the U.S. leadershipwill come into question. Rogue nations such as Iranand North Korea will beplaying "cat and mouse" with the U.S.,knowing there is nothing to fear from the current U.S. regime. The likelihood of Israel taking unilateral "survival"action again Iran'snuclear facilities will increase. That would unleash a Middle East war.  Smart money managers will raise cash.They realize that top line growth in the corporate sector just isn't returningand that recent profit improvements are merely due to cost cutting. Well, youcan't cut your way to prosperity. "Official Unemployment will rise todouble-digit levels, although actual unemployment is already approaching the20% area. Congress will consider the stupid idea of a "SecondStimulus" plan, although the first one did nothing. It means more of our moneydown the drain, to those who are well-connected. There are easy solutions, butthey would never be considered by the current Congress. Marketsare psychological. After 6 months of euphoria, we will now start seeing theflip side.  www.bertdohmen.com