Bull, Bear or Grazing Sheep? The Market Can’t Make Up Its Mind.

It’s mid-October and all three major indices are trading at exactly the same levels as mid-April, moving above or below Dow-10,300 every month since then. In early April the bulls were out in full force, and the Volatility Index [VIX] was at its lowest point in more than 18 months. Six weeks later the market had lost over 10% of its value, and the VIX had tripled from 15 to over 45.

It seems this ’bull-bear tug-o-war’ is - for the moment - evenly matched. This stalemate could end any day … or continue for months to come. There’s a compelling case on both sides of the line. Keep in mind … the bearish case is always more eloquent and persuasive. These days it isn’t that difficult to sound intelligent when you’re arguing the bearish side. It’s far more difficult to sound rational when you’re touting a pie-in-the-sky bullish future, especially in the midst of a real estate debacle of epic proportions.

• P/E ratios are below their 70-year average.
• Pent up demand for durable goods, especially the tech side (Intel, Dell, HP, Microsoft)
• International markets are BURSTING WITH DEMAND. Market rallies are no longer about America, but about Wall Street’s huge investment in overseas markets. 50% of the S&P 500’s value is driven by international consumption.
• Companies are flush with cash, waiting for a strong sign to hire again.
• Recent earnings have been relatively strong.
• Housing has to be approaching a bottom, and just think of the broad economic boom when housing finally starts to pickup! Low rates, depressed prices, new furniture, etc.
• The credit card crunch seems to have flattened out, and credit card payments over 90 days behind have fallen to less than 1% of card holders. That’s the lowest default rate in the past three years.
• Eurozone recovering? Who knows? You tell me. (One day production is up, and the next day it’s a ’terrorist watch’ for tourists!)
• What about taxes and the election? Republicans raised 10 times more than Democrats in an attempt to regain control.

You have to admit, all this adds up to a compelling case for the bulls. But right now (October 14th), the market is close to its high point for the year, and the bears are holding their ground.

Bearish technical indicators with names like "The Death Cross" and "The Bearish Abandoned Baby" have been attracting mainstream attention in recent months. "The Hindenburg Omen" is yet another doom & gloom indicator, which appeared several times in the latter part of August. We found it eerily coincidental that the Hindenburg dirigible crashed on May 6th, 1937, and the market’s most recent ’flash crash’ occurred on May 6th, 2010. The Omen was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn. Market analysts said only about 25% of Omen appearances have led to stock-market declines that can be considered crashes.

Market pundits – on both sides of the fence – rarely mention the fact that the entire stock market is based on dwindling natural resources, and the newly awakened desires of over 6 billion people to capture their own version of the ’American Dream.’

• Want some perspective regarding natural resources? Have you seen the "Home Project" on YouTube? Produced in 7 languages, this free 90 minute film has logged nearly 11 million views!
• Your retirement nestegg could be resting entirely on the relentless worldwide consumption of "stuff". The "Story of Stuff" has also logged over 10 million views.
• Gold prices are surging. Is it ’smart’ to invest in gold now? If you’re a bear maybe so, at least for awhile. Warren Buffet on gold … "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
• Corporate cash reserves may be high, but so also is corporate debt. The bond market has been on fire as companies rush to raise huge sums of money at very low yields. According to the Wall Street Journal, the month of July was the busiest on record for the sale of bonds for companies with junk credit ratings.
• Stock market rallies have less to do with Main Street USA than ever before. 50% of the S&P 500, and 30% of the Dow, is rooted in overseas consumption. Remember Ross Perot’s "giant sucking sound"? That was a mere 18 years ago.
• Housing could be nowhere near its bottom as more citizens (including municipal workers and teachers) are laid off. Add to this a new epidemic called "well-planned strategic mortgage default". There’s even a website to serve this growing ’strategy’. Check out www.youwalkaway.com. 8% of all mortgages are now in default, and for homes valued above $1 million the default rate is over 12%.
• Commercial Real Estate Crash? – I haven’t heard much lately. I wonder why… Various sources estimate that between $1.3 and $3.5 trillion in commercial loans is coming due in the next 5 years with more of it weighted toward 2012. This could be an ugly event. Chairperson of the Congressional Oversight panel, Elizabeth Warren, said that half of all commercial real estate loans will be underwater by the end of 2010 and the bulk of these loans are concentrated in small- and mid-sized banks. She even went so far as to say that this will devastate small-business lending and create "a downward spiral of economic contraction."
• If consumer buying is up, and credit card defaults are down, you can’t help but wonder how much of that is due to defaulting mortgage payments.
• College enrollments are down, as many consumers question (or can’t afford) the economics of a 4-year degree. Workers with specialized skills like electricians, carpenters and welders are in critically short supply in many large economies. The shortage of skilled workers is the No. 1 or No. 2 hiring challenge in six of the 10 biggest world economies. A poll of 15-year-olds by the Organization for Economic Cooperation and Development found only one in 10 American teenagers see themselves in a blue-collar job at age 30.

This is just a brief glance at the most pressing issues. Regardless of your sentiments, anyone can tell you – be it the Tea Party or Ms. Huffington – the American middle class is shrinking. Politicians (well… too many of them!) are but a shadow of the brave souls who founded this country. The most affordable places for many baby boomers to enjoy their retirement are located outside US borders. What will America look like in ten years? Your guess is as good as mine, but without plentiful jobs that pay a decent wage, mounting government debt could undermine some of our most basic assumptions about America.

Trade wisely.