Dow is approaching its recent peak

Despite widespread concerns that the stock market had peaked recently, the Dow has climbed from its recent mini-correction to within 37 points of the close on April 2, 2012 and within 70 points of its recent 52-week intra-day peak. So, a new near team high, which is the hallmark of a bull market, is within striking distance.

 

Unfortunately, we are also only a day away from the infamous "Sell in May and go away" trading zone, although there is not a hard, specific date range for that myth.

 

So, anything can and should be expected to happen in the market next week. Volatility could be interesting.

-- Jack Krupansky

Q1 GDP shortfall

GDP reports tend to get revised upwards, sometimes very significantly, so I wouldn't read too much into the lackluster +2.2% Q1 growth rate, even though the forecast had been for +3.2%. Sometimes it is simply a matter of which of two quarters spending near the end of a quarter gets assigned to, so a shortfall in Q1 may turn into a windfall in Q2. And, the initial estimate (which today's report is) usually has a fair amount of interpolated estimation due to incomplete data that will gradually get turned into a solid number as the months tick by.

 

Next week we'll look to an update from Macroeconomic Advisers (MA), the buys who had the +3.2% forecast.

-- Jack Krupansky

Macroeconomic Advisers ups Q1 GDP forecast to +3.2%, but lowers Q2 to +2.3%

Macroeconomic Advisers (MA) has once again raised its Q1 annualized real GDP forecast, to +3.2% from +3.1% last week, but they also once again lowered their Q2 forecast, to +2.3% from +2.4%.

 

Reemphasizing what I said last week, we already knew that Q1 was semi-decent anyway, and this latest forecast only underlines the concern about a deceleration in Q2, and uncertainty about Q3 and beyond.

 

That said, there is in principle nothing alarming about quarter-to-quarter volatility of GDP. That is perfectly normal. And, as we all know, a single data point in a data series does not establish a trend.

-- Jack Krupansky

Pulled the trigger - bought STD, AAPL, PCLN

I was super-impressed with how negative people were this morning about Europe, everywhere else, and even about Apple. So impressed that I decided to pull the trigger and buy some Banco Santander (STD) – the Spanish bank that gets most of its revenue from outside of Spain - at $6.14, some Apple (AAPL) at $561.61, and some Priceline (PCLN) at $688.73.

 

I had been looking at STD for a number of weeks now. I felt that people were overdoing the negativity about Spain. Interestingly, after I made the decision to buy, I checked and noticed that Goldman Sachs has just added them to their "conviction buy" list and JPMorgan upped them to "Overweight." Generally I pay little attention to brokerage ratings on stocks, but I did find it curious that these ratings happened to match my judgment.

 

I am not a fan of Apple, but it felt like people were trying to artificially push the stock down before the quarterly report.

 

And Priceline is the only company whose product/service I can actually "rave" about, and the stock had a nice, buyable dip this morning.

 

I am also implicitly betting that the U.S. is not going to sink into a significant recession over the next six months to a year (and nobody knows what the outlook is beyond that anyway.)

 

I have no idea how these stocks will do in the near-term. Let's see how brilliant/idiotic I look six months and a year from now.

 

I just invested 80% of the cash from my 2011 retirement contribution. I just couldn't bear the dullness of the Fidelity 2025 target data fund I had been investing my retirement contributions in for the past few years. If there is a big dip in the coming months, I am likely to move a chunk of that target date fund to these stocks, or others that look attractive.

-- Jack Krupansky

Is the Fed being clear?

The NY Times has a spurious article entitled "Aiming for Clarity, Fed Still Falls Short in Some Eyes" which states or implies that a lot of people think that the Federal Reserve is not communicating clearly, without pointing out the simple and obvious truth that the vast majority of people making that claim are probably simply critical of Fed policies in general or monetary policy in particular and simply lobbying for alternative policy approaches. These people know EXACTLY what the Fed means, they simply disagree with it and don't like it.

 

You can nit-pick over any statement in the English language and find some sort of purported ambiguity, but for a lot of these people to falsely claim that they don't know what the Fed means when they have more than enough context available for review is quite disingenuous.

 

In a lot of cases people are simply implying that the exact path of future Fed action is indeterminate, which is true since the Fed has made clear that they will adapt to economic conditions as they unfold, and even the Fed cannot predict the future so precisely. Unfortunately, there are a lot of gold bugs and so-called "Austrian" economists who misguidedly believe that if they had their way the economy would be predictable.

 

In short, the Fed is being quite clear, but a lot of people just don't like what they hear the Fed saying.

-- Jack Krupansky

Another mini-short squeeze to push the market around, with no trend in sight

The significant declines of quite a number of major technology stocks yesterday (Monday) left a lot of traders and short-term speculators with a negative, bearish stance, hoping for further declines. As frequently happens in such situations, an excessively bearish stance causes sharper-witted, nimbler traders to then pounce with a load of buy orders and instigate a little bit of a short squeeze, forcing the bears from Monday to "remove (or take off) their shorts" (as they say on Wall Street), and then everybody piles on for another ride up. Rinse and repeat.

 

Whether we see a continuation of the rally is unclear. Sure, it can happen, but just as likely is that "easy come, easy go" is the rule.

 

I would note that even with the sharp rise today, the Dow is still not close to setting a new near-term high.

 

So, we remain well within a trendless trading range, with more of the same expected.

 

Even if the Dow does set a new high, if it is not a healthy amount higher then we will face the prospect of a "double top", which is a distinctly bearish indicator. In truth, some people think that the Dow has already hit a double or even triple top, depending on how closely you measure these things. That's why we need to see a clear and definitive break out to clear the air about the trend.

 

Quarterly results are coming in fairly decent, but we already knew that Q1 was a semi-decent quarter for the overall economy. The big question is Q2. The even bigger question is Q3 and even Q4. After all, the stock market is supposed to look ahead and forecast nine months out.

-- Jack Krupansky

My effective tax rate is 23.3%

Since this seems to be all the rage (figuratively and literally!), I'll disclose that my own effective tax rate is 23.3%, for 2011. But, being self-employed, that includes full FICA, while an employee would not include the employer's share of FICA. Subtracting half of my FICA, would give an effective tax rate of 17.3%. My total income would put me roughly at the bottom of the top quintile (20% make more than me, but I make more than 80% of the households out there.) I am single and without dependents or significant charitable contributions, and a small amount of dividend income, a lot of which is tax-free in ROTH retirement accounts.

-- Jack Krupansky

Macroeconomic Advisers now forecasting Q1 GDP of +3.1%

Just a few days ago Macroeconomic Advisers (MA) was expecting Q1 GDP to come in at only +2.6%, but now they are forecasting annualized real GDP growth of +3.1% for Q1. But, they lowered their forecast for Q2 from +2.5% to +2.4%.

 

A decent retaill sales report for March bumped the Q1 forecast upwards. We will get an initial official read for Q1 GDP in a couple of weeks.

 

We already knew that Q1 was semi-decent anyway, and this latest forecast only underlines the concern about a possible deceleration in Q2.

-- Jack Krupansky

More dead-cat bounce short-covering as the range trading continues

The yo-yo trend continues. The sharp decline on Friday sucked in a bunch more bears and now traders are showing them a little short squeeze, giving us another dead-cat bounce. Even Wall Street firms are confused as to where they think the market is headed, with Goldman Sachs "liking stocks" and Morgan Stanley "seeing risk", but that may be the classic story of selling the customer one story and collecting the fees and a short while later changing the story and collecting the fees a second time as the customer exits from what they thought had been a sure thing.

 

There are certainly a lot of variables up in the air. I do see the market on a slow upwards trend for the longer term, but that is independent of where the short-term and intermediate trends will head, each of which is themselves independent. The federal budget balancing early next year is a huge uncertainty with a significant risk of throwing the economy into a recession, coupled with the lingering risk of a modest recession in the coming months. The economy is still growing at a slow enough pace and with enough volatility that even a modest dip can end up being recessionary. Personally, I don't see that as a huge risk, but ECRI is still adamant about it.

 

The two key questions for investors are whether the short-term trend will break below the near-term low from the middle of last week, or break out from the recent peak for the Dow. They are probably equal probability events over the next month or so. Meanwhile range-trading is the rule.

-- Jack Krupansky

Somebody's lying about somebody's taxes!

Hmmm... The White House is now claiming that the president's secretary had a HIGHER effective tax rate than the president, but that doesn't fit the facts. According to ABC News, his secretary "pays a slightly higher rate." His secretary "makes $95,000", supposedly. I checked with IRS Form 1040EZ, which is the worst possible scenario (no itemized deductions, mortgage interest, or charitable contributions or any of that) and came up with an effective tax rate of 18.5%, which is certainly BELOW the president's rate of 20.5%. Somebody is LYING here!

 

And as I pointed out earlier, the president's rate is as low as it is precisely because he has a boatload of charitable contribution deductions. If we believe that charitable contributions are a great value to society, that should be a GOOD thing, and would justify a lower tax rate.

 

But the big revelation and scandal here is that WE, the taxpayers, are paying $95,000 for a SECRETARY! Oh, right, they probably got her from GSA, those guys. Hmmm... I wonder how much Buffett pays his secretary.

-- Jack Krupansky

Today's decline was payback for the shorts after the short squeeze on Thursday

The nice pop on Thursday was nothing more that a traditional short squeeze as traders and short-term speculators realized that too many people were betting too heavily (and with too-tight stops) for a further market decline. Once the market started moving against the shorts, they quickly covered and followed the rally up. But, their only interest was to follow the momentum as long as it lasted. Once the short-covering rally quickly ran its course (as they always do), the shorts piled on their short positions again (or "put their shorts back on" as they say in the boy's club on Wall Street.) Back to square one as far as judging the short and medium-term market trends.

 

Well, not quite back to square one. The Dow is still well above its near-term low on Wednesday, so a "recovery" of sorts is still quite possible.

 

The bottom line is that we will see a lot of volatility that "makes no sense" until we get some clarity as to true trend. Meanwhile, range-trading is the dominant trend. What we need to keep our eyes open about is whether we quickly set a new low below Wednesday's low or set a new high above the recent peak for the Dow. Otherwise, trading range it is, indefinitely.

-- Jack Krupansky

Obama's effective tax rate

I had actually reviewed Obama's 2010 tax return recently, so I quickly latched onto his 2011 return when it came out today. Some interesting tidbits in there.

 

First, his 2011 return completely takes the wind out of the sails of his claims that "we need to change our tax code so that people like me, and an awful lot of Members of Congress, pay our fair share of taxes. Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes." In 2010 he made more that $1 million, but in 2011 he only made about $800K ($844,585 total income, $789,674 adjusted gross income, and $496,376 taxable income), so his infamous "Buffett Rule" would NOT apply to him. Let's see if he adjusts his stump speeches accordingly from here on.

 

Second, the White House referred to his 20.5% effective tax rate, sort of implying that it was lower than a typical middle-class tax rate, which is completely false. I read recently that the median effective tax rate for the middle 20% of U.S. taxpayers is 13.3%, WELL below Obama's effective rate. More wind taken out of the sails.

 

Obama's effective tax rate was reduced significantly primarily due to a significant level of charitable contribution deductions ($172K). Without the "tax break" for those deductions, I calculate that his effective tax rate would have been 28.2%, still WELL above the tax rate of an average American without the high level of charitable contributions. I calculated that he saved $60K on taxes as a result of the charitable contribution deductions. Incidentally, Romney's 2010 effective rate was low in large part due to very large charitable contributions.

 

Every penny Obama made over $379,150 was taxed at a marginal tax rate of 35%. For a middle-class family making less than $100,000 (that's most people), their highest marginal tax rate is only 25%. No sign of any need for a "Buffett Rule" there.

 

This 30% number in "The Buffett Rule" seems rather arbitrary and completely unrelated to this separate issue of what a millionaire makes vs. the average middle-class worker.

 

For one important thing, it completely muddies the distinction between marginal rate and effective rate. "Bait and switch" is a sleazy form of rhetoric.

 

Even more important, the proposed rule doesn't even bother mentioning the whole point of the 15% capital gains rate: to encourage investment that will help grow the economy. That would be a terrible loss to both the economy and the government itself.

 

And what exactly do people think will happen to charitable contributions if the government starts telling people that if they take a tax deduction for charity their tax rate on the rest of their income will GO UP?!

 

That was actually a rhetorical question because there is absolutely ZERO chance that "The Buffett Rule" will get passed in Congress, so there isn't actually any need for anybody to worry about consequences.
-- Jack Krupansky

Unemployment insurance initial claims up, but probably due to Easter holidays

The weekly unemployment insurance initial claims number did pop up a bit this week more than I would have expected, but my hunch is that this was a statistical anomaly due to the recent Easter holidays. We'll see how the next two reports come in before judging that something "bad" has happened.

-- Jack Krupansky

Going after the shorts

The name of the game for today will probably be to go after the shorts, all the people who have placed bets that the market decline will continue, hoping to hit their "stops" (stop loss orders on their short positions) and forcing them to buy to cover those stop losses. Meanwhile, traders will hope to gain from the pop driven by that mini "short squeeze." None of this is an indication of the intermediate market trend, just a short-term trading tactic.

 

Some of these short positions are simply an outright bet on market direction while others are legitimate hedges to protect long positions from downside losses, and a fair number are probably somewhere in the middle, a legitimate hedge plus a little more to "juice" returns. In some cases, stock holders are willing to tolerate market volatility in the near term without any hedge, but can't resist the lure of extra "juice" from short positions on the side. Especially the hedge funds. The actual distribution between these various "strategies" (tactics) is of course unknown and unknowable given the way the various stock markets are currently

constructed.

 

Some of the buying at this stage will be by "dip buyers" who will see a second day of "recovery" as an indication that it is "safe" to increase their long stock holdings. Flip a coin as to whether they are right.

 

In any case, expect more volatility, with quite a mix of days of euphoria and despair. Meanwhile, true investors can sleep well at night simply with a "stay the course" strategy.

-- Jack Krupansky

Okay, we did the dead-cat bounce... now what?

Okay, we had the obligatory "dead-cat bounce" today, sort of, at least for some stocks, but now we are back to the question of follow-through. The bounce has zero-predictive value. My hunch is that the market will drift sideways for the next week, with equal probability of a sharper bounce or another sharp decline, neither of which will indicate the true medium-term trend. In short, it will take another week of this "screwing around" before we can get a feel for whether sentiment is still holding up or really beginning to fall apart.)

 

Besides sideways movement, the next two milestones are whether we set a new near-term high for the Dow or break down to more than a 5% decline from the recent high.

-- Jack Krupansky

Q1 GDP probably at 2.6% and Q2 probably at 2.5% growth

As of April 10, 2012, Macroeconomic Advisers (MA) is now forecasting that annualized real GDP growth for Q1 will come in at +2.6%, a bit higher than their forecasts during the quarter (1.8% to 2.2%.)

 

They are also forecasting Q2 GDP to come in at +2.5%.

 

In other words, no sign of a recession, yet. That is not to say that a recession could not start late in Q2, but simply that the bulk of the first half of the year will be recession-free.

-- Jack Krupansky

Why can't I find Lending Club on the SEC web site?

I recently recommended Lending Club to someone and they wanted to see where there was evidence of registration with the SEC, so I went to sec.gov and searched for "Lending Club" and found nothing. What?!?! I know that sometimes the official name of a company is not exactly the same as the name that we in the general public use, so I went to the Lending Club web site and looked up one of their SEC filings to get the exact company name. On the most recent 10-Q it is "LendingClub Corporation", so it made no sense that it was not found. I stared intently at for for a bunch more seconds and the spacing or lack thereof jumped out at me. So, I tried my search on sec.gov for "LendingClub" (without a space) and lo and behold I now see the SEC filings for LendingClub (not Lending Club.)

 

All these months (years now), I have been referring to Lending Club (with a space) when it is supposed to be LendingClub (no space.) Sigh. But now I know better.

 

I checked the company web site and they use "Lending Club" (with a space) almost everywhere, except in graphics and the legal agreements where the specific company name is required.

 

AFAICT, "Lending Club" (with a space) is essentially a brand or service mark.

 

In short, it appears to be A-OK to refer the "Lending Club" (with a space), unless you are searching on the SEC web site, or referring to the official, legal name of the company – LendingClub Corporation.

 

I have been remiss at reporting my ongoing experiment with Lending Club investments. My return had been up near 15.50%, but then I got hit with a fair number of defaults over the past year. Currently, my net annualized return over the past three years (in June) is 7.72%. I am continuing to re-invest all cashflow, but I haven't added any fresh money recently. I am basically waiting for that wave of defaults to stabilize and then take stock and come up with a revised investment plan. There are still a couple more left. One recent action that I took was to raise my minimum credit score requirement a notch (above 700). I am hoping that will reduce future defaults a bit.

-- Jack Krupansky

Nice drop, but still unclear how real it is

That was a healthy drop we saw on the stock market today, but even combined with other recent weakness it still presents a rather weak case for concluding that we are entering a bear market or a recession is coming or even a healthy correction (5% to 10% drop.) It still looks a lot more like traders and short-term speculators at hedge funds and prop trading desks at banks trying to manipulate the market artificially, or to put it more charitably, trying to front-run where they think the market is or should be headed. It is also very possible that we are seeing some sympathy for a little premature "Sell in May and go away" selling, which is typical at this time of year, again some "hot money" trying to "front-run" where they think the market is going.

 

Yesterday it was the "Jobs" report. Today it is "Europe." So typical. Every day traders and short-term speculators fabricate yet another excuse for their manipulative trading practices.

 

In any case, I still want to see what kind of follow-through we have. Engineering a one or two day or even a week-long drop is a no-brainer for Wall Street traders to artificially contrive these days.

 

The decline may continue for a couple more days, but it is just as likely that we will see a healthy "dead-cat bounce" soon enough ("Even a dead cat can bounce.") Be wary of any such bounce. The real test of any bounce is whether the market bounces high enough to set a new high greater than recent market highs, say to 13,300 for the Dow. If we don't set such a new high within another week or two, that would be a bad sign.

 

I am no fan of the so-called "Buffett Rule" being proposed by the White House, but I absolutely am in favor of a steep hike in taxation of short-term trading and speculation gains. Lets keep a 15% (or at least under 25%) rate for long-term gains – any asset held for a least two years (or one year, at least), but slap a 35% tax on short-term gains – any asset held for less than two years. Lets get our investment goals and incentives right from a taxation perspective. That will go a long way in correcting a lot of the misbehavior on Wall Street.

-- Jack Krupansky

What stocks to invest in?

As I think a little more about investment alternatives to my bland Fidelity 2025 target date fund for my retirement account investing, one option is to pick a handful of high-quality "investment grade" blue-chip stocks. such as GE, PG, JNJ, MCD, KO, DIS, NKE, AA, and KFT. Maybe that sounds like just buying the Dow and maybe an ETF would do the trick, but I don't necessarily want all of the companies in the Dow, just a handful that I can "manage" on my own, maybe as few as four, no more than a dozen.

 

The basic idea here is that a target date fund is way more conservative than I need or want to be and focuses too much on bonds for my taste. My Fidelity fund also focuses on international and commodities. I understand little about the former, but have nothing but disdain for so-called "investing" in commodities and see it primarily as an effort to rip off consumers.

 

Another option I need to think more about is "growth" stocks. Alas, most of the "growth" stocks from years past that I knew anything about are now more like "value" than growth. I don't fully understand or trust Apple. Google I understand moderately, but I'm skeptical about the reliability of its growth and profitability. Ditto for Amazon. And Netflix. And lots of other "growth" stocks. I do like and understand Priceline, but the stock seems a bit overpriced. I need to identify more Priceline-like stocks.

 

I may end up with a "blend" approach, maybe half dividend-paying blue-chip companies and half growth. Maybe four to six of each would be manageable. To be clear, this is all for retirement accounts, not one dime for short-term trading or "speculation."

-- Jack Krupansky

Just a day of "testing", no biggy, and little to do with the "Jobs" report

Although the media portrays the market decline as a reaction to the lackluster "Jobs" report and anxiety over Europe, nothing could be further from the truth. The decline is simply traders and short-term speculators "testing" the market. The Dow was hovering "within striking distance" of the psychological 13,000 level and the market manipulation crowd decided to make a go of it. The "Jobs" report sounded negative and the rule on Wall Street is to exploit any even remotely emotional connotations of any "news", regardless of the true underlying economic and business fundamentals.

 

The real question is not what happens today on the market, but what kind of follow-though occurs. Will this decline simply invite a "buy the dip" rally or have people had enough and is it close enough to May to "Sell in May and go away"?

 

And this still begs the question of where the economy will be headed in the months ahead. The stock market traditionally is a leading indicator for the economy, but the vast amounts of "hot money" in the ADHD-driven hands of hedge funds and prop traders has clearly "broken" the classic "stock market barometer."

 

It is certainly true that there are ongoing drags on the economy, but they have been there for quite some time without overwhelming underlying strength in business. It is worth noting that unemployment initial claims are still on a downwards trend, which is more indicative of a strengthening economy than a weakening economy.

 

The bottom line on the "Jobs" report is that it is well-within the statistical range of error for growing employment. And as the time-tested wisdom advises us, it is never wise to determine a trend or trend change based on a single data point. Apparently a lot of people think they are seeing a trend change when all they are looking at is statistical noise. The sensible people know better, but meanwhile traders will try to get away with whatever shenanigans they can since the media is too clueless to call them out.

-- Jack Krupansky

A modest pause, start of a decent correction, or... the end?

Of course, nobody has a clue what the modestly sharp decline of the stock market really means. Is it simply a modest pause before moving higher? That kind of thing happens quite frequently. Or maybe is it the start of a nice, sharp, decent correction, especially since market action in recent weeks has been somewhat a stop and go semi-pause anyway, again before moving higher? The kind that is overdue? Or, is this "the end", a harbinger of an impending bear market and indication of the long-rumored "recession that never quite happens"? We had a nice bump up in the economy since the summer, but the economy almost never moves in a straight line. A modest to moderate pause in the economy is quite believable. Not to mention the fact that the Economic Cycle Research Institute (ECRI) is still forecasting that we will be tipping into recession by the middle of this year, sometime in the next 90 days.

 

All of that said, hedge funds and proprietary trading desks are in control since they control the vast bulk of "hot money" that defines most market moves these days. The $64 billion question is whether they are "just messing with us", or about to pull the plug after the nice rally and switch to a "risk off" bias heading into the summer, the election season, and dramatic federal budget uncertainty in the new year as the "sequester" hits on January 1, 2013.

 

It is still a little early for the "Sell in May and go away" crowd to take action, but not by much and I would note that traditionally there is another crowd that starts selling in February, and all the pros want to get the jump on any big sell-off.

 

The mania over Apple is just another indicator that the market is getting just a little too "frothy" and "toppy." That said, those qualities are never a reliable indicator of the precise timing of any major selloff.

 

My hunch at this point is that the decline is simply another pause before the hot money crowd manipulates the market higher. My other hunch is that these manipulations are not primarily about giving the hot money crowd opportunities to exit and take their profits. It is really no different than the market manipulations of the 1920's, albeit with "rules" and regulations that simply make it a bit more challenging and interesting.

 

In any case, I am still sitting on the cash for my 2011 retirement contributions. My default plan is to invest 25% on a 10% drop in the market. Still not sure what to invest in, with a 2025 target date fund as my default, but Verizon and Priceline as possibilities, among others.

-- Jack Krupansky

GDP probably grew 2.2% in Q1

To be honest, I am really struggling to figure out both where the economy is right now and where it is going next. Q4 GDP clocked in at 3.0% growth, while Macroeconomic Advisers (MA) is still forecasting that annualized real GDP growth for Q1 will be about 2.2%. I mean, unemployment claims are down  for Q1 and the ISM Manufacturing report is up, but we still supposedly had a slowing of GDP growth in Q1. I don't doubt it, given the complexity of GDP and its calculation and estimation, but it is still a little much for anyone to get their mind around.

 

Meanwhile the Economic Cycle Research Institute (ECRI) is still forecasting a new recession starting before the middle of 2012, which means sometimes in the next 90 days. I don't doubt that a recession could pop up out of all the uncertainty ahead of us, but I can't say that I can offer any convincing argument that one will occur.

-- Jack Krupansky