How We'll Know If Hindenburg Omen Is Wrong

Yesterday, a 4th dirigible was seen flying the not-so-friendly skies.  According to Robert McHugh, who seems to be THE expert in the now famous Hindenburg Omen, we need 5 to get a "cluster".  But, let's take a deep breath, reduce our hyperventilation, and examine what signs we might look for that would suggest that this entire exercise is nothing but a blip on the radar screen.

One key factor is time.  The "crash window" is open, but won't stay open for very long.  If the financial markets don't implode pretty soon, then this entire exercise will become, as Dee Dee Myers used to say, "non-operational".  Ms Myers, who had the tremendous misfortune of explaining away Mr. Clinton's ongoing non-truths, had to constantly change stories as new facts came to light.  But, we can discuss that at another time.

If the Dow Jones Industrial Average (INDU) remains near or above 10,000 through the end of September, at the LATEST, I'd say that it would be time to go back to the lab. 

Key downside levels to watch would be roughly 9,500 on the INDU, 1,025 on the Standard & Poor's 500 (SPX) and 2,100 on the Nasdaq Composite (IXIC).  A break above 10,500 on the INDU, 1,100 on the SPX or 2,300 on the IXIC would suggest that the markets are probably poised to rally more.

As far as Gold goes, a break above $1,250 would suggest that an upside explosion could be at hand.  Contrarily, a penetration below $1,200 would be bearish, short-term, and probably be followed by a sharp, albeit temporary, correction.

Other signs that this whole scenario is incorrect would include rising long-term interest rates or a falling Dollar.  In the instance of a deflationary scare, we should see a strong dollar and strong bond market.  The key industry group to watch is the financial stocks.  They are currently poised to be leaders on the downside.  The markets CANNOT rally without at least a some upside strength in this group.

Do we care about earnings or economic statistics?  NO!  They are backwards looking and have ZERO predictive value.  In fact, any decline is likely to take place against a backdrop of at least decent news.  Like a sleight-of-hand magician, markets are very expert at having investors look up when investors should be looking down.  Look at my pretty assistant!

It's important to note, that as of this writing, not ONE of these possible contra-indicators is in place.  In fact, there is only one piece of evidence that the scenario is not imminent.  The yield curve is steep and positively sloped, meaning that the difference between long-term rates and short-term rates is high.  The reason this is important is that a steep yield curve creates a very profitable lending environment for banks and other financial institutions which borrow short or cheap and lend long or dear.  Since banks aren't lending, this may not be all that signficant.

The slope of the yield curve determines how profitable the financial sector will be prospectively.  And, as noted above, the health of this sector is important to the direction of markets and the entire global financial system.  It also has very high predictive value in assessing the prospects for economic growth. 

Another sign of strength would be felt in the commodities markets outside of the precious metals, which are acting as currency right now.  Keep an eye on oil, food and key industrial metals such as Copper.  Dr. Copper, as it's known, is a better economist than most Nobel Laureates.  Doc Copper has "Marko's Take" in his waiting room.  As of today, all the commodities are either weak and weakening or looking very toppy.

So, keep on an eye on the checklist that might suggest that the dark clouds are nothing more than a short thunderstorm.  The forecast is for torrential rains, but predicting the market is not much more of a precise science than the weather.  Even if it doesn't rain, don't forget your umbrella.

Therefore, unless the conditions for a re-assessment are met, as described above, investors should continue to hold lots of cash, use inverse ETFs for hedging and profits, and wait out the storm.

Marko's Take

Next Stage of Double-Dip Depression About To Emerge?

While signs of an economic recovery are indeed real (http://markostake.blogspot.com/2010/01/what-economic.html), what's important to us here at Marko's Take is the future.  Sure, we appear to be in a bona-fide recovery, but for how long?

Corporate earnings, which are streaming in for the Fourth Quarter, are hardly a blowout once the "improvement" in financial companies is stripped out.  Last year's period demonstrated record losses among the financial sector and this year the sector has returned to slight profitability... or so we're told.  The problem is that the accounting of financial companies is incomprehensible to virtually anyone - making it impossible to understand exactly what is going on.

Among financial companies reporting so far, Goldman Sachs turned in the best performance.  In part this was attributable to the firm's decision to greatly restrain bonuses - proving that even the world's most powerful firm can live without for at least a year.  Other companies were mixed:  JPMorganChase and Wells Fargo turned in solid performances, while Bank of America, Citigroup and Morgan Stanley lost a combined $5 billion.

But, the real problem which brings up the high probability of a short-lived recovery, is that the policymakers have continued the same low interest rate practices that got us into trouble in the first place.  And, given the country's $12 TRILLION National Debt, any rise in rates will do nothing but exascerbate the deficit, which is already at mind-numbing levels.  For every 1% increase in rates, the addition to the deficit will be $120 billion!  Imagine if rates were allowed to float to say 5%.  That would raise the deficit by $600 billion, or, as some of us would call it, "real money".

I've used a "drug dealer" to "drug addict" analogy in describing the situation in conversation, but here it is in print.  Imagine the Federal Reserve as the drug dealer, dispensing its 0% interest rate policy as the drug of choice. This policy has led to asset bubble after asset bubble, finally culminating in the near wipeout of the world financial system in late 2008. 

So, now that the economy is "hooked" on low rates, what do our friends at the FED do?  They give us more  of the same "drug" that caused us to crash in the first place!  However, as occurs with all "addicts", the economy has built up a tolerance to the drug - making its efficacy vastly reduced.

That's what appears to be happening now.  Yes, unprecented stimulus and low rates helped re-start the economy's heart like a couple of electrified paddles, but the "high" was even more temporary than before and the inevitable crash will be LARGER than the one preceding it!

Even the ever optimistic FED isn't exactly overjoyed with the spotty recovery so far.  According to the most recent "beige book", a release of anecdotal activity around the various FED districts, policymakers remain concerned about continued high unemployment, low factory utilization, weakness in credit activity and commercial real estate.

So, while the temporary "bounce" in the economy has slowed the rate of deterioration in the quality of many people's lives, the sad reality is that it won't be long before the downturn resumes with a greater vengeance.  The only question is - when?

The stock market may be providing an answer.  Yesterday, it broke 213 points lower and could be on the verge of a nasty correction, or perhaps a resumption of the bear market that began in late 2007. 

If the break was indeed the beginning of a serious move lower, that would suggest an economic downturn is no later than 6 months away.   However, it's WAY too early to draw conclusive evidence from the last few days of trading.

At this point, given all this evidence, I WOULD HIGHLY RECOMMEND INVESTORS CONSIDER GETTING MORE DEFENSIVE.  I realize that I have predicted that the stock market would rise in 2010, but for the moment, it is acting like it wants to go much lower and in a hurry.

The same may apply for Gold.  Yesterday, the break of $1,100 occurred and was sustained.  At the very least, assuming that TODAY does not show otherwise, I would  become more defensive there, too.

While my longer term prediction for Gold remains the same, we are on the verge of the point where I would be careful not to get crossed up by a sharper correction than need be.

As I've stated many times before, the market does what it wants and WHEN it wants to, whether or not it has read Marko's Take!

Today is a critical day.  I'll have more over the weekend on U.S. stocks and Gold so that by the time trading resumes on Monday, I'll have proposed a plan.

Agree?  Disagree?  TAKE ME ON!

Marko's Take