What’s Happening Now – Fed meeting and durable goods orders
The Census Bureau reported today (6/24) that Durable Goods Orders were unexpectedly up +1.8% in May. This was well above the consensus estimate, which forecast a decline of -0.9%. Most of the increase was attributable to machinery orders which jumped +7.7%. Excluding transportation orders, durable goods were +1.1%; again, well above the consensus projection. Although this particular set of economic data is prone to a high degree of volatility, durable goods orders have increased almost +4% in the past 2 months. This rise in orders represents looks to be good news for the economy since it appears that manufacturers have increased their buying as a prelude to gearing up production. Presumably all of this is in anticipation of a rise in consumer demand. The problem being twofold: First, it is very likely this is just inventory buildup from depleted supplies. When the market went into the tank, companies laid of people and let inventories dwindle down to historically low levels. Now they are counting on increasing consumer demand. I discuss this more below.

Today the Fed couldn't seem to convince the markets that it will not raise the fed funds target rate anytime soon, and at the same time tout its credentials as an inflation watchdog. To date, the Fed’s Treasury buying program has had a negligible impact on rates overall, and its even larger MBS purchases have not prevented an appreciable rise in mortgage rates. The Fed is facing a situation where an economic recovery is far from assured and consequently they are determined to keep rates low until unmistakable signs of economic progress are clearly evident. As they fight a Keynesian’s mortal enemy, “deflation”, they are trying they’re damdest to “inflate” which will create growth. After all, there are only two ways to pay for the spending: increase growth or raise taxes.

Market Commentary – Put the troops on alert, the foundation is shaking
This market is making me nervous. The most since I went bullish (practically all alone) on March 11th. From day one I have been saying that this is a Bear Market rally, and not the start of a new bull market and the recent market action has made me even more confident of that. There are 2 major issues that have me on high alert: the first being the meteoric rise of this rally. Healthy rallies rise in stair step fashion, not straight lines up. This rally has all the markings of a simple technical bounce from extreme oversold levels. The 2nd being the cracking of the foundation.

Buying Power Index which measures investor demand, usually increases sharply during at least the first four to six months of a new bull market, commonly leading the major price indexes to new rally highs. Expanding Demand is the fuel required to propel a bull market upward. But, in the current case, Buying Power has not made a new high during the past six weeks, since May 8th, and has been gradually eroding. During the past week, the drop in Buying Power has accelerated, now having lost 74% of its gains from the March’09 market low, and ending the week at approximately the same levels seen in the first four days of the March rally. Such a dramatic loss of investor Demand has never occurred during the early months of any new bull market in modern history. This headwind is a major issue that will make it extremely difficult for the market to stage a broad, healthy advance while Buying Power continues to contract.

Although the DJIA and S&P 500 are still close to their rally highs, many stocks not included, or not heavily weighted, in the major price indexes have been weakening. Just last week, the % of stocks above their 30-day moving averages stood at approximately 75%. This week, that % has dropped to about 40%. A review of this indicator during Nov’08 and Mar’09 will confirm that such significant drops in the number of stocks participating in a rally usually persist until the % approaches zero. A 90% Downside Day was registered on Monday, June 15th. History shows that a single, isolated 90% Down Day generally has limited significance from a trend standpoint. But a second 90% Down Day occurring within 30 trading days or less of an initial 90% Down Day significantly increases the probabilities that a new downtrend pattern is in force that could eventually push the major price indexes to new bear market lows. We had that 2nd 90% down day this past Monday, just 7 days from the first. Typically we get a brief respite, 2-7 days after that 2nd 90% down day before selling resumes. If we get a 3rd anytime soon, I will be likely be moving our managed accounts to more defensive positions.

I cannot stress enough the potential present danger. I was largely alone when I suggested that the market would crash in early 2008 in my Economic Tsunami Special Report (ET link), and alone when I called for a rally in early March. The market is much more likely to break strongly one way or the other, rather than just prodding along. Either things are going to get better and push the market higher or it is not which will kill it, bringing with it pain and desperation as we saw earlier this year. Those who become complacent are often trapped when the market’s primary downtrend resumes. Don’t take this as glum news, as money can be made in this market provided you are positioned correctly. I can show you what we have been doing that’s worked so well. Almost nobody is calling for a test or new lows, so I think that has the strongest probability.

Naturally I hope the economy improves and the market goes up from here….but my clients don’t rely on me to use “hope” as an investment strategy. Be the expert, or hire one! But make sure you are working with someone that knows what they are doing. There are definitely places to make money in any market, if you are prepared. We have been relatively conservative for some time, and it has paid off handsomely. We are having a stellar year, not because we took big risks to beat the market, but rather because we lost far less. Our TDT™ investment strategy works. If you’d like to learn more, contact me today.

Economic Update – Green shoots don’t equal a bumper crop
Of late, there has been a tendency for analysts to see numbers or statistics that are "less bad" and interpret them as signs that we are in recovery or at least almost there. They glance back at previous recoveries and say, "Doesn't this look like the last time? When such and such happens it means that recovery is on the way. We should therefore buy stocks" (or whatever). Well folks, to expect a normal recovery cycle, whether it is corporate profits or lending or consumer spending or capital investment or (pick a category) is just not reasonable.

First, we are at the end of a huge cycle of increasing private debt that ended in an overleveraged society. The process of reducing debt and unwinding leverage is going to take a rather long time. It will not be the typical one or two years and then things get back to an ever-higher normal. In our new world, we will not need as many malls or factories or stores or new-car plants or car dealerships or show stores (sorry ladies) or any number of other things to satisfy our new world consumer desires. As an example, and jumping ahead to a statistic for one minute, capacity utilization is now approaching 65%. Anything under 80% is anemic. Does anyone really think that businesses (in general) are going to invest more money in expanding capacity, in the face of the lowest level of production relative to potential since the 1930s?

The demographics of our population are aging rapidly, going from net spenders to net savers. The savings rate has shot up from zero to 6% already. It used to be 12%. It would not be all that unusual historically for savings to go to 9% or more in a few years. That means that consumer spending will drop by 9%. Since consumer spending was 70% of GDP, that new lower level will become our new world. And of course, due to population growth and hopefully increasing incomes, consumer spending will once again grow from whatever that new normal will be. But it is going to take some time for spending to reach the level of our productive capacity of a few years ago. We are going to have to shutter a few factories and businesses. This is going to affect corporate profits, especially for companies that depend on consumer spending. Investors who expect corporate profits to rebound in 2010 are dreaming.

Housing: the housing market is going to take at least 2 or 3 more years to truly recover. Looking at one month's data that shows housing starts up a few thousand as a sign of recovery in the housing market is pretty silly. Housing starts are anemic and the inventory of unsold homes is still at all-time highs (an 11th month supply) with more and more homes coming onto the market through foreclosure. Just in Sacramento alone, there are an estimated 22,000 foreclosed upon homes the banks are sitting on that will overwhelm the market, with more to come. Just wait until the prime loans, the people with money, start walking away from their loans because a bad credit score is more desirable than losing hundreds of thousands of dollars. However, housing construction was once about 5% of GDP. Obviously, the collapse of housing construction has had a rather negative impact on recent GDP numbers. But housing is probably close to, if not at, a bottom. Even if it dropped by another 20%, it would have far less of an impact on GDP at the much-reduced level where it is now.

I hope you understand that I am not a perpetual bear or a non-believer in the American way. To the contrary. I have been largely bullish for most of my 25+ years in managing money. However, it is more important to be prudent and not rely on hope because it feels good. I like to say “pray for peace but prepare for war”, and that’s what I want to do. You can do well in any market if you are prepared. We are not in an unrelenting death spiral. There is a bottom. It is like a sky diver jumping from a plane. They fall rather rapidly until the parachute opens, and as they get closer to the ground they manipulate the chute to further slow the descent. But until they reach the ground, they are still falling. That is the case today. The economy is still falling, but the parachute has opened. We are going to reach the bottom at some point.

Cheers -Keith

Keith Springer is President of Capital Financial Advisory Services, a registered investment advisor, providing Wealth Management and Mortgage Consulting Services.  For more information on how to build and maintain a solid retirement plan, please contact Keith at
916-925-8900 or Keith@KeithSpringer.com