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Emailed Notes from Fritz (Year 2010)

Recovery in Sight?. . .November 13, 2010

Dear Fellow Investor,

According to the National Weather Service, the Atlantic Hurricane season that began June 1^st will end November 30^th.  We have already survived the Washington, DC political hurricane.  But whether we survive the hurricane now building from Bernanke's QE-2 is anybody's guess.

The market has been able to climb recently on the strength of the anticipated new QE, but it will soon be facing headwinds that are getting stronger.  Back in August we wrote:

At the risk of sounding like another "Dr. Doom," I do not see any break in the storm clouds that continue to build on the horizon beyond November.  Soon after the elections the game will end, at which point the chickens will come home to roost: Europe is waiting for us to recover, while we look in vain for significant results of their own self-imposed debt-recovery process; Asia and Europe are watching for the results of the Geithner/Bernanke exit strategy, whatever it might be; China continues to lower its US dollar exposure by slowly reducing their Treasury holdings; Domestically, we continue to struggle with major unemployment, as well as major uncertainties about the direction of tax policy, fiscal controls, impact of Obama-Care, outcome of and escape from the Fed's QE program, etc, etc. Market-wise, recent TRIN numbers have moved strongly into negative (>1.0) territory, including an astounding 7.39 on August 11, while Advance/Decline ratios continue to slant downward. All in all, these are not a sign of good times ahead.  Markets do not like uncertainty - - and uncertainty abounds.  Recovery from a "V" or a "U" or a "W" is not very likely.  Instead, we should be preparing for a long winter of mediocre GDP, continuing high "actual" unemployment (with honest numbers), increasing CPI (again with honest and inclusive numbers), and most likely, a 12 to 18 month struggle with stagflation.

Now we are also beginning to feel the effects of some earlier storms that never made the radar screen, but which have begun to affect our stuttering recovery:

• a realization that this latest recession was not induced so much by easy money, but more by an unwinding of over-valued assets.  Thus, recovery will not be as speedy as previous recoveries - - - there are just too many variables and unknowns in the global economy to which we are attached;
• a currency/trade battle between ourselves and China (have you any doubts on the outcome?);
• the legality of titles to property burdened with mortgages in default.
• the incubation of a stock market bubble - - - excessive dollars being printed are generating speculation that the Fed will not be able to control the inflation it is seeking to build, and the best place to park funds is not in fixed assets or bonds or under the mattress, but in stocks, where growth (and exit) can be the fastest.

Adding these new factors to the view in our August crystal-ball, we do not see any path to a swift economic recovery.  This recession we are emerging from is not like previous ones that could be repaired with Keynesian action and Fed fine-tuning.  It will take time for our country's engine, small business, to evaluate the effects of legislation expected to flow from our new Congress.

Until clarification arrives on Obama-Care, budget and tax strategy, card-check, etc, the uncertainty that now caps corporate and individual investment courage remains in place as an anchor against economic growth.

You can expect to see higher VIX and TRIN numbers, rising PE ratios, and more days with 3 digit swings in the Dow.  Preservation of capital has never been more important that it is today.

We urge you to use the E-Zone System to do so: take money off the table at opportune times when prices are in or above the Exit Zone; and if you are inclined to average down, do so only on prices in or below the Entry Zone.  You are living in a time when it will pay to be cautious, not courageous.

With best wishes for your success,
Fritz H.

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Posted August 26, 2010

Dear Fellow Investor,

For the past few months we have watched the Dow do its almost daily dips below that holy and revered 10,000 level, and then almost magically recover in the final minutes of trading to present us with a warm and fuzzy message, via the evening news, that, not to worry, the markets still remain healthy.

Meanwhile, CNBC continues to tantalize us with intra-day headline clips:
"Market (tests - - flirts with - -  recovers) the 10,000 level."
"Stocks off worst levels of the day."
"Dow climbs back above 10,000 level."
"Stocks bounce in last hour."

How much longer can this charade continue?

 Not much longer - - -  we entered the final quarter today.  It's my guess the end is near because today the "automatic support team", (aka the PPT, see footnote *), came up just a bit short in the final minutes with the Dow closing at 9985.81.

We can't tell whether this was just a glitch by a support team member, or whether the President's Working Group on Financial Markets finally reached some pre-set limit on the amount of paper they would print.  (Would be nice if they published minutes of their meetings, but so much for that promise of transparency **)

Yes, there will be more 100 point daily swings (good trading opportunities); and yes, the Dow will recover its magic 10,000 point level.  However, IMO, than number is more likely a resistance level now, and not a support.

At the risk of sounding like another "Dr.  Doom", I do not see any break in the storm clouds that continue to build on the horizon beyond November.  Soon after the elections the game will end, at which point the chickens will come home to roost: 

• Europe is waiting for us to recover, while we look in vain for significant results of their own self-imposed debt-recovery process;
• Asia and Europe are watching for the results of the Geithner/Bernanke exit strategy, whatever it might be;
• China continues to lower its US dollar exposure by slowly reducing their Treasury holdings;
• Domestically, we continue to struggle with major unemployment, as well as major uncertainties about the direction of tax policy, fiscal controls, impact of Obama-Care, outcome of and escape from the Fed's QE program, etc, etc.
• Market-wise, recent TRIN numbers have moved strongly into negative (>1.0) territory, including an astounding 7.39 on August 11, while Advance/Decline ratios continue to slant downward. ***

All in all, these are not a sign of good times ahead.  Markets do not like uncertainty - - and uncertainty abounds.  Recovery from a "V" or a "U" or a "W" is not very likely.  Instead, we should be preparing for a long winter of mediocre GDP, continuing high "actual" unemployment (with honest numbers), increasing CPI (again with honest and inclusive numbers), and most likely, a 12 to 18 month struggle with stagflation.

Prudent investors have at best just a few more months to move to cash or else hedge their holdings with significant contras (QID, SDS, etc).

* <<< Conclusion
Given the available information, we do not believe there can be any doubt that the U.S. government has intervened to support the stock market.  Too much credible information exists to deny this.>>>

http://www.sprott.com/Docs/SpecialReports/08_2005_TheVisibleHand.pdf

John Crudele, "Some Advice On How To Successfully Rig The Market," St. Louis Post-Dispatch (August 12, 1996).

** http://abcnews.go.com/Politics/wireStory?id=10111633

*** courtesy MarketWatch