It’s called a “snap-back rally”, something that occurs when the markets are extremely oversold and have experienced a straight down plunge that gives no quarter to investors trapped in the market. Sometimes these rallies can be quite powerful and are usually sharp and fast. They are temporary and are usually followed by a re-test of the lows and sometimes break lower.

However, a truly “tradable” bottom is an altogether different animal.

“”What do I look for?” asked a reader last week.

  One area to watch is the options market. This is the arena where speculators place bets on whether a security or market will drop further (or move higher). In this case, I’m looking at the put options on the S&P 500 Index. On Thursday put buyers were practically in a panic to buy put options on the S&P. Over one million contracts changed hands, which represents 2 ½ times the average daily volume for these contracts.

The last four times this has occurred (February, June, August and November, 2011) the markets were close to an important bottom. But this is only one variable. Some other signs include the following:

The talking heads on television will stop promising a “near-term” bottom. Instead, they will throw in the towel and start advising viewers to sell everything because there will never be a bottom.

Those pundits who are continuously cheerleaders for the markets called Perma-bulls will begin to back step, vacillate and some might even go bearish while the loudest and most obnoxious Perma-bears will announce that they are “shorter than ever before and you should do the same.”

Start listening to the radio on the drive to work. It is a good sign when broadcasters start leading off with the latest bad news of the market.

Rumors of hedge funds in trouble, big margin calls and the like are another sign we are closing in on a bottom

My clients will call in a panic demanding I sell a stock or mutual fund that up until now I could not convince them to part with at any cost (think “A”). The conversation usually begins with “Oh my God” or “Did you see that?” and ends with “sell everything.”

Finally, most bottoms are accompanied by a “flush” where selling volume explodes and prices drop as if they are on an express elevator.

All of the above, plus a couple more factors come into play when I am looking for a tradable bottom. Yet, I must admit that it really comes down to a feeling that one develops after many years of watching markets and experiencing nasty down turns and glorious rallies. It is why managing money and investing in markets will always be an “art” and never a science.

I couldn’t close without mentioning a worldwide social networking phenomenon that went public on Friday. The build-up to this initial public offering reminded me of the “John Carter” movie trailers that I was forced to watch every time I turned on the television, and its debut appears to be as much of a disappointment as the man on Mars. When I look back through history at other hyped up IPOs that were touted as the greatest thing since Moses parted the Red Sea, I discovered that most of the future upside in these stocks was priced in by the close of the first trading day. On average, the price of these stocks was down from the offering price six months later. 

We must reach back to the Great Depression to find the last time there was a large-scale banking crisis in which leverage and excess credit were the main cause of a recession. Too much credit (sometimes called leverage) is the “Achilles heel” of any economic system. Unfortunately, neither government nor the private sector has much experience in dealing with the aftermath of an economic credit binge. Instead, we have all tended to try and jump start the economy using the same tools we have been using since WWII. It won’t work.

Up until the aftermath of WWII, real private lending had grown about the same pace as economic activity. But in the early 1970s, credit began to grow at about twice the rate of economic activity and it continued expanding from there. Economists think that the credit binge was ignited by the collapse of the Breton Woods international monetary system. That agreement, established in 1944, was forged in an effort to reconstruct the world’s economy after the war.

Forty-four allied nations agreed to peg their currencies to the U.S. dollar. In turn, the dollar was pegged to the price of gold. The U.S. took the world off this dollar/gold standard on August 15, 1971. Currencies from that point on were allowed to fluctuate based on the economic fortunes of each nation and that’s where credit came in.

Governments and their economists figured out that the more credit (leverage) you used, the higher the growth rate of your economy and the longer that growth could be sustained. If you wanted a strong currency, the ability to borrow, and be able to make a name for yourself on the global block, the expansion of credit was a good way to do that. The challenge was balancing that credit growth with the underlying capital base of your financial sector. Up until then, that had not been a problem, but times change.

During 2004-2007, we expanded credit further and faster than anyone really understood. Like children with a new but dangerous toy, our financial wizards had no idea what excessive credit could do to an economy. Anyone that had first-hand experience (during the 1930s) had long since retired. Readers are now intimately aware of the sub-prime mortgage debacle, our credit collapse and its resulting impact on our financial system.

As a result of the crisis, a large fraction of the global banking systems’ capital base was erased almost overnight. In Europe it continues to unfold today. When something like that happens, it takes a long time to rebuild that capital base. In the meantime, lending is put on the back burner as banks struggle simply to survive. Without lending, the life blood of economic growth, the economy will and has experienced a deeper recession and slower recovery. That is the natural result of a credit crisis and there’s not much a government can do about it.

In the past, it took at least five years before lending (and investment) once again approached pre-recession levels. Credit, after all, has much to do with the trust and faith by the lender that the borrower will be able to repay the loan. A credit crisis like the one we experienced in 2008-2009, destroys that faith. No matter how low the Federal Reserve forces interest rates, lenders won’t lend until that faith is restored and they feel their capital base is once again secure. That takes time. The on-going turmoil in Europe’s banks simply delays that from happening.

In the meantime, ignore all the promises of both candidates. “Getting America back to work again” and similar slogans would require an understanding of the nature of the slowdown and an entire new set of tools to address it. Neither party’s candidate appears ready to recognize that this Great Recession is truly different from any in their lifetime. I doubt they or the armies of experts advising them will ever recognize the truth, except in hindsight.

The good news is that time does go by. It’s been three years since we have officially entered a “recovery”. In another two years or so we should be getting back to normal. I hope.

“You played it for her, you can play it for me…If she can stand to listen to it, I can. Play it.”–Humphrey Bogart.

Casablanca

The Same Old Song?

Last year the bull market rally began to run out of steam on May 2^nd. Over the next two months, the Dow fell 1,000 points to the 11,900 level. There was then a rally that took the averages back up to a little over 6% before giving up the ghost once more on July 26^th . It continued to decline until the beginning of October, falling all together about 20%.

It wasn’t until the Federal Reserve Bank came to the rescue once again with a new round of monetary easing that the markets finally bottomed and began to rise on October 4th, 2011. Over the next six months, the S&P 500 Index rallied 30% until its peak this year on April 2^nd. It waited until May 1^st before beginning its present pullback.

For Wall Street traders it was also an exhausting time in the markets where swings of several percentage points a day became common. Much of the decline was blamed on Europe. The U.S. economic data didn’t help either. Week after week, one disappointing data point followed another raising the specter of a double dip recession. Does any of this sound familiar?

Today the circumstances in both Europe and the U.S. are eerily similar to what happened last spring. So far in May the stock market is playing the same swan song as last year.

“History doesn’t repeat itself, but it sure does rhyme,” said Mark Twain well over a century ago. And that saying certainly applies to the stock market. The question is what, if anything, is different about this time around?

The short answer is, not much. Italy and Greece were the focal points of the Euro debt crisis last year. Since then there has been a massive bank bailout and an austerity pact but nothing much has been done to turn the European Unions’ struggling economies around. The economic picture has actually deteriorated further, thanks to the nonsensical austerity plan engineered by Angel Merkel of Germany.

Spain is the main problem right now. As their economy nose dives, their debt explodes, while their banks wobble under mountains of bad real estate loans; the twelfth largest economy in the world is fast approaching a life support situation. Greece, after last week’s election upset, is also revisiting its off-again, on-again membership in the EU.

Once again, investors are keying off the Spanish/Greece/Italian sovereign debt yields to decide whether to buy or sell on a daily basis. So far it’s been mostly selling. Remember my “She said, He said” columns of last summer? Investors were driven crazy by conflicting and often contradictory statements out of Europe’s capitals. Today the names have changed– Hollande instead of Sarkozy in France, Draghi instead of Trichet at the ECB, and in Greece, Papandreou for someone yet to be announced– but the conflicting statements remain the same.

Over here we have the same issues over the economy that we had last year. And in the wings, hovers the Fed. That’s right, if our market, Europe’s markets, the economy and employment begin to drop dramatically, the Fed will once again come to the rescue. That, my dear reader, is why this year is rhyming with last year and the year before that.

As long as governments continue to tinker with the world’s stock markets, as they have done ever since the 2008 financial crisis, we will have these same issues over and over again. I have written about our stop and start economy often. As long as the Fed is the sole locomotive of growth, we can expect the economy and the stock markets to continue to boom and bust.

This has truly become the Great Recession. Readers of this column were advised at the end of March, beginning of April, to take profits and prepare for this sell-off. I am writing off this second quarter. By the end of it, I suspect the averages could be where they were at the beginning of the year, until then, stay defensive and I’ll keep you posted.

John McClane (Bruce Willis): Hey, what’s a fire sale?

Matt Farrell (Justin Long):  It’s a three-step… it’s a three-step systematic attack on the entire national infrastructure. Okay, step one: take out all the transportation. Step two: the financial base and telecoms. Step three: You get rid of all the utilities. Gas, water, electric, nuclear. Pretty much anything that’s run by computers which… which today is almost everything. So that’s why they call it a fire sale, because everything must go.”

 Live Free or Die Hard

There is a war being waged today in this country, one that could have severe repercussions for each and every one of us. It is costing us billions of dollars a year and yet neither business nor government wants to spend the money necessary to fight back.

This week on Capitol Hill lawmakers are getting down to debating the pros and cons of passing one of several versions of a cyber-security bill. Everyone hopes the eventual legislation will launch a counterattack on an army of highly sophisticated hackers bent on some serious mayhem. The debate boils down to who is going to pay for a defense system that will prevent the bad guys from accomplishing a “fire sale,” a la the last Die Hard film.

The Obama Administration backs a Senate bill sponsored by Sens. Joe Lieberman, (I- CT) and Susan Collins, (R-ME) that would implement new rigorous standards and require companies to notify the government when their networks have been breached. The business community opposes it as just more intrusion into the private sector which will mean more costly regulations on top of more regulation. Instead, they would prefer a bill promoted by Senator John McCain (R, AZ), which wants the government to issue alerts about imminent cyber-attacks but would not require a company from acting on the information unless they thought it was a threat to their business.

Unlike other wars the United States has fought this one is on our territory and the frontline troops are increasingly the IT departments of American Corporations. To date, those troops have been both outnumbered and out-fought by the enemy. The rates of infiltration by organized gangs or state-sponsored hackers are escalating. In a multinational study by the Center for Strategic and International Studies the three countries ranked as most vulnerable to attacks were the U.S., Russia and China, while the biggest potential source of attacks was our own country.

 Today, we only hear of the biggest cyber-attacks such as the 2011 theft of over 200,000 customer names, account numbers and contact details from Citigroup or the 100 million accounts pilfered from Sony Online Entertainment’s PlayStation Network. I was on the receiving end of the Citigroup theft, and believe me, it drives home the danger like nothing else.

These attacks are costing American companies big money. It costs on average over $7.2 million in costs (lost business, legal defense and compliance) or $214 per customer record in costs. If it is a first time breach, it can cost 30% more, not to mention the inconvenience to its customers like me. Yet, the real danger is not in the consumer sector. It is in the potential for a breach in the nation’s infrastructure system.

As you read this, for example, our natural gas pipeline companies are currently battling a major cyber-attack from a single source, which was launched in December, 2011. Don’t dismiss this threat. As early as 1982, the U.S. CIA managed to blow up a Siberian gas pipeline by using what was called a “logic bomb” involving the insertion of a portion of code into a Russian computer system overseeing the pipeline.

Those involved in cyber security worry that our infrastructure companies (power, water, nuclear, etc.) do not realize how vulnerable their systems are to outside invasion. Computer systems and safeguards that were originally installed years ago are out-of-date. But managements are loathed to upgrade their systems simply on a bet that someday maybe their company might be targeted by hackers. It is a persuasive argument since to safe-guard a company against all possible dangers—earthquakes, tornados, floods, nuclear fallout, to name a few—would be cost prohibitive.

On the other hand, no one wants another 9/11. Maintaining a head-in-the-sand attitude until something happens is just the kind of strategy that has organizations such as Homeland Security experiencing perpetual nightmares. It is a tough one but somewhere in the debate lurks a compromise. I just hope we can find it.

In April, the labor force participation rate, the employment-to-population ratio, and the number of people who said they are employed all fell in the month. The sad fact was that 350,000 people quit looking for jobs altogether. As a result, the labor force technically shrunk, which makes the overall unemployment rate look better than it actually was.

Investors ignored the fact that the number of jobs that were reported by the Bureau of Labor Statistics over the last three months was all revised upward. In total, during the last quarter 53,000 more jobs were gained but went unreported until now. But the market focused solely on this month’s data and sold accordingly.

I think that responding to an individual data point is a mistake. Data like unemployment numbers, GDP and the like should be viewed over time. It is the trend that counts, not individual data reports, because government statistics by their nature are highly inaccurate and most of the time undergoes several revisions before a final figure is reported. Yet, the markets insist on trading off today’s numbers as if they held the answer to the market’s directions for days or weeks into the future.

The big drop in labor participation, however, is not a good sign for the economy or for the administration. In an election year, the GOP front runner, Mitt Romney, is asking voters if they are better off today than they were at the beginning of the Obama Administration. Clearly those 350,000 workers who have abandoned the work force will answer with a resounding no.

And yet the total number of jobs has grown since President Obama came into office, so both sides will use the unemployment data to suit their own agendas. As the politicians blame each other for the failures and take credit for the successes, no one is really enunciating a clear and precise plan for how to increase the number of jobs in this country. It is simply a game of sound

Overseas, this weekend there are also elections in both France and Greece. It appears from the polls that Nicolai Sarkozy will lose the presidential election and French Socialist candidate Francois Hollande will take over the reins of power. This will present a problem to both Germany and the European Union since Hollande intends to renegotiate the recent austerity pact signed after much deliberation and market turmoil by EU members.

In Greece, parliamentary elections will be held in the midst of a deep recession caused by these same austerity measures. There is enormous unhappiness among Greek voters toward the European Union and its own leaders in both major political parties. Extreme and radical fringe party candidates have been gaining support.   There is a chance that voters will not only reject both parties but elect new radical leaders that will want to either renegotiate all their past agreements with the EU or outright reject remaining agreements within the Eurozone altogether.

Given this background, it is not surprising that investors are selling first and waiting for the elections results later. Next week could offer investors a wild ride if things go the wrong way in Europe. Despite the sell-off this week in the markets, we are still a mere 33 points below the level of the S& P 500 Index at the beginning of April. We could easily fall further given the right circumstances. My advice is to stay defensive and remain on the sidelines until the landscape is a bit less muddy.

Will stocks wilt in May?

Back in July, 2008 I wrote in “Myths of the Market”:

“Sell in May and Go Away,” is one often quoted saying that implies that stock market returns are higher in the November-April period than in the May-October months. After 27 years experience in global markets, I tend to agree. My belief is backed up by multiple studies that indicate that in 36 out of 37 developed and emerging markets this indicator works the majority of the time. Although no one can provide one single cause for this, I believe it has something to do with summer vacations, especially in Europe, where the effect has been noticeable since 1694.”

As a contrarian, when everyone is expecting the same thing, (in this case, a sell-off in the markets lasting into the fall), I tend to lean the other way. There certainly are plenty of good reasons to be concerned that this third year will be the charm. Questions over QE3, the on-going Euro crisis, a slowdown in China, an incredible first quarter rally in stocks—all of these would indicate we need a correction or at least a healthy pull back.

The most convenient thing for all of us would be to cash in our chips, get to the sidelines and enjoy our summer. If you had done so in 2010, you would have missed a meager 1% gain in the markets between April 30 and October 31. In 2011, you would have dodged a 6.7% slump in the averages. But markets usually do what is most inconvenient for the greatest number of investors.

A recent report from Ned Davis Research pointed out that the Selling May strategy doesn’t work nearly as well when it occurs in a presidential election year. They looked at every presidential election since 1900. Investors on average would have missed a hefty 4.4% gain as measured by the Dow Jones Industrial Average in those years by selling in May. If an incumbent wins, the gains are even higher (7.6%).

Now, before you reverse course and buy everything in sight, a word of caution is appropriate. The same study did show that, on average, a correction did occur during the second quarter of presidential election years. The duration of the pull back is what differs.

Usually, a summer rally occurs after the second quarter sell off in an election year. When the incumbent party has lost the election, the summer rally fizzled out and the Dow made a new low in late October, followed by a weak year-end rally. When the incumbent won, the summer rally was stronger and the pull back in the fall was mild, followed by a strong gain into the end of the year.

The explanation for the differences in these presidential election year markets comes down to uncertainty. That uncertainty is compounded when the economy has been weak, as it is now. Leadership in times like these is extremely important to market investors. Some would argue that the incumbent (the devil you know) is preferable to one you don’t know, who may or may not, usher in successful policy changes. The presidential candidate’s party affiliation did not appear to have any bearing on the results.

So the moral of this tale is that there may still be a sell-off between now and the end of June, but politics will have an inordinate influence on what happens this summer and fall.

Well, it depends on who you ask. Its advocates say it has accomplished its goal, which was to stop the predatory policies against middle/lower class consumers by the nefarious money-center banks and credit card companies.

For the life of me, I really can’t see much difference between today and back in the bad old days, can you? Take interest rates, for example, here we are in the lowest interest rate environment in modern history and yet my Visa rate is 15.24% for standard purchases. And if, God forbid, I need a cash advance, well then I have the privilege of paying 25.24% for that loan plus a fee that could amount to 4-5% of the advance.

There is also a clear warning on my bill that states if I fail to pay the minimum balance within the 23 days (my monthly grace period) then my late payment interest rate charge will be 29.99% plus a $35 late fee. My second credit card company charges me even more for transgressions. It is true that the fine print on the back of the bill has gotten bigger and so have the explanations for how they calculate the interest rate they charge me. At last count it was a 19-line explanation that never once actually told me the interest rate I’m paying.

And how about those “Balance transfer” offers we find in the mail every other day or so. You know the drill:

“Save on Interest. Get a low 0.00% APR on balance transfers until 04/01/13. After that, your variable purchase APR will apply, currently 15.240%”

The ad is accurate enough, but what it fails to make clear is that the offer only applies to balances you transfer.  Any new, additional purchases will be charged the 15.24% rate. And if the offer also includes the lower rate for new purchases, the time period is very short, no more than 4 or 5 months. Many times there is also a fee for the transfer itself, often amounting to 3-5 percent of the balance.

There can also be another hitch. You need to qualify for the offer. If your credit rating doesn’t pass the muster, you might simply be transferring the balances from one high charging credit card to another. Don’t even think about being late on your payments either, because even one mishap will send your rate soaring on your entire balance despite the original offer terms.

To be fair, there are fewer late fees today, especially the kind that compounded a credit card holder’s debt through ballooning charges for over-the-limit purchases and the like. There has also been some roll back in debit card fees, but in exchange consumers are losing things that until recently were free within the banking universe.

The debit card reward program is dead and there are little to no price savings anymore for restaurant or other retail purchases. Retailers are actually boosting prices on many small-ticket items as a result of the Durbin Amendment. The legislation was a last-minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act that went into effect on October 1, 2011. The amendment capped the debit interchange or “swipe fees” that franchisees pay to accept Visa and MasterCard debit cards by about 70%.The swipe fee cap has had an unintended but disproportionate impact on transactions for small amounts.

A new study by the National Association of Convenience Stores also found that drivers are paying 6 to 10 cents a gallon in hidden bank fees every time they use a credit card to gas up. At the same time, the banks swipe fee goes up with the price of gasoline. Convenience stores paid more than $11 billion in card fees last year, a jump of almost 25%. As gas hit $4/gallon in some markets, the bank’s average cut of swipe fees alone increased to 7 cents, if you pay with a debit card and 10 cents with a credit card. 

The government’s legislation still allows credit card issuers to impose plenty of obscure and hard to understand charges such as fees on purchases abroad ( usually about 3%) or for having a zero balance (punishment for paying off your debt).

Companies can close accounts and reduce or withdraw lines of credit without notice or reason although they must wait 45 days before applying over-the-limit fees or a penalty rate on a newly lowered credit limit. They can raise your interest rates as high as they want, after giving you 45 days’ notice. If you dispute it, the card company will close your account and give you five years to pay off the balance. Finally, you must go through mandatory arbitration to address grievances rather than the courts.

It should come as no surprise that banks have had to look elsewhere once the law made their former abusive and usurious practices illegal. As a result, the credit card issuers are more selective in obtaining new customers and turning down those they don’t want. In order to replace lost revenues, the banks have begun to increase charges on checking accounts and minimum balance requirements. So in today’s checking account environment, the typical customer will not only receive zero interest for the funds they deposit in a bank’s checking account but also pay increasingly higher costs for the privilege of losing money.

The bottom line: all the credit card legislation has done is switch the chairs around the same old slippery deck, in my opinion. Although credit cards are so prevalent that many of us think a credit card is a necessity (some will go as far as say it is a right), it isn’t. You can opt out of the system and pay in cash anytime you want. For some of us it has become a convenience item, which we pay for, in lieu of carrying around bundles of cash. For others it has become much much more and that is dangerous. Credit cards were never intended to become your plastic loan shark or an alternative to a payday loan or check cashing storefront, but for many that is exactly what they have become. If so, it’s time to make a change because legislation can do only so much.

Markets Blast Off

“I don’t get it,” said a reader on Friday morning. He was sure that the markets would crater on the back of a disappointing Gross Domestic Product number for America’s first quarter. The data indicated our economy slowed from last quarter’s 3% growth rate to 2.2%.

“Not only was the U.S. market up, but so was the Spanish market. That doesn’t make any sense. Will you help me out here?” he asked

It is true that S&P, the credit agency, downgraded Spanish sovereign debt Thursday night by two notches from “A” to “BBB+”. S&P believes that Spain’s budget deficit is going to worsen based on further declines in their economy. In a different era our reader would have been correct in anticipating a downdraft in Spain’s stock market, but not in this environment.

  Investors took the initial decline in their stock market as another buying opportunity. By the time the U.S. opened on Friday the Spanish market was up by almost one percent. So what makes weak economic data, whether in the U.S. or Spain such an opportunity for investors?

Investors are conditioned to believe (after two and a half quantitative easings here at home and the on-going monetary stimulus in Europe) that the weaker the data becomes the higher the probability that the governments will step in and save us. Thus, the worse the news becomes, the better it is for the future of the stock market. There is plenty of precedent to believe that.

Just look back at what has happened every time our government-influenced stop and start economy began to slow over the past few years. The cycle began with the first stimulus package combined with central bank monetary stimulus (QE I). For a short time the stock markets skyrocketed, the economy grew and unemployment began to decline. But as QE 1 waned so did the economy, and with it the stock market.

 The Fed waited and hoped the slowdown was simply a blip but in the end the negative data forced the Fed to launch another program (QE II). Once again the economy and the markets reacted by moving higher. But here we are again. The economy is slowing and investors are expecting the Fed to bring a new punch bowl to the party.

Will the Fed cooperate? Yes, at some point if necessary.  QE III is not on the table quite yet and may never be if the economy can find legs of its own. But if the economy and unemployment begin to slow further then we can expect another save by the Fed. Of course, the devil is in the details. The key words to focus on are “if” and “further.” Those words appear to represent one thing to the Fed and another to investors.

At this point, no one (including the Fed) really knows if the country is in a sustainable recovery.  Investors who expect the Fed to launch QE III because the economy declined .80 basis points in one quarter are smoking something.  In each of the prior cases of Fed easing the stock markets and the economy had to stall dramatically before the next round was launched.

You might recall that in each case we had to suffer an 18-23% stock market decline before the Fed stepped in to save us. If those same investors expect the Fed to ease with the stock markets approaching the year’s highs then once again, give me some of what you’re smoking.

Yet, in my opinion, that’s what the markets are betting on.  If we look back at the month to date, we could argue that the markets gave us the 5% correction we had been looking for and are now poised to move higher. A contrarian indicator like bearish market sentiment is rising. Dips are being purchased once again and momentum seems to be on the side of the bulls for now.

I’m thinking we could run another couple of percent here on the S&P 500 Index, at least to 1,420 or maybe as high as 1,450 over the next few days or weeks. If you are nimble, you might be able to take advantage of that move. If, on the other hand, in-and-out trading is not your style than just stay where you are and enjoy the fireworks.

The oil and gas boom in this country has had some serious side effects. Everything from earthquakes to polluted water has been blamed on the industry. Residents near the areas of hydraulic drilling and exploration are fighting back using the Environmental Protection Agency, lawsuits, lobbying and the media.  The challenge is separating fact from fiction in this on-going fight.

There is no question that there has been a remarkable increase in the number of earthquakes in the middle of the country, for example, or that an entire neighborhood of homes in Dimock, PA claimed it was threatened with explosive levels of methane gas. Twenty water wells in the same area, the site of natural gas drilling in the Marcellus Shale, showed the presence of sodium, methane, chromium or bacteria.

A recent documentary, “Gasland”, on HBO featured another Pennsylvania village caught in the controversy over America’s oil and natural gas boom. The movie allegedly uncovered the “secrets, lies and contamination” of natural gas drilling. As a result of the growing controversy three states—New Jersey, New York and Pennsylvania—have called a moratorium on any further drilling or hydraulic fracturing for the time being. That is a big deal because the Marcellus Shale sits below those states and has enough natural gas to fuel this country for the next twenty years.

Environmentalists and people living near drilling sites are saying not in my backyard. They believe that attitude is justified since the risks are great and who can blame them?  I’m sure I would feel the same way if someone proposed to drill a well in the parking lot of my condo. The moratorium is needed, so its advocates argue, simply to study the impact of this drilling before people get hurt or sick. Naturally, the energy industry is arguing that the risks are small and that thousands upon thousands of wells have been drilled with no negative impact whatsoever. They have a point.

Take the earthquake issue, where a study by the U.S. Geological Survey identified a six- fold increase in man-made quakes in an area including Arkansas, Colorado, Oklahoma, New Mexico and Texas. All the headlines pointed to natural gas drilling as the culprit. The gas guys were found guilty, strung up and buried before the survey team could come to a conclusion. Only then did the scientists admit that the quakes were not directly caused by hydraulic fracturing with one exception, one lone well in Arkansas.

The twenty “contaminated” wells in Pennsylvania I mentioned were later found by the EPA to present no threat to human health and the environment. As for the earth beneath the affected homes in Dimock, it did contain methane among other elements, but the EPA could not prove a connection between the contaminants and the oil and gas developments. In fact, they concluded that the presence of these elements could just as easily have been caused by naturally-occurring background levels or other unrelated activities.

I have learned that most studies tend to reflect the bias of those conducting them. In other words, you can make a study say anything you want given enough samples.  This battle, in my opinion, has already been won by the weight of public opinion.  A cessation of exploration will have a negative impact on the economies of all three states. At the same time, the declining price of gas will not justify continued drilling in a land of litigation. 

Free market capitalists might moan and argue that a person has the right to do whatever he wants with his property including fracking. On the other side, advocates will contend (rightfully so) that there is no such thing as zero-impact drilling. One’s decision to allow fracking in your backyard can and does directly impact my property next door.

The industry heightens the paranoia surrounding it by refusing  to disclose what potentially toxic chemicals (if any) are used in the drilling process. The regulations do not require disclosure so they won’t provide it. They are also exempt from EPA regulation thanks to the Bush Administration’s 2005 loophole legislation dubbed the “Halliburton Loophole” by opponents.

 As a result, all sorts of fears can be invoked (real or imagined) by any blogger or tree-hugging anarchist that wants to invent their own bizarre plot against humanity.  Is the nation’s watershed in jeopardy of contamination? Many environmentalists claim it could be impacting millions of unsuspecting Americans. Without the data, we don’t know. Others worry that in the vacuum caused by the absence of Federal regulation, undermanned and revenue starved state regulators are turning a blind eye to industry regulation.

Back in the day, when the United States was still a powerhouse  of industry, a growing and vocal group of concerned citizens began uncovering the seamier side of this formidable industrial base. We discovered that the by-products of these industries were causing enormous amounts of air and ground water pollution. At the same time, workers were coming down with all sorts of ailments from asbestos poisoning to cancer. Instead of helping the industrial sector transform itself into something more acceptable, we drove it away.

Politicians swooped in to pass bill after bill creating new safety standards, stricter codes and of course higher taxes on these bad boy industries. Industrial companies found themselves spending more time and money defending their practices from lawsuits, sit-ins and protests. In the end it wasn’t worth it.  They started looking for less hostile manufacturing locations abroad and found them.

Americans today lament the loss of that U.S. industrial base. We conveniently forget that part of the reason for that exodus was caused by a sea change in how we viewed those industries. Although the present challenges facing further gas drilling in our country should be taken seriously, let’s try not to apply the same “not in my backyard” attitude towards gas drilling that sent our industrial base packing in the past.

All week long a barrage of weaker than expected data buffeted the stock market. Weaker manufacturing and home sales, consumer confidence and rising layoffs paint a portrait of weaker economic growth and higher unemployment ahead.  As I have written in the past, a stock market that is priced for perfection can’t take much more of this negative news.

On the other hand, 80% of the companies that have reported so far this quarter have beat estimates. One should take the number of “beats” cynically. It is common knowledge that Wall Street analysts reduce their earnings forecasts ahead of time so that the hurdle for beating estimates for the companies they follow is absurdly low. The entire game of earnings forecasts has become somewhat of a joke within the investment community.

Europe continues to cast a long shadow over U.S. investment. Spain’s bond auction this week had everyone on edge. It came in poorly but it wasn’t a complete disaster.  Markets in the beginning of the week sold off in advance of the auction.  Investors expected the market to rally but instead we had one of those extremely volatile up and down days that made everyone’s stomachs churn.

This weekend investors’ eyes will be glued to French election results. The French electorate will choose among 10 candidates with a May 6 runoff scheduled between the top two winners.  Socialist challenger Francois Hollande is expected to win this weekend’s vote. He has promised to revisit the European Union’s fiscal austerity agreements if elected. Investors fear this will upset the entire European financial pact, of which France is an integral player. That leaves more tension and more stress for market participants.

The market internals continue to deteriorate. I have noticed that while the volume on upside days is anemic at best, the volume expands substantially the days the market sells off. Take Thursday, for example. It was a down day and volume was 20% higher than normal. It indicates that investors are cashing in on the gains of the first quarter every time the stock market gets close to its upper limits.

We seem to be trading in a narrow range around S&P 500 Index’s 50- day moving average. At the moment that level is 1,380. Remember, a moving average is just that and it changes from day to day. Clearly we have not made any progress at all since the end of the first quarter. In fact, we have lost 2% since then.

One can argue that the markets are simply catching their breath after their three month sprint. I don’t disagree with that prognosis. As I have mentioned before, there are several ways a market can digest gains. The first is through a pullback commonly known as a correction (if it exceeds 10%). The second involves a lot of backing and filling that sometimes can stretch out for several weeks or months. Either way the market consolidates its gains and is then ready for further upside.

There are also times in which a market will do both. Decline, churn, drop again, churn and so on until it reaches a level where investors believe it offers value based on economic and other factors.  I suspect we are in that kind of market for a little while. We are also fast approaching May. We have all heard the expression “Sell in May and go away.” Historically speaking, that has been very good advice. I await the end of the month with bated breath.