Insiders are fleeing stocks like a Russian pilot fleeing a plane at a European air show (Bears Prowl Wall St. as Insiders Dump Stock - Reuters):

“Company executives are selling stock at a rate not seen in two years after a near 50 percent rise in the S&P 500 from a March 9 low. That suggests directors and managers may think stock prices are nearing the top end of their range in the current economic climate.”

This appears to be a rather strong indicator, as insider selling was probably rather high at some point in the prior two years.

“For brokerage Jefferies & Co., a significant increase in insider selling transactions as well as a decrease in short interest across most sectors of the S&P 500 demonstrates the weathering of the bear market rally.”

Basically, this means Jefferies & Co., considers this an indicator the recent rally is waning.

“In the second half of July, short positions held by investors fell 10.3 percent on the New York Stock Exchange and 5.1 percent on the Nasdaq, according to the exchanges.”

“Short interest on the NYSE is still higher now than it was at the beginning of the year, suggesting that a rally that runs on the back of bearish players forced to cover positions is still possible.”

Sure this is possible, but it’s also possible the shorts take over and begin to ride the market down.  It should be noted that short interest on the NYSE dropped from 10.3 to 5.1 at the end of July.  Thus, a large portion of shorts have already covered.  Maybe another couple hundred point run causes another big covering move by the shorts, but then the shorts would be almost completely out.

I’m betting we are either at the end of the rally or damn close.  Thus, I’m 90% cash and may go to 100% if this market is green tomorrow.  There has to be a buying opportunity just over the horizon…right?

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“The upturn in industrial production reported for July suggests that June could wind up being the NBER cycle low,” McKelvey wrote. The projection was “highly tentative” and “a lot has to happen before we can state this conclusion with conviction,” he said.

He is right, a lot…a LOT has to happen before you can say this is true.  For one, the majority of this increase in production is probably due to the ridiculous Cash-for-Clunkers program.  The article states this itself:

“The government’s cash-for-clunkers program is among the reasons production, GDP and sales are all likely to increase this quarter, McKelvey said.”

What happens when this program ends?  The buyers will disappear.  No new buyers = lower production numbers.

The Goldman Sachs economist also notes that the job market is likely to deteriorate further.  Hmmmm…yes, this sounds like the end of the recession and suggests there will be “tons” of buyers to pick up the slack when the Cash-for-Clunkers program ends.

The only positive number in the article, no increased production due to an artificial increase in demand (Cash-for-Clunkers), is the re-hiring of 1,350 union workers by GM.  Of course, this is still a semi-artificial number and job losses are still high.

This guy does not sell me on a turn around yet.  Especially, when the banking issue is still out there, people are still losing their jobs, 1.5 million people will be losing unemployment benefits this fall, and the consumers’ debt load is still huge.

I wish these guys would be a little less blatant with their attempts to talk up the market.

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The market has probably completely confused everyone by now.  First, the market has a spectacular crash last winter and seems like it can’t possibly stop going down until it hits zero.  Now it seems like it will never stop going up, as it even turns positive with bad news.  What’s an investor to think?

We should all stop worrying about what the market is doing today and worry about what the market is going to do over a slightly more extended period of time, which would be roughly a couple months.

Determining where the market is heading is not easy.  One of the major obstacles is worrying what others are doing or what the idiot talking heads on CNBC are saying (I will have a future post on which talking heads are reliable.  No, Cramer isn’t one, and neither are the random bullpen of anchors CNBC tosses up everyday).  They all have different agendas, backgrounds, biases, etc. that do not coincide with yours, and let’s face it most people invest with emotion, not logic.  This includes professionals.

Where does that leave us?  It means we have to do our own broad economic research if we are going to have a chance of determining where the market is going and timing it fairly properly.  Yes, I know every single personal finance “guru” has a rule of thumb that states, “You can’t market time.”  Well, if there is anything I hate, it is “guru” rules of thumb (see my previous post).

Now, let us take a look at some recent events and data that will impact the market:

• Earnings at US companies are up. This is good news and shows that the economy is starting to grow again…right? NO. These earnings are receiving a one time goose from staff cuts, general cost cutting, and inventory rebuilding. None of these things will continue to provide earnings growth in the future (Insight: Cause for caution on US earnings). They are a one time deal. This includes inventory rebuilding, as consumer demand is still dropping…
• Consumer demand is still falling. Excluding autos July sales dropped .6% (Consumers not feeling a recovery). Not surprising considering people are still losing jobs and the people who have lost jobs are now losing unemployment benefits (Unemployment insurance running out for many US Jobless).
• Companies still are not spending money to increase capacity. Boeing recently halted construction of a new plant to build their new Dreamliner. (Boeing halted work at Dremliner plant)
• Banks are still in trouble, as most still have not tackled the toxic loans on their books (Toxic Loans Topping 5% May Push 150 Banks to Point of No Return).

My point is that the economy is not getting better, it is getting worse.  Sure, the economy is not crashing through the floor like a fat man on a Dorito binge, but it is still going down.  Down is not good no matter what kind of spin the talking heads throw out there.

We are not in a normal recession sparked by falling consumer demand due to a slight overextension by the consumer.  The consumer is massively overextended and they have now taken huge Enola Gay type hits to their two largest assets: their home and 401k.  Thus, the consumer will not be retrenching any time soon to save the economy.

In turn, this means the current “bull” market we are seeing is a cyclical bull market in the broader theme of a bear market.  This means it is a positive run inside a market that over time is slowly going negative.  No market ever moves all up or all down in one long obvious move.  We at least have one more hard down leg to go.  Thus, no V recovery.  At best we will see a W market, but probably more of an L.

The actual shape of the recovery is a longer term forecast that is harder to determine.  What is easy to determine is what I am doing now.  I am going cash during this nice bounce.  I am currently about 90% cash and I hope to be 100% soon, if the market allows me.

I am going almost all or all cash, because I am looking for the market to drop again and it is possible that drop will occur in September or October.  These months are historically bad months, so it increases the likelihood the drop will be in this time frame.

Am I right?  I have no idea.  However, I seem to have had a knack for noticing macro moves in the economy, so I am going with my own ideas and thoughts.  You should be doing the same.  Do not rely on anyone, but yourself to plan your investments and your future.  Gather information and make your own decision.

Friday…Beer Day!

The recommended beverage for this hot muggy summer weekend is Wailua Wheat Ale.  There isn’t a more thirst quenching summer beer out there.  Plus, it’s from HAWAII, which is very appropriate given the season.  Enjoy and do at least one fun thing this weekend.

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Anyway, we are heading into the bulk of the earnings reports, which should either solidify the recent run up or start to pound it back into its dank little hole.  I’m voting for the pounding.  Why?

Banks are making numbers up again.  Goldman Sachs switched reporting years, which effectively allows them to hide December 2008.  Guess what month they took their huge hits?  DECEMBER!  BoA and many others are now freed of mark to market and are suddenly finding their assets “appeared” to be undervalued.  Nice to see we are back to short-term thinking from our vaunted corporate leaders (See Bank Profits Appear Out of Thin Air - NYT, for more info).  How often does Lucy have to pull the football from Charlie Brown before he learns?

S&P 500 earnings have had their largest percentage drop EVER (Chart at Big Picture)!  The drop is larger than the Great Depression and far faster and steeper.  The line is so steep it is bending back in on itself.  This does not seem to have EVER happened in the past, though it is a little hard to be sure due to the clutter on the graph.  Black swans within black swans?  Scary.

Also, foreclosures are still increasing and have moved into the higher end market (Foreclosures: Mov’n On Up - Calculated Risk).  Along with the accompanying link, I have seen a significant number of comments, on various blogs, from other areas of the country, noting the difficulty in the upper end market.

Ok, that’s enough bad news for now, anymore and I might have to get closer to 80% or 90% cash.

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Hopefully, this will wake up all the banks and Wall Street firms who have been taking advantage of government bailouts for far too long.  The need for real change in the finance industry still exits.

By the way, don’t pay attention to the gloom and doom about GM’s potential bankruptcy (CNN Money article, “Auto Bankruptcy:  What it means”).  It’s not that the article is incorrect, but that the bad things it lists are also good things:

• Remove excess capacity from the market
• Make not only our auto manufacturer’s more efficient, but our auto industry (dealers, parts suppliers, etc.) more efficient
• Make our auto industry stable for the long haul, which will really help the economy
• Eliminate welfare jobs provided by the auto unions
• Reduce the wages for jobs that require little skill

If none of this happens, all of the people who say we don’t make anything will actually be correct.  And, none of this happens without giving GM the chance to succeed or fail.  This will be rocky over the short-term, but it is nice someone is waking up and looking further ahead than the next quarterly report or the next election.

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On the outside, the recent gains suggest the market may have turned the corner.  However, if you look back through the history of the market this is more likely a bounce from lows and not a recovery.    

Along with historical data suggesting it is just a bounce, the economic and market data does not suggest a recovery:

• Housing is still declining, though at a slower rate. This is good news, but not great news. (Yes, you have seen headlines stating housing saw an “unexpected rebound” in February. This is incorrect. Housing sales did go up from January to February, but they always steadily go up from January and peak in mid/late summer. This happens in good times and bad. If you compare February ‘08 with February ‘09 you will see that housing stats are still declining)
• “As to the overall economy bottoming, not only is there no evidence of that, but the leading indicators (ECRI, LEI, etc) all suggest the opposite: The economy is likely to get worse before it gets better.” - The Big Picture (Mr. Ritholtz has been very accurate during this downturn)
• “A large portion of the recent buying was from investors and institutions covering their short positions. This is especially true concerning financial stocks.” (CNN Money) Overall, this is slightly positive for the long-term, but probably means the rally won’t have legs over the short-term once the bulk of the shorts have covered.

Based on this information, I plan on selling at least 15-20% of my portfolio this week, as long as the market stays fairly positive.  I see no reason the market will stay at this level long-term, and I expect we will retest the lows at some point.  Thus, I will take a modest profit on some of my investments and wait for another buying opportunity.

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“So here is a sobering thought: Maybe we have to swallow hard and pay up, partly for our own good. I can hear the howls already, so let me explain.” -  NYT

Bullshit!

Mr. Sorkin provides a couple “great” explanations for paying these bonuses.  These reasons look valid on the surface, but fail miserably when you look closely.

“On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the “fundamental value” in question here is the sanctity of contracts.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts. ” - NYT

This is his best argument, but is ultimately a failure.  It’s not a failure because the idea is incorrect.  It’s a failure because the government has already forced auto unions to tear up their contracts.  This hasn’t caused the government to abrogate contracts willy-nilly, nor has it caused any great contract catastrophe amongst businesses, as the “vaunted” compensation consultant advocates.

This isn’t even a real business contract, it’s really just welfare.  It isn’t like the government wants to own AIG.  They had to take a chunk to even have a chance of getting anything back.  If you are getting something for free, which is AIG, you lose some of your rights.

Now for Mr. Sorkin’s second point:

“A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave - the buzz on Wall Street is that some have, and more are ready to - they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.

So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.” - NYT

With rivers of blood flowing on Wall Street, only the very heavy hitters are getting scooped up by firms.  None of these heavy hitters are still at AIG, as they would be long gone knowing the dire situation at AIG.  These guys don’t stick around to watch their company be moved to the minors.

Even if these supposed “brainiacs” never left, why would you want to keep them?  They are the same guys who got you into this mess.  They shouldn’t have a job anyway.  Considering how much of a mess these idiots made, letting them trade against AIG’s book might be a good thing, as it’s almost impossible to imagine them not screwing it up.

The last point about unwinding these investments sounds good, but it’s been 16 months already, and no solution.  There is no magical financial formula or genius Ivy League financial vehicle that will get us out of this mess.  The solution is not brain power.  The only solution is time and none of these idiots at AIG can make it go faster or gives us more.

“The word on the street is that A.I.G. employees are being heavily recruited,” Ms. Meyer says. -  NYT

Of course, this is the word on the street.  AIG is part of the street and fanning these rumors.  What do you think everyone of these guys who got the bonus is telling anyone who will listen?  They are telling them they have tons of offers.

Instead of trying to save these guys’ and gals’ jobs we should be marching them in front of a judge and finding a place for them in Leavanworth.

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The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable - environmentally, economically, socially. But that can - and must - be altered; there’s still time to change the road we’re on.[1] It is not an exaggeration to claim that the future of human prosperity depends on how successfully we tackle the two central energy challenges facing us today: securing the supply of reliable and affordable energy; - World Energy Outlook

The IEA estimates oil field production to fall 5.1% for every field with the top 3 falling 3.4%, 6.5% and 10.4% respectively.  This would be an issue if world energy use was stagnate, but it has been rising.  Admittedly, the economic downturn will reduce the percentage increase, but it is unlikely to completely stop increasing energy demands.

Along with a reduction in potential oil field output, major oil producers are starting to reduce production.  The producers are looking to drive prices back-up, as most see anything below $50 per barrel to be far too cheap. 

It said that Saudi Arabia had committed to trimming its crude output to around eight million bpd by January compared with more than nine million bpd in September. The Kingdom, the world’s top crude exporter, is also planning to reduce production by an additional 300,000 bpd this month. - Business 24/7

Saudi Arabia’s reduction in oil also means they are reducing their natural gas production.  As a result, Saudi Arabia is now a net importer of natural gas.  They knew a reduction in oil would force them to import natural gas, but to them it is worth a little extra cost in natural gas to force oil prices up.

All of this suggests oil prices will be heading far north of the mid $40’s where they are currently residing.  This makes oil and quality alternative energy companies valid opportunities over the next few years.

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Billionaire Warren Buffett, whose Berkshire Hathaway Inc. posted its worst results ever in 2008, said the economy “has fallen off a cliff” and that efforts to stimulate recovery may lead to inflation higher than the 1970s.

The American public is fearful, confused and changing their buying habits, which is showing up at Berkshire’s operating units, Buffett said during an appearance on the CNBC television network today. While the recession will end and future generations will live better than their parents, the economy “can’t turn around on a dime,” Buffett said, adding that some inflation is appropriate right now.

“We are doing things now that are potentially very inflationary,” he said. Buffett called on Congress to unite behind President Barack Obama, comparing the economic crisis to a military conflict that needs a commander-in-chief. “Patriotic Americans will realize this is a war,” he said. - Bloomberg

When Buffett is fearful, or at least as fearful as someone of his stature can ever be, is the bottom in sight?

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I have one word, and it’s a word you have heard over and over again…China. I know…I know, I’m not coming up with anything new and earth shattering, but it still needs to be said with conviction. Why? Because, even though everyone talks about China there always seems to be an air of non-committal or slight disbelief that China, Inc. will actually happen.

Here are some key reasons China, Inc. will happen and create the best market in the first 25 years, or more, of this century:

· China is completely committed to expanding its economy and political influence.

o It is making energy deals with any country regardless of politics.

o They spent over $40 billion on the Olympics (the British are projected to only spend half that when they host the summer games).

o China is investing $6.9 billion; the port of Shanghai now has almost as much container capacity as all U.S. ports combined (Source: Brookings Institute).

o The U.S. is currently investing less on infrastructure as a percentage of gross domestic product (GDP) than Europe, China and many emerging countries (Source: Progressive Policy Institute).

o By 2020 China plans to build 55,000 miles of highways, more than the total length of the U.S. interstate system (Source: Atlanta Fed).

· Coke is investing $2 billion dollars in China over the next 3 years. This is during the worst economic downturn since the Great Depression. It demonstrates that Coke sees enormous growth in China and refuses to let anything stop them from being part of it.

· China saw venture capitalists invest a record $4.2bn in 245 deals in 2008, up from $2.8bn in 290 deals in 2007. Again, this was during the worst downturn since the great depression.

· China expects their economy to grow roughly 8% in 2009. This number is probably inflated, but even if it is inflated 8% and their growth is flat, their economy will still be better than the US or Europe.

· “Ace commodities investor and global investment guru Jim Rogers says he hates British pound and is putting all future hope and investments only on China.” – Jim Rogers. He is not investing in a lot of Chinese companies, but he is investing in commodities he expects China to use.

I’m not advocating we all go “Jim Rogers” on our lives and move to Singapore and push all of our cash into investments connected to China. What I am saying is if you are an active investor, and EVERYONE should be, you need to keep an eye on China, Chinese companies, and commodities connected to China, as this is a great buying opportunity.

Along with actively researching, we need to allocate a decent portion of our capital to make Chinese investments a large part of our portfolios. You don’t want to miss the creation of a new America…do you?

“Saying that China is a fascinating place to invest in, Rogers said China is on the rise, like America 100 years ago, and the problems the Asian giant is encountering right now in certain, mainly export-driven, sectors of its economy will not alter the country’s long-term trajectory. “ – Jim Rogers

Concerning the end of the week beer recommendation, I am focusing on a beer that can be the mainstay of your fridge. It will win over everyone who actually likes beer. Yes, even some people who drink Bud/Coors/Miller like beer. They are just misguided and need our help. The beer is from New Belgium Brewing and is called Fat Tire. It tastes like beer, which means it actually has taste unlike the three stooges I mentioned above. However, it is not overpowering and will not scare off those beer drinkers who are unfamiliar with real beer.

The one real problem with Fat Tire is its availability. It is very rare east of the Mississippi, which is unfortunate. So, if you stumble on to it somewhere…BUY IT!

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