The Tycoon Report

There's Still Time to Change Your Financial Fate

Monday, October 5, 2009 | Ron Ianieri

They say history repeats itself. Maybe so ... but not this time in the stock market!

Today’s stock market is at an inflection point, the likes of which has never been seen. Never before has the market come to such a well-defined line in the sand.

Up or down? Up or down? That question is as old as the market itself, but never has it come to such an anticipated climax.

Sure, the market has had many indecisive moments in the past, but none so pronounced -- and none so widely followed -- as today.

Your first question has to be, "Why is this situation any different from all the similar situations before?"

That is not only a good question; it is the right question.

The Stakes Keep Getting Higher

The answer is simple, but the explanation is another story. This situation is different because there has never before been a situation like this one!

The beginning of the explanation is that there are more people in the market today than ever. There are more people paying attention to it on a daily, weekly and monthly basis than ever before.

In fact, there are exponentially more people paying attention to the market on a minute-by-minute basis.

Finally, there are more people’s savings and investments tied to this market than ever before.

To sum it up, the market has never had a wider scope of interested parties involved. It currently affects the greatest percentage number of lives than it has ever before … let alone the simple cumulative sum.

More People Affected by Wider-Reaching Influences

The next factor that contributes to the explanation is the fact that the market itself is now influenced by more variables than ever.

We just discussed the fact that more people are currently involved in the market … but, to be more specific, it is NOT just U.S. citizens. It also includes investors from around the world!

This leads me into my point on increased influences. Unlike the Great Depression of 1929, and even the decade-plus-long recession in Japan starting around 1989, today there is a global economy.

From a standpoint of the economy, the days of individual-country economies are over. We live in a global economy, with countries so interwoven into each other’s economies, that even bitter enemies of the past now have major stakes in the other’s economy.

Since when did we care what was going on in China or Russia other than politically or militarily? But today, we really don’t care what Russia’s or China’s military is doing; only what their economies are doing.

Why? Because, for the first time in history, their economies directly affect ours and in a very noticeable fashion.

All Politics is Local ... and Global

Beside the new influences of economies that were never before linked to us like today, we still have the internal political situations and geopolitical situations that have regularly existed.

There is even a difference here, too. There are more nuclear interests in today’s world than ever before.

The days of solving global problems with us just smashing our fists onto the table aggressively and saying, "Or else!" are long gone.

Negotiations are at all-time highs, and most are solved with some sort of cooperation or concession that often involves the economic front -- which, in turn, serves to further deepen the concept of a global economy.

Consumer's, Economy's Health Interlinked

Another outside influence that is about to make a little noise looks to be swine flu.

Now hold on -- I am not saying I believe this will turn into the Great Pandemic of 2010. I do not think that the loss of life will be anywhere near as great as it was in the Influenza Pandemic of 1918.

However, I do believe that at least the public fright that can be created from even a suggestion of a comparison between today’s swine flu and 1918 can cause real damage to a healthy economy and catastrophic damage to today’s economy, which we know is anything but healthy.

A substantial scare about infection at this juncture that keeps people from going out to malls and stores would create a virtual crash in consumer spending at a time when it is needed most.

We all have heard in countless articles and TV reports how consumer spending accounts for 70%-75% of the economy!

Market Makes History ... Again

With all of this said, the market has staged a historic-sized rally.

Although my opinion is that this rally is based substantially on smoke, mirrors, deception and manipulation, it does have some positive factors behind it.

One is that the government has kept, and probably will keep, interest rates exceptionally low for as long as possible -- making for lots of money to be "out there."

Who has it, and for how long they will have it, remains to be seen. 

But, with rates down so low, there is nowhere to put that money with a chance of making a reasonable return on it but into the market.

The worries of inflation are real and will hit hard, but not now. As long as the recession continues to deflate prices, there is time before inflation becomes a problem.

Next up: Run-up, or Sell-off?

Also, whether the value is there or not will be told in the future. But stock prices for most companies are -- throughout many sectors -- lower than we have seen in a decade.

From the standpoint of pure price, there are some great deals out there to be had. Of course, the concern at this inflection point is that, if we do sell off, prices will get even better ... so why not just wait for that?

The problem with that thought is that, if the market does not sell off and this is the start of the next bull, you cannot afford to miss it ... since you have so much to make back from your losses on the 2008-'09 sell-off!

What's Your Next Move?

So, this inflection point in the market is also a psychological one. We all know the size of the losses most people took. Many of you have gained back a good amount of that loss in this last rally, but have a good amount to go before it is all back.

So, adding to this inflection point is the investor psychology:

• Should I stay with the trend (and in the market) and believe the government when it says things are getting better and the economy is finally out of recession?
   
• Or should I look at all the numbers for what they are, get out now, wait for the sell-off to get much better prices, and have a much better chance of getting whole in my account again?

The decision you make right now will influence your financial fate for many years to come!

Another Road Never-Before-Traveled

This inflection point in the market is historic and without equal. Trust me, you will read all about it in textbooks 10 and 20 years from now.

The conclusion that I feel the historians will reach is that this inflection point was without historic equal due to the fact that it was not just an inflection point for the market, but for the individual investor as well!

Your next question is obvious. "Well Ron, what should I do about this inflection point now? How do I play it? How do I prepare myself in the case of either of the outcome?"

I think I have a good answer, but not enough room in this week's report. You are just going to have to read about it next Monday!




Ron Ianieri
Contributing Editor
The Tycoon Report



MONDAY, OCT. 5   

10 a.m. Non-Manufacturing ISM: Institute for Supply Management

    * Importance (A-F): This release merits an improved B-.
    * Source: Institute for Supply Management
    * Release Time: 10 a.m. Eastern on the third business day of the month for the prior month.
    * Raw Data Available At: http://www.napm.org

The non-manufacturing ISM report is a national survey of purchasing managers that covers new orders, employment, inventories, supplier delivery times, prices, backlog orders, export orders, and import orders. Diffusion indexes are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.

The index should be far more indicative of the broader economy given its inclusion of service-producing as well as good-producing sectors outside of manufacturing. However, the short history of the index dates to only July 1997 and doesn't provide the insight of a longer period inclusive of varied economic climates.

The seasonal adjustment of the index didn't begin until January 2001 with only 3 of the 9 components seasonally adjusted as of April 2001. The lack of historical data and lack of a tight correlation to the non-manufacturing economy leaves the relatively poor "B-" rating compared to the "A-" rating of the well-respected manufacturing ISM index.

Highlights

    * The August ISM non-manufacturing report met consensus expectations (48.0%) and grew 2.0 points to 48.4%. This was the 11th consecutive month the index fell below the 50.0% threshold and continues to signal a contraction in the service sector.

    * There were some bright spots in the data: overall business jumped to 51.3% from 46.1%; new orders increased to 49.9% from 48.1%; employment rose to 43.5% from 41.5%; export orders rose to 54.0% from 47.5% and import increased to 49.0% from 47.5%.

    * Inventory problems continue to exist as inventories dropped from 47.0% to 43% and inventory sentiment increased from 67.5% to 62.5%. Even though inventories have contracted for 12 consecutive months, firms still believe their inventory stock is too high. Expect inventories growth in the non-manufacturing sector to stall over the next few months.

    * Prices jumped from 43.3% to 63.1%. The jump was similar to the price increase in the manufacturing sector and may give inflation hawks more evidence to suggest higher inflation rates in the near future. Our views have not changed and we believe inflation to continue to moderate through 2010 as the output gap slowly declines.

Key Factors

    * It was expected that the service industry was still in contraction mode, but after the nice positive surprise from the ISM manufacturing index on Tuesday, there was strong hope the non-manufacturing sector show the beginning of an expansion phase.

Big Picture

    * The market generally doesn't pay much attention to the services index because the service sector is less cyclical than the manufacturing sector. During the current recession, the service index held steady around 50.0% through September 2009 before bottoming at 37.4% in November 2008. Since then, the service index has slowly risen back to the upper-40s. In contrast, the manufacturing index, with the exception of January 2009, stayed below 50% from December 2008 through July 2009 and bottomed at 32.9% in December 2008.


FRIDAY, OCT. 9

8:30 a.m. International Trade

    * Importance (A-F): This release merits a C-plus.
    * Source: The Census Bureau and the Bureau of Economic Analysis of the Department of Commerce.
    * Release Time: 8:30 a.m. Eastern around the 20th of the month (data for two months prior).
    * Raw Data Available At: http://www.census.gov/foreign-trade/www/press.html

The trade report is most widely watched for trends in the overall trade balance. But trends in both exports and imports of goods and services bear watching as well. The export data in particular are important to watch for indications that a strengthening competitive position at home and/or strengthening economies overseas are boosting U.S. growth. Imports provide an indication of domestic demand, but given the severe lag of this report relative to other consumption indicators, it is not particularly valuable for this purpose.

The volatility in the monthly trade balance can play an important role in GDP forecasts. Net exports are a relatively volatile component of GDP, and the trade report provides the only early clues to the net export performance each quarter.

Highlights

    * The trade deficit widened to $32.0 bln in July from $27.5 bln. Consensus expected the deficit to grow to $27.3 bln. July exports grew $2.7 bln to $124.9 bln while imports grew $7.2 bln to $152.4 bln.

    * The report is very encouraging. The consensus expected strong import growth in the automotive and petroleum sectors and limited or no change in all other sectors. Instead, the bulk of the import growth was in consumer goods ($1.7 bln), industrial supplies and materials ($1.4 bln), and capital goods ($1.3 bln).

    * The auto sector didn't disappoint, as the Cash for Clunkers stimulus plan helped increase imports by $2.4 bln. However, the petroleum sector didn't produce much growth as imports rose only $0.7 bln.

    * The growth in consumer goods was an unexpected surprise. Retail sales has been down for the last few months, and growth in consumer good imports would represent increased optimism that the consumer is going to rebound shortly.

    * The export report was also very strong as automotive vehicles, parts, and engines ($1.3 bln), capital goods ($0.7 bln), industrial supplies ($0.4 bln), and consumer goods ($0.4 bln) provided strong growth.

Key Factors

    * The last ISM report showed the manufacturing sector beginning to expand. The increase in demand for industrial goods and materials along with a jump in capital goods imports provides the first hard economic evidence that the ISM report is correct. We know from press releases that the auto sector is revving up for increased production, but it is unknown if other manufacturing sectors were a contributing factor into the increase in manufacturing input imports.

    * Global demand does not look too robust, but, like the import data, the increase in sales of industrial supplies and capital goods signal a jump in global manufacturing production.

    * Hopefully, the strong report carries over the next few months and we'll get a better feeling for how the U.S. is coping with the economic recovery.

Big Picture

    * The trade deficit can be thought of as a Catch-22 situation for the US economy. A drop in the deficit has resulted from import demand declining at a faster rate than the decline in export demand. The result was an increase in GDP growth without any actual increase in output. The recent rise in the deficit was the result of both exports and imports growing, but with imports outpacing exports. We are now experiencing an increase in output, but GDP is negatively affected. The trade-off of more production for negative GDP growth is better than the reverse and we'll take the increasing deficit as a signal of a stronger economy.

Source: Briefing.com