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Why The Stock Market Doesn’t Give A Flying F*$# About The Shutdown

Daily chart Oct1

 

After an official US Government Shutdown on Monday night, most Americans braced themselves for a stock market bloodbath on Tuesday. Instead, the market surged higher with the DOW +0.4%, S&P +0.8% and NASDAQ +1.23%. 

Why? 

As I have told you many times before, the market doesn’t follow the news. It is a leading indicator, not a reactionary one. It could care less because it is a future predicting machine and it is predicting the following things.

  1. The US Government showdown will not last very long and even if it does, it is a non event. 
  2. The US will not default on its debt, which is a more significant issue here. 

Can it be wrong? Sure and many times it is, but that is not the point here. The point that I am trying to make is that news and events do not have an impact on the overall market. The market is a much more complex discounting and future predicting mechanism that sees weeks, months and sometimes years into the future. 

As such, many people have the tendency to label the stock market as random and volatile. It is not. It is simply doing exactly what it is supposed to do. It is predicting the future and in the majority of the cases it is many steps ahead of today’s news cycle.

Now, I know that for many of you it doesn’t make any sense. That is why I invite you to read TIMED VALUE in order to gain further understanding. 

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Will The US Government Shutdown Freeze The US Real Estate Market To Death?

CNBC Writes: For housing, shutdown is ‘freeze of the pipeline’

 frozen pipes investwithalex

The fight may be in Washington, but the effects of the government shutdown will ripple through every neighborhood in America-without a fully functioning government, an already tight mortgage market may become even more prohibitive. It is exactly what the housing recovery does not need.

“This is going to be very disruptive to the mortgage industry and pretty much result in a freeze of the pipeline,” said Craig Strent, CEO of Bethesda, Md.-based Apex Home Loans. “New loans can be taken, but without IRS and Social Security number verifications, [they] will not be able to proceed to closing.”

“It certainly won’t help housing. Among other things, it is likely to spook would-be homebuyers,” said Cecala.

Read The Rest Of The Article Here

I am not in the camp that believes the US Government shutdown will be a lengthy one.  Although I could be wrong,  either way I don’t believe the shutdown will have any impact on the overall US Real Estate Market.

As I have mentioned many times before, the US Real Estate market is in final stages of secondary bear market rally. Meaning that is in the process of topping and will revert to its downward movement soon enough.  There are only two primary forces driving it forward.  Interest rates and speculation.  Speculation will exhaust itself in due time while interest rates will continue oscillate here with overall upward trajectory (read my previous interest rate analysis).

Could this event be viewed as the top when the people look back a few years from now? Perhaps. If mortgage originators cannot truly proceed with loan underwriting process without IRS/SS verification we can have a freeze. However, I don’t believe that would be the case. In case of a prolonged shutdown they will find a way around it. 

All we can do now is watch the numbers and see if this has any impact. 

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RIP US Postal Service.

CNN Money Writes: Postal Service defaults on $5.6 billion payment

 

USPS-Truck-Crashing-investwithalex

The U.S. Postal Service has defaulted on a $5.6 billion payment for retiree health benefits that was due on Monday, just as the Postmaster General had warned it would.

“We have not made the required $5.6 billion Retiree Health Benefits prefunding payment due Sept. 30, 2013,” wrote USPS spokeswomen Patricia Licata in an email to CNNMoney. She added that the default has absolutely nothing to do with the federal government shutdown. “We have been saying for several months that we will be defaulting on this payment. This is the third time we have [done so],” Licata wrote.

At the time, he said the Postal Service was “in the midst of a financial disaster” and that it is “burdened by an outdated and inflexible business model” that prevents it from making payments.

Read The Rest Of The Article Here

Another wonderful service being destroyed  by the US Government.

Believe it or not but it is believed that the US Postal Service is very profitable if you take out Retiree Health Benefits out of the equation. It is unclear why they have to contribute so much and/or why the situation hasn’t been fixed yet. Is it simple complacency or something more sinister than that. Is there a conspiracy to destroy USPS? I have no idea, but the Postmaster General had begged Congress on numerous occasions to remove business killing Retiree Health Benefits prefunding that no one else has to pay.  

As far as I am concerned this is just another perfect illustration of why the US Government representatives are totally incompetent. Perhaps our officials have a good reason for killing USPS. Just as they did for the US Government shutdown.  

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US Politicians Are Playing With Fire

Forbes Writes: Shutdown And Debt Ceiling Debate Prove U.S. Not Worthy Of AAA Credit Rating: S&P

 politician investiwithalex

With the U.S. government on the verge of a shutdown, credit rating agency Standard & Poor’s made it clear this level of brinksmanship in Washington is precisely why the U.S. isn’t triple-A rated anymore.  While S&P’s ratings services team indicated they don’t expect to downgrade the U.S.’ sovereign credit rating this time around, they warned that failing to reach an agreement by mid-October would most probably lead to the Treasury missing debt payments, and therefore the first-ever U.S. debt default.

 “The current impasse over the continuing resolution and the debt ceiling creates an atmosphere of uncertainty that could affect confidence, investment, and hiring in the U.S.,” explained S&P’s research team, indicating it expects a short-lived shutdown that won’t result in a new downgrade.  “This sort of political brinkmanship is the dominant reason the rating is no longer ‘AAA,’” they added.

Read The Rest Of The Article Here 

This is almost identical to the point I have argued in my blog post yesterday.  It took me a while but I finally came to a realization that most US Politicians are basically morons who do not understand the financial issues (or perhaps most issues) at hand.

It is not so much the shutdown of the Government or any perceived default that matter. As I have mentioned before, the US will not default.  It is an issue of confidence.  Standards & Poor’s is absolutely correct in that sense.  It is not about downgrading US Debt further, but shaking the confidence of foreign debt holders (US owes close to $17 Trillion).

Will this be the catalyst for the US Economy and the financial markets to start going down? Perhaps.  As of right now we do not yet have a confirmation that a bear market has resumed.  As far as I am concerned the damage has already been done. Now it is a simple matter of timing.

The outcome is clear. Higher interest rates, significant economic slowdown and much lower financial markets. Thanks a lot Washington.

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Why You Should Default On Your Student Debt….Today!!!

Bloomberg Writes: Student-Loan Defaults Rise in U.S. as Borrowers Struggle

 student debt investwithalex

About one in seven borrowers defaulted on their federal student loans, showing how former students are buckling under higher-education costs in a weak economy.

The default rate, for the first three years that students are required to make payments, was 14.7 percent, up from 13.4 percent the year before, the U.S. Education Department said today. Based on a related measure, defaults are at the highest level since 1995.

The fresh data follows the announcement by Barack Obama’s administration that it would seek to restrain skyrocketing college expenses by tying federal financial aid to a new government rating of costs and educational outcomes. The rising number of defaults shows the pain of borrowers, said Rory O’Sullivan, policy and research director at Young Invincibles, a Washington nonprofit group.

“Our generation is behind in the economic recovery and not recovering as fast as we need to,” said O’Sullivan, whose group represents the interests of people ages 18 to 34. “It’s financial disaster for borrowers. Defaults can dramatically affect their credit rating and make it harder to borrow in the future.”

Read The Rest Of The Article Here

U.S. borrowers owe $1.2 trillion in student-loan debt. That is an obscene amount that is literally killing the future of America and postponing everything from household formation to purchasing a car.

Clearly that is not good. If you are a college student with a lot of debt here is my advice for you.

  • If you owe less than $50,000 pay it off over time.
  • If you owe more than $50,000….DEFAULT NOW. Simple as that.

Now, understand something. American Corporations and the US Government spend billions of dollars each year marketing to you that your Credit Score/Report is basically a sacred institution. Default and it will destroy the rest of your life.  In fact, it is so bad that most Americans would rather die than ruin their credit report.    

You know what my opinion is? Screw them. These same Corporation default all the time, only to come back and ask you for a bailout. The US Government is basically insolvent. Yet, they want you to be their debt slave forever. Defaulting will not destroy your future. If anything, it will free you up. I highly encourage you to do research into this area to see if defaulting on your debt is a viable option for you. 

Now, I know that you technically CANNOT default on your student debt. However, if there is a will there is a way. You are smart, you went to college. Do what you need to do in order to figure out how to do it. 

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Americans Hate Each Other?

The Exchange Writes: Americans Are Losing Faith in … Themselves

negative mood investwithalex

Who are “the American people?”

If you ask politicians (on the record), they’ll tell you the American people are the greatest font of collective wisdom in the history of wisdom. Yet even Americans have growing doubts about their own sensibilities.

A recent Gallup poll found that Americans’ trust in “the American people” has fallen to a record low. Just 61% of respondents said they have a great deal or a fair amount of trust and confidence in their fellow Americans when it comes to making judgments about important issues facing the country. That number peaked at 86% in 1976. In 2005 it was 78%. Even during the 2007 – 2009 recession, the number stayed in the 70s. It began to plunge in 2010.

So Americans seem to be saying to each other, “You’re nuts and I’m not.”

Everybody, of course, has declining confidence in politicians. Confidence in Congress is at a pitiful 10%, the lowest level in the 40 years Gallup has been asking the question. Confidence in the presidency has dropped from a middling 51% in 2009, when Obama took office, to 36% today (though it was slightly lower from 2006 to 2008).

People clearly feel something is wrong in America, and without knowing exactly what it is, they blame government, business, the media , the education system, the wealthy and even organized religion.

Read The Rest Of The Article Here

I highly recommend anyone involved in the stock market to read the article above. While seemingly unrelated, the premise in this article has huge repercussions on the financial markets and/or the overall economy.

It could be successfully argued that financial markets and the overall economy are driven not by fundamentals, but by social mood. Elliot Wave Investment Approach has dedicated decades to that point of view and has legitimate data to prove it.  Whether or not you agree with such a premise, I can attest that in many cases MOOD SWINGS are the primary driver (not the secondary) where the fundamentals simply follow.

For example, you see such a situation in the stock market at March 2009 bottom. Even though the fundamentals were falling apart and will not recover for at least a year, the mood changed and stocks started to go up. In regards to the article, this is an important indicator to watch.

Further, I see a Nation clearly divided along political lines with each side viewing the other as “UN American.” Clearly that is not good  for the future of the country. Basically, this is an important trend to watch. If the indicators above continue to go down, it spells trouble for both the US economy and it’s financial markets. 

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US Corporations Have Saved $700 Billion In Interest Payments. Should We All Celebrate?

bonds investwithalex

The U.S. Federal Reserve’s efforts to boost the economy by holding down interest rates has saved corporate America $700 billion in interest payments over the past four years. Issuing debt at record-low yields allowed blue chips and shaky businesses alike to invest and expand

That’s great. My question is, at whose expense?

When the economic growth is steady everyone benefits over the long run, yet over the short run it’s a zero sum game. In order for businesses to benefit to the tune of $700 billion, many had to lose that money.  So, who are these poor souls?  

  1. Savers and older Americans who rely on fixed income for survival.
  2. Real economy. As most resources shift to the financial economy.
  3. You and I. Everyone will pay the price for artificially low interest rates.

But there is a bigger problem. Due to artificially low interest rates most of the capital above was misallocated to create financial bubbles and other mispriced assets. Instead of increasing salaries (which is understandable given the current economic backdrop) US Corporations have spent the majority of that money of various financial shell games such as stock buybacks, dividends, off shoring, etc…

Of course, that will come back to bite us in the ass…..big time. Thanks a lot President Obama, the Fed and the US Government. 

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Hello Beijing, Washington Here. Listen, Do We Have Your Permission To Shut Down Our Government?

Reuters Writes: Analysis: Default or not, Asia a hostage to U.S. debt

china owns us investwithalex

SEOUL/BEIJING (Reuters) – Unless the U.S. Congress settles a political showdown to raise the country’s debt ceiling in coming weeks, it will be left on the edge of an unprecedented default. But America’s main creditors in Asia may be the least of its worries.

The creditors – China, Japan and other Asian governments – have a hoard of U.S. Treasuries in their $5 trillion cache of foreign exchange reserves, the equivalent of almost a third of U.S. gross domestic product.

Despite having so much at stake as bond prices lurch violently, they are not about to do anything more than minor tweaking of their portfolios.

“But the expected returns from bond investment will fall greatly in the future,” Choo said. “How to deal with this structural change in investment environment is what all the central banks are agonizing over.”

U.S. bond yields have already risen more than 100 basis points since May, when the Fed first indicated it is going to cut back on its $85 billion per month asset purchases.

Read The Rest Of The Article Here

With a lot of theatrics going on in Washington, I do not believe Asian countries debt holders should worry about any sort of a default. At the end of the day, the US Government will pay on all of its obligations.

The biggest story here is not the shut down or the potential default, but the eroding confidence in the US Economic and political system.  The US politicians are acting like a bunch of 5 year olds on the playground (I guess no surprise there) while the rest of the world is watching. Why is this important? Very simple.

Not a good idea when you OWN $16.5 TRILLION 

If Asian creditors see this continue, they could (well, they should) in theory start reducing their US Debt exposure.  As that happens, yields would spike leading to a significant stock market and the US Economic decline. So, as the US Politicians aimlessly point fingers at each other while scarring the rest of the American people with Economic Armageddon,  our creditors are watching very closely. That’s what we should be really worried about. 

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Epic Credit Bubble…..Says World’s Largest Hedge Fund

CNBC Writes: Blackstone: We’re in an ‘epic credit bubble’

too much credit investwithalex

One of the world’s largest investment firms believes the financial system is overly leveraged.

“We are in the middle of an epic credit bubble, in my opinion, the likes of which I haven’t seen in my career in private equity,” Joseph Baratta, The Blackstone Group (BX)’s global head of private equity, said Thursday night at the Dow Jones Private Equity Analyst Conference in New York City. “The cost of a high yield bond on an absolute coupon basis is as low as it’s ever been.”

“We’re not just levering up U.S. GDP into multiples today,” Baratta said. “I do expect mean reversion to happen at some point on interest rates, on credit spreads, on the cost of some investment grade corporate credit.”

The high valuation of many companies today makes it harder for them to grow. “The biggest risk to returns of this vintage is that exit multiples are depressed,” Baratta said.

Read The Full Article Here

I strongly agree with Blackstone on this point.  In relative terms we are in the largest credit bubble mankind has ever seen. The situation we find ourselves in now is like a very bad runaway science experiment that cannot be stopped.

How will it end? No one knows, but the outcome cannot be pretty. What we have experienced in 2007-2009 was just a preview. Now that the credit bubble is much bigger only time will tell us how this experiment will end.  Perhaps with a bang or perhaps with an extended period of economic suffering.

What I do not agree with is that Blackstone doesn’t necessary see it as a problems by indicating that they are still bullish on the economy. The only reasons we haven’t seen the full impact of this massive credit bubble is because “so far” the Fed has been able to control the interest rates. As soon as the Fed losses this control (and they will) the interest rates will zoom up.  At that point anticipate the credit bubble to implode and take the housing market, the stock market, car sales, retails sales and the overall economy down with it.

So, what’s the point here? I am not the only crazy person running around and screaming that we are in a massive credit bubble that is soon to explode. World’s largest hedge fund believes that much as well. As such, you have been warned. 

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Stock Market Update, September 27th, 2013

daily chart Sept 27, 2013

Summary:  Continue to maintain a LONG position.

Even though I am BEAR, I am not the dumbest bear in the woods.  The economy and the stock market will fall apart soon enough, yet for the time being we cannot ignore the technical picture of where the market is going.  Doing so would lead to capital losses for my clients and myself.

As such and with the market sitting near all time highs I maintain my “HOLD” position for the DOW if you are long.  Technically speaking nothing really happened this week. The market did give up some gains but that is to be expected after 900 point rally from August lows. There is a open gap in the 15000-15100 range and the market might go that low in order to close the gap. Overall, the long time chart remains strong and bullish.

From a bearish stand point we continue to wait for an indication or a confirmation that the bull market that started in March of 2009 is over and the bear market is back.  If no such confirmation surfaces over the next 6 weeks I would have to shift my DOW TOP forecast to the next inflection point occurring in March of 2014. For now we wait while maintain a LONG position. 

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