March 24, 2006 -- I continue to believe that the US has two Achilles Heels, the dollar and real estate.
The Dollar -- So far, the action in the dollar has been counter intuitive. In the face of huge current account deficits which now amount to 6.5% of the US Gross Domestic Product, the dollar holds up. The stubborn "holding together" action of the dollar has cost many currency traders major portions of their bank accounts. When you play with the currencies, you're asking for difficulties and frustrations -- they're tough to trade and even harder to figure. Yeah, I know the dollar is going to fall apart -- but when? So far it's not happening. But it will fall -- it will, it will.
Real estate -- Does the same frustration regarding the dollar apply to the real estate bears? So far, the answer seems to be "Looks like it." A recent study shows that as of last September, 9.4% of all mortgage borrowers had either no equity or actual negative equity in their homes. That increased to 29% of all owners who took out first mortgages in 2005. This amounts to the following -- borrowers with $800 billion in mortgages now owe more on their homes than their homes are worth.
Home prices have declined in selected areas of the US, but in general prices are still above those of a year ago. However, home insurer First America states that if prices were to fall just 10%, the share of 2005 owners with no equity or negative equity would surge to nearly 48%.
Thus, keeping home prices up is a "must" for Ben Bernanke and the Fed. For this reason, I expect liquidity to continue to surge -- it has to. The slowly deflating real estate bubble may be Mr. Bernanke's first priority. He's got to keep homes prices from caving in. Therefore, nevermind the interest rates, it's the liquidity that is crucial here. And liquidity is coming in at the rate of almost a trillion dollars a year (the M-3 statistics have now ended).
I started this site talking about the dollar. OK, so what does the Dollar Index look like? Here it is below. It's formed a tightening triangle, and I'm not going to guess which way this triangle breaks. The trendlines are clear enough. The breakout should come soon. I'm waiting, and I'll report it when it happens (I'm talking about the breakout).
This must be the "year of the triangle." Because here's the Phila. Housing Index, and it too has formed a large triangle. Triangles are patterns of indecision -- they can break out either way. The Housing Index looks surprisingly like the Dollar Index. On the fundamentals I would expect this triangle to break down, but why guess -- the answer should be coming up shortly.
Can the Fed keep the US housing market afloat the way it has kept the stock market afloat since 2002? I almost feel sorry for Ben Bernanke. What a mess that little egomaniac, Alan Greenspan left him. But Bernanke took the job, he's got that "Mr. Chairman" title -- now he's got to sweat it out.
Speaking of Bennie and Alan, I believe Bernanke is a smarter and certainly more honest man than Alan. Greenspan was all about "me, me, me," he posed as the smartest man in Washington, and he thrived on Senators and Congressmen bowing at his feet. He avoided many questions, and talked in a roundabout language of studied obfuscation. His turgid "Fed-speak" allowed everybody to think he was a genius (since half of what he said was indecipherable.)
In contrast, Bernanke seeks to clarify. He appears to be a modest fellow. He's not looking for adoration, and I don't think he wants it. Bernanke is a student of markets, and what's more he believes in markets. He better believe in markets, because I have a feeling that the markets are going to give him all the problems he'll ever need -- probably starting this year.
Next -- below is a chart that I've shown before. It's the percentage of stocks that are in bullish trends on the NYSE. You can see that the percentage has swung back and forth between 52 percent and 80 percent. But the percentage has never dropped below 52 percent since 2004. However, note that each rise has tended to end at a lower peak than the preceding rise. Right now the bullish Percentage is 67 percent, and I suspect that it is heading down. I further expect (this is just a guess) that this is the year when the Bullish Percentage is going to go all the way down to below 30, in other words, to a major oversold condition.
Let me put it another way. We know that as night follows day, the Bullish Percentage "some day" will decline all the way down to 30 percent or below. I think it's going to happen this year.
Let me take it a step further. What happens if the market is weak enough to (finally) take the Bullish Percentage down to 30 percent or say 26 or 24 percent? What happens to housing prices is that occurs? I have a feeling that we're going to find out.
As an aside, a lot of investors have placed money in various foreign markets, and many of these foreign markets have done a lot better than the US market. As a result, holders of foreign securities believe that on a resumption of the bear market in the US they will be safe or safer in foreign securities.
I'm not at all convinced. The US and its surging liquidity has been the engine of the world's prosperity. If the US markets run into trouble, I believe that trouble will spread around the world. Therefore, I don't think you'll be immune from trouble if you simply hold foreign stocks. Anyway, that's the way I see it, and that's the way I'm playing it. Right now I prefer Treasury bills to foreign stocks, and I don't care how good foreign stocks have been up to now.
Comment -- Both oil and gold have made major moves to the upside, and they should be correcting. Yet, both are holding well and both were up and impressive today. I get the feeling that there's something negative in the wind which both oil and gold are discounting.
TODAY'S MARKET ACTION -- My PTI was up 4 to 5704. Moving average was 5690 so my PTI remains bullish by 14 points.
The Dow was up 9.68 to 11279.97. No movers in the Dow today.
April crude was up .35 to 64.26.
Transports were up 4.15 to 4527.41.
Utilities were down .86 to 399.74.
There were 1904 advances and 1303 declines. Up volume was 73.1% of up + down volume.
There were 163 new highs and 24 new lows. My 5-day high-low differentials declined from yesterday's plus 661 to today's plus 560.
Total NYSE volume was 2.29 billion shares.
S&P was up 1.28 to 1302.95.
Nasdaq was up 12.67 to 2312.82 on 1.88 billion shares.
My Big Money Breadth Index was down 2 to 695.
June Dollar Index was down .43 to 89.69. June euro was up .64 to 120.93. June yen was up .30 to 86.07.
April gold was up 9.70 to 560-.50. May silver was up 4 to 10.73. April platinum was up 5.20 to 1051.60.
HUI was up 10.61 to 314.02.
ABX up .62, DROOY up .06, GLG up 1.44, NEM up .22, SIL up 1.11.
One share of the Dow buys 20.12 ounces of gold
One ounce of gold buys 52.21 ounces of silver.
Gold and silver both acting well. Gold closed just above its 50-day MA. Silver closed well above its 50-day MA, which stands today at 9.78.
STOCKS -- My Most Active Stocks Index was up 3 to 433.
The five most active stocks on the NYSE were -- LU up .24, NT up .12, TWX down .09, T up .37, PFE down .14.
The VIX, staying very low -- was up only .02 to 11.19.
McClellan Oscillator up 23 to +29.
CONCLUSION -- Some mild interest in buying this market exhibited today. Not much selling as seen in only 24 new lows on the NYSE.
New home sales fell 10.5% last month, the biggest drop since April 1997. The stock market took that as a plus, since it will damp US growth and diminish the need for rate increases. On the lousy housing news, the bonds surged -- and of course the stock market loves rising bonds. And that, folks, is basic Wall Street logic.
Gold and silver acted well today and oil remains over 64 bucks a barrel.
With gold over 550, watch for increases in the price of Rolex watches (what, you don't have one?).
No site this weekend, but like the proverbial "bad penny" I'll be back Monday.
