Twenty-Five Reasons We Remain Cautious
by Atlantic Advisors http://online.barrons.com/article/SB121512477327428081.html
July 1: Risks remain high [because]:
1. Stocks are firmly in a downtrend -- From the market peak on October 11, 2007 the Standard & Poor's 500 is down roughly 20%.
2. Corporate spreads are widening, quickly.
3. [Many are] saying, "All is well, buy America." The crowd's usually wrong at extremes.
4. European equities are taking out the lows of the year. European large-cap stocks peaked June 20, 2007 and now are down more than 28%.
5. The capital-raising window is closed ...[for most] new corporate deals.
6. Forward projected earnings are far above reality. This creates a false sense of security in stock prices.
7. While much of the move in financials is done, it should spread to other industries. Financial companies provided credit to consumers in all forms (credit cards, mortgages, etc.). Credit is the [consumer's] oxygen....Once the oxygen gets cut off, the consequences to the consumer [are] dire.
8. Well-managed companies should do well in any environment, but if they're not able to meet even their own projections, what can we expect from companies managed less well?
9. In the election year of the presidential cycle, extra fiscal and monetary stimulus is usually applied by the incumbent party to 'juice' the economy...after the election, this extra stimulus is removed and the hard work of making changes usually begins.
10. Mortgages cannot be refinanced, credit card balances are maxed, retirement savings are now being tapped, and existing portfolio values are declining.
11. Corporate buybacks are gone. Buybacks have dropped to a bare $1 billion per day on average.
12. Net equity issuance is very high -- especially in the finance area, where new capital is needed just to stay in business.
13. We are at war -- on multiple fronts.
14. Oil above $100 is very bearish. This is like an extra tax on...consumers.
15. The savings rate is zero. The personal-savings rate [was] between 5% and 10% from 1960-1985. It has steadily declined since, and now hovers around 0%. Retirement isn't possible when you have no savings.
16. The U.S. is actually one of the best-performing markets in the world this year.
17. Companies from GM to Ford to Lehman are technically insolvent.
18. Level III Assets continue to grow.
19. The "credit rot" is spreading from sub-prime to prime/autos/credit cards.
20. The dollar index is a measure of our currency against a basket of foreign currencies. The index has now declined from 120 in early 2002 to a new all-time low of 72. Our ability to buy things from the rest of the world is getting more difficult.
21. The Federal Reserve's balance sheet is impaired after accepting low-quality securities from investment banks in exchange for nearly $400 billion in Treasuries.
22. Mutual-fund equity cash [is] low. Normal cash levels used to be around 7% to 8%, but has steadily declined to under 4% now. This means that when investors want to sell their mutual funds, managers that need to honor those redemption requests [won't] have any cash to satisfy the demand...creat[ing] downward pressure on equity prices.
23. Individual investors are now taking money from their retirement accounts just to live. That's just sad.
24. Technically, the market is on the verge of breaking down. We've reached and crossed some important technical levels watched by many investors/traders.
25. We've broken the 200-week moving average in the Dow Jones Industrial Average for the first time since 2003, a very long-term and bearish sign.
If I am wrong for being cautious, all I will have lost is opportunity, not capital.
Bennet Sedacca
