Today the market is at a critical juncture

T minus zero.

We believe another 10%+ pullback is desirable at this point for the longer-term health of the market.

This year has seen an 80% surge in communist/socialist emerging market stocks, while the dollar has posted a decline. A declining dollar and surging emerging markets were the hallmarks of the credit-fueled stock bubble earlier this decade. Recent weeks have brought huge rallies in some of the lowest-quality American stocks such as AIG, Fannie Mae and Freddie Mac that are being propped up by the government and are unlikely to return to health any time soon. The market recently has behaved as though the FED has inflated a stock market bubble. It can consolidate now or it can be bid up to a panic collapse this fall.

When the Federal Reserve announces results of its policymaking meeting today, it is all but certain to leave its target for short-term interest rates near zero, and likely will indicate that it intends to keep rates there longer. The question is will the Fed offer a plan for how the central bank will unwind its inflationary interventions that prop up the economy while allowing the overhang of the impending avalanche of commercial and residential debt to unwind next. Financial crises usually come in unpredictable waves, and the Fed leaders still must deal with considerable risks that the economic decline could easily tip into a double-dip recession or stagflation as seen under the "malaise" of Jimmy Carter.

The breadth of the market advance to date has been very narrow and manipulated by the funds. That is why few people are feeling the worst is over. The stock market tipped negatively under increasing volume these past two days. Today we are at a decision point.

Stocks have surged even as employment continues to fall and unemployment exceeds 16 % when those who have given up or have exhausted their benefits are included. The rate of layoffs is still five times higher than the highest the Bush administration experienced. President Obama is recently seen as already a failed president whose main focus is on switching 40million of his supporters from the worlds most successful and charitable regulated private health care system to the standard slow and inept socialized system where his mostly 40million indigent but formally grateful supporters will take the funds from the aging population of workers who actually paid for the health system. Obama's 40million special interest supporters now outnumber the aging people who built the system. The new system modeled on that of Middle Eastern socialist theocracies believes wealth is a gift from Allah just like oil. It is an unearned gift, an entitlement that should be distributed just like unemployment insurance to the masses. The new America under the Obama dream will have 30% unemployment hidden by the fact that work is the least popular life style of the third world. Relax, be happy is the most popular life style of socialism in the world. Entitlements are undermining free enterprise and human rights throughout the world and are dependent on a vast bureaucracy of generally incompetent and dangerous leaders who usually are elected by vast majorities as Lenin, Hitler, Stalin, and Saddam Hussein were. That is because electorates typically prefer handouts not productive work.

The Federal Reserve has spent the past year cleaning up after a housing bubble it and the Senate Banking Commission had created. But along the way it may have pumped up another bubble, the stock market. The central bank has slashed interest rates while funneling money to banks. Stocks have bounced back with startling speed as distressed corporate takeovers have more than doubled pumping money into the stock market.

Economist David Rosenberg, who notes that consumer credit has dropped an unprecedented five straight months, said it's far from clear the recession is over. He says the risk of a market relapse later this year is high. He wrote in a note to clients Monday,

"This is the most speculative momentum-driven equity market since the early 1930s. We see this as the Fed has been financing the speculative mania that could end in another damaging rout."

Given free money, investors' appetite for risk shoots higher and they gobble up stocks. Unfortunately economic growth doesn't seem to support the higher stock values. That is a bubble that pops when the excesses of band loans and bad investments come home.


Short-term interest rates could soon head higher, judging by action in futures markets. That could raise companies' borrowing costs and the weight of the overburden of bad debt.

Market forces August 12
The market is at a nexus. Today it decides if a new equities bubble gets out of control and pops, or if the market can consolidate into a stronger value based portfolio.

Market Outlook

For more than a month now we have advised taking profits and getting out of the emerging markets. We were first to say they would lead us out of the recession and now we say they have become mine fields for investor losses.

The recent rally has the market in a highly overbought position again. We expect U.S. stock buying opportunities and then wild optimistic appreciation (as we have now) that are times to take profits. This may very well be a positive consolidation period not a negative distribution period. But it would be unusual not to have a sharp sell off panic from time to time. Summer and early fall is usually a time when markets decline.

If you have been buying stocks when they were low you are finding you have some large profits now. You need to consider selling them (or enough to capture just their costs) if you do not want to lose capital when the next market panic occurs.

The communist/socialist economies of the third world are driven by American imports. Communist China's bureaucracy with an 8% growth rate is wasting its money on car production while embarrassing corporate executives are beaten to death by their masses or shot by the government! We recommended emerging markets more than six months ago and have warned readers to get out of emerging markets now for over a month. Last night Asian markets were down sharply: communist China down -4.7%, socialist Japan down -1.4%, oligarchy Hong Kong down -3%, theocratic Jakarta down -2.2%, and socialist India down -0.4%.

Today most of the socialist European markets are presently flat in a range of -0.1% to +0.5% half way through their session.

US futures indicate a slightly higher USA market opening this morning. The financial sector is particularly overbought with commercial debt about to crash through the roofs.

The new socialist indigent entitlement proponents seemingly destroy every free market sector that they touch as they strive to make America into a laid back don't worry be happy third world country. Hedge funds seem to be betting that the Obama entitlement bills fail. But if his socialized medicine passes in any form whatsoever we expect health care stocks to implode as they did when Obama first announced his plan. Communists and socialists think "profit" is a dirty word. Mediocrity reigns greatest where inept and corrupt socialist governments rule. Look primarily at Africa and the Middle East for this administration's vision not Europe.

Anticipate a panic spike down any time now as a buying opportunity. We must be capturing profits on the rallies and then finding better buys on the declines. That is called cherry picking the best buys. We will continue cherry picking mostly into and now also out of the market rotating before or when the funds rotate through the sectors. We expect the decline will be a typical rotation with sharp drops in some individual stocks/sectors while other stocks/sectors bottom out or rise and then decline so the change in the market indices will be much smaller. The advances will be similar but opposite.

Investing time is now compressed and hence investing requires more trading skill. We watch the sectors carefully because hedge funds seem to deflate one sector at a time and then let investors pump them back into overbought territory. They can do that best during the kind of rallies we see in this sideways market.