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7/30/2019 Bear or Bull Fall Letter 2012
1/14
BEARHAT OR BULLHAT Bearhatorbullhat.blogspot.com
BearHat or Bul lHat
"Remember, democracyneverlastslong.
Itsoonwasts, exhausts, andmurdersitself.
Tereneverwasademocracyyetatdidnot
commitsuicide."John Adams
The Fiscal Cliff is closeat hand. Will Congress get it
together or will they just kick the
can down the road? Fiscal Cliff
is a word we are seeing more
and more in the news, but what
is the Fiscal Cliff? Fiscal Cliff is thepopular shorthand term used to
describe the conundrum that theU.S. government will face at the
end of 2012, when the terms of
the Budget Control Act of 2011
are scheduled to go into
effect.(From About.com) Bush-era tax cuts, payrolltax relief, and emergency
unemployment benefits will all
be cut, plus you will have cuts
across the budget due to the
wonderful job of the SuperCommitteeor The NOT so
Super Committee. Then you
will have health care reform
taxes kick in. The major problem in allthis is now the economy is
starting to show signs of life, and
it will be hit with higher taxes
and a reduced stimulus. At least
we will still have the Fed
pumping money into the
market! Thanks Uncle Ben! Now congress will mostlikely come up with a Super
Committee idea (because they
have worked so well in the past)
and just buy time. Nothing will
be done until after the election
Lets hope whomever loses willbe willing to work with the other
side. Another key issue is weare about to hit the debt ceiling
once again. It will be one more
issue for Congress to work out.
The last time we raised the debt
ceiling, it was not so fun for the
markets and business across the
United States. Now one can see
why some are worried as all thisis coming to a head at the end of
this year. There are many issues
for Congress to fix in less than
two months after the elections.
Sadly it feels like Congress is
playing Russian Roulette with a
fully loaded gun.
FALL 2012
7/30/2019 Bear or Bull Fall Letter 2012
2/14
BEARHAT OR BULLHAT Bearhatorbullhat.blogspot.com
INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 2012As educated investors lets look at probable
scenarios done by Goldman Sacks.
Looking at Exhibit 1, there is a strong
chance the S&P-500 index will take a hit. Like
we saw during the debt ceiling crisis, Congress
lost the faith of many investors and they will
most likely be taking their profits before the
Fiscal Cliff hits. One other key reason the
markets could be in a sell off, is taxes will be
going up across the board next year and many
investors will be looking to sell this year into a
lower capital gains tax that is currently in place.
Looking at Exhibit 2, it shows us the olds of
probability of an agreement. Please come to
your own conclusions.
2
Exhibit 3 shows the effect of fiscal drag on
GDP growth. GDP is currently growing at a
snails pace and with the hits from the Fiscal
Cliff, GDP will go negative. This will be a
major drag on stocks. Exhibit 4 shows that the
Federal Debt Ceiling will be hit early next year.
Looks like in early February.
There are many head winds going into early
next year and that is not including what is
happening to other economies over seas.
Investors have a right to be a little worried.
There is a large amount at stake and the effects
of the Fiscal Cliff could be very negative if
Congress and the President can not come to
terms. As an educated investor it would be wise
to have in trailing stops on current
investments.
The Fiscal Cliff is one of the many reasons
I am concerned about the markets. The
markets are coming to a major cross roads. We
will see new market highs or new market lows.
Quantitative Easing (QE) has a majorrole in the markets but is it really helping or just
more drugs for the market?
7/30/2019 Bear or Bull Fall Letter 2012
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BEARHAT OR BULLHAT Bearhatorbullhat.blogspot.com
I. QUANTITATIVE EASING (QE)UNINTENDED CONSEQUENCES?
What is QE?
Short answer: Its an unconventional monetary tool used
by central banks to stimulate the economy.
INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 20123
Quantitative Easing (QE) is something the
markets have come to know very well since
2009. Is it good or bad? Well in the short term
QE has been nothing but a steroid for the
market (See chart below), but are there
unintended consequences? As one can see, QE
has been the S&P-500s best friend.
The main reason for QE1 was to get
interest rates lower for housing. To help
households across the United States to
refinance and start building home equity once
again.
Now QE has moved rates to historic lows
and helped the S&P-500 jump to 4 year highs
and the markets just got QE3 near those highs.
Are the markets set to make new all time highs
now because of QE3? Possible in the short
term but the effects of QE will hurt the
consumer more and more, there are many
unintended consequences.
Lets look at some other charts and you can
decide.
7/30/2019 Bear or Bull Fall Letter 2012
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BEARHAT OR BULLHAT Bearhatorbullhat.blogspot.com
INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 2012Unintended consequences of QE1 and
QE2 have been the price of gasoline and food.
During QE1 gasoline prices jumped 30% and
food prices jumped 7% . For QE2 gasoline
jumped 37% and food prices jumped 22%.
Due to the rumors and impactions of QE3,
gasoline and food have risen 19% through the
end of the 3rd quarter. Why does this matter?
Most Americans are having a very hard time in
the current economy. A direct result of higher
gasoline and food prices is the less fortunate
have to seek government aid. For example,
Food Stamps and Disability. (See chart below)
As one can see there is a strong link with the
influx of QE and increase of those who need
government aid. Now take the number with a
grain of salt. The economy did take a major
down turn in 2008. However every time a QE
has been implemented, food and prices go up.
4
QE1
QE2
Why is it such a big deal that food and
gasoline prices are going up? Two words, THE
CONSUMER. Many forget that the United
States economy is 70% based on the consumer.
Much like early 2008, with high gasoline and
food prices, the consumer started to pull back.
Could this happen again? Very easily as the
economy is based and supported by the
consumer. If the consumer hurts, the economy
will hurt. It is just an unintended consequences
of trying to re-inflate the housing market.
Sticking with the consumer we should look
at the effects of QE on their Hourly Earnings
and the Consumer Price index. Now we know
(from the charts above) QE is the markets short
term best friend, but how does the consumer
feel about QE?
7/30/2019 Bear or Bull Fall Letter 2012
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BEARHAT OR BULLHAT Bearhatorbullhat.blogspot.com
INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 2012Looking at the direct effects of QE on Real
Average Hourly Earnings is pretty negative.
When a QE is released, hourly earnings take a
pretty steep hit. Why is this happening? The
wages are paid in US dollars. When more
money is pumped into the markets from the
Fed, more dollars are created and the cost of
goods based in US dollars will increase. Now if
they are actually being printed is up to debate,
however dollars are being put into the system,
mainly by computer.
It looks to be the same story when it comes
to the Consumer Price Index. When QE is
pumped into the system, prices climb. It is just
that simple.
Now the question is how long can this last?
How much longer can the consumer keep on
spending? QE1 helped the markets for 11
months, QE2 and Operation Twist only had an
effect for 6 months. How long will QE3 last? I
believe it will all come down to the price of oil
and food.
5
Why oil and food? Oil is what the world
runs on. Most importantly it is the key driver of
global trade. If global trade slows down,
companies will be forced to make cutbacks
which will hurt employment. If unemployment
is high as well as the price of food the consumer
will suffer.
Now the consumer is hurting, however thestock market is not. But why is the stock market
doing so well? Remember the Fed has kept rates near 0.
This hurts income style investments like bonds
and treasury bills (safer investments). Why is
that important? Looking at the Baby Boomers
who were in safer investments are now being
pushed into the stock market because they need
a higher return on their investment to live off
of. Currently we have around 10,000 baby
boomer retiring each day!
This is just one more unintended
consequence. from the Fed. By keeping interest
rates at all time lows, they force people into
risker investments like the stock market. Risk isOK when you are young but when one is
looking to retire, risk is the last thing one needs.
This can all work out as long as the stock
market holds up, which it could in the near
term. However, if the market sees any type of
crash we could have another major headache
for the American people.
'00 '04 '08 '12
0%
1%
2%
3%
4%
5%
-1%
-2%
-3%
0%
1%
2%
3%
4%
5%
-1%
-2%
-3%
Real Average Hourly Earningsy-o-y percent change, monthly
Source: Bureau of Labor Statistics. Through August 2012.
QE1 begins
QE2 ends
QE2 begins
QE1 ends
'00 '04 '08 '12
0%
1%
2%
3%
4%
5%
6%
7%
-1%
-2%
-3%
0%
1%
2%
3%
4%
5%
6%
7%
-1%
-2%
-3%
Consumer Price Indexy-o-y percent change, monthly
Source: Bureau of Labor Statistics. Through August 2012.
QE1 begins
QE2 ends
QE2 begins
QE1 ends
7/30/2019 Bear or Bull Fall Letter 2012
6/14
7/30/2019 Bear or Bull Fall Letter 2012
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BEARHAT OR BULLHAT Bearhatorbullhat.blogspot.com
INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 20127
It is not doing well at all. Looking at the
Household Net Worth in the chart below, it has
not seen the recovery that the stock market has
and that is a major problem. Without any
growth in the Household Net Worth it is very
possible the recovery is just hot air and that can
be very dangerous when it comes to the stock
market. As we saw in 2008, it is very easy for
people to start to panic.
Why is Household Net Worth important? It
comes down to the simple truth, if American
households are doing well. Its the economy will
continue to do well, it is just that simple. Muchof the recovery we have seen in the stock
market is due to the high injection of money
from the Fed forcing people into stocks. If we
start to see Household Net worth go positive,
that will be a sign that the recovery and
inflation are taking hold. That is what the Fed
is trying to do at the current time.
If we see Household net worth continue to
go down, that will be a sign of deflation. No
matter how much money the Fed pumps in,
deflation can still take told. Mainly because
assets will be going down in value just like in
2008. Now lets take a look at a few charts to get
a read on how the internals of the jobs market
and another major bubble getting ready to pop.
7/30/2019 Bear or Bull Fall Letter 2012
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INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 20128
Looking at the first chart below titled
Outlook for Hiring Deteriorates Significantly,
it looks pretty bad in the hiring department.
Why is it starting to drop off ? It come back to
the Fiscal Cliff. Many companies do not know
what is going to happen early next year,
therefore they are at a standstill.
Jobs, it is the key ingredient when it comes
to building a strong economy. If the job market
starts to dry up once again, the economy will
fall back into a recession.
One market that could fall apart due to the
lack of jobs would be Student Loans. Now
looking at the chart below titled Student
Loans, one can see that there is over $900
billion in student loans.
7/30/2019 Bear or Bull Fall Letter 2012
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BEARHAT OR BULLHAT Bearhatorbullhat.blogspot.com
INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 20129Currently the default rate on Student Loans
is 9.1%. If the job market does take another
downturn, that rate will jump much higher.
Lets rewind to 2007. This little thing called
Sub-prime loans were starting to see
defaultsrates jump. The Sub-prime market at
that time was 1.3 trillion. Defaults started to
come in over 14%. We were told by the Fed
that Sub-prime would be contained. We all
know how that worked out...
As one can see we are starting to see a
similar pattern. Large amounts of loans are
starting to default once again. This will be a
major issue if the economy does not pick up
and those with student loans cannot find work.
The next step is defaulting on payments. It
would not be as bad as the Sub-prime mess but
it would be a major headwind on the United
States. It is just something to start watching.
To sum up how the United States is doing,
Streettalklive.com put together a wonderful
chart. As one can see in the chart below all four
areas are pointing down. This is a very bearish
trend that needs to reverse very soon or we
could end up in another recession.
Much of the current downturn in the
United States is due the Fiscal Cliff and we
need to see that fixed ASAP. Many business
owners are very worried and that is why they
are not hiring. We must get jobs back in this
country.
It is starting to look like the recovery was
just hot air fueled by the Fed, but we will know
soon enough and the charts should give us a
heads up on which way the economy will move.
7/30/2019 Bear or Bull Fall Letter 2012
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BEARHAT OR BULLHAT Bearhatorbullhat.blogspot.com
III. CHARTSBEAR OR BULL
Can Andrews Pitch Fork And Other Charts
Give Us Some Insight To Where The Markets
Will Head Next?
INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 2012
Andrews Pitch Fork
The Pitch Fork is a method I use to actively see where the markets could be heading. The
Pitch Fork acts more as a guide line and sends warning signals if a line is broken no matter if you
are bullish or bearish.
10
The current pitch fork is a bearish fork (the red fork). The market looks like it could be topping outfor the moment and keep in mind that is with QE3. In the past QE1 and QE2 put in short term
bottoms. Is it different this time around? If the markets break below the1300 level the 1100 level
would play as major support. The bear fork suggests that the markets could be in for a hard time
ahead and lines up with the Fiscal Cliff. For you bulls, the larger green fork is also still in play. It
states we have major support around the 1380 level. The bull fork would be broken if there is a
major close below 1250. This is why I believe the markets are at a major cross roads.
7/30/2019 Bear or Bull Fall Letter 2012
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BEARHAT OR BULLHAT Bearhatorbullhat.blogspot.com
INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 201211Now it will all come down to what fork takes
hold. Whatever fork does take hold it will take
the markets to new highs or new lows.
Personally with all the head winds and the
Fiscal Cliff ahead there is a great chance to the
down side. We can look at one more chart that
could give us an early sign.
It is the New York Stock Exchange. Ticker
NYSE. The Dow Jones also know as the
DOW-30 has 30 stocks in it. The SP-500 has
500 stocks but the NYSE has 3796 stocks in it!
Therefore, it gives us a much broader scope of
the over all market.
Looking at the chart below we can see the
NYSE is coiled like a spring. If the green line is
broken the bulls will be very happy because
most likely the market will see new highs. It
would be a break above the 8,750 level. For the
bears to be happy they have to break the 50 and
100 day moving average which will play as
support for the bulls. Then they will have to
break the red line at the 7,750 range. Whatever
side is broken, it will play a major role in which
way all the markets will head. We will know
what way that is in the coming months.
Currently a lot of economic data is pretty
bearish. I believe that is due to the large
amount of unknowns. You have the elections
and the Fiscal Cliff. It is always much more
difficult in business to have unknowns.
Hopefully congress and whomever is elected
president will not let us down and fix the
problems at hand.
Now due to the fact it is a spooky time of
year with Halloween being right around the
conner. Lets take a look at some SPOOKY
charts!
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INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 201213For the last chart below it is more realistic
and spooky. It looks at Manufacturers New
Orders. Now one would think that new orders
would be not going down but up because of the
holiday season.
This is alarming but I believe it all comes
down the the Fiscal Cliff again. No one wants
to have high inventories in an economic slow
down, like they did 2008. Another reason I am
worried is we have not seen this much
downturn in new orders in a very long time.
Remember, the United States economy is based
on the consumer, therefore manufacturing is
not our big growth engine. If new orders are
not coming in, business will be forced to thin
their workforce. If the workforce is light,
consumer spending will come down and that
will hurt the United States.
All three of these spooky charts we looked
at can change their outlook. We just need to
see growth in the jobs market and the Fiscal
Cliff to be solved.
7/30/2019 Bear or Bull Fall Letter 2012
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IV. TWO PATHSBEAR OR BULL
Who will win the great battle ahead?
INVESTOR NEWSLETTER ISSUE N3 FALL 2009FALL 2012
Much of the data looked at during thisletter has been more on the bearish side. A
large amount of the data is on the downward
slope due to the Fiscal Cliff. The debt ceiling
mess brought the markets down at a forceful
rate in 2011. Now you have the debt ceiling
once again, plus tax cuts expiring, and theSuper Committee cuts coming across the board.
The markets could be in for some hard times.
To be on the safe side I would make sureone has in trailing stops in place on current
investments. It is just a way to lock in profits. It
does not cost anything and it is just like wearing
a safety belt. Safety belts keep you safe and
trailing stops keeps your investments safe. If the
market continues to go up the stops follow to
lock in your gain. I would recommend talking
to your investment advisor about them.
Looking at the SP-500 the lines in thesand are the 1404 level and the 1380 level on
the short term. In the longer term the 1250
mark will be the line in the sand for the bulls
and bears. If the 1250 level is broken in the
SP-500 I would start to be much more bearish. If the United States does slip intoanother recession I would be worried that Fed
and QE will not be able to save the day again.
If the Fed keeps pumping a high amount of
money into the system, oil and food costs could
be the tipping point and the consumer could
pull back at a forceful rate like we saw early
2008.
As we saw in the charts, QE is the stockmarkets best friend but not the consumers best
friend. I am not sure how long a market can
last just on QE and government stimulus.
Seems like just hot air but that is why I useAndrews Pitch Fork to give me guide lines on
where the market is headed.
The market is looking at two paths. Ifthe bears win most likely we will see new market
lows. There is a lot of market moving events
that are about to take place. If they turn out
more positive the markets could be off the new
highs. We will just have to see how those events
turn out.
Be safe and best wishes.
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