I am scheduled to appear on Bloomberg Television - Monday June 11th. Taking Stock with Pimm Fox (7:00 - 8:00 pm M-F) is a superior show and I am looking forward to it. Pimm takes on current topics that investors need to hear about and rather than asking the same questions that usually have already been covered, he has a habit of digging deeper and holding his guests to a pretty tough standard. So tune in to his show whether I am on it or not. You can always count on investing ideas that are supported by data and rational explanations. If you just want to see what I look and sound like - that’s a good enough reason too.

Some of the biggest permabulls keep saying things like - “The retail investor is just not participating in this rally.” “Just wait until the retail investor comes in.” “Retail investors better get on board.” I never hear what evidence they have to support those comments. Maybe because evidence and fact is less important than hyping the market. Maybe they think the mere act of having it come out their mouth makes it true. It’s easy to take their moment on CNBC or Bloomberg and come up with hollow statements but some facts like the margin debt levels might conflict with the idea that retail investors have missed the run. Besides, I never liked calling the retail investor “dumb money.” A lot of retail investors have a habit of outperforming the index and the track record of smart money does not indicate that they are so perfect. Let’s not forget that the supposedly “dumb money” is usually represented by financial professionals called stock brokers. So when I hear the bulls calling all retail investors and when those calls come out of no where and they are repeated by a bunch of different people all at the same time, I get suspicious.

All news is being treated like good news lately. Usually optimists are defined as those who see the glass half full. This market is a bit more extreme than that and investors look like optimists who see the glass 99% full. Yesterday’s Fed minutes were very cautious about the housing market, uncomfortable inflation and poor economic growth. Regardless, the bulls loved it. Today’s GDP data was pathetic at best and pre-recessionary at worst. Instead, I am hearing a lot of bulls saying how great it is. 99% Full!!

I will be personally checking out the start of the hurricane season in the Caribbean next week!  Since broadband and wi-fi are not technologies that have found their way to my destination, I won’t be writing posts or commenting on the market.  Rather than using Monday’s opening prices to update the signals, I will be using Friday’s closing prices so the database will be updated by Sunday.

I did not expect record highs on a day like today, but given my bearishness, I guess I have lost the credibility to even question it. So I just accept it and move forward. Regardless of my personal opinion, the bulls really put on a show today and most likely, the bears screwed up again. I was glad to see that the markets did not sell off in response to China and yet, the failure to decline is a weak reason to rally almost 1%. Having the Fed minutes reinforce the case for uncomfortable inflation and slow growth expectations for the rest of the year may be inspiring to the bulls, but not to me. Then again, the bulls are running this show and not me. This week’s signal work didn’t tell me too much and had almost the same number of new UPs to new DOWNs with an edge to more bullishness for the second consecutive week. Clearly, the action over the past two days is not consistent with my view but the HEDGEfolios Timing Indicator is still showing a bearish bias. While it is becoming more bullish, I will be waiting to see if it manages to cross over.

“Chinese stock markets and the Chinese economy have little to do with each other.” This was a phrase spoken by several investors that I greatly respect. I agree with that comment but give it a thought for a second. It’s more than just a great way to tell US investors to disregard last night’s Chinese selloff and avoid a trickledown here.

On the way up, the Chinese markets are heralded as a proxy for the amazing growth in their economy and yet, when it declines a more rational but still bullish commentary appears. For the past several years, financial advisors and money managers have been pushing for increased exposure to foreign stocks and especially, emerging markets to capture a portion of the dramatic growth while the US economy is not so robust. Without a doubt, China is the primary engine of that strategy and with the comment that the extreme economic growth has nothing to do with the extreme stock market appreciation - it should cause you to think. Just accept that concept as reality and then see how you would feel applying that same statement to the US economy and the US market. Can you imagine anyone saying - “US stock markets and the US economy have little to do with each other.”? It works for China but does not work here. I’ll let you decide to what degree there might be some similar truth, but overall, I doubt you’d ever hear it or believe it so easily if it was said. My takeaway from this discussion is that US investors really need to evaluate why they are so in love with buying stocks that have little to do with economic growth. I suggest that the performance chasing and fascination with growth in foreign economies have become disjointed and so have the risk / reward tradeoffs.

I said I agree with the comment that the Chinese stocks and economy are not very related. Here are a few thoughts:

The Chinese markets are represented by a few hundred stocks and the total capitalization is only $2.5 trillion  - about 10% of what is traded here. However, what it’s really worth is another story and the valuations of over 40 times earnings makes China the most expensive market in the world, by a wide margin. In January, it was only $1 trillion and people thought it was overvalued then. 100% increases in the stock market are not equivalent to 10% increases in their economy. The Chinese economy is huge and the growth rates seem not only sustainable but almost unstoppable. The government has an insatiable need to maintain the economic growth and yet they have a problem - spreading it out. A large percentage of the population, primarily the rural citizens, are still living in poverty. The image we see of China’s advancement is truly amazing and yet the income inequality between the “haves” and “have nots” is very troubling. Promoting an inflated stock market or letting it get out of hand just makes the divide even worse. However, given that Chinese investors have very few investment choices and they have very low consumption rates, it’s just a matter of supply and demand to push the market to ridiculous levels. Hearing stories of maids quitting their jobs because they were making more money trading stocks is either a myth or a very clear sign that stocks and the economy are out of touch with each other. The government cannot afford to lose touch with the masses. That has happened in the past and they cannot allow it to happen again.

Shanghai and Shenzen markets are taking a 10% dip due to the government’s attempt to deflate the bubble in Chinese stocks. Instead of just talking it down, the finance ministry decided to triple a stamp tax on securities purchases and the slide has been immediate and significant. I am sure that China’s new investors (almost 300,000 per day lately) will have a challenge dealing with a new concept - stocks actually trading down. Without a doubt, comments from Li Ka-shing and Alan Greenspan over the last few weeks will once again test the “Don’t shoot the messenger” theory. However, this mess has nothing to do with smart guys like Greenspan and one of the 10 wealthiest people on the planet. It has to do with millions of poor novice investors who have been chasing performance.

This situation will likely reflect the arrogance created by the February 27th 9% decline and subsequent 3-month rally to new highs. Until a selloff does not rebound like all the prior “buying opportunities”, I expect that investors will try to shrug this off. When I wrote “A New Asian Contagion” on February 8th, I made similar analogies to the ignorant and arrogant reaction to January’s Shanghai and Shenzen selloffs. A few weeks later we had the February 27th fiasco and an overreaction in the US. When Chinese stocks had recovered all their losses by the time I wrote “Chinese Checkers” I had gotten tired of hearing how investors were just “repricing risk.” I guess I’ll get to hear it all over again when the American investors wake up to the current Chinese fallout.

As for Japan, the Nikkei is only down about 1% right now so hopefully we will not have to hear about their contribution to US equity declines. I will reiterate - there is no causal relationships of daily, weekly, monthly, annual or multi-annual periods between Yen currency appreciations and US equities. I know you heard that over and over again in February and March but it just isn’t true. There was a 15-day period where an inverse relationship appeared but that was only true as long as commentators were hung up on it. Since then - can you tell me how many days, weeks or months the Yen appreciated relative to the dollar and the S&P fell or vice versa? I suppose if you look it up you could, but if there was truly a causal relationship, it just wouldn’t disappear after leaving the media headlines.

And as for that mythical and exaggerated Yen Carry Trade that almost no one bothered to mention prior to February 27th and almost everyone was an expert on in the following weeks - I hope we can avoid some of that overreaction. By the way, just search this site for “carry trade” and you’ll find a hint of my concerns a day prior to the selloff as well as several other posts dealing with the topic. Contrary to what you might think, I am not claiming that I knew it was going to happen. Why not? Because despite all the hype, I don’t believe there was a substantial unwinding of the Yen Carry Trade when everyone else was saying it was going on. I am not an expert on Forex but just because the Yen appreciated (and it may again now), this does not mean it is caused by an unwinding of the Carry Trade. Currencies, including the Yen, fluctuate all the time and a Carry Trade excuse is rarely sought. Regardless, if all the smarties convince themselves and investors that it’s the case, then we are all doomed to hear this nonsense again. I have other projects that I am working on, but if the Yen appreciation story makes headlines again, I will post the research I have done and let you decide. As for the Yen Carry Trade, I have already written enough about that topic and will leave it alone for now. Just rely on my previous posts and assume I am sticking to what I said before.

This winter and early spring, I was bearish because I didn’t like the way our stocks looked and was told that I needed to lighten up. My view had nothing to do with the Chinese stock markets, the Yen, or the Carry trade. Then February 27th showed up and suddenly everyone was blaming China and Japan for our stock declines. Americans have a great desire to blame others and it was ridiculous that we couldn’t be honest enough to say that we had our own issues which contributed to the selling. For several weeks, I have been seeing a massive deterioration contrary to the hypesters who have been telling you how wonderful the new record highs are. If this Chinese selloff hurts our markets on Wednesday, I expect the bulls will have to tell you that it was a surprise or blame Greenspan or talk about anything other than the dangerous domestic issues they have been trying to ignore.

Good luck and please Support our Military.

Our country has done amazing things in the past when we all came together. But we have not been “together” for a long time. In fact, I doubt we have ever been so apart. It’s time to change all that.

If you are opposed to this war, you should be free to peaceably debate your views with those who support it. However, being “for” or “against” this war and saying you “support the troops” at the same time is not good enough. What does that mean - “I support the troops.” It’s a very convenient phrase but it has come to mean very little for both sides of the debate. In the preceding post entitled Financial Casualties of War, I tried to throw some light on the financial aspect of the War on Terror and the lives that are being affected. But it’s just not good enough to be aware of a problem - we need to do something to help out. It doesn’t matter how big or small the gesture, it just needs to happen.

For my part, I have decided, for an indefinite period, to offer free subscriptions to HEDGEfolios for anyone in the American armed forces - all you need is a military email address in your registration. Right now, I have no idea how much of an impact this offer will have so I will periodically assess my ability to keep this entirely free. If I do have to charge later, it will be a nominal fee to cover the cost and any excess profit will be donated to military-related charities. Just take a few minutes to register for the normal 30-day free trial and I will take care of the rest on my end. If you are in the military, please forward a link to this post to others who might be interested.

That’s the best I can do. What about you? If you are a CPA, how tough would it be to provide tax preparation for a few military families? If you are a financial planner, could you spare a few hours a week to advise some people that really need your help? How about extending more of a discount on insurance products? Every aspect of their financial lives is fair game from banking to brokerage and I will be pushing this idea as hard as I can with firms that I’d like to see contribute.

Regardless of your ability to provide financial services, there is something you can do to help out. If you truly support our troops, what can you DO?

The casualties in Afghanistan and Iraq should never be forgotten and they should not be ignored - not on Memorial Day and not on any day. However, there are some additional casualties of The War on Terror that I fear have not received enough attention for the past several years. With thousands dead, it may seem inappropriate to discuss the problems of the living but I suspect each patriot that gave his or her life in the service or our country would appreciate our concerns for the families they left behind.

Of the over half million members of the National Guard and Reserve, approximately half have been mobilized in various missions during the War on Terror. Tens of thousands are now serving in Iraq and Afghanistan while others are waiting to be called up for another tour of duty. To respond to the shortage, the government has tried to improve the financial consideration with higher signing bonuses, improved medical and educational benefits, expanded retention bonuses, etc. However, the costs of service for many families are not what they bargained for. Prior to 9-11, the National Guard and Reserve had typical deployments for various civil emergencies and natural disasters within the American boundary lines that lasted about 2 weeks per year. Now we are counting on these groups to serve overseas for up to 15 months at a time.

For the average American, providing for a family and setting aside money for the children’s college education and retirement are a constant battle. Imagine then the challenges facing those families who are struggling for survival on the battlefront and the homefront. It’s impossible to not know someone that has been affected - a neighbor or a family member or a friend or a co-worker. In many National Guard and Reserve families, the soldier may have been primarily responsible for paying the bills or managing investments. Now they are absent and those roles are taken on by the remaining spouse. While some employers make up for lost pay, the military families usually see a significant decline in their incoming cash flow. Prior to being called up, a reservist may have been the primary breadwinner and after deployment, it’s down to military pay schedules. Spouses are left to make up the difference to keep the family afloat. That may mean getting a job, taking a second job, or working overtime. Somehow they manage to get it all done and keep their families strong.

And when a serviceman returns home from one tour of duty, you might think that the problems are in the past. Unfortunately, that is not the case. With continuing commitments and the government extending service due to the “stop loss” provision, it’s not so easy to just go back to work. While the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) gives employees who take a leave of absence for active military service the right to get their job and benefits back, it’s not a perfect situation. Neither is getting a job when you have a continuing military obligation. Some surveys have indicated that over half of the responding employers would not knowingly hire members of the National Guard or Reserve because of the disruption and costs associated with an employee being called up. It’s wrong and discriminatory, but it happens. It’s also not so uncommon for the Guardsman or Reservist to put their career on hold until they are completely done which relegates them to jobs that are less permanent and less rewarding.

On Memorial Day, I thought it was fitting to talk about this subject. Maybe I should have saved it for a normal day when most Americans are less likely to think of the sacrifices that our military families are making for our benefit. While we may routinely focus on death counts and the devastating injuries and emotional distress, we cannot forget the financial casualties they are suffering during this war.

Each time the CPI comes out, commentators and investors spend a lot of time dissecting the data and finding ways to give it credit or tear it apart. Many people say inflation reported by the government is not indicative of their personal experience and I agree. My budget and expenditures are up far more than 2.3% over the past year, so I did some research.

The most valuable part of my investigation came from talking to some people at the Bureau of Labor Statistics. First off, I have to say that I was impressed with their responsiveness, willingness to answer my questions and the intelligence of their response. I wanted to find out whether they had any studies or data which shows the CPI by demographic group. They have some some subsets broken down by elderly(CPI-E) and blue collar (CPI-W), but not much more than that.

The CPI commonly quoted is a composite number and is not likely to match the individual experience of each consumer. One great point from a BLS employee was that the CPI includes an average of housing costs and that average includes rental data as well as home ownership. Yet none of us have a primary residence that we simultaneously rent and own. So when you see the CPI each month, try to remember that the average is an average and read this explanation as to why the CPI may not match up to your experience.

Some people say that perception is reality so you can evaluate this great article on the demographic impacts affecting how an individual thinks about inflation. Here’s what I think. Your personal demographics are extremely important to actual inflation and when that is compared to your income / wealth, it becomes pronounced. If you are getting a college degree, you likely feel the huge increase in tuitions. If you are older and on a fixed income, then your experience with rapidly increasing medical costs are probably skewing your inflation experience. Note that I am unable to imagine or describe anyone who is experiencing tame inflation.

We all have different lives with a matrix of demographics that affect our spending patterns and the ability to pay for them. Inflation is a personal experience. Only a few people exist in the happy medium of 2.3% shown by the most recent CPI. The rest of us who eat, drive, live in heated homes, go to the doctor, etc. are probably experiencing a different inflation number.