There Are Enough Cracks In The Dam – Stay Short!

Yesterday, the market started off on a weak note when Greece's credit rating was lowered. As I mentioned, the PIIGS economies (Portugal, Ireland, Italy, Greece and Spain) are fragile and credit downgrades are possible. This morning, Spain's credit rating was placed on a "watch list" by Standard & Poor's. They are on the brink of having their debt rating lowered. Eastern European countries are dangerously close to default and today we learned that Latvia's GDP fell 19% in Q3. They have already tapped into emergency funds from international sources. Global financial conditions have stabilized in the last eight months, but we are far from out of the woods. Loose credit and irresponsible lending practices will take years to filter through our economy. Americans with free access to capital are like a dog with a bottomless bowl. We will eat until we keel over. We have been feasting for decades and the problem stretches from our government down to individuals. Last week, a former treasury comptroller calculated our nation's total indebtedness to be $56 trillion. That includes future obligations like Social Security, Medicare and pensions. The combined net worth of every American is $46 trillion. We are $10 trillion in the hole and we pray the rest of the world will not take the bowl away. In the good old days, Americans would buy US debt and finance our government's needs. Now, the majority is funded by foreign investors. States are also in bad shape. Today, Illinois debt rating was lowered by Moody’s. There are proposals to raise state personal income taxes by 50% in 2010. In aggregate, all 50 states are about $300 billion in the red. This is prohibited by the U.S. Constitution and they must balance their budgets. This means that state governments will cut payrolls. Our personal savings rate has been declining for 20 years and it went negative in 2007. The average baby boomer has less than $100,000 saved for retirement. One third of all homes have negative equity and 15% are either delinquent on mortgage payments or are in foreclosure. Our personal balance sheets are a mess. Corporations have been fiscally responsible. They have strong balance sheets and they are waiting for signs of improvement before they increase capital expenditures and hire new employees. President Obama has publicly stated that corporations are too efficient. They are not hiring back employees when they can afford to. Apparently, he wants businesses to operate more like our "can't say no" government. Another stimulus program and healthcare reform are on the political front burner before year-end. We will see if Congress can push these through. The market has rebounded this morning and seasonal strength should keep profit-taking in check. If sellers get more aggressive throughout the day and the market can't rebound from yesterday's decline, anxiety will set in and investors will head for the exits. The key is to watch the price action in the last hour of the day. If the market is not able to sustain a decent rally, we will see a late day selloff. Tomorrow's initial jobless claims number should be decent, but it's hard to say how the market will react. Good employment news last week did not generate the rally you'd expect. Hang on to bearish positions. There are enough cracks in the dam to spark selling. A breakdown below SPY 108 would be very bearish. If we close above SPY 111, lighten short positions and wait for a better entry point.

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