We do not like posting bearish news but we hope readers prefer commentary based on reality versus fantasy.  In 2009, we had what was called a compression rally or others might call it a dead cat bounce.  Some people would also call it a Fibonacci retracement.  The bounce is over and the market will be looking at corporate earnings.  Unfortunately, 70% of the American economy is based on consumer spending.  Most consumers are tapped out and people with money or above average incomes are spending much less. 

Our wealthier neighbors on the other side of the street used to have trucks lined up every morning when the economy was good.  They would have roofers, plumbers, painters, pool men, carpenters and marine mechanics.  You know they have a nice boat when the boat mechanic’s truck says Caterpillar diesels instead of Mercury outboards.  Now the street is fairly quiet each morning.  People are not spending money.

On Friday, the CEO of JP Morgan Chase, Jamie Dimon, said he is more worried about California going broke than Greece.  JP Morgan Chase was better positioned than most large banks in the financial system implosion.  His warning should also be a warning to anyone holding muni bonds. States like NJ, NY, MI, IL, AZ and a lot of others are not far behind.  Pundits, gurus and a few politicians are actively talking about Medicare, Social Security, Medicaid and the FDIC going broke.

A local example of this fantasy that the government can keep printing money to paper over things is occurring in Miami.  Jackson Memorial Hospital is around $244 million in debt.  Much of the loss is due to Medicaid and people not legally in the country using the emergency room for primary care. The hospital was going to cut costs and staff but the hospital unions fought against it.  The hospital cuts are being held for 45 days until they visit Washington DC looking for $50 million.  California is also trying to get billions from Washington.  Where does will the money come from? IOUs? Printing presses? China buying Treasuries that they stopped buying?

So what is the point, interest rates are going to eventually take off.  Who wants to buy government bonds from a country spending itself into oblivion?  To sell those bonds, rates will have to go up.  When that happens, the stock market will go down.  As we type this tonight, France and Germany will buy some Greek bonds to try to save Greece. This will allow them to [ay back the money in a few months by selling more bonds! They will also cut government spending or try.  Who is next? Spain, Ireland, Italy, Portugal? Who knows?   

The Market

So if things crack, where are we headed?  Well right now we are at 10,330. We would guess the Dow would go down to 9,800 or around the 200-day moving average then down to 9,200. Once the ball is rolling in the longer term  - who knows.  We know one person who nailed 2008. He had said the Dow was going to below 7,000 in 2007 in front of a meeting of 100+ people.  He now sees the Dow going below 4,000 over the next 18 months. He said this recently in front a room with about 100 + people.

So if things are so bad, why is the market holding up?  The answer is low interest rates.  Short-term Treasuries are yielding zero, long-term T Bonds are inching up a bit.  The Fed has said they will work to keep rates low but at some point they may have little control.  Interest rates are low so stocks are attractive.  The problem is California, the U.S. Treasury. Greece and loads of other governments may have to start paying a lot more to sell bonds.  When that happens, institutional money will move from stocks to fixed income.  Please note that we may possibly get a short-term rally in the interim but the outlook for stocks is not positive.  The positive part is you can do something about it. We can tell you which countries may avoid a global recession or depression.

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