Enzio's Clock

Background

1. "Shoots" in the wind

Normally, we refer to "straws" in the wind, but with contributors to CNBC recently  stressing'green shoots", we thought that this noun might be more appropriate.

We are clear: America's  Economic Time® has to worsen. As put forth in our just-released Economic Clock® update for America, she continues suffering under an

• excess demand for money (banks don't want to lend), and thus under an
• excess supply of goods.

This is why previous rallies have sputtered in more recent history. In 2008,  the S&P500  rallied by

• 7% between 3rd Mach and 238th May;
• 7% between 15th July7 and 27th August, and by
  
• 21% from 20th November until 17th January 2009

This year, it has rallied by 15% since its more recent low on 10th March. 

None of this market sputtering can change in the near term: you cannot force banks to lend, thereby creating an excess supply of money! In particular, adding to your existing knowledge base, here are three concerns:

• the federal stimulus cannot help because -by law- the governments in individual states must balance their budgets., This means that even if the US consumer gets more money from the Federal government, s/he is giving it back by way of higher state and local taxes or by lower state and local outlays;
• Congress cannot help.  It is relevant because it   - probably-  will have to approve any Treasury plans. But legislators are caught in political  cross-fires with their constituents: the general voting public is pitted  against those voters who pull the purse strings via campaign finance contributions, and that is increasingly looking like a pernicious street fight between both camps (witness the stones etc. being hurled the homes of some of the rich). This is because of a political structural flaw in how the private investor's risk is limited (see next);
• Private investors cannot help. The FDIC will enable investors  to buy dodgy assets with cheap loans at a debt to equity ratio of six to on. According to the Wall Street Journal of 25th March 2009, p. 13, this means that "...the FDIC would guarantee 72 cents in funding for an asset purchased for 84 cents on the dollar." The op ed in this issue of the  Journal  goes on to state that "If the asset rises in value...the taxpayer and investors share the upside. If it falls further, then the taxpayers(my italics) would absorb by far the biggest chunk of losses."Do you seriously think that members of Congress, already lampooned by voters at large, are going to approve this unequal deal? If they don't, then there will be no legislation - so how can private investors then help out in the absence of legislation?, and 
• Who is "boss"? That the Treasury wants to wind-down some prominent non-bank financial institutions is great - but who, ultimately, will be the boss of a watered-down Resolution Trust: the Fed, or the Treasury? Seems like a turf war will emerge, one whose divisiveness will dampen market enthusiasm.

2. How to Make Money Off This Idea

1. Always consult your financial adviser first.
2. Buy into market weakness on the following ETFS through which to "short":
• overall US market: SDS:US
• US financials: SKF:US, and
• Chinese stock market:   FXP:US