You Get What you Pay For

by JDH on August 15, 2009

If you like bad news, this has been a good week. Here are some headlines:

Clearly I should not be worrying about the headlines, since the market just keeps on going up. Well, they kept going up until a pullback on Friday left the major averages down for the week.

Fundamentals be damned!

There are some people who are worried, like Royal Bank of Scotland chief credit strategist Bob Janjuah, who believes that we will test the March lows at some point in the next few months.

So who do you believe? The markets are up, so the markets are always right, right?

Perhaps. But if that’s true, why are insiders selling, not buying? I assume insiders know more than outsiders, which is why they are selling.

President Obama was elected with great fanfare. He was going to change the world. Unfortunately, even if he had some good ideas, there was no way one man could undo the mess left by George Jr. and all of his predecessors. Alas, Mr. Obama has just made things worse.

The Cash for Clunkers program may go down as the stupidest government program in history. You encourage people who have perfectly good older cars, and no debt, to trash their cars and finance new cars, mostly with debt. Debt is what got us into this mess in the first place, so encouraging consumers to take on more debt is almost criminal. And what about the environmental impact of destroying thousands of cars? Does that make sense?

Mr. Dines, in the August 14, 2009 issue of The Dines Letter, continues to make the case for rare earth metals, his latest crusade. Rare Earth Metals are those metals with names you can’t pronounce, like neodymium and gallium and lanthanum, that are essential for use in cell phones, small batteries, wind turbines, solar cells and electric cars. Even today’s cars have rare earth metals.

So does it make sense to trash a car that has valuable metals in it? So that a consumer with no debt can take on more debt to buy a slightly more energy efficient car? Nope. Fortunately the demand for the program is dropping, and will presumably fizzle out in the next two or three months.

Here’s the sad part: U.S. taxpayers are on the hook for $3 billion to destroy old cars so that consumers can buy cars from Japan! The largest sellers in the cash for clunkers program are Toyotas! Yup, your tax dollars hard at work to support foreign industry; brilliant!

(I’m a Canadian, so I can be smug about the absurdity of the program. Unfortunately the Canadian government is also run by idiots, so of course they are considering an even more stupid cash for clunkers program in Canada).

Sorry, I apologize for that rant. I know I’m supposed to be talking about the markets, and I know I’m not supposed to be talking about politics, and I know many of you will now put comments on the Forum about why Obama is good, or bad, or whatever. Please don’t bother. That’s not my point.

My point is that we are in a mess. A big mess. And massive government spending, by either a guy named Bush or a guy named Obama, is only going to make the problem worse. If you don’t believe me, try this experiment: Go to every bank in town and borrow as much money as you can on mortgages, loans, credit cards, lines of credit, or whatever. And spend it. Then see if you are better off. See if having a massive amount of debt makes you better off. My guess is it won’t.

I know I have been wrong all year. I did not expect the bounce we have had in the markets over the last three months. I have remained largely in cash, so I have missed it. The bounce may continue for many years to come, which means I will continue to be wrong. If so, I promise to refund your entire subscription fee to this weekly report.

(Oh wait, this thing is free, so I guess you get what you pay for. I’m still amazed that, according to my Google Analytics reports, there are over a thousand unique people each week who read this weekly commentary, which is down from around 1,500 that read it weekly during the boom times of a year and a half ago, but it’s still a strangely large number. I wonder how many would read this if I was actually correct in my assessments……….).

But I digress. The markets are due for a fall. The followers of Fibonacci retracement levels tell me that we are getting close to key turning points. They may be right. All I know is that government spending, and swine flu, and Fibonacci levels, don’t bode well for the future.

Me; I’m staying put. At least until next week. Talk to you then.

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