News 
Market Data 
Discover
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
70% of our treasuries are purchased by our government. How would one confirm this?
It’s a Trap
By Tim W Wood CPA
11/16/2011
So far, the high for the year occurred on May 2nd at 12,876 on the Industrials and on July 7th at 5,627.85 on the Transports. In turn, this left an upside non-confirmation in place and on August 4th both the Industrials and the Transports closed below their previous secondary low points. This was the first time since the March 2009 low that this has occurred. In doing so the primary trend turned bearish in accordance with Dow Theory. Also in accordance with Dow Theory, once a primary trend change is established, that primary trend is considered to be intact until it is authoritatively reversed. In this case, such a reversal requires a move above the previous secondary high points, which has not occurred. Therefore, according to orthodox Dow Theory, the bearish primary trend change remains intact. The current Dow Theory chart is included below.
However, in spite of this orthodox bearish Dow Theory trend change, history also shows that not all Dow Theory trend changes are created equally. Point being, while all major down turns in the market have been accompanied by a Dow Theory trend change, not all trend changes have been accompanied by a major downturn. So, to say that just because we have seen a Dow Theory trend change and that a major turn has occurred is a bit misleading. Therefore, in my studies I have looked at ALL Dow theory trend changes at both tops and bottoms going back to 1896. In this case we are concerned about potential tops so the context of this article will be with tops in mind. What I have found is that while no Dow Theory trend change should be taken lightly, including the current one, there are distinguishing differences.
My studies have also shown me that as the secular bull and bear market periods grew, we began to see Dow Theory trend changes occur within the context of the longer-term trend. This was first seen in 1946. This also occurred in 1948, 1951, 1953, 1956, 1960, 1962 and 1965. Sure, these were important tops in the market, but none of them marked THE top of the secular bull market. The leading Dow theorist of that time was E. George Schaefer and he recognized that the secular bull market had stretched in duration. As a result, Mr. Schaefer explained that he used his other technical studies, outside of traditional Dow Theory, to filter these Dow Theory trend changes.
I want to add that during the secular bull market period that ran between 1974 and 2007, there were also a number of traditional Dow Theory trend changes. Such trend changes were seen in 1977, 1981, 1984, 1987, 1990, and 1998. As it turns out, even the trend change that occurred at the 2000 top proved to have occurred within the context of the longer-term secular bull market, which appears to have finally peaked in 2007. Again, these were all important tops. But, none of them prior to the 2007 top were THE top. Thus, history clearly shows that Dow Theory trend changes are not always ominous nor do they always set the longer-term trend for the market.
With this all said, my long-term view has definitely not changed as I continue to believe that the rally out of the March 2009 low is a bear market rally that will ultimately separate Phase I from Phase II of a much longer-term secular bear market. I also continue to believe that the Phase II decline will be much more devastating than the Phase I decline seen between October 2007 and March 2009. However, as with Mr. Schaefer, based on my other technical studies, I have found that every major top since 1896 has been accompanied by unique DNA markers. It is because these DNA markers were missing in conjunction with the recent Dow Theory trend change that I have to question its strength. I also believe that this Dow Theory trend change will ultimately be part of a much more meaningful setup and that once the DNA Markers do appear, all financial hell will break loose. The details of these DNA Markers and their development are covered in my monthly research letters. Until such time as they appear, the overall technical data suggests that a much larger trap for both the bull and bear alike is likely being set.
Decided to place another big chunck of money in TIPS. Pays divy and should the economy tank with new plan, this seem to be safe.
I'm still in IPE though.
Technical bull indicator...
The Road to a Downgrade
A short history of the entitlement state..
JULY 28, 2011.
http://online.wsj.com/article/SB10001424053111903999904576470551476951590.html#articleTabs%3Darticle
Even without a debt default, it looks increasingly possible that the world's credit rating agencies will soon downgrade U.S. debt from the AAA standing it has enjoyed for decades.
A downgrade isn't catastrophic because global financial markets decide the creditworthiness of U.S. securities, not Moody's and Standard & Poor's. The good news is that investors still regard Treasury bonds, which carry the full faith and credit of the U.S. government, as a near zero-risk investment. But a downgrade will raise the cost of credit, especially for states and institutions whose debt is pegged to Treasurys. Above all a downgrade is a symbol of fiscal mismanagement and an omen of worse to come if we continue the same habits.
President Obama will deserve much of the blame for the spending blowout of his first two years (see the nearby chart). But the origins of this downgrade go back decades, and so this is a good time to review the policies that brought us to this sad chapter and $14.3 trillion of debt.
With former President Truman at his side, LBJ signs the Medicare bill into law, July 30, 1965.
Associated Press
FDR began the entitlement era with the New Deal and Social Security, but for decades it remained relatively limited. Spending fell dramatically after the end of World War II and the U.S. debt burden fell rapidly from 100% of GDP. That changed in the mid-1960s with LBJ's Great Society and the dawn of the health-care state. Medicare and Medicaid were launched in 1965 with fairy tale estimates of future costs.
Medicare, the program for the elderly, was supposed to cost $12 billion by 1990 but instead spent $110 billion. The costs of Medicaid, the program for the poor, have exploded as politicians like California Democrat Henry Waxman expanded eligibility and coverage. In inflation-adjusted dollars, Medicaid cost $4 billion in 1966, $41 billion in 1986 and $243 billion last year. Rather than bending the cost curve down, the government as third-party payer led to a medical price spiral.
LBJ launched other welfare programs—public housing, food stamps and many more—that have also grown over time. Last year, the panoply of welfare programs spent about $20,000 for every man, woman and child in poverty, according to Robert Rector of the Heritage Foundation.
Social Security's fiscal trouble began in earnest in 1972 with bills that increased benefits immediately by 20%, added an annual cost of living adjustment, and created a benefit escalator requiring payments to rise with wages, not inflation. This and other tweaks by Democrat Wilbur Mills added trillions of dollars to the program's unfunded liabilities. Believe it or not, these 1972 amendments were added to a debt-ceiling bill.
None of these benefit expansions were subject to annual budget review and thus they grew by automatic pilot. They are sometimes called "mandatory spending" because Congress is required by law to make payments to those who meet eligibility standards, regardless of other spending needs or tax revenues.
According to the most recent government data, today some 50.5 million Americans are on Medicaid, 46.5 million are on Medicare, 52 million on Social Security, five million on SSI, 7.5 million on unemployment insurance, and 44.6 million on food stamps and other nutrition programs. Some 24 million get the earned-income tax credit, a cash income supplement.
By 2010 such payments to individuals were 66% of the federal budget, up from 28% in 1965. (See the second chart below.) We now spend $2.1 trillion a year on these redistribution programs, and the 75 million baby boomers are only starting to retire.
We suspect that in the 1960s as now—with ObamaCare—liberals knew they had created fiscal time-bombs. They simply assumed that taxes would keep rising to pay for it all, as they have in Europe.
On Monday night Mr. Obama blamed President George W. Bush's "two wars" for the debt buildup. But national defense spending was 7.4% of GDP and 42.8% of outlays in 1965, and only 4.8% of GDP and 20.1% of federal outlays in 2010. Defense has not caused the debt crisis.
Many on the left still blame Ronald Reagan, but the debt increase in the 1980s financed a robust economic expansion and victory in the Cold War. Debt held by the public at the end of the Reagan years was much lower as a share of GDP (41% in 1988 and still only 40.3% in 2008) compared to the estimated 72% in fiscal 2011. That Cold War victory made possible the peace dividend that allowed Bill Clinton to balance the budget in the 1990s by cutting defense spending to 3% of GDP from nearly 6% in 1988.
Mr. Bush and Republicans did prove after 9/11 that the Washington urge to spend and borrow is bipartisan. Republicans launched a Medicare drug benefit, record outlays on education, the most expensive transportation bill in history, and home ownership aid that contributed to the housing bubble. The GOP's blunder was refusing to cut domestic spending to finance the war on terrorism. Guns and butter blowouts never last.
Then came Mr. Obama, arguably the most spendthrift president in history. He inherited a recession and responded by blowing up the U.S. balance sheet. Spending as a share of GDP in the last three years is higher than at any time since 1946. In three years the debt has increased by more than $4 trillion thanks to stimulus, cash for clunkers, mortgage modification programs, 99 weeks of jobless benefits, record expansions in Medicaid, and more.
The forecast is for $8 trillion to $10 trillion more in red ink through 2021. Mr. Obama hinted in a press conference earlier this month that if it weren't for Republicans, he'd want another stimulus. Scary thought: None of this includes the ObamaCare entitlement that will place 30 million more Americans on government health rolls.
This is the road to fiscal perdition. The looming debt downgrade only confirms what everyone knows: Congress has made so many promises to so many Americans that there is no conceivable way those promises can be kept. Tax rates might have to rise to 60%, 70%, even 80% to raise the revenues to finance these promises, but that would be economically ruinous.
Yet Mr. Obama and most Democrats still oppose any serious reform of Medicare, Medicaid and Social Security. This insistence on no reform reinforces the notion that our entitlement state is too big to afford but also too big to change politically. This is how a AAA country becomes AA, the first step on the march to Greece.
AI
