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Five Things for Monday, June 1


Strange Days, Personal Savings Rate, Market Target and Turning Bullish?


1) Strange Days

For more than a year now I've awoken nearly every morning with the same terrible thought: What fresh hell is this? Part of it is finance-related. But above and beyond finance there's the strange sense of being frozen in place while reality slowly melt away. You can hear it in the voices of news anchors who report increasingly bizarre events with the same mechanical numbness as flight attendants illustrating how to put on an oxygen mask.

How is it possible to report in the same breath that General Motors (GM) is preparing to file for bankruptcy protection on the same day that Chrysler is emerging from bankruptcy without ducking under the desk to take a sip of whiskey from a flask? I don't know either. Which is why my television appearances are limited to carefully scripted affairs involving months of preparation, weird camera angles and multiple takes.

Even stranger is the fact these bankruptcies have actually sparked improvements in credit market conditions, not fully dismantled them as many once feared. Part of that improvement - being felt in the bond market as narrowing corporate credit spreads and falling yields as safe-haven Treasuries are sold to buy corporate debt - is related to at least the perception that bondholders of both Chrysler and GM were able to walk away from the government bargaining table with at least some measure of self respect intact, no small feat.

Of course, the largest ownership stake in GM, around 60%, now belongs to us. How's your self respect doing? Meanwhile, the well-polished silver lining-ists working this cloud are taking the view that the GM and Chrysler bankruptcies will prove to be beneficial to the economy longer-term.

Yes, these are strange days.

2) Personal Savings Rate Hits 14-Year High

Here's another notch in the deflationary belt: personal saving as a percentage of disposable personal income reached 5.7% in April, the highest since February 1995. The nominal personal savings level of $620.2 billion marks the largest since record keeping at the Commerce Department began in January 1959.

Now, unlike the contortions required to view the GM and Chrysler bankruptcies as longer-term positives, this actually does have the potential to be a longer-term positive... if policymakers will allow asset prices to decline to natural levels.

Graph of Personal Saving Rate

3) Target Practice

The SP futures and now the SPX Index have now perfected the weekly TD Sell Setup. What does this mean? A TD Sell Setup is nine consecutive bars where the close exceeds the close four price bars earlier. Remember, that for a setup to be perfected the high (low if a buy setup) of bars 8 or 9 must exceed the highs of both bars 6 and 7.

When a setup does not meet this requirement for perfection, then instead of getting the typical 1-4 bar reaction to the setup, prices will often need to gravitate back above the high of bars 6 and 7 in order to fully exhaust the underlying momentum that the setup is counting. Remember, these are weekly charts, so we are looking for a reaction within a 1-4 week time frame, not an immediate reaction.

What about potential targets? Moving down to the daily charts, there are a couple of important levels that stand out. The first is the 38.2% TD Absolute Retracement Up from the March 6 low. That generates a target of 944.43. The equivalent level on the NDX is 1537.39.

I am not looking for these levels to initiate short positions. They are merely guideposts for the near-term. Rather, I want to be building longer-term exposure to U.S. stocks just as I have with emerging markets stocks.

4) Bullish? Depends on the Time Frame

So, does this mean it's time to be bullish? Depends on the time frame. I can live with the possibility of a 20%+ decline in S&P 500 over the course of a decade or more, but not a 50%+ decline, which is where we were 18 months ago. Look at it this way. At 750, I have a pretty good idea which way the next 700 points are going to be on the S&P 500. At 1500 in 2007, however, I did not.

Increased bearishness at 750 should be a conversation that takes place while one is packing and stocking ammunition and food supplies, not within an investing forum. I don't mean that facetiously. Those who are forecasting an all-consuming and destructive hyperinflation would be better served closing their money management firms and putting their money where their mouth is, not running for public office and scaring up votes, as it were.

5) News & Weirdness

GM Files for Bankruptcy in Bid to Regain Profits With $50 Billion U.S. Aid - Bloomberg
You and I have a 60% stake in General Motors now. Like it or hate it, the Chrysler and GM bankruptcies are being interpreted as positives by credit markets (see Number 3, above) and just as the deterioration in credit in 2007 and 2008 were leading indicators for stocks, improvement in credit is signaling stocks may be too negative here.

Minyanville's Andrew Jeffrey Breaks Down the GM and Chrysler Bankruptcies - Minyanville
"Without a dedicated client based in the United States that buys its cars because they are superior to those manufactured by its foreign competitors, the restructuring of GM will fail in even its most modest aims."

Dept. of Rally-Not-Quite-Finished:
Investors Skeptical on Stock Market Rebound - Financial Times
"Barclays Capital has revealed that just 17.5% of the 605 investors interviewed for its quarterly FX investor sentiment survey – including central banks, asset managers, hedge funds and international corporate customers – think risky assets have further to rise."

Note to Inflationists: Zimbabwe Monthly Inflation at -1.1% In April - Reuters
But hey, that's a slowing in the rate of deflation, which was -3% in March. Schools have reopened, hospitals are functioning again and shops are now stocked with basic goods. Electricity shortages remain, however, and some suburbs are still without water, a potential source of another major outbreak of cholera, which has already killed more than 4,200 people, according to Reuters.

Black Swan Fund Makes Big Bet on Inflation - WSJ
"Universal will invest in options tied to commodities such as corn, crude oil and copper, as well as options on stocks such as oil drillers and gold miners."

Meanwhile: Cutting Salaries Instead of Jobs - BusinessWeek
"The president of United Technologies' (UTX) $34 billion-a-year commercial businesses has frozen hiring, deferred pay increases, and required some executives to take a week of unpaid leave." Over the past nine months, FedEx (FDX), Hewlett-Packard (HP), Advanced Micro Devices (AMD), and The New York Times (NYT), have all trimmed staffers' base pay.

Brokerages Drop Fees to Retain Top Clients - WSJ
To retain valued retail-brokerage clients, Morgan Stanley (MS), Smith Barney and others are offering clients discounted commissions or in some cases waiving account-management fees.

Starbucks Pushing Landlords for 25% Cut in Cafe Rents - Bloomberg
Starbucks (SBUX) presses commercial landlords in a deflationary move to lower rent costs.
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