I'm gonna go out on a limb here.

I believe we made a top in February in the broad market indices.

Yes, I mean it.

I'm really calling one.

My confidence is only about 75% right now, but it's increasing dramatically.

Here's why.

What drives equity prices, in the end? The same thing that drives all other prices. Supply and demand. Nothing more or less.

Earnings drive the multiple that people will pay, but not whether they will buy stocks - and other investments - at all. THAT is determined by.... supply and demand.

Just as it is for cars, trucks, computers, gasoline..... anything.

Now, what's happening on a macro level - that is, in the United States as a whole.

Two things:

• Boomers are starting to retire. This means that they will, over the next few years, begin to withdraw from their 401ks and IRAs to fund their retirements. This is a net negative cash flow situation out of investments.
• The housing bubble has burst; the ATM machine is CLOSED. People have withdrawn equity and spent it - whether it went into the market (and some of it did) or was blown on a car, truck, boat or vacation doesn't matter - the fact is that there's no more equity to be extracted in this fashion.

Note that money already in the market moving from one investment to another (whether that investment is real estate, stocks, bonds, whatever) does not have a net impact on investments as a whole. It can and does determine what sector(s) do better than others, but not on the price of the total investment pie.

The boomer situation was always going to happen, and we've known that for quite some time. It is, in fact, something I've blogged about in Musings (May '06, March '06 and elsewhere) on several occasions - how we will, and not too far in the future, run right off an economic cliff, just like the Coyote - and with the same results.

The housing implosion was telegraphed long in advance, but I was totally blind to the insanity in the lending industry. I figured that people had gotten way ahead of themselves, but they were doing it with equity - like, for example, by robbing 401ks. Wrong. They were doing it with "exotic" loans - something that was totally off my radar until it all started to go bang a month or so back.

Well, this last couple of days I've gone back and started recomputing a few key pieces of information. Like, for instance, where the edge of the cliff is.

I saw some rumblings about this a few days ago on the net, and that prompted me to re-run computations that I'd done back when I started blogging about the coming economic implosion of America - in March of 2005.

What did I miss? The 40-60% of the people who couldn't have qualified for loans in 2006 (and likely a good part of 2005) if they had to do so on the fully-indexed rate, plus the inversion in housing prices (which hadn't happened yet; the market had flattened, but not turned down.) In retrospect, I guess I get a fair pass on that - after all, it hadn't happened yet!

Well, when I got done adjusting out that growth rate in investable capital, I sat at my desk, stunned. Then I cleared my trusty HP12C and did it again. And then, once more.

I had expected the number to flatten out. What I didn't expect was that when the dealflow shut down on the ALT-A and Subprime mortgage space, investable capital went negative.

Now folks, I cannot peg exactly when the top has - or will - occur. I believe we hit it in February, but I could be wrong - we might grind higher for a bit, or we may be swirling around the bowl right now.

But this much is certain - you cannot have increasing investment prices if the investable capital is decreasing.

In retrospect, the bounce off the February highs makes perfect sense. So does the decreasing volume on approach for the retest, which in the S&P, has pretty much happened now.

The most important part of this picture is that there is essentially nothing that can be done to fix it. I went back and assumed a half-point rate cut - it moved the inflection point out by a couple of months - but that's all. Even an immediate drop in the Fed Funds rate to 4% - a change that would spark inflation way beyond Bernacke's tolerance - would not restore the upward slope of the curve.

So, essentially, here we are, with what (unless I've done the numbers wrong) is a fall-off in investable capital. The curve has little slope now, but in the remainder of '07 and especially into '08 and '09 it starts to look like a waterfall as increasing numbers of those ARMs reset (one copy of the chart can be found here) and the increasing slope continues for a full five years out.

This forecasts a bear market of five years duration. And oh, by the way, barring some Act of God the second bear market that I was worried about 10-15 years from now is still going to happen too - there may be a recovery between the two, but it will be of relatively short duration (3-4 years?)

Now folks, this isn't the sort of forecasting that many people put much stock in. But it was the foundation of my entire premise for the March '05 call on the coming economic implosion in the United States, so if I follow my own economic model, with these revisions, then we topped in February and the direction of the market for the next several years is DOWN!

In this sort of environment "buy and hold" is not such a great investment strategy. While you will eventually recover your money, it may take ten years before investments, purchased today, are above-water again!

Now a few days ago, on April 1st, I posted an article on my blog talking about a coming meltdown in the markets. That was based on the housing market, the technicals, and the fundamentals.

I had totally missed the investable capital curve inversion. That just amplifies all the other indicators - and raises the risks significantly.

Beware. There are people out there who claim that their own particular form of this signal is 100% reliable going back to 1900. I don't have the data to support that nor am I anywhere near as refined in my computations as some of the others, but what I do know is that it was this signal that caused me to bail to municipal bonds in 1999, and it was SPOT ON with the call.

Do with this what you will. I'm already fairly-well positioned myself, and will make the rest of the adjustments that are necessary in my portfolio on Monday.

Labels: Bear market, investable cash indicator