I don’t think it’s any stretch [of the imagination] to say that we are now facing a coordinated economic slowdown the likes of which we haven’t seen since 2008 and, frankly, something has to give — and my belief is that it will be stock prices! Here’s why. Words: 710
So says Mike Larson (www.moneyandmarkets.com) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Larson goes on to say, in part:
Here’s what have we learned about the real economy in the past several days – and none of it is good!
- Retail sales fell 0.2 percent in May, the second such decline in a row. Strip out auto sales and you get a 0.4 percent drop, the biggest fall in any month going back two years! The Dow Industrials were trading around 9,900 at the time.
- The Institute for Supply Management (ISM) Manufacturing Index plunged to 49.7 in June from 53.5 in May. That was far below forecasts and the single worst reading going back to July 2009! [Read: Telling It Like It Is: Latest PMIs Reveal Truth About the Global Economy] The Dow closed out that month at around 9,200.
- The ISM Services Index, for its part, slumped to a worse-than-expected 52.1. That was the lowest reading since January 2010 (Dow level: About 10,100).
- Overseas, we saw China’s PMI report on manufacturing fall to a seven-month low.
- In the 17-nation bloc of countries that use the euro currency, the jobless rate just hit 11.1 percent. That was the highest monthly reading since officials began tracking back in 1995! Care to venture a guess where the Dow finished that year? Try 5,100.
None of the above means the Dow has to get cut in half tomorrow, or lose 3,000 points in the next few weeks, but it does underscore the massive economic threat we’re facing. In fact, I don’t think it’s any stretch to say that we are now facing a coordinated economic slowdown the likes of which we haven’t seen since 2008.
Judging from the chart below, something has to give — and my belief is that it will be stock prices!
The main reason stocks haven’t tanked yet is that Wall Street still believes that somehow, some way, fiscal and monetary policy will come riding to the rescue! I’ve maintained for a long time, however, that policymakers can paper over fundamental problems for a little while but, in the end, those fundamentals always win out. We saw that in the first phase of the great credit crisis a few years ago, and I believe we’re seeing that play out again. Indeed, my wariness of downside stock risk here stems from the 2008 playbook [in that], just as it did back then:
- the global economy is slowing sharply,
- a great credit crisis is sweeping through the markets,
- policymakers are trying to help by enacting several measures designed to stem the losses and now
- the half life of each bailout is shrinking rapidly.
The above makes me believe that this is a battle that policymakers can’t win for more than a few days or weeks. The numbers are just too daunting. Greece, Ireland, Portugal, Spain and Cyprus have already received hundreds of billions of euros in pledged help and reports now suggest Slovenia could soon look for its own program. If that happens, it would mean six out of the euro-area’s 17 countries are on the dole. Is that really affordable over the long term? Of course not!
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Take Action When the Market Rallies
One lesson I learned during the first phase of this credit crisis was that you have to look at intervening rallies like the one we just got as gifts. They offer great opportunities to:
- buy inverse ETFs more cheaply than you could otherwise get them and to
- unload any vulnerable stocks you may own.
I won’t always remain negative. I’ve switched approaches in the past, and will do so again but only if two conditions are met:
- we get a grand plan that actually attacks the underlying sovereign debt, rather than temporarily paper over them and
- we get a REAL washout panic. I’m not talking about a mild correction like we had recently. I’m talking about the kind of sell off where investors dump anything and everything.
I recommend you steel yourself against grand projections of successful “fixes” in Europe — or Wall Street talk that central bankers somehow have an ace up their sleeve to save us all!
Until next time,
*http://www.moneyandmarkets.com/deepening-downturn-to-put-more-pressure-on-markets-49978 (To access the above article please copy the URL and paste it into your browser.)
Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
We are continuing to see ongoing pessimism among individual investors about the short-term direction of stock prices [but if you are a contrarian you should bet on a continued rise in stocks despite the continued sense of unease. Let’s take a look at a few charts that tell the story.] Words: 510
Looking at the charts we…[see] a very strong double-top formation – very similar to what we saw back in 1980….[which suggests] that we are headed all the way back down again, possibly even to the lows that we saw in 2011….This is likely to weigh on equities. Words: 291
Goldman Sachs reports their Global Economic Indicators (GLI) show the world has re-entered a contraction and…is predicting a market crash worse than that of the early 90′s recession and one slightly less than the sell-off at the turn of the millennium. [Below are graphs to support their contentions.] Words: 250
The latest research note from CITI’s Richard Schellbach includes the firm’s “Multi-asset Investment Clock” which tells us we are now at 8 o’clock. What does that mean? Take a look.
As investors become more and more worried about the world economy…it makes sense to us to look into stocks that held up best in periods of market decline. Managing risk is as important as reaching for return. One aspect of managing for risk is the past behavior of particular stocks in negative market periods. Toward that end, we identified four key, recent down periods for the S&P 500, and identified those liquid stocks that were in the top quartile for price return in each of those four periods, and did at least as well as the S&P 500 index in the 2008 crash period. [Take a look!] Words: 620
Marc Faber has stated in an interview* on Bloomberg Television that “I think the market will have difficulties to move up strongly unless we have a massive QE3 (something Faber thinks would “definitely occur” if the S&P 500 dropped another 100 to 150 points. If it bounces back to 1,400, he said, the Fed will probably wait to see how the economy develops)….. If the market makes a new high, it will be with very few stocks pushing up and the majority of stocks having already rolled over….If it moves and makes a high above 1,422, the second half of the year could witness a crash, like in 1987.” Words: 708
Investors are being told that the worsening sovereign debt crisis in Europe will leave the U.S. economy unscathed….[because,] since we don’t make many things to export to Europe, our GDP won’t suffer a significant decline at all…. What [has been] conveniently overlooked, [however’] is the fact that 40% of S&P 500 earnings are derived from foreign economies and the seventeen countries that make up the Eurozone have collapsed into recession. [Let me explain what effect that will have on the performance of the S&P 500 this summer.] Words: 325
At the end of November 2011 the U.S. behavioral indicator for the U.S. stock market, based on insights on investor psychology, touched the crisis threshold for the fifth time (1971,1979, 1986, 2006) since 1970. If the current case follows the four prior cases, we expect a similar positive return from November 2011 to the end of October 2012 as in the four prior periods followed by a decline somewhere between 15% and 30%. [Let me explain.] Words: 317
The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. My latest estimates [suggest] that the broad stock market is about 33% above its arithmetic mean and 42% above its geometric mean……Periods of over- and under-valuation can last for many years at a time, however, so the Q Ratio is not a useful indicator for short-term investment timelines [and, as such,] is more appropriate for formulating expectations for long-term market performance. [Let me review the Q ratio with you, along with several graphs, so you can clearly understand what the Q ratio is, how it works and what it is currently conveying.] Words: 800
The second half of the year has begun, and…one of the best leading indicators that can shed light on the health of the economy is the purchasing managers index (PMI). The latest local readings of the manufacturing PMI for countries around the world collectively…give investors a critical insight into the pace of economic growth by month [and they can be found below.] Words: 550