THE MARKET IS AT RISK OF A MAJOR SELL-OFF
The overwhelming weight of the evidence over the past four to six weeks is that economic growth has peaked and is now slowing down. In that period we have seen either disappointing results or actual declines in the following important economic indicators: core durable goods orders, the Chicago Fed National Activities Index, initial weekly unemployment claims, new home sales, existing home sales, payroll employment, the NFIB Small Business Index, construction spending, the ISM Non-Manufacturing Index, personal income, the Kansas City Fed Index, the Philadelphia Fed Survey, industrial production, the Empire State manufacturing index and the NAHB Housing Market Index.
These indicators cover most of the U.S. economy and generally provide a good idea of where activity is headed. In this regard we point out that the Chicago Fed computes and puts out a little-followed monthly indicator called the Chicago Fed National Activity Index (CFNAI), a weighted average of 85 monthly economic indicators covering production, income, employment, hours worked, personal consumption, housing sales, orders and inventories. The CNFAI has declined for three consecutive months and entered negative territory in March. From what we see so far in the current numbers, another drop is likely in April as well.
The significance of the above data is reinforced by ECRI Weekly Leading Indicator. On December 10th the ECRI dropped to 5.25% below a year earlier, a level that indicates a high probability of recession. In fact, since 1968 the ECRI leading indicator has declined to that level or below only six times, and each time a recession began either a few months before or a few months after. There has never been a false call, and this is the first negative call since January 2008.
Since most serious investors follow the same economic releases that we do, they must be aware of the fragility of the current recovery, particularly given the household debt burdens and the problems in Europe and China as well as the so-called “fiscal cliff” awaiting the U.S. That is why they slice and dice every single word in the FOMC monetary statements, minutes and speeches of Chairman Bernanke and every other Federal Reserve Board member, hoping to get a hint that QE3 is coming to the rescue soon. Yesterday was a good example where the FOMC and Bernanke basically said nothing new, yet were subject to all kinds of interpretation by the “experts” who do that sort of thing for a living. The market has been moving up on the liquidity provided by central banks around the world and is deathly afraid of going it alone.
All in all, the economic recovery is not sustainable, and we doubt that the Fed can do anything more. Although QE1 helped prevent the economic and financial system from collapsing, each easing move after that has had less and less effect. We believe that the stock market is in for a rude awakening.
36 Comments
To quote Neilson from The Simpson, ha ha!
The economy is not the stock market, especially when QE3 perceptions start building.
Wow, are these guys ever right about anything? Permabears are perma-wrong…except once every 5 to 7 years.
Looks like it is time to double down on those market bets……
Funny this is following a very similar trajectory to last year which means the revisions will be negative and the GDP will be even lower than this pathetic number – especially given how sensitive the number is to the deflator.
If it wasn’t for the 100% expensing at the end of last year I think this initial print would have been even worse.
Last year ended up being revised down to 0.4% for those that were paying attention from an initial expectation of well over 3%. The recent trend is weakening so it is hard to see how this won’t be a similar path to last year.
The FED of course is the intangible. Stocks swooned last year with the same kind of data so this year will be interesting.
After trillions of pumped up go go money from the Federal Reserve……. The muppet puppet stares into the abyss with several high probability demand/supply shocks on the horizon……. if one looks away from the engineered index the shorting opportunities are galore. The macro neoclassical experiment has run its coarse…….. investment trends start with the belief of a few and end with the conviction of the many…… IMHO, the muppet puppet’s press conference was one of those moments. Stay long the “controlled” issues and short the pee out of the issues not covered by the puppet’s muppet masters.
For those new to this site. There are a number of books on ivesting. One of the most important chapters of the good books.(Howard Lindzon books on Trends and many others on momentum..Seth Klarmans-Margin of Safety, Howard Marks, David Einhorn. etc.) is the chapters that talk about NOISE.
To quote Lindzon-”…you will welcome the naysayers and no longer fear them.”
Comstock doesn’t just listen to the noise but they help dissemante it in hopes you too will be at the losers bar. Talking about all the things you could have done or should have invested in. Be cautious they will say under the guise of prudance. My dear Og Mandino would say…”only the coward is convinced that he is only being cautious and the miser always thinks he is practicing frugality”
I don’t know if the market is ripe for a “big sell off” based on GDP numbers. Neither does Comstock. Find opportunities, get some knowledge, work hard and invest in the future.
That Chapter on noise is Comstock.
But in the last two years the market always went down when the QEs got over. So what’s different now? Pl forgive me if I sound dumb. I’m a novice investor.
@ bahar
No one said QE won’t be done in June. Let me offer some Historical Color.
Back in 2011 I was calling for the market to peak at 1350 and then decline first sub 1000(990) then a rally and then lower into 850-875. I don’t believe 400 billion was enough to totally halt the decline from 1363 down to 1098.
I believe(not that it matters what I believe) the coordinated Central Bankers with LTRO/BofJ/FED from September-January adding and telegraphing 1.7 Trillion U.S dollars into the markets did it.
If their is NO QE come June 24th..and Europe implodes guess what happens. You guessed it…something none of us can predict..more monetary market dusting from above. They have gone mad.
It could be Emerging Markets-China, ECB, and BoJ and Bernankes implied Helicpter Marke Dusting. He doesn’t need to dust…he just needs to look like he’s walking over to the helicopter.
Silly all this seems to be. I agree…but the iSPX/Honeybadger always does what it wants. It could all change next week with a break below 1363 for me.
But it seems to me the economy is grinding along(muddling as Cullen likes to say) with one exception. Central Bankers are throwing money into any holes that pop up. No matter how big or deep.
In all seriousness though how can we justify all news is good news and slow recovery equating to all time highs? I’m neither bearish or bullish but always try to be logical. Is this country in sum as wealthy as it was in 2006? The real question that all raging bulls should answer is can liquidity overflow continue forever? And that again is a real question, I have no favorite answer. It seems clear based on relative performance of the market during the Feds magic tricks of shuffling piles of money around is that the market cares only what central banks do. And that leads to can they do it forever?
Is it as “wealthy?” I don’t know.
Is there more money in the system with which to bid up financial instruments?
Even if the iSPX sells off this new hologram technology could be used for the 94-95 Analogs to go higher. Just put a hologram over the sell off an no one will know. If they can bring Tupac back then bring back 95-99!
The honeybadger doesn’t care about Spain or GDP.
2 days above 1390
3 days up
Up on bad news
As Jeff Saut likes to say…you can get cautious but don’t get bearish
Long short works best. Long only has to much risk. Bernanke’s press conference was a game changer for the neoclassical guys……
@ Coolidge Low-
You know..I can learn alot..but I’m convinced either I’m the worst shorter ever or Bernanke/Draghi have hacked into my computer and when I add SDS on they add more money into the system. Since I can’t figure it out..in fact..the other day when it was struggling at 1363 I almost shorted again..but just gave up on shorting. Not that you can’t…but I suck at it.
I think there are a number of studies that suggest shorting equities is much more difficult for a typical speculator than playing the long side. A look at historical charts suggests this as well. Sharp sell offs tend to be followed by furious rallies. All of this volatility can be gamed of course, but when you have a long you have something that, hopefully, has some intrinsic value. When you have a short you have the potential for infinite loss. Unless one’s timing is superb, shorting can cause a lot of indigestion. If for no other reason than that, shorting is psychologically more difficult. In the end, it’s sometimes possible to simply camp on an unwise long (not necessarily smart to do so, but possible) until it comes back. Camping on an unwise short takes a lot more guts, and I would wager that time is never on the shorts’ side, except in cases where a particular company is going to actually fail. When I was a kid, I shorted sometimes. I never made much money on that side. But my longs seem to pay off well, even in terrible markets. Obviously, I’m missed great shorting opportunities. But I’ve had enough experience with the animal to understand that it has sharper fangs than its counterpart.
@ Coolidge Low
I figure it out. When bloomberg shows a picture of the black and gold helicopter that Ben uses to dust the markets on the bed of the Ron Paul Libertarian Toe Truck I’ll short.
When that happens the honeybadger will bite Bens arm off for not feeding it and then Joe Pesci will come in like Goodfellas and the honeybadger will be his pet.
We’ll change the honeybadgers name to Joe Pesci and it’ll be one mean SDS all the way down.
1500 by July. Old highs late 12 / early 13.
1900 summer 14….
Mr Ferro –
I feel like I should go ‘all in’ with those numbers…
B Ferro -
Your like EF Hutton- You say very little but the party stops to listen.
BF, Your line sounds vaguely familiar. I’m sure I’ve heard it before somewhere.
1500 by next April, up from around 1400 right now in July. Ah! actually we’ve gone back in time to July 1999.
FF almost 13 years on and the market has gone absolutely nowhere NET while plumbing the depths at 666 en route.
Profit levels at record highs, US and most of First World remain mired in debt, the rationale for why things will continue to improve in this idyllic world you paint will be worth reading. Please tell.
Who knows Cy. You and I can argue about why things should or should not happen all day or we can just accept the fact that despite two consecutive summers of near depression like financial contagion in Europe along with ongoing fears of the US slipping back into recession and China hard landing, the SPX is at a four year high…
That type of resiliency is worth paying attention to. If those things can’t sustinably take us lower, what will?
Also, have you ever considered the idea that emerging markets are in a secular growth cycle similar to that which the US experienced in the 82-00 period? If so, by my watch that puts us 12 years into their cycle (assumimg 00 is the beginning) or, per the US comparison at ~1995…
Food for thought.
Lastly, are headlines like the following more indicative of market tops or bottoms in your view?
http://www.bloomberg.com/news/2012-04-27/equity-fund-redemptions-in-april-are-largest-in-17-years.html
BF, that’s a good question. In other decades, huge redemptions would have to have been seen as a positive sentiment indicator. But with demographics running the way it is, and with more and more people needing to draw down savings as a result of income stagnation to maintain lifestyles, I’m not sure that’s the case moving forward. You?
@ B Ferro
What I think I know: US Market is supported at these levels thanks to QEx / Twist / promised ultra low rates until 2014 / No labor pricing power / Govt Deficit spending supporting Corporate profits plus in a world full of problems the US is actually in relatively un-bad shape.
What I don’t know: how long will these good (equity market) times last.
What I worry about: what happens when 1 or more of above no longer supports equity prices.
None of the above gives me any great confidence that the market will make your projected leap to 1900 but I’m happy to be proved wrong. Re redemptions I think Lance has it spot on – who knows?
When was the last time Comstock warned of the upside risks? Or made a call that was not bearish?
The guys I respect the most are those that make calls in both directions, not just one.
A layperson like me reasons this way. They want a rally in Oct., just in time for the election. Or at least they wouldn’t want a pullback on third week of Oct. But they do want a pull-back to justify the next QE. So QE will be announced in July. Lot of bad news until then.
All these comments are very interesting – it seems NOBODY believes the market could possibly go down more than a couple of %. I respect both sides and understand the arguments, but this sentiment backdrop really makes me stop and think…
Interesting comments, but I’d think that rail volume is a coincident to slightly lagging indicator rather than a leading one. Thus, I wonder how much this really tells us about what’s ahead for the economy or equity markets.
I’m very concerned about many negatives in the global macroeconomic outlook. Contrary to what Anon said, I do believe the market can POSSIBLY go down more than a few %. We just had a 4.3% correction in early April, and I think we could easily see a 6% or more correction in May. However, I do believe it is probable that if the SPX were to fall by 150 points down to 1250 or lower, then the Bernanke put and ECB put would come into play. We would see QE3 and LTRO3. Then there would be a big bounce in equities. This is what emboldens the bullish investors now.
How about some inventory change analysis?
I understand that inventories have been growing in the last 2 quarters and making a significant contribution to GDP.
Are they blowing out, or merely growing in line with general growth in sales?
I would have thought that YOY inventory growth should be slight but stable (say 2.5% pa) within seasonal patterns now that we have had consistent employment growth and 12 quarters since the bottom.
Any inventory specialists out there?
Did anybody actually read the GDP numbers? The economy absorbed a huge drop in government spending and eeked out real growth that is above the 1.5% estimates that were put out just a few weeks ago. Not too shabby.
It’s fashionable to be bearish, but the fact is that the economy is still growing, and that is supportive of earnings and asset values.
sure- gdp numbers have been continuously revised down with no headlines… only the initial staw man numbers get a print… just like unemployment. this market has no fundamentals whatsoever- levels matter. it is soley supported by hft qe ltro…
which is not to say that there is not money to be made, there is.
let’s just not get fooled into thinking there is anything good about the economy in the u.s. or globally.
Did not seem you read the report.
Estimate was 2.5%. So 2.2% was a disappointment.
Government cutbacks had been smaller than before and had a smaller impact on the GDP this time. Still did not help.
Inventory was lower than last quarter’s, but still pretty high. Especially when compared to disappointing final sales. This is going to drag in the second quarter.
The only bright spot is Personal Consumption Expenditures. But real personal disposable income was negative. These all indicated Q1 was much a weather factor: warm winter and people got excited and spent more than they had.
Finally, the real GDP counted on a questionable deflator to even get to 2.2%.
How can you say there is growth when inflation is higher than GDP!?
How is GDP helping real employment/underemployment (abysmal job creation, looking at employed population ratios), incomes, debt/deleverage? Are purchasing power and financial costs & burdens getting lower or higher? How is the distribution of these GDP gains?
Big corporate balance sheets are doing amazing, and record incomes too; as well as CEO’s pocket’s. The rest, not so much. There you go with the ridiculous obsession with meaningless GDP.
http://www.bloomberg.com/news/2012-04-27/equity-fund-redemptions-in-april-are-largest-in-17-years.html
” Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
- Warren Buffett
I love all the negative talk. With confidence, I will remain long the market, buying more stocks during every correction.