IS THE RECOVERY BUILT ON QUICKSAND?
For the first time in months, the foundation of the 50% rally is being called into question. There is no doubt that the March bottom in the stock market was largely driven by government intervention. What the government was relying on with this plan, however, was that they could buy enough time to get the consumer back on their feet. Recent data, however, is beginning to show signs that the consumer is just as weak as they’ve ever been and showing little to no signs of recovery.
As we’ve been quick to point out, the real underlying components of this recovery have been questionable at best. Rail data continues to come in incredibly weak, retail sales have shown almost no signs of recovery and corporate earnings have shown no signs of organic growth (i.e., the no revenue recovery). Governments around the world are running short on time as global stimulus plans begin to lose their gusto heading into Q3 & Q4 of 2009.
The most alarming government intervention has not been in the U.S., however. China, one of the primary drivers of the global recovery, could be building a recovery on quicksand. Deloitte is out with a recent report detailing this intervention and the potential unsustainability of the government induced recovery:
Though the economy is forecast to grow above 8 percent in 2009 — it is likely to happen — there are significant vulnerabilities in the system. Much of the growth is being driven by the state and very little by consumers. For any sustained recovery, and because external markets still remain weak, domestic consumers must eventually become center stage in the recovery process, something yet to happen. Though car sales are up significantly, the high number is because of the base effect as well as government subsidies — it means car sales will falter sooner or later. Large swathes of migrant workers lost their jobs (they don’t show up in official unemployment statistics) and haven’t found new ones; the retail sector is at risk once subsidies on appliances are withdrawn.
As I type, Asian stock markets are all down 3%+. U.S. stock futures are down 1%. The so called “recovery” has been powerful thus far, but will almost certainly sink beneath the sand if the consumer does not find their footing. Thus far, there are little to no signs of this occurring.
Source: Deloitte
These charts help sum up the situation:
http://economicedge.blogspot.com/2009/08/week-in-charts-buckle-heck-up.html
excerpt: To Quote John Kenneth Galbraith, “The majority is always wrong.” Right now the majority believe we are exiting the crisis. They are just plain old fashioned WRONG – again.
With the sell-off this morning, how best do you position yourself?
My positions haven’t changed since last week. About 35% Derivative/pseudo shorts, 0% equity, 10% RE short, 55% cash. This is a destructive day. Hopefully the bulls buy it.
Looks like your move out of stocks is prescient again. When do we get short?
Good question Mark. Wish I was heavily short into a morning like this, but my currencies, derivatives and cash feel almost as good. The bulls will make another stab in the next few weeks. Count on it. Then Short it. I’ll keep you up to date.
TPC report coming tomorrow….
TPC,
Do you think we will cycle all the way back down to the 880/neckline level before the bulls fight back?
I know this is TA voodoo but it appears we are forming a broadening top or some kind of complex head and shoulders on the SPY. If we only cycle part of the way to 880 that could be quite bullish. However, another test of the 880 neckline would certainly be another step forward towards failure. 880 could also make a very nice short term long entry.
Thoughts?
JTodd,
Im not really sure of a price level, but the risks for now are mounting. If we continue to get negative consumer data and the housing data turns seasonally negative we could be in for a sizable move to the downside. I can think of little to no reason to get overly bullish in the near future. There are almost zero catalysts. The v-shaped recovery has been all but priced in. I expect that to get price out in the coming weeks and months. It’s just no going to happen with the consumer as weak as they are.
TPC, didn’t you think that this week would be a bad one to short into. And now the whole picture has changed? I think I am at the “throwing my hands up” phase which means I have no idea which way she goes.
I would not hold much overnight though I know that.
Prescient,
I am not really short at all. I am long some currencies and derivatives with a small RE short, but I still think the news will have a positive tilt this week. I haven’t been looking to get short. The bulls still want to buy the dips.
Of course, I thought Lowes would provide more positive commentary so perhaps my whole thesis for this week is wrong, but my broader bearish/cautious perspective remains intact. Don’t take my What’s On Tap out of context. Me thinking the news could be positive this week does not imply I am long….I am out with a TPC report tomorrow. I’ll detail my outlook then. It hasn’t changed too much since the last report….
TPC, I by no means want to pin a position on you. But I am just curious where you stand, I’ve followed your blog for months now, after seeing you post on ZH and following your links. Ah, the good old days.
So I remember your reading of key data points coming out and saying that there is some bullish fundamentals out there. I know you’re “cautious” now, but that doesn’t really say anything. Are you going day to day or do you have any type of longer (2-6 week) term view here.
Here’s where I personally come down. Until the government can no longer sell debt, the Fed. stop will be in place in the markets. Meaning “they” will not let it drop below 800, maybe 750. There are no real true fundamentals in place until all this garbage washes through the system, and right now it’s choking up the disposal since the “equity” holders run the government. mom and pop are funding the multimillion mortgage payments of those business “titans” that wouldn’t give them a whit of consideration.
If there is a second cliff to dive off of, then Denninger’s prices on the top of his blog will be correct. I don’t think that’s likely, and although I think China has significant problems years down the road, as do we, for now, the charade will continue. V shaped recovery will be f’ing impossible though due to the weak/dead consumer and lack of any job growth. And the fools in Washington will speed up our demise fiscally given all these crazy programs.
That’s my two cents.
I don’t day trade. My positions tend to be weeks and months. As I outlined above, I am heavily in cash, currencies and derivatives that will benefit from market downside. I don’t have an equity short bias at the time besides a small RE short.
I don’t think you could exactly pin me as super bearish, but my portfolio is up about 1% today. Cash is the primary weight in my portfolio now so I guess I am technically neutral with a cautious outlook.
I am not looking to get long stocks any time soon.
My fear is: many people will jump on the short bandwagon and then be squeezed once again. Hence why I am reluctant to go short. Until this ends there will continue to be rallies in my opinion. This is also signals that many people still don’t trust the rally if they go short any time there is bad news. Whatever, the best trade may be to just straddle stocks or the indices with options. If it goes down or up in a big way that is. It could always stay flat…
Yeah, let’s not forget how bullish everyone was just 4 days ago. I mean how bipolar can people be? The bulls will be back to work with the government on their side before the week is over.
I am with TPC. Lot’s of cash until we get a more certain outlook.
TPC,
I wrote a long response and it was lost in the ether. From a long-time reader, not trying to pin you on a position, but you have stated that you think several data points are fundamentally bullish and I’m curious as to your 2-6 week outlook.
Myself, the government stop is in place at 750-800, so I think we are range bound. I had called 1,000 as my feel free to short target.
Also, got back in the USD/Yen, I’m a buyer at 94.50 as I think that should pop about 200 basis points, i hope.
Pres:
“I don’t think you could exactly pin me as super bearish, but my portfolio is up about 1% today. Cash is the primary weight in my portfolio now so I guess I am technically neutral with a cautious outlook.
I am not looking to get long stocks any time soon.”
So, you don’t see gold as a viable hedge, and would rather own another flavor of fiat “funny money”? You certainly might be vindicated, but with most central banks playing with fire(Q.E.), CAD, CHF,etc. don’t give me the same warm, squishy feeling as the yellow metal
Gold cannot rally above $1000/ounce. Easiest short in the world at these levels.
I don’t know much about gold or trading but I have been watching metals closely as I buy scrap metals for a living and I’ve wondered for weeks now why investors were continuing to push metals up when industry wasn’t buying? I mean, if no one is manufacturing products then why would anyone expect the price to go up.
In the last few days metals began their drop and my suspicions were confirmed…
Gold is the one asset I will never pretend to be an expert about….
Been reading for a few months now. Was wondering why you let con-artist commercials advertise on your site? Do you have any control over this?
Tom,
Are you referring to Ally? Unfortunately, one of my ad companies doesn’t let me control the inventory. Comes with the territory of being a small and relatively light traffic site. Sorry.
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