The Stock Market Is Not the U.S. Economy 27 comments
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I’m going to start today’s post with a warning: Over the next three months, be prepared to see some of the worst economic data you’ve ever seen.
Why do I say this? It stems from the only economic indicators I regularly monitor, from the Economic Cycle Research Institute. The firm basically invented the concept of leading economic indicators–the guy who started the popular monthly leading indexes for the U.S. government left decades ago, founded this firm, and took the process to a whole new level.
The company has dozens of indexes, but the main one I monitor is the aptly named Weekly Leading Index. It has a great track record of telling us what the economy will look like in two to three months.
Here’s the whopper: Thursday morning, the weekly leading index’s growth rate stood at a minus 24.6%. And what exactly does that mean? Well, not only has the rate fallen off a cliff in recent weeks, it’s also the lowest reading … ever! And this is no small data series–ECRI says that its data goes back to January 1949, nearly 60 full years of information. That tells me that the next couple of months should see the sharpest slowdown/recession in decades.
Thus, Thursday morning’s unemployment report (240,000 jobs lost, on top of a downwardly revised 284,000 jobs lost in September) is almost surely just the tip of the iceberg. I would venture a guess that we’re all going to be seeing some truly scary, once-in-a-lifetime readings on jobs, industrial production, economic growth, you name it.
Actually, that process is already underway. Just this week, General Motors (GM) reported monthly vehicle sales of less than 200,000 for the first time in years. The figure was down 45% from just a year ago! GM Sales Chief Market LaNeve said, “In my 27 years in the industry, I’ve never seen a month like this,” adding that, adjusted for population growth, October was likely the single worst month for the auto industry since World War II.
Another example came Wednesday night, when networking behemoth Cisco (CSCO) sharply cut its guidance. For the current quarter, it anticipates revenues will decline 5% to 10% from the prior year, compared to earlier estimates of a 6% gain. It might not sound dramatic, but the difference is from $10.4 billion (analyst’s former estimate) to around $9.1 billion (the new guidance).
If the Institute’s leading index is correct, and I believe it is, you should be ready for more such “worst in decades” readings in the weeks and months ahead.
Now I’m going to continue this piece with another word of advice: You shouldn’t read too much into the coming economic data.
Why did I write about the approaching maelstrom if you should simply ignore it? Because I want you to be prepared for some hugely worse-than-expected readings, and (more important) for all the hoopla and headlines that will surely come along with them.
What’s key to remember is that the market has already discounted much of the bad news you’re going to read about. That’s why the major indexes are down more than 35% this year, and why they crashed in September and October. That doesn’t mean the market will shrug off all the bad news–the big drop on Thursday after Cisco’s earnings outlook (along with horrible retail sales reports) attests to that.
My point is that the market is reacting to what the economic landscape will look like in six months, not the economic readings of yesterday. And from that point of view, I continue to think there’s a good chance that the market is beginning a bottom-building process.
Despite the declines seen this week, most indexes are still well above their lows of mid-October. And, more important to me, the market is now 20 trading days removed from its major October 10 low, when a still-unbelievable 88% of all NYSE stocks hit one-year lows.
Stocks could (emphasize could) be starting a re-test process, where the major indexes again fall back to their October 10 levels. Historically, bear market bottoms see these re-tests, and they usually occur anywhere from 25 to 40 trading days after the initial low (October 10, in today’s scenario). So we’re right on schedule.
Seeing this process unfold also makes sense because, to get a sustainable rally (if not a whole new bull market), you need leadership, which is defined by companies with solid sales and earnings growth, and whose stocks are well traded and have built solid launching pads. Right now, there are just a handful of potential leaders–at the start of a big rally, you’ll see a couple dozen, with more emerging soon after.
A re-test, then, is not something to fear, but has historically been a necessary and (eventually) bullish event that’s led to a sustainable upmove. The latest successful bottom/rally/re-test process came earlier this year, in January and March. While that didn’t lead to a new bull market, it did lead to a two and a half month rise, led by commodity stocks, providing some nice profits.
Thus, on the indexes, here’s what to watch for: See whether the Dow can hold above 8,000 to 8,300 or so, and if the S&P 500 can hold the 850 area. If they decisively break below those levels … well, then, just remain defensive, and be glad you’re holding on to your capital.
However, if the indexes do re-test those levels sometime in the next couple of weeks, sit up in your chair – the market may have laid the groundwork for a few good months ahead, despite what the economic indicators may say.
Stock position: None.
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This article has 27 comments:
Down 35% off a bubble high is not quite the same like being down 35% off a what was initially a rational valuation.
As the economy and the market return to reality after Greenspan's & Bernanke's wild parties, I doubt that we will see a major upside as we got accustomed to during the era of the Great Bubbles.
as for the world economy it doesnt seem to have a heartbeat and has literally flatlined if you look at the baltic dry index which has dropped close to 0 and now is just a steady line
However, I don't think you have really considered the serious potential downside from some very troubling facts, including ever increasing layoffs, growing commercial real estate loan defaults, unabating home foreclosures and a trillion dollars worth of credit card and auto loans, many of which are not current and could go into default. Pile in the CDS mess and you've got more than what a few good leading companies could overcome to pull us out of this decline.
Listening to Paulson yesterday, it doesn't take rocket science to figure out that these fools don't have a clue; nobody does.
Buckle up because you ain't seen nothin' yet!
On Nov 14 09:23 AM R. Ennis wrote:
> What about yesterday? Hello? Were you watching?
For now, we are done. Our government is clueless, our business leaders were crooks (ok well not all of them but unfortunately in the areas ie: banking, lending, rating, etc) and the US "prior" to all this mess was already the worlds biggest debtor nation.
Regardless of other countries and economies reflating right along with us, and using their reserves, many countries (India, China, other emerging countries) actually make stuff, unlike the US where we are expert, now broke, consumers.
The favorite bull argument that: "China, India, etc, need the US consumer to survive" will be proven wrong over the next 5-10 years, as their own citizens become consumers of their own goods, thus negating any effects of lost US consumption. These things take time, and time is not what the financial media wants you to think about.
Own stocks in Canada, Singapore, etc, that trade directly on those exchanges. Over the next 50 years, the US dollar will continue to decline, and economies outside the US will grow and grow.
You will get the double boost of share return plus currency return. Again, these things take time, and the financial media wants to keep you focused on "Mad Money" and "Fast Money". Not real money.
Please google the video "money as debt" and take 47 mins out of your life to learn how banking really works, how money is really created, and why this debt/credit crisis has a long way to go in the US.
The rest of the world will come out of it long before the US, for like I said, we were already the worlds biggest debtor nation prior to this crisis, both on a governmental level and a consumer level.
I commented here often beginning in 2007 the crap was going to hit the fan and when. The next bull will be 2013 with a lot of pain and economic restructuing in-between. The last two months of performance are the formation of a depression, stimulus always occurs in an election year and for obvious reasons was heavy this year.
10% of excess capacity in all sectors beginning in 2002 to current has come off the U.S. economy. Another 10% is coming off between now and 2011. I expect a decent bear rally in 2009 after Q1. For those with substantial cash, this is the opportunity of a lifetime. That represents about 3% of the population. To all others, this will be the most miserable few short years Americans have experienced in our lifetime. But leadership and innovators will step up, let's see if Washington accelerates this process or continues hindering it as a continuation of an oligarchy. I am tired however of the doom and gloom and fear. Rest easy and get busy paying attention to fundamentals. The U.S. economy will come back strong but we may have serious geopolitical consequences to deal with later. Act as gentlemen and help your neighbors and friends through it. We will also be called the second greates generation when it's all said and done and I am also tired of hearing the crap that we don't have the will or know how anymore to accomplish goals in America.
"what about all the delinquencies? The CDO's? The hedge funds are cooked. Unemployment is going to spike!!!!"
Congradulations, you read the July edition of the Wall Street Journal. Anyone bothering to pay attention to the market over the past 12 months has know that we were in for hell over this housing bubble burst. By the way, a distinction should be made between the housing bubble and a stock market bubble. The S&P was trading at an average of 18 times earnings before the sell off, which is hardly a bubble.
The point the article is making is that the market knows that the economy is in for a very rough ride. People keep posting negative sentiment stuff, and then 20 more people post negative comments, and then everyone thinks they are the only ones with a clue. Do people really think that everyone is a cheerleader still? I struggle to find any optimism these days.
www.bloomberg.com/news...
If you’re getting into trading seriously, I think it’s important to understand this. Ironically, these rational proprietary programs (basically more sophisticated investools), helped cause the very irrational crash of ’08, by going into self-reinforcing routines that kept triggering lower and lower stop-loss sell orders, overriding all fundamentals.
It’s fascinating to observe that when the future is supposedly predicted, the very knowledge of the prediction en mass ends up changing the future outcome.
IMO trading is a huge waste of time and effort directed toward something that provides little to no value to society. However, there is opportunity now to pick up bargains while the “masters of the universe” try to figure out what went wrong and reset their code for the next irrational move to the upside.
Feel free to tune into this channel: CNBC
Where optimism never left. Where they tell you how to protect your money and survive the bear market, "after" the market has fallen 30% from the high.
Where "investing" goes out the window and they substitute "gambling" knowing how weak, desperate, (and broke) americans are. Hence "Fast Money, "Mad Money", million dollar portfolio challenges.
Where shills come on and call yet another "bottom" after calling 10 bottoms already from DOW 14K 13K 12K 11K 10K 9K 8K...
Ofcourse the shill fund managers get paid by foolish americans who are happy to pay "asset gatherers" instead of what are supposed to be "asset managers" I think Bill Miller is still hiding on his 85 ft yacht counting his hundred million he stole from his fund holders, who are now back at 1998 levels.
Asa result of unprecedeted economic dislocation,the leading indicator (the stock market) is sometimes a confusing leader(market volatility).
The investment community must simply evaluate the global scale of intervention attempting to stabilize financial sector and economy in general.
Clearly (allowing for the multiplier),the global "intervention" is unprecedented and will succed in precipitating a global economic/market rebound led by the the U.S .
By mid 2009 ,the magnitude of the U.S economic rebound will surprise the biggest bulls(if there are any left).
Some of the individual market rallies will redefine the word "Bull".
20,000 DowJones is a reality in the period ahead.
Now ,let me hear from the peanut gallery dicussing the end of the universe scenario.
Can I buy your crystal ball on CNBC?
Then apply the result to the corporate revenues that sell to consumers. I hope I'm wrong, but I see something very different unfolding, something that may make old patterns obsolete. We have never before faced such a massive downturn with so high a debt load. And the magnitude of losses - both corporate and personal - is without precedent.
Even the "safe" insurance sector with its mandated reserves is now suspect. Anyone who thinks things are going to turn around soon is an optimist. Perhaps naive as well.
In the "youtube" video that was posted, you can clearly see how someone like Peter Schiff was early, yet dead right, and people such as Arthur Laffer were dead wrong. What is worse, people like Laffer are still paraded around on CNBC as if they have any credibility at all left. People such as Laffer, Luskin, Kudlow, Farrell, etc, are all bold faced liars who get away with it because we the public, allow them "zero accountability".
My repeat post:
Invest your money in companies outside the US. Do not be fooled by all the lies you hear about how "the US is going to lead the world" in the future.
For now, we are done. Our government is clueless, our business leaders were crooks (ok well not all of them but unfortunately in the areas ie: banking, lending, rating, etc) and the US "prior" to all this mess was already the worlds biggest debtor nation.
Regardless of other countries and economies reflating right along with us, and using their reserves, many countries (India, China, other emerging countries) actually make stuff, unlike the US where we are expert, now broke, consumers.
The favorite bull argument that: "China, India, etc, need the US consumer to survive" will be proven wrong over the next 5-10 years, as their own citizens become consumers of their own goods, thus negating any effects of lost US consumption. These things take time, and time is not what the financial media wants you to think about.
Own stocks in Canada, Singapore, etc, that trade directly on those exchanges. Over the next 50 years, the US dollar will continue to decline, and economies outside the US will grow and grow.
You will get the double boost of share return plus currency return. Again, these things take time, and the financial media wants to keep you focused on "Mad Money" and "Fast Money". Not real money.
Please google the video "money as debt" and take 47 mins out of your life to learn how banking really works, how money is really created, and why this debt/credit crisis has a long way to go in the US.
The rest of the world will come out of it long before the US, for like I said, we were already the worlds biggest debtor nation prior to this crisis, both on a governmental level and a consumer level.
Or maybe that was never his intention at all. History will be the judge.
On Nov 14 07:39 AM prudentinvestor wrote:
> Good points, but you state that ".....What’s key to remember is that
> the market has already discounted much of the bad news you’re going
> to read about. That’s why the major indexes are down more than 35%
> this year...".
>
> Down 35% off a bubble high is not quite the same like being down
> 35% off a what was initially a rational valuation.
>
> As the economy and the market return to reality after Greenspan's
> & Bernanke's wild parties, I doubt that we will see a major upside
> as we got accustomed to during the era of the Great Bubbles.
Our own government and Wall St. have created their own Depression. They had to scare the general public into believing that the only way to save the country was to do this Bailout. To do that, they created the impression of a Depression coming, and we bought it, hook, line and sinker. People stopped buying out of induced, not real, fear! It now feeds off itself, and the government has a REAL problem, now! Good work guys!!! It is easier to break an expensive toy than to fix it, and the dumb guys, you figure out who you are, broke the toy, so that the next smart guy in office will have to spend all his time trying to fix it, and not get any meaningful work done.
So where does that leave us. Well, first fix the illusion problem, if we can.
Recessions do good things for the economy, lets let that happen so that all the excess greed blows off, and everyone else gets really efficient. Look for the new idea, product, and companies. They, the NEW, will lead us out of this hole we dug. Do I know how or when? No! But, I didn't know that in the last five recessions I've been in over 65 years either. But the chip, the computer, the Internet, the"............." next time, always seemed to happen. It never came out of the problem, and we never saw the cure, until it was THERE! The down side is that recessions hurt really bad. It's hard going through the eye of a needle......
zinfool
The MotleyFool is optimistic on certain stocks, but that's them. Should this market continue, my DRIP stocks will be able to buy much more of themselves. A small "yay" to that.
except for the punters and Mark Perry, few people are forecasting a robust recovery. most are forecasting languishing around the economic level we recess to for an extended period of time. this means no increase in future earnings - and should translate to the market remaining in the general area it finally settles into. but hey, the dow does what the dow does.
this is not like past recessions in that we have several bubbles to unwind, and a damaged economic engine (aka consumers).
there is going to be a big change.
DHL is closing all their satellite's (remote stations) they are only keeping open one main office in the US with a staff under 200 people
time to dump it your DHL stock now.
On Nov 14 07:39 AM prudentinvestor wrote:
> Good points, but you state that ".....What’s key to remember is that
> the market has already discounted much of the bad news you’re going
> to read about. That’s why the major indexes are down more than 35%
> this year...".
>
> Down 35% off a bubble high is not quite the same like being down
> 35% off a what was initially a rational valuation.
>
> As the economy and the market return to reality after Greenspan's
> & Bernanke's wild parties, I doubt that we will see a major upside
> as we got accustomed to during the era of the Great Bubbles.