Beginning of Another Big Market Decline? Not Quite 25 comments
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Markets are in a tizzy of late, as the assets that rose in price from early March through early June now head south (e.g., equities, oil, gold). Treasury bond prices are doing just the opposite, a natural reaction from a market that views economic weakness as a source of deflationary pressures. Hopes of a recovery are now being called into question. Governments are threatening to pile on more regulations and more taxes in an effort to fix the mess. These are times that try men's souls, especially those who are optimistic.
The market is clearly moving against my position. I've been highlighting green shoots and the beginnings of a recovery for months now. I've argued that the economy was doing better in spite of all the counter-productive policies coming out of Washington. The market seems to be telling me that my optimism is badly misplaced.
Am I wrong, or is this just a typical correction? To help answer the question I've posted the above charts.
Gold vs. Spot Commodities
In the first chart I compare gold prices to spot commodity prices. I've long thought that gold was a leading indicator of a lot of things, commodities being one. Gold has clearly led commodity prices in many instances. Although gold and commodity moves since 2001 look coincident, gold turned up in early 2001 while commodities didn't turn up until late 2001. Gold prices have since risen far more than commodity prices, and gold fell a lot less than commodities last year. If gold is still a leading indicator, it is telling us that commodity prices still have plenty of room to rise.
And in any event, just a glance at the chart tells me that the decline in prices of the last few months is perfectly consistent with the normal ups and downs you see in almost all markets. I don't see any indication that the upward trend in commodities and gold has been broken. The monetary fundamentals support this view as well, with the Fed trying very hard to avoid any generalized price decline.
Oil Price
The second chart tells pretty much the same story: the recent price decline does not suggest any change in the upward trend of oil prices, and prices haven't wiggled any more now than they have many times in the past. Nothing moves in a straight line.
No Shift in Fundamentals
I would feel a lot more nervous about my position if the fundamentals had shifted, but I don't see that they have. Monetary policy continues to be very accommodative; the recent, modest decline in the Fed's balance sheet doesn't change that at all. Fiscal policy continues to be counterproductive, as it has been for the past year or so (tax rebates and bungled bailouts and the stimulus bill don't do anything to stimulate growth, but they do increase future tax burdens), but on the margin I detect a slowing in the pace of Obama's lurch to the left, which if true, would be a definite positive. (See my earlier posts from today that point out growing resistance to a big-government agenda.)
Market-based indicators also continue to point in a positive direction. As noted above, the downturn in commodity prices doesn't look significant, meaning they are still in an upward trend and reflect both improving economic growth fundamentals as well as accommodative monetary policy. Credit spreads are way down from last year's highs, and swap spreads and agency spreads are almost back to "normal" levels. Implied volatility in both the stock market and bond market is way off earlier highs.
The TED spread is back to normal (35 bps today). Global trade still looks to be improving, with the Baltic Dry Index trading at many multiples of late-2008 lows, the four-week moving average of the HARPEX index I've highlighted before turning up for the first time since last July, and container shipments out of Los Angeles and Long Beach turning up. Consumer confidence has improved significantly. Housing affordability has improved dramatically. Used car prices have moved sharply higher. Corporate layoffs are way down. The ISM indices are way up. Money velocity is no longer plunging and looks to be stabilizing. The ECRI leading indicator is way up. Deflation fears have all but vanished. All of these things and more are discussed in prior posts.
There's one important dynamic that I can't document but which I think is the force behind a lot of the improvements noted above. It's the reason I have maintained an enduring optimism, especially when confronted with a market that was priced for the end of the world as we know it. It's the reason the U.S. economy has survived serious challenges in the past. It's my belief that free people and free markets (which have taken some hits of late but which are still the norm) want very much to work and make money, and that often involves making adjustments as circumstances change. We've had plenty of time for changes to take place, and relative prices have changed dramatically in many markets. On the margin, in the nooks and crannies of both the U.S. and global economy, I think there are many positive developments taking place that will eventually spread to the broader economy.
In short, I don't see this as the beginning of another big market decline. I think this is a normal correction; a bout of nerves that will soon pass.
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This article has 25 comments:
Would you care to share the list of many positive developments? I am not saying there aren't any, but if you know of a list then please share with us ( isn't that the point of this site, to share information?)
But before you come up with your list, improvement in the 2nd derivative is NOT the kind of positive development I am looking for. If Housing prices go from falling at a 16% annual rate to falling at a 14% annual adjusted for seasonal factors( I just made those numbers up), then I wouldn't exactly be so happy.... Especially with low volume.
$
Near the depths of today's trading range, 3 of my limit buy orders were executed at prices I think are attractive relative to where I think the market will be before year-end.
Granted, I am investing on the assumption that we will not have a huge and sustained downturn in the stock market--and I do believe the present correction (which was well-telegraphed by almost everyone), will soon run it's course.
However, even if I'm wrong about the depth of this correction (which means there remains more fear than greed among investors), I am not investing $ I will need in the short term, and thus I will remain convinced we will return to S&P900+ before the year ends.
With respect to "positive developments"--it seems to me those who are strongly negative on the market are waiting for someone to ring the "all clear" bell so they are guaranteed all their buys will be at the lows, and gains are assured (ain't gonna happen!).
I fully expect that the natural course of events improvement in the economy will come in erratic good and bad news long before all news is good news.
Do you have a magic 8 ball too?
We will miss you, E. Bunny. And we will miss you, American economy.
When a situation is more distant from you it is easier to ignore or believe that it is not as bad as you hear it is. After all "I'm OK and so is everyone else I know". That is less the case with each passing day. And I think that is what we are seeing in the market. IF the rally was driven mostly by retail investors, so too will be the downturn. Sure the fundamentals are not there, but they never were. This was a rally of confidence, something that is in shorter supply right now.
As things slowly, and I do mean slowly, improve so will the feeling that we still have our feet under us. Our friends will get new jobs, the empty houses around us will have new families in them. Things will at least begin to have the appearance of normalcy. Then and only then, I believe, will the retail investor turn to the market once again and start to invest in earnest. In the meantime I would look to be range-bound in this market with a down bias. We will have some good days on the way to the new bottom, but nothing sustained until what really drives this economy, the people, start feeling good about the country and there personal situations again.
Is this current market downturn going to hold though? My personal sense of the markets tells me the decline in progress now will be in reversal again before fall. I don't think this downtrend is "the big one" we all worry about.
On the contrary, I rather suspect we will see another bear rally leading into late August through to October that could actually see the DOW hit 10,000 if not more. Crazy talk perhaps. But there is still plenty of time to draw more suckers into the game before the "real" crash comes.
All the folks who missed out on the huge rally that just took place will not want to miss the next one. Once back from holidays they should predictably get back to work investing and building wealth.
Just in time for the rug to be pulled out from under them.
> On the contrary, I rather suspect we will see another bear rally
> leading into late August through to October that could actually see
> the DOW hit 10,000 if not more. Crazy talk perhaps. But there is
> still plenty of time to draw more suckers into the game before the
> "real" crash comes.
Time is not a problem. The real question is what are the catalysts to push DOW 10,000? ... funny, I will be bullish when Americans goes back to their negative saving rates again! Yikes! If america consumers want to go down to that over-spending mode again, I will be the first one to declare DOW 20,000 here we come! ;P
Not!
However, if the opposite is true, then this may be the resumption of of the the bear.
Regardless of the camp we're in, we can muster up enough arguments to support both of our premise. I'm in the latter camp.
Who is right? Time will tell ...
I have to disagree. Pres. Obama really wants a new bill to curb carbon emissions, a healthcare bill, and--lately--maybe even a second "stimulus" package (he hasn't specifically ruled it out). Such actions on the part of the federal government create, as Prof. Robert Higgs has called it, "regime uncertainty." Such uncertainty was one factor in the lengthening of the Great Depression; businesses couldn't plan because they didn't know where the Roosevelt Administration was going to strike next. Similarly, businesses today can't plan because they have no idea what sort of legislation or administrative rulemaking will compromise their investment in capital, be it mechanical or human.
When there is equilibrium between these three is terms of risk premium, then the fair value of stocks will be determined vs. an investment in bonds or cash. Right now the market is trying to reset the risk premium in the face of rapidly moving targets of cash interest rates, bond dividends, and stock potential for principal accretion.
Once investors are convinced that GDP growth will be in the 2 - 2.5% range for the next decade, then stock prices will rise to a level that incorporates risk with 2- 2.5% growth. This will exceed the bond dividend rate by the RISK premium which should be the same as it was in 2007 or 2008.
This will determine the natural market value of a stock, once again.
I believe the following two step recalculation will fully take place by the end of the 4th QTR.:
If AAA bonds are paying 3.5%, then add 5% RISK premium and get an 8.5% return required by a stock to be competitive with the bond.
The stock price has to show a potential 8.5% gain made up of Price gain and dividends to be attractive in the market. If stock prices at this level can't be achieved, bond yields will decline until the are below the stock price by the RISK premium amount.
This means that bond yields will drop dramatically over the next 12-18 months as stock prices go lower and lower until equilibrium between the two is reached.
I believe this will leave stock prices
I think there are 20+ charts telling you something else, you just need to find the graphs you like to find to approve your own estimates.
So if people now tell me that you need to be a good analyst and do your homework, how about this:
"recent price decline does not suggest any change in the upward trend of oil prices"
Why should any decline not suggest any change upward ....
One always needs to analyse sentences, sometimes they are packed in great articles, and everybody tends to just take it as given.
We have gotten into a major bout of deflation/recession - all asset classes will continue to fall - as is readily evident.
On Jul 09 12:08 AM punk_ash wrote:
> It seems like you get into your Porsche from the garage in your suburban
> home and go into the garage of the posh downtown building, and take
> the express elevator from there. Your secretary then wishes you good
> morning and gets you your coffee. You do not have a clue what is
> going on outside the Ivory Tower.
Has anyone noticed that emerging market bonds, high yield bonds, and small caps globally are still looking very bullish. This behavior is not consistent with a bear market or a move to risk aversion. Have you also noticed that TIPS are still in an uptrend against US 10yrs? All this behavior is supporting what Calafia BP is saying!
"technical analysis is based on the idea that... price is a comprehensive reflection of all market changes in the balance between supply and demand as caused by traders' reactions to economic, political or psychological changes. The market price of any given [commodity] takes into account the effect of all possible forces acting on that commodity"
Does your Magic 8 Ball do that?
On Jul 08 05:24 PM drewriders wrote:
> He is using charts.... Ugh...
>
> Do you have a magic 8 ball too?
1. This market has been pumped up on hope. No reality, no fundamentals, just hope. Now that hope is fading, so is the market.
2. Residential real estate has been "tanking" for 3 years and the back log of foreclosures (as well as short sales, etc.) will continue for several more years. No way we have a "real estate bottom" for at least 3 years.
3. Commercial real estate is the next ticking time bomb and it is now doing its thing. Commercial delinquencies are at 7% and quickly deteriorating. This will be a huge mess.
4. Check out the malls, office buildings, etc. Lots of vacancies and these vacancies are increasing. Companies are going out of business and will continue to do so.
5. Personal and corporate bankruptcies are picking up and will also continue to increase (unfortunately the government can't bail everyone out, just the chosen few).
6. Unemployment will be in double digits prior to 2010 (within the next 4.5 months) with no end in sight. Of course all the the people that are no longer counted in the "unemployment statistics" is another story. Should these people be included the unemployment number would be huge. Either way, these people are not making an income and therefore not spending, etc.
7. The stimulis was no stimulis at all, so we have received no help there. We burdened our citizens with another tax of $700 billion dollars. Now politicians are (and Warren Buffet) are talking about STIMULIS 2.
8. Government is becoming ever more intrusive in the private sector and bailing out failing companies. Another burden to our citizens.
9. Cap & Trade - Should the senate pass this, we yet again heap a "huge" burden on the taxpayer and become less competitive in the world market. Yet another tax on the deteriorating number of people that still have jobs.
There of course are many more examples to sight but the bottom line is this - If we want to be positive about a rising stock market we need to have reasons for the market to rise.
This economy is collapsing with no end in sight. Will better days be ahead, I think so. During the next 3.5 years, I absolutely doubt it. The economy was bad, as this administration and congress came in. Since their arrival all they have talked about is spending on any and every kind of program imaginable. Printing money as if were "going out of style". These are not the policies for driving an a strong economic engine. These policies will exacerbate an already bad situation.
It is important to remember. Bubbles generally take twice the amount of time to recover as they did to create. The residential housing bubble was 10 years in the making (started in the mid 90s, started to collapse in 2006).
Even if we had a pro-business, pro-employment, pro-growth, lower tax administration, etc., the economy would take years to recover. We don't have political leaders that are anywhere near what we need to creat an economic recovery.
Hate to break the news but things are bad and they will get much worse. And until the leadership in this country decides to honestly and constructively address our economic problems, our situation has no choice but to continue to deteriorate. We reap what we sow and we are sow'n some pretty bad stuff these days.