What Can Stop This Market Rally? 64 comments
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You hear a lot of talk these days about what could possibly stop the current stock market rally given that we've clearly passed the "acute" phase of the financial crisis and, quite literally, there is no place to go but up for many economic indicators.
The term "statistical recovery" is bandied about quite a bit by doubters of the recent move up for equities and for many very good reasons such as the following:
- Home prices seem to be going up when they're probably really still going down.
- Consumers have dramatically cut back on their spending but no one seems to care.
- Current quarter GDP will print at +2 or +3 percent but it is completely unsustainable.
- Bank balance sheets appear healthy when they are really still loaded with bad loans.
But, none of this really seems to matter when you have a chart that looks like this.
A 50+ percent move up over a period of five-and-a-half months will eventually make a believer out of almost anyone, a point that is proven again and again, day after day.
But, aside from some big new financial market brush fire developing somewhere that, having learned the lessons of 2008 well, the Treasury Department and Federal Reserve will no doubt quickly hose down with another few hundred billion dollars in money and credit (more if needed), is there anything out there on the horizon that might dampen the enthusiasm of the stock-buying public?
Well, the obvious one is housing.
While a growing number of pundits have all but declared the housing market healed, the latest evidence being offered the other day in the S&P Case Shiller Home Price Index, there is still clearly a ways to go before real estate stops being a drag on consumer psyches and far too many still believe that, somehow, we'll revert to our 2005 spendthrift ways.
There are millions of foreclosures still to come over the next year or two and most people seem all too willing to take their $8,000 tax credit and bid on a property, not seeming to know or care that home price bottoms are long drawn out affairs and that five percent 30-year fixed rates are the exception, not the rule.
As for the Case Shiller Home Price Index, as noted here previously, there's a pretty good chance that seasonal factors will result in the resumption of negative monthly price changes in another few months, though, with the sea-change in prices recently, anything could happen.
The reversal in home prices from a February-March decline of more than two percent to a May-June gain of almost 1.5 percent was the largest three-month swing in more than 20 years of data for the 10-city index - more than double the previous record.
Is that what's really happening in the housing market and, if so, how long can that possibly continue with the deluge of sellers that will now be entering the market, most importantly banks with their huge inventory of foreclosed homes?
Another month or two of rising home prices and then a swift return to negative numbers could dampen confidence very quickly later this year and millions of shareholders might realize that home prices have not yet hit bottom, despite the optimism everyone felt over the summer.
Turning to the labor market picture, it remains a bleak outpost where stock market bears can still gather to compare notes. However, it is not likely to scare off any bulls at this point.
Who would have thought that we'd ever "cheer" a quarter of a million jobs lost in just one month? But, that's what happened last month and it might happen again next week.
There is much more pain to come in the labor market but, from here on out, except for the low-profile, long-term unemployment statistics, it will continue to be a case of being "less bad" than what we've already seen.
In a world where "less bad is the new good", that's reason alone to bid stocks higher.
There is one thing, however, that could put the kibosh on investors' enthusiasm a few months down the road - inflation.
Inflation?
Hasn't inflation morphed into deflation - an annual rate of minus 2.1 percent as of July - and isn't everyone looking for consumer prices to be tame for the next year or two if, as it appears now, we are lucky enough to avoid that dreaded Great Depression malady of "de-flation"?
Surely, the now-docile CPI won't be spooking any shareholders this year.
Well, maybe it will...
Here's why.
Recall that the consumer price index breaks down into eight major categories as shown below, the two categories that contain energy costs - housing and transportation - both broken out into energy and non-energy components.
Here's the way things stand today, energy prices being the clear driver in the current negative annual rate of inflation which reached a 50+ year low last month.
Notice that, even through the distortion of hedonic adjustments and other nefarious measures that the Bureau of Labor Statistics uses to ensure that prices don't rise too much, nearly all non-energy categories are still up from a year ago, some of them a lot.
Though economists may still favor the dubious "core rate" of inflation, it is the year-over-year change in the "overall" rate of inflation that garners all the headlines and elicits concerned looks from investors of all stripes.
So, what happens later this year when, instead of comparing energy prices against $140 crude oil or even $100 crude oil, energy costs are compared to $40 or $50 crude oil?
Well, it may not be pretty.
Even though all energy components account for less than eight percent of the overall index, they have quite a large impact on the headline figure when you get changes of 30, 40, 50 percent or more and, importantly, this works in both directions.
According to Energy Department data, U.S. gasoline prices reached a low at about $1.61 a gallon last December and stayed below $2 a gallon until the spring. Today's average retail price of $2.62 represents a whopping 63 percent increase over last year's low, a full 30 percent above the two dollar mark. With the prospect that crude oil prices may not go down and, perhaps, might just head toward $100 a barrel between now and the end of the year, this sets the stage for some surprisingly high inflation rates.
Keeping all other categories in the CPI unchanged from year-over-year readings and throwing in a healthy increase for heating oil, piped gas, and electricity (which is something of a stretch for natural gas prices, but, anything's possible these days), all of a sudden you come up with thre or four percent inflation again before Christmas, perhaps higher.
After the huge success of the Cash for Clunkers program, many now expect car prices to rise which could push that last red bar hanging below the x-axis into positive territory.
Now, I don't know about you, but it seems to me that inflation rates this high might set off all sorts of chain reactions in financial markets, especially with interest rates at zero percent and the Fed printing money furiously, and none of this is likely to be good for equity markets.
As the world learned painfully in the 1970s, stocks and inflation don't get along too well together and, while this surge in consumer prices might only last four or five months, it will nonetheless have the media talking about inflation again and those poor seniors who are getting no cost of living adjustments in their Social Security checks will again be calling their Congressmen to complain.
Believe it or not, a curve like the one you see below is quite possible as we enter 2010.
Now, the really bad news here is that, since the recent wave of liquidity has pumped up nearly every asset class, the price of oil is not likely to go down (making for tame inflation later this year) unless stock prices go down.
But, based on the much higher year-over-year rates of inflation that will show up later this year if oil prices do not go down, that, in itself may be enough to send the price of stocks down.
Either way, it looks like something has to go down.
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On the other hand, I think it started with the advent of the Fed and the banking oligarcy. That was in John Adam's time or before.
The myth is an efficient market. The reality is that money talks, real money screams, and the type of money running this country only cares if the market is not efficient and that they hold the key to that lack of efficiency.
Money as your god and fairness are opposite concepts.
On Aug 27 06:02 PM jack789 wrote:
> Tim,
>
> Maybe I missed it, but did you fail to include what happens in China
> among "is there anything out there on the horizon that might dampen
> the enthusiasm of the stock-buying public?"
>
> China's stock market does not seem to be too healthy. One propped
> up, as ours is, by government intervention, but perhaps on a grander
> scale and with less attention to true productivity and performance,
> and less possible redemption in the long term.
>
> Some months ago I read -- i wish I could remember where -- that
> our problems in the US started long before the Housing Bubble crash
> and credit crash this past fall:
>
> According to that source, it started in Asia, the new engine for
> world growth, with falling demand for commodities there, because
> China was not using them as had been expected; that led to a series
> of domino effects which, when it hit the US, was combined with our
> already serious problems of too loose credit and the Housing Bubble.
>
>
> Who knows? But China is now certainly a major engine of world growth
> for good or ill, and as it goes, so goes some part of the world's
> economy.
Most who believe in the efficient market and who manage their investments according to that myth would find it difficult to fathom how self centered and myopically viewed the money is god crowd is.
As we read the paper and go through this process of bailing out the very people who caused the problem and allow them to act on "we need to give someone a bonus of millions or hundreds of millions of dollars or they will leave" we keep letting them win and continue the game as it's always been played.
Where is the uprising?
On Aug 28 01:19 PM thotdoc wrote:
> One place the problem started was in too low interest in order to
> keep the market moving up. That occurred b4 2002. Then in 2002 we
> did not get a clean out of the problem.
>
> On the other hand, I think it started with the advent of the Fed
> and the banking oligarcy. That was in John Adam's time or before.
>
>
> The myth is an efficient market. The reality is that money talks,
> real money screams, and the type of money running this country only
> cares if the market is not efficient and that they hold the key to
> that lack of efficiency.
>
> Money as your god and fairness are opposite concepts.
On Aug 27 09:10 PM Neil459 wrote:
> The "truth" will stop this rally cold. If the public ever finds out
> or the money for manipulation runs out, no one will stick with the
> next decline. If its triggered it has the potential to be sharp and
> deep.
On Aug 28 01:28 PM tarantilla wrote:
> Everyone thinks the market is "fake", pumped up with taxpayer money.
> Fake or not, it will keep going up as long as the Fed keeps pumping
> money. And it appears they will do this for a long time. When the
> economy is bulging at the seams with excess cash (we're no where
> near there yet), gold will have fallen, mortgage rates will be near
> 3 percent, and inflation will be perceptable, even to the Fed. Only
> then will rates rise along with gold, commodities, and anything of
> intrinsic value. Currencies should not be held, except to cover debt.
> The smart investor will have borrowed as much as possible during
> this period and then use the cash for tangible assets which will
> rise in value. Debt will be inflated away!
On Aug 27 04:05 PM Shimmers wrote:
> Why is inflation bad for equities?
How many thousand times will he say the same old shit?
I think you're referring to the "shoulder season", between the end of the summer driving season, and close to the end of the hurricane season, and start of the winter heating season (the NE US relies on heating oil, rather than NG). Depending on what sort of winter we have, oil (and NG) might well strengthen.
Additionally, I believe it was the IEA came out with a report a month, or so ago, stating that for the first time ever (since records were kept), energy use by emerging markets outpaced use by developed markets. I suspect that won't be changing anytime soon.
On Aug 27 04:55 PM thiazole wrote:
> "With the prospect that crude oil prices may not go down and, perhaps,
> might just head toward $100 a barrel between now and the end of the
> year, this sets the stage for some surprisingly high inflation rates."
>
>
> I don't think so. Oil prices almost always peak out during hurricane
> season and then fall in the winter. It is possible that we get a
> hurricane that does some damage (think Katrina), but otherwise, oil
> is likely near the yearly peak already (it could go to $80 on hurricane
> fears in Sept-Oct).
What is going to cause the next market correction will be something that isn't purely a financial issue. I predict something like a resurgance in the Swine Flu scare. That will cause the scales to fall from a lot of peoples eyes. Then they will see the economic abyss yawning wider. This will cause the herd to turn.
Second possibility is that the economic masters are crazy like foxes and this will all work out.
being fed infomation by false prophets.
One of you mentioned the next two months will determined the outcome, I agree.
Problem is the stock markets was 6 to 9 months ahead of the economy in normal times .... during the dacades of garden variety rallies and recessions.
This is not a garden variety recession. For all we know the stock markets could be leading the economy by a year to a year and a half. And we are only 6 months out into this rally.
So why bother obsessing with the economy? The stock markets lead the economy not the other way around.
Just in case the stock markets do lead the economy by 12 to 18 months in this extra-ordinary times; what can we expect? The economy bottoming out 6 to 12 months from now?
Where should the stock markets be another 6 to 12 months from now?
Another brief bout of selling in the interest rate instruments to raise competitive yields would be another harbinger. Interest securities are overbought on daily, quarterly and yearly stochastics but oversold on weekly and monthly.
Any correction will be relatively short lived (Oct-mid Nov). Stocks are very overbought on weekly and monthly stochastics, but oversold on quarterly and yearly. Also, the yield curve is very positive and "don't fight the Fed." Small investors are drowning in money market cash earning nothing, and banks have nothing to do with the incredible mountain of free reseves except earn arbitrage interest and dividends and play the stock market (for quite a long time they won't be lending it to real estate developers, commercial refinancers, small businesses or the many millions of un/under-employed small fish who will fry eventually in bankruptcy and foreclosure waiting for the strong recovery that will come, but not soon enough).
On Aug 27 11:45 PM nova wrote:
> We all agree that there are no fundamentals to drive this market
> 50% up with the real economy going down.
>
> Consequently, the old market valuation paradigm is not valid anymore.
> The same is true for the US$. The reason is the USA government are
> in business of manipulating US economy, stock market and US$. <br/>
>
> Note that strong & stable US$ is in American and Chinese government
> interrests. Why? It allows
> - US government to bail out its financial institutions using US$
> printing presses and
> - Chinese to maximize their purchaces of and access to natural resources
> and advanced technologies
>
> How long can this American & Chinese "love affair" go on? Untill
> the USA, EU, and Japan recognize that Chinese are about to control
> Western access to strategic natural resource. The similar situation
> to EU energy dependence on Russia.
>
> Therefore, watch out for gold and commodity prices. At some point,
> a break out will take place indicating that the present geopolitical
> equilibrium is collapsing.