16 Reasons for Equities Markets to Fall Soon

1. The equities markets have had a huge run up of over 50%. They are overbought. At approximately 18x 2009 Earnings, they are priced far above fair value. At the beginning of March 2009, they were price at only 11x 2009 Earnings. According to Art Cashin and others, fair value for the S&P500 is at about 850 to 880. At approximately 1020, the S&P500 is far from there.
2. The Insider Selling/Insider Buying ratio is 30.6. This is the highest that ratio has been since it has been tracked (2004). Those corporate officers probably know something.
3. Retail Sales are still decreasing. They were down about 4.4% for Aug. year over year according to Redbook. The much anticipated back to school season has been a bust so far. Even the Cash for Clunkers program, which gave automakers a shot in the arm, disappointed analysts. Plus it likely robbed future auto sales to record better numbers now. The national rate of auto loans that were 60 days past due was up 7.35 percent for the Quarter ended in June. That doesn’t sound like a lot of people are going to be able to afford to buy new cars soon.
4. The latest Factory Orders figures were a disappointing +1.3% vs. an expected +2.3%. July Factory Orders excluding transportation were a negative -0.7%.
5. Unemployment continues to grow. Last week’s announcement put it at 9.7%. With unemployment still rising, it is unlikely retail sales will improve soon. The lack of consumer buying may also help unemployment continue to grow.
6. Although a high percentage of companies beat earnings estimates for Q2, actual earnings were still down approximately -30% for the S&P500 stocks. Earnings predictions for the S&P500 for Q3 are still negative (approximately -20%). Much of this negativity is in the energy and the materials sectors. Q3 is likely the last high oil/commodity price quarter from last year. Future quarters should yield better results in these two areas. Still, most of the improvements to earnings this year have come through greater efficiencies. Very few companies have shown any revenue growth this year. That seems unlikely to change soon with still growing unemployment figures (and anemic retail sales). Companies will need to show revenue growth in order for the economy to really recover.
7. The “Flu Season” has started. Swine Flu is rampant in the UK. With respect to business, 72 percent of employers in the UK reported absenteeism due to Swine Flu. 38% of employers in the UK anticipated sales would be hit (Reuters). It is starting to take hold in the US. A presidential panel estimated that Swine Flu could infect 50% of the US population this fall and winter (Washington Post). This could cause 1.8M hospitalizations and as many as 90,000 deaths. I am not sure anyone would want to discount the negative effect this is likely to have on the US economy. This is a worldwide problem. The “real pandemic” is just beginning to take hold. It will have serious negative economic effects. One only has to think of the airline, cruise line, restaurant businesses, etc. to realize how true this is.
8. Inflation is starting to rear its ugly head. The ISM August Non-Manufacturing Prices Index rose to 63.1 from July's 41.3. The August ISM manufacturing data Prices index rose to 65 in Aug. from 55 in July. This looks like huge inflation. Fed Governor Hoenig was recently cited as worrying about inflation. He said that the Fed should not leave interest rates too low for too long. The fact that the Fed’s thinking is leaning this way is very bad news for businesses and for the real estate market. Hence it is bad news for the equities markets.
9. Both the residential real estate and the commercial real estate markets are still a problem. Residential real estate has shown some gains recently. Still, these gains are precarious. If inflation rears its ugly head soon, the increased interest rates could cause another downturn in residential real estate (i.e. make it effectively much more expensive). Commercial real estate seems to be worsening if anything. In fact, commercial loans are "going to be a bigger driver of bank failures towards the end of this year into next year," said Sheila Bair (FDIC).
10. We have had about 89 bank failures so far this year. Kanas predicts 1000 banks will fail in the next 2 years. If that happens, we have a lot of pain to come.
11. Wegelin & Co., Switzerland's oldest bank, is telling wealthy clients to sell their U.S. assets. Other Swiss banks may follow suit. Swiss banks account for 27% of the world's privately held offshore wealth (about $2T). If they sell all their US assets, US bonds and stocks will be hurt.
12. Consumer Sentiment in August was down to 65.7 vs. 66.0 in July. The Consumer Sentiment Current Index was worse. The August figure was only 66.6 vs. July’s 70.5.
13. The Fed is gradually ending stimulatory measures. The Fed is withdrawing money from the money supply after stuffing money in during the prior year. M2 has shrunk at a 3% pace since mid June, while MZM, the St. Louis Fed's measure of liquid money, is down by 2% over the same period. The Fed’s $300B Treasury buying program is set to end in October.
14. Prechter has called a bottom on the USD. He says that the only 3% bullish sentiment is a clear sign of a bottom. The charts seem to bear out that the USD is trying to bottom. If the USD starts going up, it likely will cause the US equities markets to go down.
15. Commodity prices have generally been going up since March. This will cut into businesses margins. This will make them less profitable, not more. It will be hard to raise prices of finished products appreciably in the current economic environment.
16. The charts are indicating a topping pattern. In fact we could be seeing another try at the famous head and shoulders pattern that failed a few weeks ago. It may not fail this time. The decreasing volume as the equities market rose is a strong indicator that the up trend is weakening. It may be in the first phases of a fairly strong reversal. See the 3 month SPY chart below:

No one can say for certain which way the market will go. Still the fundamental reasons for a strong retracement are growing. The markets generally only ignore fundamentals for short periods. We may soon see a strong acknowledgement of current fundamentals.

Disclosure: The author is currently short SPY.

Comments

[David White:]

I should have mentioned that virtually none of the negative economic effects of the "real Swine Flu pandemic", which is supposed to occur this fall and winter, have been incorporated into earnings estimates for the next 2 or more quarters. When the "real economic effects" are factored into the estimates, a spate of estimate lowering can do nothing but drive the market down.

Is the Swine Flu a real threat in the US? If Washington State University is any example, yes it is. Over 2000 students in the university of 19,500 already have the Swine Flu. I am sure more will get it. The University term has only recently started.

Tuesday (today) is the day many public school children go back to school. If they spread the Swin Flu as fast as the students at WSU, 10% to 20% of the US population could have the Swine Flu within 2 weeks. I would think that is likley an economic problem as well as a public health problem.

Sep 08 04:35 AM

[AndrewBaker:]

I agree with nearly all of the author's reasons for a market correction soon. If the market were priced on fundamentals, then we would be nowhere near the level we are now. At some point that must become reality because you can't take money out to spend unless someone else has it and wants to buy you out, which they won't do when valuations so obviously do not add up: and we're already there in my view, and will be in an increasing number of others' views too as prices keep marching north on an unrealistic and increasingly tenuous pathway.

Sep 08 07:00 AM

[Paul Harper:]

A great slab of very good arguments to chew on, most of these I have thought about at least once in the last month or so, to see them all in a list is frankly worrying.
Great article, thanks.

Sep 08 07:49 AM

[perceptions...:]

Ok, I'll give it a try -
1) The Debt to GDP ratio is heading north quickly, to 100% and beyond.
2) Consumers have taken a massive hit, via falling housing equity, lower share values & reduced access to credit.
3) The economy is deleveraging and will do so, for some time to come. Derivatives is the other Elephant in the living room!
4) Two of the three major growth drivers (Oil & Population), have Peaked and are heading south.
5) Unemployment and Taxes are both rising.
6) Business Earnings are falling dramatically and bankruptcies are rising.
7) Tax revenues and consumption are both down.
8) Massive increases in Health and Social Security Costs, are on the way, again expanding government deficits.
9) Problems arising from Climate Change and Food Production are also set to interfere with future plans.
10) Share Markets first fell some 50% and have since increased some 50%, still leaving a massive reduction in total wealth.
11) P/E ratio's moving into orbit, based on likely future earnings.
12) Increased insider trading and low volume are hardly encouring signs.
13) Gold is rising & the US$ is falling.

As Thirteen is a lucky number, I would try for 16.

Sep 08 08:05 AM

[bartpr:]

markets often move on other drivers than fundamentals. one fact mssing is the length of a market rebound from more than 45% down moves in the last 100 years. on average the move up lasted 200 trading days. if the market were to pull back now it wuld be the shortest move from the bottom in history. give it the full 200 trading days, then worry. a correction wil come, make no mistake.

the stimulus package has always moved market upward. given that much of the spending has yet to occur give this time also.

Sep 08 08:12 AM

[NUCLEAR1929:]

i know only one reason, its called no money

Sep 08 08:35 AM

[Mad Hedge F...:]

rytjk. Everyday, I make an effort to speak to a maker, miner, driller, or provider of a service in the real economy. If you keep your head in the financial markets too long, it is easy to lose touch with reality. Yesterday, I spoke to a friend whose company produces large format copies of blue prints, making him a great leading indicator of building trends. His fall in sales has leveled off 40% down from the peak, and layoffs at client developers and architects seem to have dried up. There are some signs of life in shovel ready city and state projects directly benefiting from the stimulus package. A few small private remodels and additions are coming through, but there are absolutely no big projects on the horizon. He is hoping that his business will maintain this low level at least until the first few quarters of 2010. The scary thing is that I get exactly the same answer from everyone I talk to in every industry, be they the butcher, the baker, or the candlestick maker. This is not the stuff that economic recoveries or bull markets are made of. Perhaps this explains why the recent stock market rally has been absolutely devoid of insider buying, unlike previous upturns, as the two year daily chart below attests. When corporate managers and owners don’t want to eat their own cooking, neither do you.

Sep 08 10:20 AM

[TCK:]

Possible trump cards which may be played;

Consumers buying cars and refrigerators with your money.

Goldman Sachs buying stocks with your children's money.

The Fed buying S&P futures with your grandchildren's money.

Sep 08 12:48 PM

[MarkitWacha:]

My friend at Trinet sees HR data everyday, and sees strong numbers in the hospitality / restaurant industries. Maybe tourists can give us a boost, while the dollar is low.

Sep 08 12:55 PM

[SwingTimer:]

Hey Guys...
There are always two sides to any situation (just ask your wife/girlfriend). While an awful lot of arguments can be cited for a lower market in the near/intermediate term, a similar number (in importance, at least) can be cited for an opposite viewpoint - they can all be boiled down to ONE though - investor psychology.
I agree fully that the market is due for a correction. But it is where it is, despite all the doom & gloom arguments, because investors as a whole prefer to ignore the awful realities of today and prefer to "anchor" their strategies on the fact that the market - over the long term - will inevitably continue on its merry way due to the indisputable resilience of the human spirit. OK, I perhaps digress here.
But the point is, in the short/intermediate term (you decide what that is), the market is over-extended. Viewed over the longer term, it is no doubt cheap and will continue to gradually climb higher and higher - it always has, and that's because we as a species inevitably adapt and move forward. So, define your investment strategy within a defined time perspective, and move on.
Just remember that investor psychology incorporates two rather dismal attributes - fear and greed - and these always produce market price oscillations, up...down...up...down.... That's the nature of the beast, so live with it by adapting to it.
Good luck, and then some.

Sep 08 04:29 PM

[David White:]

Up today, but the signs for tomorrow look negative.

The ABC Consumer Confidence was down for the first time in weeks to -48 from -45.

The Consumer Credit contracted again by about $22B. This may be good long term, but short term it likely means lower retail sales, etc. Basically it is $22B less money stimulating the economy (in the short term).

The SPY was up on very low volume 131M vs. the average 191M. This is bearish. Plus the SPY candlestick pattern for today was a hanging man or a dragonfly doji. This is very bearish (after the up trend of the pas few days) for tomorrow and the immediately following day or days.

Sep 08 05:42 PM

[Albertarocks:]

These are all great arguments and they all make a lot of sense to me. But the one factor that wasn't mentioned is what's really behind this sucker's rally, and that's the FED and its minions, namely JPM, GS and the usual crowd of piggy bankers.

This market rally isn't going to end until they decide its going to end. They're drivin' me nuts and they're drivin' a lot of other people nuts who have their heads screwed on right.

Every indicator out there says this rally should have had at least some sort of a correction in the past 6 months. At least one damned correction! With late day stick saves that should have been featured on the front page of Sports Illustrated happening every other day... with volume on an absolutely steady downtrend since the very first week this rally started... with stocks trading at p/e ratios that are 2 or 3 or 5 times what we usually see at market tops, we all know this can't continue forever. But it will... until the thieves who've stolen literally trillions of dollars from the good people of the USA decide otherwise.

And you can bet your last dollar, they'll do it when it suits their needs and in a fashion that will shock the world to its very core. They love surprises and there's no doubt in my mind that the top of this market will come in the form of an unwelcome surprise of one sort or another. Probably a very painful and shocking event. So watch for the market make some sort of a blow off top and for JPM to load up on puts... that'll be the day the key enters the switch.

Sep 08 06:37 PM

[Mindyourtai...:]

I couldn't agree more.


On Sep 08 10:20 AM Mad Hedge Fund Trader wrote:

> rytjk. Everyday, I make an effort to speak to a maker, miner, driller,
> or provider of a service in the real economy. If you keep your head
> in the financial markets too long, it is easy to lose touch with
> reality. Yesterday, I spoke to a friend whose company produces large
> format copies of blue prints, making him a great leading indicator
> of building trends. His fall in sales has leveled off 40% down from
> the peak, and layoffs at client developers and architects seem to
> have dried up. There are some signs of life in shovel ready city
> and state projects directly benefiting from the stimulus package.
> A few small private remodels and additions are coming through, but
> there are absolutely no big projects on the horizon. He is hoping
> that his business will maintain this low level at least until the
> first few quarters of 2010. The scary thing is that I get exactly
> the same answer from everyone I talk to in every industry, be they
> the butcher, the baker, or the candlestick maker. This is not the
> stuff that economic recoveries or bull markets are made of. Perhaps
> this explains why the recent stock market rally has been absolutely
> devoid of insider buying, unlike previous upturns, as the two year
> daily chart below attests. When corporate managers and owners don’t
> want to eat their own cooking, neither do you.

Sep 11 06:35 PM

[jp23:]

time to buy amzn...you can still go shopping without risking being in public due to swine flu

Oct 27 01:34 AM