2011 has been a progressively volatile, and ultimately mostly a flat trading year for developed equity markets. The same can be said for most commodities, which have suffered major sell-offs in recent months after spiking early in the year. As always predicting the future is no task to be taken lightly, however the picture is becoming increasingly clear - and frankly it ain't pretty. The following are seven reasons investors should be ultra-conservative in the current environment, if not flat out bearish.
- China slowing: "Skidding to a halt" seems more appropriate than "slowing," but either way demand from China for raw materials appears to be satisfied for the near and medium term. With developed economies experiencing optimistic "low growth cyclicality," demand in emerging economies is required to pick up the slack. The Shanghai Index is trading at levels last seen in early 2009, off 30% from 2011 highs.
- Oil tanking: Crude oil has led both rallies and market declines since the dot com bubble burst. Black gold is down 8% over the last three days, including a December 14 drubbing that has yet to be followed by any sort of bounce. Also noteworthy is a 12-hour period of total price stagnation December 15. Demand for oil as an investment appears all but dead after total mania overcame the market in 2008.
- Gold takes a dive: On its own mission to the moon for much of 2011, gold has shown extreme weakness since peaking at $1900/oz in August. The yellow metal is argued to be a sound form of money, however it is not the world reserve currency. An economic slowdown favors that which can be exchanged for goods and services - the US Dollar.
- The death of the euro: Such has been recanted many a time, particularly in recent weeks. Germany works, the rest of the eurozone takes siestas. Unproductive cultures and endless disputes do not make for a strong currency, unless of course that currency has world reserve status. From a technical perspective the euro failed miserably December 12 and completed a retracement December 16.
- Santa Claus is coming to town: Christmas time is traditionally great for stocks, but the United States is traditionally the growth engine of a booming global economy. Enough said.
- Mainstream analyst predictions: CNBC superstars are repeatedly predicting a year-end rally followed by weakness in early 2012. If you were told the foundation of your house was on the verge of collapse but had a good 2 weeks left, how long would you stick around?
- US welfare programs waning: Unemployment benefits and other major welfare programs in the United States are fast approaching the end of their term. With a record level of Americans employed by the government, pseudo-workers in addition to full blown welfare recipients may be on the verge of losing their livelihood. Tic toc tic toc...
Disclosure: I am long VXX.