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A Visit To The Bear Den

Daily State of the Markets
Monday, September 24, 2012

Good morning. Since Ben Bernanke announced the launch of what is now being called by many "QEinfinity," the stock market has actually done very little. In fact, the S&P 500 is up just 0.16 points or 0.01% since the big announcement was made on Thursday, September 13th. And with stocks essentially moving sideways on a closing basis last week, the argument in the analyst community over what comes next continues to rage. As such, I thought it might be a good idea to sit down with one of my colleagues who just happens to be uber bearish at the present time, in an attempt to objectively consider the bear case these days.

While I tend to take an opinion-agnostic stance when dealing with the stock market, I will admit that I am a card-carrying member of the glass-is-at-least-half-full club. I tend to take the optimistic side of the argument more often than not for one very simple reason. Over the years I've learned that stocks tend to spend more time rising than falling and as such, being negative all the time sets one up for long stretches of disappointment. And besides, during my 32 year career, it hasn't paid to bet against the good 'ol USofA for very long.

Another reason for my visit to the bear den this morning is that history tends to favor our furry friends on the Monday's following quadruple-witching expiration Friday's as well as the week following such events. So, I figured that if stocks are going to work lower this week, it might be a good idea to understand why.

My long-time friend and colleague Curt Bergquist is not shy about his views these days. Unlike my check-the-ego-at-the-door, systems-based, trend-following approach to the markets, Curt likes to form a view of the world and then manage the client accounts he has been entrusted with accordingly. And the bottom line here is that Curt is bearish in his overall outlook - very bearish.

For the record, Curt was one of the few that got 2008 "right" and kept his clients out of harm's way during the credit crisis. And for this reason alone, I like to listen to his macro views from time to time.

When asked to explain his less-than enthusiastic outlook on the markets, Curt started with, "The global economic situation is bad and getting worse. The traditional metrics point to an extended market that is becoming ever more divorced from economic reality." Curt then quickly added, "Around the globe old problems refuse to go away while new ones (China/Japan, Middle-East, Iran/Israel) have recently cropped up. Also, the latest data shows the U.S. and global economies continue to struggle."

In order to back up his point of view (Curt knew that I would demand evidence to support his opinions), my friend presented, in rapid-fire fashion, a laundry list of issues that he's concerned about. He mentioned that while his list is not all encompassing, the following negatives have surfaced in just the past week.

  • China recent PMI was bad at 47.8, which was the 11th consecutive month below 50.
  • China's delinquent loans have risen 333% since 2011 year-end.
  • Euro-zone PMI composite came in worse than expected (again) at 45.9.
  • France's manufacturing PMI collapses to 42.6 versus expectations of a rise to 46.4. This is the worst reading in 4 years.
  • U.S. weekly jobless claims remain weak and last week were worse than expected at 382K. This is the 5th miss in the past 6 weeks.
  • Bank of America confirmed plans to lay off 16,000 by year-end. Happy Holidays.
  • Philadelphia Fed's General Business Conditions Index came in at -1.9 for the fifth consecutive contraction reading.
  • Ireland's GDP was flat versus expectations for a +1.0% figure. (Curt sarcastically adds, "Hey, wasn't Ireland supposed to be the great bail-out "success story"? Never mind.")
  • The U.S. Index of Leading Economic Indicators fell -0.1%, missing expectations. That's 3 contraction readings out of the past 5.
  • Spanish 10-year bond yields are once again flirting with the 6.00% level.
  • Iran might have a Nuclear weapon soon.
  • China and Japan are having a bit of a tiff.
  • And this just in this morning, Greece will miss its targets - yes again. Ooops.

On this last note, Curt says that although the markets have forgotten about Greece, the problem still remains. He opined, "This could be very important. Recall that the latest tranche of bailout funds has been held up as the "Troika" has been checking things out on the ground and as the Greek government has been struggling to come up with the required amount of austerity measures. With anti-bailout sentiment already running high in many "Northern" or "Core" EU countries (Germany in particular) the chances for the granting of another extension to Greece were already slim. This latest report of falsifying numbers will hardly improve those odds." Curt then added, "If this leads to Greece actually being forced from the EU and defaulting on its debt the consequences could be quite disturbing. And I would submit that such has not been built into market expectations."

Oh, and lest I forget, Curt believes that the latest "bazooka" firings by the U.S. Federal Reserve and the ECB won't have the outcomes the markets are expected. My friend suggests that while Bernanke's latest grand economic expirement may continue to win friends on Wall Street for awhile, buying unlimited amounts of mortgage-backed securities isn't likely to produce many jobs.

So there you have it; a not-so cheerie start to the new week. And given that stocks are overbought, the market's historical tendencies just might become self fulfilling today and into the rest of the week. But while stocks are set to open lower and you may be discouraged after reading Curt's litany of negatives facing the markets these days, let's remember that at this stage, stocks remain very close to their high water marks for this bull market. And while Curt does remind us that this bull is getting long in the tooth, the most bullish thing a market can do is to go up in the face of good news.

So, while the bears are due to have a day or three in the sun, I'm going to continue to follow the guidance of my market models and try my darndest not to get depressed when I talk to Curt these days.

Turning to this morning... Curt's team appears to have taken possession of the ball in the early going as all kinds of worries about Europe (Greece's targets, German IFO, and the Merkel/Hollande disagreement on banking) seem to have zoomed back to the forefront today. And with overseas markets seeing red across the board (Shanghai sports the lone green number), the U.S. futures are following suit and moving lower.

On the Economic front... There are no economic reports scheduled for release this morning.

Thought for the day... Beware the barrenness of a busy life. -Socrates

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: -0.43%
    • Shanghai: +0.31%
    • Hong Kong: -0.19%
    • Japan: -0.45%
    • France: -1.07%
    • Germany: -0.67%
    • Italy: -1.35%
    • Spain: -1.58%
    • London: -0.54%
  • Crude Oil Futures: -$1.02 to $91.87
  • Gold: -$15.30 to $1762.70
  • Dollar: higher against the yen, euro, and pound
  • 10-Year Bond Yield: Currently trading at 1.722%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -7.40
    • Dow Jones Industrial Average: -53
    • NASDAQ Composite: -11.54

Positions in stocks mentioned: none

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