Always a Winner Strategies
& Stock Market Analysis for the Discerning Investor & Executive
it and Reap!
Week Ending August 14, 2011
Volume 29, Number 6
This Week: Cash Call,
February, I issued a call to cash based on my reading of the fundamentals of the U.S. and global economy. In April,
I reiterated that call; and with this newsletter I continue to see this as a poor time for retail investors to be in the market.
When I issued my cash call in February, the exchange traded fund for the S&P 500 was at 135.
Over the next two months, it would dip as low as 126 and would then rebound to a top of 136, just one point above the level
of when I issued my cash call. Now, at the time of this writing, SPY has fallen to 127.
note without pride that this call has been the most accurate of any analyst on Wall Street in 2011 – yet it has been
largely ignored by my colleagues in the financial media. This is most likely because of a strong bias in
the media towards bullishness. (Of course, that was the same damn bullish bias that allowed people to be
“surprised” by the collapse of the housing bubble in 2007. Yes, I called that bubble collapse
too as early as the later part of 2006.)
In thinking about the movements of the stock market in
2011, it’s important to see the February to June action as a clear sideways market for longer term investors.
Yes, there was some opportunity to trade some volatility and short term rises and dips, but that’s not what I do in
this column. What I do is handicap the market trend based on macro fundamentals and a read of the technical conditions
of the market.
To be clear, from my paradigm, a sideways market indicates disagreement among market
participants over the eventual trend of the economy. It may be that the recent movement down of the market
has ended this sideways pattern and a new downward trend has been established, but I’m not ready to make that call.
In truth, despite all the handwringing and hysteria on the airwaves, we have simply dropped back down to the lower end of
the sideways trading range we’ve been in since I made my cash call.
So what will determine
whether we recede back down into a bear market and recessionary economy or bounce back? Let’s look at the economic
fundamentals that have caused me so much concern since February.
My overriding concern stated more than a year ago is that our investment-led recovery would not enjoy
a follow through because of high unemployment, stagnant income, continued foreclosures, and high energy prices.
That concern has now heightened as I’ve watched the ISM manufacturing index – the best indicator of the investment
led recovery – fall back into the recessionary range. In addition, consumer confidence is in the toilet.
Ergo, this is a BEARISH signal.
2. With the investment-led recovery faltering,
we have no more ammunition from either a fiscal or monetary policy standpoint to re-stimulate the economy. In fact,
it’s just the opposite. We are running high budget deficits with little stimulative effect – this
is largely the product of weak tax revenues due to slower than potential growth and excess government spending on our wars
in Iraq and Afghanistan. On the monetary policy front, Helicopter Bernanke has turned the king over on the chess board
– and is left with only a swollen balance sheet and a weakened dollar. Another BEARISH
3. Despite a weak dollar, we still run large
trade deficits in oil and with China. With China, the problem is the fixed peg of the yuan to the dollar. As long
as this peg endures, America will surrender almost a point of GDP growth annually to China at the costs of almost a million
jobs we fail to create. This is BEARISH, too; and if there is anything that truly ticks me off both about
well-coifed airheads like those on the Sunday Meet the Press type shows as well as my doctrinaire colleagues in the financial
press it is the stupid and stubborn unwillingness to realize just how destructive this peg is. Earth to
colleagues – you can’t have free trade in a fixed peg world. It’s the mother of all oxymorons.
4. It is essential that we not forget the contractionary
effects on the U.S. economy of the deepening state budget crises that have resulted in contractionary cutbacks in state spending.
Here in California, for example, revenues are falling far short of projections; and the state is likely to have to endure
another round of what has already been very steep cuts. From a macro perspective, that’s BEARISH.
5. Europe’s sovereign debt crisis is deepening.
Italy and soon Spain will have joined Greece and Ireland as the weak sisters on the continent; and all the euros and Eurobonds
in the world are not going to save their sorry derriers. I predicted long ago on the Kudlow Report that the days
of the euro are numbered; in truth, the best way for countries like Greece and Italy to rebound is to abandon the euro and
devalue. If the European union persists in enforcing a strategy of fiscal austerity instead of currency adjustments
to restore vibrance in the European economy, they – and because America depends on exporting to Europe – and us
are doomed to a much slower growth rate. BEARISH, BEARISH, and BEARISH.
In Asia, at some point, the Chinese economy must stop its export-dependent levitation. A soft landing
would entail the emergence of a robust consumer but policies are not being put into place to make this happen – with
those policies being a yuan float coupled with increased health and pension benefits to loosen up savings for consumption.
Ergo, the hard landing scenario is more likely. This involves interest rate hikes and both monetary and fiscal tightening
to fight a spiraling inflation. A likely result will be the collapse of several asset bubbles, including that in real
estate – and no small amount of chaos in the land of unbridled mercantilism. A Dragonianly BEARISH signal
7. If – or should I say when –
China falters, so, too, will the economies of all of the commodity countries. These include Brazil, Russia, Australia,
and Canada, to name the most major players. While Brazil is the most vibrant of the four, as China goes, so goes
these countries. (Canada can fall on both the U.S. and Chinese weakness of course.) A final BEARISH
Add this all up, and it is the same damn
picture I saw in February, only worse. I only wonder why this is so damn obvious to me and seemingly so
elusive to so many other analysts. Was not the phrase “it is was it is” invented precisely
for situations just like this.
As a final observation, it’s important to separate the fate
of the U.S. stock market from that of the U.S. economy in at least one sense: All of the components of the Dow and much
of the S&P 500 consist of multinationals that have offshored much of their production to China and elsewhere; and their
revenues are highly dependent on events outside the U.S. So it is possible to have a U.S. stock market that is stronger
than the U.S. economy. That said, that kind of divergence is likely to be an unsustainable equilibrium over time because
the U.S. economy is ultimately too important to global prosperity.
As a final conclusion, the U.S.
economy remains in a structural cul de sac. Consumption and government spending cannot provide the fuel to
run our economic engine anymore. Business investment continues to flee offshore; and our trade deficit is really and
truly a vampire sucking the lifeblood out of our economy.
Until the politicians and Meet the Press
type pundits in Washington and my financial press colleagues realize this, we will continue to have the wrong debate about
what must be done and continue to give the wrong advice to investors.
And by the way, anybody who
was surprised by the events of the last few weeks and the market turmoil needs to turn their press pass back in.
That was, in John Barth’s phrasing, a paradigm of assumed inevitability.