Weekend Market Commentary: Special Edition

August 30th, 2014
in Gary's blogging, Special Post, syndication

Written by

Weekend Market Commentary: Are We Getting Closer To A Correction?

UPDATED: 1045 EST 2014-08-30

With the DOW and SP500 hitting new historic highs this week, pundits galore are clamoring that a correction just just around the financial corner but most of them really don't know why.

Let's look at where the US market really is and what single situation could derail this bull train.

Follow up:

There are so many bad-news scenarios of an imminent market correction floating around that it makes ones head spin. We have speculated the same thing in that 'something' will begin at the end of September, 2014, while others claim the summer months of 2015. One left-field opinion is that the next big financial crisis could be a cyber attack and while I agree, it isn't likely to be the one that starts the next correction. What will ultimately stop the current bull in its tracks are 'issues' closer to the news being discussed today.

The latest popular news that could be disturbing is the tax inversion plans of Burger King (BKW). While by it self is not important, the trend is and that is what we are looking at - TRENDS. The continuing trend of 'significant' financial problems in the EU are probably the most disturbing and most likely to create recessionary 'issues' for the US.

For starters, Friday's German Retail numbers came in lower than expected and that is not good news. Bret Jensen writes, "Eurozone also sees inflation continuing to fall. Consumer prices rose just 0.3% year-over-year in August, well below the ECB's target of just below 2%. Italy is in outright deflation and German retail sales just posted their largest monthly decline since January 2012."

The first column is what was reported on 08-29-2014. The second column is what was expected and the third is the last report.

Expectations for central bank stimulus grow in Europe; French PM resigns in feud over economy

FRANKFURT, Germany (AP) - Worries about the economy are rippling through Europe. Downbeat data have pushed the European Central Bank closer to more drastic action to keep the hesitant recovery from stalling completely.

Meanwhile, open feuding in the French government about how to break out of economic stagnation saw President Francois Hollande dissolve the cabinet and order Prime Minister Manuel Valls to form a new team.

Concerns had grown so strong that by Monday [08-23-2014] investors were willing to bet that the ECB will intervene with new stimulus measures, based on comments late Friday by bank President Mario Draghi.

. . . Draghi warned that low inflation - a sign of economic weakness - could be getting worse. Draghi also underlined the sense of urgency by telling European governments to make a more coordinated effort to boost growth through tax cuts and a new joint investment program.

The following is a shopping list of the many problems and issues confronting the European Union today. Most will not be solved in the near future and will only make matters worse than they are now.

Europe Drives Capital Markets

Summary

  • EMU's money supply and preliminary inflation figures from Germany and Spain are better than expected.

  • Euro briefly moved approached last week's range, but was sold off in part of the rolling start of what appears to be the Russian invasion of east Ukraine.

  • The market may be exaggerating the likelihood of the ABS purchase scheme at next week's ECB meeting. Rates cuts more likely.

Cliff Wachtel in his article, The EU: The End Is Near? Existential Threats And Decisions Approach concludes that:

"Now that even Germany is suffering from deflationary pressures and the EU remains an economic disaster, isn't it time to fire up the money printing presses and empower the ECB to do whatever it takes, inflation risks be damned?"

"Regardless of what Europe ultimately decides, the process will likely be messy and reinforce the EUR's current downtrend. While individual European assets will prosper, investors must consider significant loss from a declining euro. Just reaching parity with the USD would imply a roughly 25% decline."

Last week we submitted a list of some of the Grey Swans currently swimming in the market waters and they could be the signs of an approaching bear market. Here is an updated list with the European Union leading the list.

-EU's Economy

-Ukraine / Russian aggression

-Argentina debt default

-Ebola outbreak in West Africa

-Iraq Vs. ISIS Vs. The US

-Syrian civil war, now with the US in the mix

Grey Swans are not as dangerous as a Black Swan, but if you get enough of these smaller critters at one time it never turns out well for Wall Street. Well, we have a family of them right now and that causes me to worry.

Here is the nail in the coffin as they say. David A. Levy, who oversees the Levy Forecast, is not your run of the mill forecaster. He accurately predicted the 'Great Recession' of 2008 / 2009 when he warned that the U.S. housing sector was a bubble that was about to burst and it would be the precursor to a recession.

At that point in time he wrote, 'the Federal Reserve would have to cut short term borrowing rates to the lowest levels ever seen in modern financial circles to stimulate the economy'. As you all know, that is exactly what happened. Fast forward to his his latest prediction, Levy says, "the United States is likely to fall into a recession in 2015 triggered by downturns in other countries, the first time in modern history".

"The [coming] recession for the rest of the world ... will be worse than the last one," says Levy, whose grandfather called the 1929 stock crash and whose father won praise over decades for anticipating turns in the business cycle, often against conventional wisdom.

Levy predicts a U.S. recession will throw its housing recovery in reverse, and push home prices below the low in the last recession. He says panicked investors are likely to dump stocks and flood into U.S. Treasurys, a haven in troubled times, like never before.

He expects [US] growth to return, but not for long, as a recession in either Europe or emerging markets spreads to the U.S.

Read More >>

This not the good news the permabulls want to hear, but we will have a downturn eventually as that is just the way the markets work. The question is, and has been, how much of a decline and what is the trigger that will cause it? What are your thoughts?

"The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction. Where that is, I do not know." - Alan Greenspan, July 30, 2014

(Follow Closing Market Averages at end of this article)

WTI oil closed Friday at 97.03 (up +0.48 (+0.51%) )

Brent oil closed Friday at 103.14 (up +0.39 (+0.38%) )

The Demon The Gold Bears Are Mistakenly Overlooking

Gold closed Friday at 1305.40 (down -4.00 (-0.31%) )

Copper closed Friday at 3.107 (up +0.011 (+0.34%) )

If you would like to get advanced buy/sell tweets, sign-up in the column to the right of this post by clicking on the 'Follow' button. Write me with suggestions and I promise not to bite.

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gary@econintersect.com

Written by Gary

 









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