Weekend Market Commentary: Saturday Edition

Written by Gary

Weekend Market Commentary: Future Recessionary Visions

UPDATED: 0830 EST 2014-09-06

Last week we explored the European Union’s economy and why it was a candidate for bringing on a recession in the U.S. The arguments are good ones and the EU remains a serious problem for the US. The EU’s problems and others are only getting worse by the day and have been for the past several years. Our fear is that this is not the only issue that what will turn the U.S markets south?

Investors are becoming increasing concerned, as we are at Econintersect.com, that this aging bull market is going to turn in its horns and take a nap sooner rather than later. As each session of late ends, we are becoming more concerned that a correction over 10% is becoming a real possibility.

The low volume antics of setting new highs and then closing below a previous closing high doesn’t give me that warm fuzzy feeling that this bull trend is going to continue. However, the SP500 did set a new closing high yesterday (09-05-2014), ‘The trend is your friend, until it isn’t’.

Every day, we look for market negative reversal signs of Black Swans, Grey Swans, Death Crosses, crashing blimps or whatever that MAY be the signal to switch portfolio tactics and not get hurt in a market downturn. So far, just shadows of problems that can not be analytically identified just yet, but the ‘gut’ feeling is that they are real and are going to make themselves present soon enough.

The problem with all of this financial market hand-wringing is that everybody is considering the same thing. This type of psychological herd thinking generally pushes the market even higher and certainly not lower, but is this time different? Are we witnessing a top in the making?

This first issue to face in today’s commentary is The Eurozone Is A Growing Problem For U.S. Economy and is already becoming a drag on the U.S. Economy. This is not the only problem to face the U.S. Financial castle, but it is a biggie and one not to casually dismiss.

The Eurozone Is A Growing Problem For U.S. Economy

• The 18-nation euro-zone is the largest economy in the world, eclipsing that of the U.S.
• The euro-zone is the largest trading partner of the U.S. (the largest importer of U.S. goods, the largest exporter of goods to the U.S.).
• The euro-zone is in an economic crisis.

It has also been more than three years since the market experienced even a normal 10% to 15% correction, while on average it does so every 12 months. And of the 25 bull markets of the last 100 years, this is the fourth longest running since 1929.

You do have to at least ask yourself if that is justified, especially given the still anemic economic recovery. The market is higher than in 2000 and 2007. Even in those years of booming economic conditions, the market was not able to drive even higher, the S&P 500 instead losing 50% of its value in those apparently forgotten bear markets.

(Click on chart for larger view.)

Here is the opposite view from one of the most respected analysts and author, Mr. Cam Hui. Cam may be correct that the U.S. Markets are well insulated against recessionary ‘attacks’ from the EU, but I caution readers not be so uninformed to believe that it couldn’t happen either. Remember that the BRICS are not in such great shape either as none of them can be described as exactly stalwarts of economic strength.

What Keeps Me Awake At Night

The eurozone is becoming a basket case
Thomson-Reuters comments that not only is eurozone GDP growth slowing, Germany, which has been its locomotive, is seeing its growth roll over:

This is where my opinion departs from David Levy. While Levy believes that weakness in Europe and China is likely to pull the US into recession, I believe that the American economy is somewhat insulated from a slowdown overseas because of the relatively weak trade linkages. However, the American stock market is not well insulated from a non-US growth pause because of the high degree of foreign exposure seen in large cap multi-national companies.

Mr. Hui has a point, but that is only one part of the story in my opinion. Europe itself, says one reader, “Europe is morally, intellectually, financially and militarily bankrupt and irrelevant”. John Manson wonders, Will The European Crisis Change Things? He categorically states:

• The economies of Europe are not doing well at all.

• The European Central Bank cannot be the savior of the eurozone that everyone would like.

• Governments in the eurozone are not strong enough to bring on the reforms needed.

• Europe will just continue to bumble along facing more years of uncompetitiveness and slow growth.

Europe is in a bad way right now. Economic growth is almost non-existent and disinflation is getting very close to becoming deflation.

The bad news is the EU is not the only financial community to have ‘issues’ that could effect the U.S. Financial markets. China, second largest World’s economy, is preparing for slowing growth and yet the U.S. markets are continuing to hit new highs almost every week. There is a real disconnect on Wall Street and investors should be cautious say some analysts.

I am not a big fan of George Soros, but what he is doing might be a wake-up call for investors to be more cautious or at least pay closer attention to what is going on. The question is what has Soros done with his portifolio? Is he dumping, hedging or what?

Some say, ‘If Soros is 16% short them he is 84% long’ and could really be a hedge. While some have speculated, ‘Soros has simply bought some downside protection. It’s cheap right now and the smart thing to do, enabling one to remain fully or mostly invested’ leaving us to wonder what it all means to us investors?

George Soros Is Betting Against The Market And Why Investors Should Take Notice

• When an investor like George Soros suddenly increases a bearish position by 605% in a quarter, it raises more than a few eyebrows.

• . . . it’s clear he’s preparing for a worst-case scenario.

• Investors should consider this a warning notice to begin protecting your portfolio with appropriate hedges like covered calls and puts. Caution is recommended in this environment.

The bottom line, as I see it, is that Soros is NOT the only member of the ‘big boys’ club contemplation a downturn in the near future and it would most likely be a good idea for us to pay attention. Tomorrow in Part II, we will discuss what else could send the U.S. Markets into a ‘correction’. What are your thoughts? I would love to hear from you.

“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 93.52 +0.06 (+0.06%)

Brent oil closed Friday at 100.91 -0.09 (-0.08%)

The Demon The Gold Bears Are Mistakenly Overlooking

Gold closed Friday at 1,269.40 -1.60 (-0.13%)

Copper closed Friday at 3.171 +0.002 (+0.06%)

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Written by Gary