The story of the optimists now is that stocks are cheap enough to discount all the weakness the global economy is likely to see over the next six months. In other words, they’re saying that all the bad news is in the stocks, so it’s time to have some nerve and buy.
You can certainly say that there are some stocks trading near historic lows of valuation, such as Microsoft (MSFT) going for a forward price/earnings multiple of 10. I’m the biggest Microsoft skeptic around — the company is severely dysfunctional, failing to introduce a major new high-revenue, high-margin product in years — but that valuation is eye-catching. Here’s a shocker: at this level its dividend is almost meaningful, at 2.2%.
Yet as ISI Group points out, much to their chagrin, the consumer and business environment is actually worsening, so it’s pretty hard to say that all the bad news has been discounted. We learned last week that private payroll employment is barely growing, household employment was repotted down 301,000 in June, the work week is shrinking, pending home sales were down 30% month over month in June, mortgage applications are down, retail sales are down, home building is down and homebuilders’ shares fell 8% last week.
Shall I go on? OK, well, countries in the Eurozone announced more fiscal tightening last week, including VAT hikes of 2% in Spain and Greece; all commodities were down last week; bond yields plunged as investors fled to safety; the Shanghai stock market was down 7% last week; consumer net worth was probably down $1.3 trillion in the second quarter (yanked lower by falling stocks and home values); and the China manufacturing index slipped to 50.4% from its recent high at 58%.
Business leaders are so frustrated at the Obama Administration that they’re taking the brazen step of going public with their views — a real rarity. Jeff Immelt of General Electric told an interviewer that “people are in a really bad mood” and that “government and entrepreneurs are not in synch.” That was followed by a comment by Ivan Seidenberg, head of the Business Roundtable, stating that he believes “Obama is not a friend of the private sector.”
Putting together all the evidence, ISI figures that the leading economic indicators probably fell 0.3% last month, which would turn around the measure’s recent upward tilt. Add to this the fading of the fiscal stimulus package enacted last year, the failure to extend federal emergency programs for unemployment benefits, state and local government spending cuts and higher taxes and fees, and the likelihood of higher federal taxes next year once the Bush era cuts expire, and you can see that the train is running the wrong direction.
The only good news here is that the TED spread is falling, as shown above, which is usually interpreted to suggest that credit fears, particularly in Europe, are abating. That’s the ratio of Treasury bills to the Eurodollar (T/ED), and when it falls it means that banks are not clamoring for high interest rates to compensate for the risk of lending.
You can see that the TED soared in the winter of 2008 amid the credit crisis, and when its fever broke in November that year the economy and markets did start to improve — about four months later, as shown in the bottom clip of the S&P 500. Right now it’s sinking off its recent June peak, so perhaps we can look forward to an improvement in the market and global economy in November.
Another plus: Inflation has been falling around the world. That’s good in that it gives central banks cover to avoid raising interest rates but it’s bad in that it shows a lack of growth expectations and can lead down the road to the worst malady that can afflict a country, which is deflation. ISI points out that U.S. average hourly earnings were down -0.1% month over month, the first decline in seven years; German headline consumer prices, which is what the ECB watches, was just 0.0% month over month and 0.8% year over year; Japan core inflation was down 1.6% year over year at its latest reading; and commodity prices are down 13.2% from their recent peak.
The pressure will now grow on policy makers to do something new. Both Europe and the United States are unlikely to pass more fiscal stimulus, so the job will probably go to central bankers. The European Central Bank has more room to cut rates, and the Federal Reserve can go back to what it euphemistically calls “quantitative easing” and what normal people would call buying bonds (most likely mortgage securities from Fannie Mae and Freddie Mac).
To get more creative, ISI observes that Obama and Congress could delay next year’s tax increases, reinstate homebuyer tax credits, try to extend unemployment benefits, renew the tax credit for new hiring and also revive the bonus depreciation for businesses. China also has a lot of tools at its disposal.
Bottom line:�Growth is slowing, inflation is slowing and asset prices are down. Last year in this very week, the markets launched a massive rally after a two-month slide amid hopefulness that policy makers’ efforts to right the ship would work out.
Now hopefulness is in short supply again. This is the kind of condition that can lead to a huge short squeeze and a “face-ripping” shot higher, as traders say. �Look for the potential for a move to the 1,100 level. Bears will defend it with everything they’ve got. If bulls get through, they’ll have a straight shot back to the April highs.
The only good news here is that the TED spread is falling, as shown above, which is usually interpreted to suggest that credit fears, particularly in Europe, are abating. That’s the ratio of Treasury bills to the Eurodollar (T/ED), and when it falls it means that banks are not clamoring for high interest rates to compensate for the risk of lending.
You can see that the TED soared in the winter of 2008 amid the credit crisis, and when its fever broke in November that year the economy and markets did start to improve — about four months later, as shown in the bottom clip of the S&P 500. Right now it’s sinking off its recent June peak, so perhaps we can look forward to an improvement in the market and global economy in November.
Another plus: Inflation has been falling around the world. That’s good in that it gives central banks cover to avoid raising interest rates but it’s bad in that it shows a lack of growth expectations and can lead down the road to the worst malady that can afflict a country, which is deflation. ISI points out that U.S. average hourly earnings were down -0.1% month over month, the first decline in seven years; German headline consumer prices, which is what the ECB watches, was just 0.0% month over month and 0.8% year over year; Japan core inflation was down 1.6% year over year at its latest reading; and commodity prices are down 13.2% from their recent peak.
The pressure will now grow on policy makers to do something new. Both Europe and the United States are unlikely to pass more fiscal stimulus, so the job will probably go to central bankers. The European Central Bank has more room to cut rates, and the Federal Reserve can go back to what it euphemistically calls “quantitative easing” and what normal people would call buying bonds (most likely mortgage securities from Fannie Mae and Freddie Mac).
To get more creative, ISI observes that Obama and Congress could delay next year’s tax increases, reinstate homebuyer tax credits, try to extend unemployment benefits, renew the tax credit for new hiring and also revive the bonus depreciation for businesses. China also has a lot of tools at its disposal.
Growth is slowing, inflation is slowing and asset prices are down. Last year in this very week, the markets launched a massive rally after a two-month slide amid hopefulness that policy makers’ efforts to right the ship would work out.
Now hopefulness is in short supply again. This is the kind of condition that can lead to a huge short squeeze and a “face-ripping” shot higher, as traders say. Look for the potential for a move to the 1,100 level. Bears will defend it with everything they’ve got. If bulls get through, they’ll have a straight shot back to the April highs.
For more ideas, check out my Trader�s Advantage and�Strategic Advantage newsletters.
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