Second down week for US stocks may signal full-on correction
Posted on 16 May 2011 with 13 comments from readers
So many black swans have taken to the skies without any impact, and so long has this stock market rally been running that the shorts have long been slaughtered, and nobody has correctly called the US stock market correction, although with the S&P closing lower for the past two weeks it may already have started.
Financial markets today appeared to be entering a third week of sell-offs with US futures lower and Asian stocks tumbling across the board. The current sell-off has been led by a sharp decline in commodity prices but is spreading to other asset classes.
Japanese depression
Perhaps all those black swan events are finally coming home to roost. The nuclear fallout from the Japanese earthquake is still making waves in markets with fears about debt from the power company now weighing on bank stocks, quite apart from ongong disruption to production by some of the world’s largest manufacturers in the third largest global economy.
China is tightening up its monetary policy at the same time, and the risk of a hard rather than a soft landing is considerable with the economy more dependent on construction and real estate than Dubai at the height of its boom.
Then of course life is not exactly running smoothly across the Middle East and North Africa: from civil war in Libya to something close to another revolution in Syria, there is much to push oil prices back up again soon.
In Europe the sovereign debt crisis moves from bad to worse with Greece now back pleading for an extension to its $155 billion financial bailout, amid talks overshadowed by the arrest of IMF managing director Dominique Strauss-Khan for alleged rape in New York yesterday.
Meanwhile in the US the problems in the housing sector that triggered the slide into the global financial crisis almost three years ago remain. The National Association of Home Builders/Wells Fargo sentiment index is out today and expected to stay deeply depressed about the outlook for the sector.
Housing depression
Falling US house prices and low sales mean no chance of a pick up in this key area of domestic economic activity, and its continued demise threatens more bad debts and foreclosures for the banks.
It is not as though any of these factors now pressing on financial markets is new, except for the arrrest of Mr Strauss-Kahn that removes the head of the global central bank at a crucial moment where one man might make a difference.
However, stock market exhubrance can become highly irrational, as a former Fed chairman once famously commented. And stock markets that climb higher and higher when events are pointing in the opposite direction clearly have further to fall than markets that act as a more tentative discounting mechanism.
Fatigued bears and bankrupted shorts might finally get the last word.
13 Comments posted by readers:
Nicely written narrative Ed. Its a very tense moment indeed. I get the feeling anything can happen this week, and probably will.
Will we see Strauss-Khan on Ellliot Spitzer a year from now?
I really do enjoy the rational gloom that you write about, Ed., so that I click into your webpage each day for more realistic gloominess. I am sure that I am a misanthropist!
I read today that the UK’s National Farmers’ Union Mutual fund managers have noticed that the returns that their individual clients are getting is LESS than the management charges they are paying! So, they are going to reduce their charges.
This is the greatest drawback to bond and share investment, is it not, that the managers take such a large percentage that growth over a 10 year period from 2000 is but 67% for shares and 94% for bonds. Pathetic, when you see what g and s have done over the same period without any counterparty risk or management milking.
Perhaps my misanthropy is for those who trust investment management, especially at a time when stock markets should be falling and not rising.
RE : IMF. Now you know how the saying, ‘Truth is stranger that fiction’ came about. This guy couldn’t pay for it? Viagra wasn’t exciting enough? He could discover that New York STATE prisons don’t serve caviar or champagne too often. The inmates might enable him to discover a whole new American minority subculture, that he never dreamed existed. The US taxpayers paid 17% of his $3,000 A NIGHT hotel bill. How nice. I wonder why we’re broke.
Don’t forget the possibility of the USA missing a debt payment in 3 months. I doubt that will happen, but if it does, I will be shocked if the banking system doesn’t require a government take-over in the USA. I can see the possibility that a LOT of derivative contracts contain some default or rapid interest rate increase language in them, but I’m certainly no finance expert. Everything could be just fine if the world’s largest debtor fails to pay its’ debts on time. Sure it will.
It will be interesting to see how long silver sits near $35.
How about Celanese Corporation claiming that they have developed a new chemical process that can make ethanol from coal OR natural gas for the equivalent of $60 a barrel oil. They claimed at a presentation in New York, that they can make ethanol for $1.60 a gallon. E-85 runs fine in new cars. Now THAT could be a game changer, since a lot more coal and natural gas remains than oil. Liquid fuel is far more convenient than compressed natural gas. The infrastructure is in place. Building the conversion plants could put many millions of people to work. And farmland won’t be waisted for fuel production. One of the dumbest ideas ever conceived by man.
I’m amused at all the discussions on TV about why the oil price doesn’t fall more. They will find out sooner than most people now think. Those big oil companies aren’t drilling in 3 kilometer deep water because they are looking for a challenge.
Finally, reflect on this question. How come we successfully landed on the Moon 6 times before we invented the wire Hesco basket? I won’t pass judgement as to which accomplishment is more useful.
Peter..irrational exhuberance was the Fed chair comment..Bill – a rousing comment
..maybe of interest regarding Celanese..it is no conspiracy theory for a 60 yr old person to doubt the ability of such innovation to surface commercially..big oil ain’t called that for its heart..as for John Mark, welcome to the finest postage stamp news service in the world this day..3/10 min w/ Peter a day is the absolute equal to wasting an hour mining the London/NY rags seeking between the lines or coddled as an infant w/ their insult brand of reverse psychology..one observation -
there is a premium attached to the man on the street in metal purchase..any way you buy, you pay..you start out behind by a “initiation/tariff” fee of 1/12 by my math..T
@ John Mark:
I certainly am not a misanthropist, but for sure, any “non misanthropists” who trust investment banks remind me of pigs waiting to be slaughtered.
@ Bill, outside of Slidell, on the hill:
I can always count on learning some little “tidbit” from your remarks. I didn’t know what I Hesco basket was, until I read your comments herein (I had to google it!).
An Off-Topic Comment on Energy:
Regarding a breakthrough in energy, I believe that one of the greatest breakthroughs will be the manufacture of small thorium reactors that are the size of an outdoor central air conditioner (oops, don’t call it a “reactor”, because the environmentalists will kill it! Call it a thorium power cell instead!). These little babies are perfectly safe, won’t emit radiation, and will power your home for at least 5 years! Available at your hardware store in 2018.
What better place than here to ask about the oil market? Anyone have a strong feeling on what oil is likely to do in the short term?
As far as these markets go, i have a basic handle on most of it, except oil. I get the following => oil prices are softening, light, sweet crude-oil futures declined to $97.15 Tue. Gas prices dropping 5 cts on expectation of Louisiana refinery safe from flood, and then we have the safe flight into dollar factor FROM commodities, AND the Euro zone to figure out. What am i missing? Japan? Bonds are rising, rates breaking, DXY making higher-highs, lower-lows. (wow) Is it really a rally? or will it blow thru the top and establish an uptrend? I’d like to understand the oil situation better. To me it looks like smart money is dumping commodities and equities slide is beginning, resulting in USD flight to safety. Do i have the picture correct? Will oil continue to slide?
Ed Note: Well it fell all the way to $32 by December 2008 – so it may be the same this time.
@ James M.:
The short answer to your question is to do what GS does in the oil space; but that’s very tough to do, because GS very often will deliberately send false signals regarding market direction and outlook.
In the long term, as the USD continues to slide, commodities (especially oil, precious metals, & rare earth metals) will continue to go up, but with lots of volatility, courtesy of the global investment banks who thrive on volatility. In the short term, these commodities will continue to be volatile, and may fall some more.
Further confusing the “decision process” (i.e. on when to invest in oil) are the oil ETFs which track different oil indices; but many of these ETFs (especially the leveraged ones!) make money for the ETF issuer rather than their investors. If you’re gonna play the ETFs, the smart way would to invest in them for a very short term (i.e. for a few days or two weeks at most) when the trend is really, really your friend.
For me, the best way to invest in energy is via the big oil firms and alternate energy firms (e.g. geothermal; thorium, etc.) but the problem with that is if the general stock market falls, these firms will fall with the market (as you know, I’m high on geothermal and thorium). If we’re very patient and wait for a market correction, then we can buy the better of these firms at a big discount. For an interesting read on this topic, go here:
http://seekingalpha.com/article/255372-the-best-and-worst-energy-companies?source=email_the_daily_dispatch
and here:
http://seekingalpha.com/article/112586-ideas-for-investing-in-crude-oil?source=front_page_most_popular_articles
and here:
http://seekingalpha.com/article/112589-crude-oil-should-offer-investors-real-opportunity-in-2009?source=front_page_most_popular_articles
Thanks Ed. I was thinking more like $90 to $92 interim.
Can you really see gold at $750? (i.e. oil at 32.00)
If we have another western banking liquidity crisis anything is possible.
tim mckee, sure there’s a premium for buying g and s but when they rise by 400% and 500% or so respectively over a decade compared to 67% for shares and 94% for bonds, it makes the premium worth paying.
The eDealer I buy and sell through has a premium on purchase of 1.48% to 2.74% for gold and 2.49% to 4.24% for silver depending on how much you buy. And that’s all you pay since there is no charge when you sell.
I don’t know how these compare with what investment managers charge, but I bet these rates are much lower.
So, the man in the street should pay a premium for whatever he or she buys, and it shouldn’t put them off getting into the market. Nothing’s free – except, perhaps, inheritance!
Just a perverse observation….
Its about time, like the banks, the IMF got Strauss tested.
PS first time reader…thought the content and style was good so, like Arnie said, ‘I’ill be back’.
@Obewon: =>
“An Off-Topic Comment on Energy:
Regarding a breakthrough in energy, I believe that one of the greatest breakthroughs will be the manufacture of small thorium reactors.”
Going to research this. All of a sudden i felt the call of the wild.
@ James M.:
The technology is available today to build those small thorium power units, but I fully expect that lots of other industries (e.g. big oil, power companies, natural gas industry, green energy freaks, environmentalists, etc.) will do their best to kill it, or delay it for as long as they can.
So yeah, research it; you’ll be amazed!