Welcome to the Fall and I mean that literally!
September and October are usually the worst market months. The 1929 crash, the 2000 crash in the 2009 crash all occurred in October. Here are the problems I see for September and October.1) China’s economy is only growing at a 3% level. China is the second world’s largest economy and accounts for some 20% of the exports of countries like Australia, Chile and South Korea. China’s exports are the lowest since 2004. To some extent, China has been living on borrowed time because its factories are operating at full employment and at less than 50% of capacity. It is trying to support its middle-class at the same time a growing economy. It’s not working. This is what happened in Russia, when communism fell. What goes on in China does not stay in China as it does in Las Vegas.2). With China leading the way it appears that a global recession is well on its way. The emerging market countries are the weakest together with oil-producing nations. Europe is suffering under excess capacity. US consumers are being hurt by low income and increased health, educational costs and soaring housing and shelter costs.3) the Fed will no longer support printing money by quantitative easing. It holds over $4 trillion of bonds and lacks any traditional methods for stimulating the economy should it fall. The only thing they can do is to delay raising interest rates,which they may do next week. However they have already signaled the end of monetary accommodation and are removing the safety net for the markets.4), Manufacturing levels are already showing declines down 4.6% in July and down 15.8% in August. Standard & Poor’s 500 second-quarter earnings saw a slight decrease in earnings and a revenue decrease of 3.4%. Oil prices are now forecasted by Goldman Sachs to go slowest $20 per barrel. This will not help consumers as much it will harm oil-producing nations such as Brazil, Russia, Venezuela, Canada and oil-producing companies. The effect will be to diminish the quality of the bonds that represent these entities. This will thereby diminish the assets in the form of bonds and derivatives that are being held by the banks. This is the major disaster that I fear will happen and could be worse than the 2008 debacle because Congress will not be willing to bail out the economy and banks as it once did. The Tea party and the Republican Party is talking about shutting down the government again in October. This would be the beginning of the end. In addition, the Federal Reserve is out of bullets. 6. Technology is replacing jobs all over the world. What made things work in the 1950s was big labor, big government and big business. Now, we just have big business overruling the government and labor. The capitalistic system has some weaknesses and when labor and capital are off balance, big disruptions occur.
All is not bad, home prices are up and corporate balances are high. Of course this was the same situation in 2008 when stimulation and quantitative easing policies lessen the blow of bond failures. However reverse tapering by the Fed at this point could be very dangerous for the markets.
EVERYTHINGS COMING UP ROSES IN THE ECONOMY. THEN WHY IS THE MARKET WEAK?
Welcome to September! September and October are traditionally some of the stock markets worst months. Europeans are returning from vacation and finding their markets down some 20%. China continues to report bad news as the Hang Seng is down 2.3% today. The New York Times reports that China, like the old Soviet Union is keeping failing factories open, so that it appears that the country is fully employed. As with the Soviet Union, these kind of subterfuges can surface with disastrous results. Recent data shows that China’s manufacturing sector shrank at its fastest pace in three years and manufacturing data in the United States also slowed in August to its weakest level in two years. The Nikkei averages are down 3.84% today. The Dow, so far this morning is down -324 2%. Crude oil is at 46.28 down 6%, but up as low of $38 a barrel. The market is now acting even weaker than I anticipated AND I’M THE LONE BEAR! I expected some kind of a rally, and one may still occur, before for the next drop. However, Bear markets have a mind of their own. My watchword continues to be: Watch out below!
The economy increased at a revised +3.7% pace in the second quarter. That is almost 1.5% percent stronger than initial estimates for that period. Personal disposable income rose 0.4% after adjusting for inflation in the month of July. That is faster than consumer spending, which instant edged up 0.3% during the month. All good news! Then why is the market so weak? Harry Truman, is quoted as saying, “There is nothing new in the world except the history you do not know.”Remember the Markets went down in 2000 and 2008 before the bad news became public. The market’s current weakness, I believe is telling us something. It is telling us that there are weaknesses that have not yet been revealed. I have talked about those weaknesses over the months in The Investment Strategy Letter.
|Forecasted Trend||DJIA||NASDAQ||S&P 500|
|Long Term||Bear Market?||Bear Market?||Bear Market?|
|Breakout Points||DJIA||NASDAQ||S&P 500|
|Short Term Up (Resistance)||18,352||5,231||2,134|
|Short Term Down (Support)||15,855/||4605/4,545||1970|
|Int. Term Up (Resistance)||18,352||5,157||2,134|
|Int. Term Down (Support)||/15,370 /14,688/ 13,377||4,116/ 3,986/3294||1,820 /1,560|
|Long Term Up (Resistance)||18,312||5,231||2,131|
|Long Term Down Fibonacci Support||50%12,000 62% 10,750||50%2,958 62% 2,555||50%1,390 62% 1,177|
|10Treasury2.18%||Gold 1,139||Oil 46.28|