Economy improves, yet stocks struggle

The market is still spooked by the prospect of Fed tapering, despite signs of a global recovery.

By Anthony Mirhaydari Aug 14, 2013 2:35PM

copyright Stockbyte, SuperStockThings are getting better. No really, they are.


The Eurozone has officially exited its longest recession on record. Factories around the world are spooling up to replenish drained inventories. The U.S. trade deficit narrowed to levels not seen since 2009. And declining labor productivity is forcing companies to hire, helping boost the job market. As a result, we're looking at a healthy reacceleration in global GDP growth in the second half of 2013.


But stocks are dancing to a different tune entirely. The Dow Jones Industrial Average is falling towards its 50-day moving average for the first time since June. Breadth is narrowing. There's been a record cluster of "Hindenburg Omens" -- a technical indicator that points to internal market dislocations. So, what gives?


Weakness abounds. The number of S&P 500 stocks in uptrend has begun to roll over, something that was last seen in late May as the market was topping. You can see this in the chart below.



It's a market that simply doesn't know what to do. For so long, it's been simple: Buy stocks based on the prospect of cheap money stimulus from global central banks. And there were derivatives on this idea, such as buying bond-like stocks since the Federal Reserve as pushing interest rates down so hard.


Starting in May, after the Fed started talking up a tapering of its $85 billion-a-month bond purchase stimulus, it all changed. Bond yields climbed, pushing up long-term interest rates. Bond-like stocks were crushed. Suddenly, that warm, comforting blanket of monetary stimulus became the wet towel of policy normalization.


The cheap money addicts on Wall Street are suffering from withdrawal. And because of this, they are ignoring some very real signs of progress in the real economy. Consider the rebound in Europe, where the region returned to growth in the second quarter, ending six consecutive quarters of recession.


Yesterday, we got a positive German business confidence survey, a solid Eurozone industrial production report, and a strong core U.S. retail sales report. Sales at U.S. department stores increased 0.6% last month, the biggest gain since March 2012.



And thus, certain areas of the market keyed into a rebound in global growth such as steelmakers are actually surging higher. The Market Vectors Steel (MV) is on the move for the first time since December. In my Edge Letter Sample Portfolio, Cliffs Natural Resources (CLF) is up more than 9.3% since I added it on Friday. Companhia Siderurgica Nacional (SID) is up more than 8.2%.



Precious metals stocks are also on the move as inflationary pressures accumulate in the supply chain. Lake Shore Gold (LSG) is up 15.4% since I added it on Monday. The ProShares UltraSilver (USLV) is up 5.8%.


The problem, I believe, is that the prospect of the Fed's stimulus taper in September and the potential of another fiscal food fight and a government shutdown on October 1 have pushed many investors to the sidelines. Risks are rising. And conservative investors would be wise to take a step back, raise some cash, and wait out the turbulence.


But for more aggressive traders, the positive economic news is creating a very lucrative tailwind in stocks -- such as steelmakers and silver miners -- that are attractively valued after being shunned for so long.


It's a mixed outlook heading into the end of the year. And thus, a mixed portfolio allocation is appropriate with targeted longs in metals, a few short ideas such as my bet against Sumitomo Mitsui Financial (SMFG), and an increase in cash.


The currency markets are also relatively calm, which means any market pullback should be relatively orderly.



Disclosure: Anthony has recommended USLV to his clients.


Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​om​​​​​​​​​​​​​​​​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

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Aug 14, 2013 3:13PM

Aug 14, 2013 3:11PM
Stocks are way ahead of the real main street economy.  And who says Main Street's economy is improving?   The Imbecile Obama?  

We have create 222,000 full time jobs this year, and lost 385,000 full time jobs this year.   We have created 770,000 part time jobs of which 61% are minimum wage.  We are printing money at 11% rate per year.  

Let me know when Main Street even begins to see a recovery...  no sign of one yet...
Aug 14, 2013 3:02PM
"Things are getting better. No really, they are."

He should have added "Who are going to believe - me, or your lying eyes" ?

Meanwhile, Obama's attitude towards American business can be summed up as...

"The beatings will continue until morale improves".
Aug 14, 2013 3:10PM
The economy is NOT getting better. When do you data-manipulators get it? The economy improves when people turn their homes back into houses instead of prepper bunkers and you can actually go into a business, apply for a job and get an interview. Europe is pulling out of it's recession ON PAPER but Macy's is dragging the market down more than 100 points? Nope. People SELLING because they know that QE is the only thing keeping the Dead Cat stock markets looking alive. LOOKING. They're anything but alive and certainly not representing economy, business or investment climates. The Kool Aid is done. the markets will be crashing NO LESS than 50% to get back to the last known validated threshold. There should be some further contraction as business platforms are forced to reconfigure into enterprises again (that means all the paper and button pushing alumni get the Pink Slip). Come on Tony... your audience isn't the Wall Street and Trader crowd dissing you every time you try to tell it like it is... your audience isn't even in the markets right now. No intelligent commonsense person is.  
Aug 14, 2013 3:49PM
Wall Street doesn't run on intelligence, it runs on greed. Traders run stock prices up, getting suckers to buy, then whip around and sell, leaving suckers holding the losses.
Aug 14, 2013 3:49PM
W.T.F.  ARE YOU PEOPLE SMOKING ????????? ITS NOT BETTER ITS THE SAME OLD S____ look at Europe's unemployment rate , that will tell you
Aug 14, 2013 4:02PM

17 Trillion Public Debt.


100 Trillion in Unfunded Liabilites (probably a fair estimate).


1 Trillion of Funny Money per annum.


800 Billion in deficits per annum.  (may edge up back to 1.2 Trillion).


Aging Demographics.


A failing education system.


Loss of global competitiveness shackled with free trade.


Economy getting better?  No.  Printing and Federal Deficits are simply making it look that way. 


Another Recession imminent?  Yes. 2014 or 2015.



Aug 14, 2013 3:54PM
Who is this guy and what the hell is he talking about?  The title of this post basically sums up the ignorance of the article.  Stocks not doing well?  - All time highs right?  And Main street is doing well?  - What?  Really?  Propaganda media at its best.  I love it.
Aug 14, 2013 3:49PM
Aug 14, 2013 3:42PM

V_L (although from some of the responses past gotten over time that think you are not in tune with things) have been right on lately.. even though we have sometimes disagree, past. 

Micron laying off 1500 more here, locally.  Not a peep and my State is already 50% on welfare.


Things are improving?  Where?  Show me and do give QE or government figmented stats on any front you can choose.  Sheep to the slaughter is coming with the millenials....just look around the chaos. Anarchy may be closer then we all want to believe right here. 

Aug 14, 2013 3:50PM
Maybe you should have done a little more investigation into the facts.  When Obama took office, 8 million people disappeared from the BLS database.  During the two years when the hard numbers were not available to the public, 8 million citizens of the USA just vanished.  Now, compare the hard numbers to those of the great depression and we would need a war or two to call this a recovery.  But wars are not popular these days and outsourcing military is just two damn expensive.  But most of the 8 million have returned which puts the true unemployment numbers at between 13% and 15%.  Now add the unreported $57 trillion that congress borrowed from social security and medicare on top of the reported $17.3 trillion in public debits that Bernanke has been trying to pay down and you have a long hard road until you can call this a recovery.  Charts are not going to pay the debit and congress just walks away from their responsibilities.  It will be a long hard road.
Aug 14, 2013 3:47PM

I used to say that any business was doomed once accountants and lawyers took over its management. In the last few years I’ve added economists, Wall Street speculators, and bankers to the list of culprits.

Aug 14, 2013 3:45PM
Sometimes there's nothing to do but wonder, in amazement, why these writers sometimes seem to have no clue what's up.

Many experts think the Chinese economy is contracting. The Japanese economy has taken step backward. The European Economies have had their first non-recession quarter after 1 1/2 years of E.U. recession.  The American economy is struggling along at less than a 2% annual growth rate.

But "we're looking at a healthy reacceleration in global GDP growth."  Really?

And if we are, the S&P 500 returned over 6%, including dividends, in July alone!  It's up 17% including divs. for the year.

So how can you complain about the market?  That it's only up 1 point in August so far?

Aug 14, 2013 3:50PM
economy is not  better  they just raised the  price of  stuff more smoke and  mirrors laid more people off  they  go by the dollar  not comity car sales  up  well yes you can only  drive  one for  so  long  and it does have to be replaced
Aug 14, 2013 3:58PM

The economy is all better? What a retard

Aug 14, 2013 3:44PM
Cheap money has elevated housing, stocks and bonds to levels where they do NOT belong. Bernanke is an old fool. Get him and his cadre of myopic nerds out of there. Raise rates back to 3% and let the chips fall where they may. 
Aug 14, 2013 3:42PM
 Of course stocks are due for a downturn as the only thing propping them up is QE and the same fat cats that caused the mortgage debacle are worried that they might have to actually work for a living instead of feeding at the Fed trough!

 Wall Street still thinks that it controls what happens in this country and to a certain degree they are right, but unfortunately for them world conditions are improving and if they start shorting stocks just because their free money is drying up and people see how Europe etc is doing fine then we may see a resurgence of the Occupy movement which this time will probably result in Wall Street and greedy corporate entities getting their A$$es handed to them on a pink slip along with a huge tax bill.

Aug 14, 2013 4:01PM
Sure it is. If you like walking a razors edge. All it takes is one little bump in the road and it comes falling down.
Aug 14, 2013 4:17PM
Everyone knows Ben's leaving at Dec 31, 2013 and he's been trying to tell us that the bond buying could start to back off. Everyone could feel something bad will happen very soon. America is losing 200 million a hour every hour that includes weekends and holidays. The difference is what we spend more what we make, we are still losing $200 million an hour. If you do the math if the fed's pull back and interest rise. There's over 60,000 Russian troops and more from other countries in American soil.WHY? The defense just bought the Russian surplus of machine guns and hollow bullets to sent here. WHY? They just active all the Fema Camps in 10 divide sections of America.WHY? America also paid Halliburton millions to buy the Fema coffins that holds 3 bodies in one casket.WHY? Japan's nuclear plant  just announced the radiations is now 8 times worst then ever and it's leaking in the ocean but no countries are helping them. WHY? Just use your common sense. Is it the Dollar crashing soon?  
Aug 14, 2013 4:52PM
Koolaid is not enough to describe this cluster **** anymore.......... the libs must be dropping acid.
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