Will the sell-off continue?
A raft of poor economic data and technical breakdowns suggest more stock market downside.
My patience and skepticism during the recent market melt-up is being rewarded on Thursday as stocks, particularly cyclical, economically-sensitive issues, are pummeled for the second consecutive day. Everywhere I look, what were perfect 45-degree up-trends are being broken in dramatic fashion.
Financial and semiconductor stocks are suffering their first bout of significant selling pressure in months; joining with the material and energy names that have already weakened.
The question is: Will the selling continue? And if so, for how long?
The first consideration is that investors are finally awakening to the deteriorating economic fundamentals I've been writing about for weeks. That's because of the belief among the optimists, that cheap money from the Federal Reserve and other global central banks would paper over all problems. That illusion is being shattered in two places, allowing panic to creep in.
For one, the Fed's recent meeting minutes revealed that the inflation "hawks" on the Fed's policy-making committee -- those increasingly worried about the $85 billion-a-month money pump associated with QE3 and QE4 -- are growing in strength and aggressiveness. Fed chairman Ben Bernanke and vice-chair Janet Yellen are both "doves," in that they believe more should be done to bolster the economy, including boosting the stock market, despite downside risks including possible asset bubbles and higher gas prices.
So the fact that the hawks are willing to take on the top two members of the Fed shows resolve. And indeed on Thursday the hawks continued to press -- with Dallas Fed president Richard Fisher expressing his concern that markets may be hooked on quantitative easing, that he doesn't see a need for any more money pumping, and that he isn't alone anymore at the Fed in questioning the efficacy of QE actions.
He added there are signs the housing market is becoming speculative again. And in an affirmation of the point I made in my column this week, he said the wealth effect of the Fed's action on stock prices has resulted in less job gains than one would expect.
The second point, shattering the illusion that cheap money solves all, was a heavy dose of disappointing economic data Thursday morning. Europe's recession is deepening again, with the Composite Eurozone flash PMI reporting coming in below expectations at 47.3 vs. 48.2 last month. Any reading under 50 indicates a month-over-month decline in manufacturing and services activity.
The French economy in particular is under pressure, as German-pushed austerity measures out of Paris result in higher taxes and less confidence.
Here at home, activity also slowed as core inflation rose -- the exact opposite of what the Fed wants to see. The Philadelphia Fed Business Outlook Survey for February was particularly disappointing, falling well below expectations.
Given the historic level of investment confidence and bullish positioning heading into this pullback, the sell-off should have legs as the global economy stumbles into a new recession.
After focusing on shorts against basic materials and energy stocks in my Edge Letter Sample Portfolio, including a 25.3% gain in Cliff's Natural Resources (CLF) and a 13.1% gain in AKSteel (AKS), I've shifted my focus to new areas -- including capitalizing on the dollar's new-found strength against the euro via the ProShares UltraShort Euro (EUO). I'm adding leveraged inverse ETF exposure to semiconductors, the latest cyclical group to succumb to weakness, via the ProShares UltraShort Semiconductors (SSG).
Disclosure: Anthony has recommended CLF short, AKS short, EUO long, and SSG long to his clients.
Be sure to 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 email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
Anthony has been bearish on the markets since at least Jan 1, when the S&P was around 1450, so we need at least another 3-4% drop in the markets before I can move him out of the "this guy gets it wrong" category and into the "just some guy with an opinion" category. If the markets go down another 10-15%, Anthony would get elevated to the coveted "this guy knows what he's talking about" category. :}
When will people understand the basic structure of the US economy is flawed.
Look you have half the people making less than $16,000 a year and most of the others less than $90,000 a year.
Yet you have gas, food, housing, cars and everything else priced for someone making $125,000 a year.
Hmmm how long can this embalance in the economy continue???
One of two things or both have to happen either average wages need to climb to $125,000 a year or prices of gas,food, houses and cars have to decrease to levels where most people can afford them.
This is simple basic econ 101 and everyone seems to have forgotten it.
All the MBA's that have graduated have done is make things worse and worse. They say let's cut out safety belts in cars to save $100 per car and my bosses will give me a $2 per car sold at the end of the year. Also we are selling cars to the top 4 percent of wage earners anyway so let's bump up the price of a car by 5 percent and we will only lose 0.01 percent of our customers and make almost 5 percent more for cars.
Forget the fact that used cars are being priced out of the range on the poor to buy and that most cities have no mass transit as GM and Ford make sure in the 1950's to destroy the trolly systems in place in most towns and get city designers to build suburbs where the nearest grocery store is 3 miles away and most people have to drive their cars to one huge store (read super Walmart) that hires minimum wage workers at 100 per store yet 100 small stores closed because of Walmart who use to hire 10 workers per store and pay them twice minimum wage to keep them.
So we are stuck with economic leaders who are slowly destroying our economy by moving jobs overseas and a government that is burdened with trying to keep the poor alive. Would not do to see hundreds of thosands of poor Americans dying each day on the nightly news.
Pretty much we are doomed as everyone in a position of power has forgotten how to run an economy.
Bernanke is running out of time. Even if the UE rate drop a tenth of a point every month, we're still looking at more than a year before we hit the 6.5% target. At this rate, he'll have pumped another trillion bucks into the economy on the current QE trajectory. Even if he fudges this and uses some bogus "momentum" argument to end QE early, we're still 10-12 months and close to a trillion dollars down the road (or up the river, depending on how you look at it). On the other hand, inflation is rearing its ugly head in just about every way imaginable, except in those areas measured by official CPI.
The interesting part is that is appears more and more that QE isn't having any net positive effects except on Wall Street, and even that is temporary. It certainly isn't improving the UE rate, which is its stated purpose. And if you dig into the numbers, the UE rate hasn't been falling because of job creation, it's been falling because people are dropping out of the workforce and retiring early, getting on disability, just living with less, etc... It's looking more and more that the UE rate would probably be the same with or without QE.
On a per capita income basis 59% goes to taxes (local, state, federal, all budgets balanced) 30% to payoff debt ( consumer and business), 11 to 12% in real inflation not government BS inflation. We have no money for economic growth. Until we put buying power back in the consumers pocket our economy is going nowhere.
The fed needs to keep real inflation between a deflationary 1/2% and 0% inflation. No more inflation forever. That will put spendable income in the consumers pocket. Congress needs to cut all welfare from business ( energy, finance, communications. agriculture, etc., etc..), put American business on the free market. If they can't make in the free market we don't need them. We need an improved standard of living in America, not government programs to subsidize the rich.
I read that the casinos of Las Vegas won $10 billion from gamblers in 2012. The extravagant Vegas city skyline is a reminder that the house has stacked the deck to always win big, year after year; I’m sure the casino-banks of wall street “won” many times $10 billion last year, although from unsuspecting citizens and not gamblers. As expected their city skyline is even bigger, and it’s obvious to all that this house too has stacked the deck to always win big, year after year.
It is logical to see the push for gun control when the economy gets bad versus the retirement of the "Assault Weapons Ban" when the economy was looking better.
Now at the same time the Department of Homeland Security is ordering 7,000 full auto M16s called "Personal Defense Firearms" in 2013, the Gov't is calling on the restriction of Semi-auto "Assault Weapons" favored by the general public.
i think the Democrats are looking over their shoulders.
I follow AM pretty close over the last 1.5 yrs. Read a lot of haters during that time. I have done well by his words. But, Tony this is not the time to do the thumb-your-nose at the haters...please tell me it is a mis-speak when you say you are being "REWARDED"---there is a lot of misery out here, all the optimists must be TAKERS---I do taxes for H&R---the TAKERS come out in droves for their FREE Income Tax Return!!!
Yes, like it or not, we (AMERICA) have to many takers, to many hand outs. Now I am gonna piss some folk off---I work 32 yrs DOD---starved in the beginning while many enjoyed the Hi-Life in the 80s-90s; I spent $15K on education---did 26 yrs with Military Reserve simultaneously---work some hard long damn hours---now I make a buck---and WE fed workers are attacked, sequestor will cut us 20% for the rest of the year---fine! Then next year to balance the budget let it be "NFL<NBA<NHL etc" then the next "Plumbers, then Lawyers---How about the FAT CAT CEO who take government taxes to balance their books, after they siphen off a big FAT Bonus!!!
Everyone take a turn giving up their hard EARNED payroll---
Get the biggest ammo magazines you can and KEEP PRACTICING. Don't become another one of the sheeple nursing neanderthal out-dated big government like in other countries. The control freaks serve at our pleasure, must live in fear of us, and must be reminded continuously.
Just foolowing this....what you have. red has little clue and it is obvious he does not. He is a "plant" and so that is about it with him. Am guessing about 35 to 40 and hoping things change. They will not and "plants' continue to grow. Just too damn many "weeds" in markets and government to change it.
O'Bama .... who cares, really. He is just a "plant", now. He was a "plant" before as some organizer
in Chicago and again... we should not care. He will be gone soon enough... just hope it is not sooner, finish your term of disgrace. All this will come out.
When they crash the world economies, they'll just come up with a new world currency, probably the Yuan. Then they'll give all the politicians a raise, wipe the banksters books clean, and deduct 50% off the peasants paycheck leaving them enough to pay for a house filled with Chinese goods and a car made in Japan.
Anything left after that will go into the emperors private fund to keep the control machine moving along.
Here we are, 6 billion Guppies in a pond with 5 Bass and everyone is scared s**tless of the 5 Bass. LoL!
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