Deepening downturn to put more pressure on markets!

So what have we learned about the real economy in the past several days? Plenty … and none of it is good!

==> Retail sales fell 0.2 percent in May, the second such decline in a row. Strip out auto sales and you get a 0.4 percent drop, the biggest fall in any month going back two years! The Dow Industrials were trading around 9,900 at the time.

==> The Institute for Supply Management (ISM) manufacturing index plunged to 49.7 in June from 53.5 in May. That was far below forecasts and the single worst reading going back to July 2009! The Dow closed out that month at around 9,200.

==> The ISM Services index, for its part, slumped to a worse-than-expected 52.1. That was the lowest reading since January 2010 (Dow level: About 10,100).

==> Overseas, we saw China’s PMI report on manufacturing fall to a seven-month low. And in the 17-nation bloc of countries that use the euro currency, the jobless rate just hit 11.1 percent. That was the highest monthly reading since officials began tracking back in 1995! Care to venture a guess where the Dow finished that year? Try 5,100.

None of this means the Dow has to get cut in half tomorrow, or lose 3,000 points in the next few weeks. But it does underscore the massive economic threat we’re facing. In fact, I don’t think it’s any stretch to say that we are now facing a coordinated economic slowdown the likes of which we haven’t seen since 2008.

Judging from this chart, something has to give — and my belief is that it’ll be stock prices!

So who’s going to win” this battle?
Here’s my take …

Why haven’t stocks tanked yet then? The main reason is that you still have this belief on Wall Street that somehow, some way, fiscal and monetary policy will come riding to the rescue!

I’ve maintained for a long time that policymakers can paper over fundamental problems for a little while. But in the end, those fundamentals always win out.

We saw it in the first phase of the great credit crisis a few years ago, and I believe we’re seeing that play out again. Indeed, my wariness of downside stock risk here stems from the 2008 playbook.

Now the global economy is slowing sharply … just like it did back then.

Now a great credit crisis is sweeping through the markets … just like it did back then.

Now policymakers are trying to help by enacting several measures designed to stem the losses … just like they did back then.

And now the half life of each bailout is shrinking rapidly … just like it did back then.

That makes me believe that this is a battle that policymakers can’t win for more than a few days or weeks. The numbers are just too daunting. Just consider that Europe, Greece, Ireland, and Portugal have already received 386 billion euros in pledged help.

Spain has now officially requested up to 100 billion euros, making it the fourth country needing help. And Cyprus chimed in shortly thereafter with its own bid for at least 10 billion in bailout money. Reports now suggest Slovenia could soon look for its own program.

If that happens, it would mean six out of the euro-area’s 17 countries are on the dole. Is that really affordable over the long term? Of course not!

My Plan for Navigating
These Markets

One lesson I learned during the first phase of this credit crisis was that you have to look at intervening rallies like the one we just got as gifts. They offer great opportunities to buy inverse ETFs more cheaply than you could otherwise get them. They’re also a wonderful time to unload any vulnerable stocks you may own.

I won’t always remain negative. I’ve switched approaches in the past, and will do so again. But only if two conditions are met: First, we get a grand plan that actually attacks the underlying sovereign debt, rather than temporarily paper over them. And second, we get a REAL washout panic. I’m not talking about a mild correction like we had recently. I’m talking about the kind of sell off where investors dump anything and everything.

Until then, I recommend you steel yourself against grand projections of successful “fixes” in Europe — or Wall Street talk that central bankers somehow have an ace up their sleeve to save us all!

Until next time,

Mike

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