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For a couple of months now, I’ve been getting increasingly cautious on the markets. The list of reasons is long: The global economy is slumping fast. The euro crisis is deepening by the day. Fiscal policy is frozen and monetary policymakers are out of bullets.
Now, all of those forces appear to be coming home to roost! Just in the last few days …
* The euro currency plummeted to 1.22-and-change against the U.S. dollar! Not only did that decline completely erase the very short-lived gains achieved in the wake of the latest “Summit to Save The World,” but it also sent the euro to the lowest level since July 2010.
* The anemic rally in stocks reversed right at technical resistance! S&P 500 futures failed right around 1,370, as I suspected. That opens the door for a retest of the lows in early June — at LEAST. That level was 1,262.
Meanwhile, overseas markets continue to drop like a rock — China’s Shanghai Composite Index just hit a six-month low, while Brazil’s Bovespa is trading near its lowest level since October.
* Earnings warnings are coming fast and furious! The big picture economic news has been stinking up the joint for a while now. But whenever someone on CNBC points that out, some two-bit fund manager comes on and says “Yeah, but corporate earnings are still sound so that’s okay.”
So much for that argument!
Just in the past several days, we’ve gotten profit warnings from major semiconductor firms like Advanced Micro Devices (AMD) and Applied Materials (AMAT) … heavy industrial and transportation companies such as Cummins (CMI) and Ryder Systems (R) … and companies with consumer spending exposure, like Ford (F), hhgregg (HGG) and Burberry (BURBY).
In fact, the ratio of negative to positive profit guidance announcements is running at a whopping 3.3 to 1 for this quarterly earnings season. That’s the worst going all the way back to the fourth quarter of 2008! I probably don’t need to remind you that was in the depths of recession, and that the Dow was trading in the 8,000s!
Why else am I worried about stocks? Because
the “smarter” bond market is freaking out!
There’s been a long-running assumption in the capital markets that bond traders are inherently smarter, and more rigorous, than their stock-trading brethren. I happen to agree.
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| Bond traders often pick up on a trend before stock traders. |
That’s not just because I follow bonds very closely! It’s because I’ve seen the bond market send out early warnings time and again —warnings the stock market doesn’t react to until days or weeks later!
Right now, the divergence in interest rates between perceived “safe haven” countries and those with huge debt problems is exploding. Our 5-year Treasury Note yield sank to just 0.61 percent this week, within a whisker of the lowest in recorded history (set in early June). Germany just auctioned off 4.15 billion euros worth of 10-year notes at a yield of only 1.31 percent, the lowest ever.
Meanwhile, Italian 10-year note yields have given up all their post-summit gains and were recently at 5.8 percent. Spanish yields are hovering around 6.5 percent, a level so bad it forced the country to announce a new package of tax hikes and government spending cuts. They’re designed to reduce Spain’s deficit by 65 billion euros over the next couple years in order to appease bondholders. But they’re only going to deepen that country’s recession in the process!
Why I’m keeping my eye on a
key interest rate spread!
That’s not all, either. Take a look at this chart below. It shows the spread, or difference, between yields on the 10-year Treasury Note and the 2-year Treasury Note in red. It also shows the price performance of the S&P 500 Index in blue.
You can see that they tend to track each other fairly well. That’s because the “2-10 spread” is a good expansion/contraction indicator. When the spread widens out, that’s generally a sign the economy is expanding and that investors are willing to take on more risk. When it contracts, it’s a sign that the economy is weakening and risk aversion is gaining steam.
What I find remarkable is that the 2-10 spread is sending off a huge warning here! It’s sinking to levels we haven’t seen in more than three years when the economy was just beginning its anemic rebound phase from the depths of the Great Recession.
Yet for the past couple of months, the stock market has tried to ignore that signal. The reason? Stupid hopes on Wall Street that QE3 will somehow succeed where QE1, QE2, Operation Twist 1, Operation Twist 2, LTRO1, LTRO2, etc., etc. all failed!
Me?
I have no doubt in my mind that Fed Chairman Ben Bernanke is contemplating another round of QE. I just believe that QE — Quantitative Easing — is turning into “QU” — Quantitative Uselessness! If it has any impact at all, it will be extremely fleeting — just like we saw with the last European summit, which only managed to boost risk assets for a couple of days.
Long story short, I believe the bond-stock divergence is at high risk of collapsing … not by the 2-10 spread widening out, but by stocks tanking! And like I said earlier, it almost always pays to bet with the bond market pros versus the stock jockeys!
So please, if you haven’t already dramatically dialed down your stock exposure … or added protective positions like inverse ETFs and put options … do so now. Before it’s too late!
Until next time,
Mike
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 8 comments }
You have not just recently gotten cautious about stocks. You have been cautious about stocks for a very long long time. As a matter of fact I can’t remember a time when you were not cautious about stocks.
Calm down Mike! You don’t need to worry the world is not coming to an end. Eventually, the world will figure out that there are rational solutions to the problems we face.
Also, your readers should realize that the very best time to invest (or go long) is when things seem to be the bleakest. If you feel the pit of fear and anxiety so strong you want to throw up, paradoxically that is the best of all times to invest.
Moreover, all the problems we face are purely political. For example, the US is still strong. Its currency is still the reserve currency of the world and that will not end anytime soon. America is still the most productive country in the world. Its still the biggest economy in the world and the most productive.
Does it have problems? Well yes. But the world has ALWAYS had problems. But are they insolvable. Far from it. The biggest problem is NOT the debt crisis. The biggest problem is political. Both in the US and in Europe.
In the US vastly overpaid, untalented politicians are sitting on their fat asses, trading on insider information getting rich. They really don’t care what happens to America because in the final analysis they get paid no matter what happens. Joe Public is the one that is screwed, and really the fat cat politicians couldn’t care less. The get their obscene pensions and their family’s have access to the very best heath-care that money can buy.
So if your readers really want to do something that will make a difference, rather than buying or selling or trading frantically do the following: Firstly, go out and buy the best portfolio of outstanding companies money can buy.
Here’s a list:
Caterpillar
Google
Microsoft
Wal-greens
Walmart
Johnson & Johnson
Apple
CACI International
Potash
Celgene
Oracle
Bidu
Joy
STJ (Striker)
There are plenty more.
Then at the next election vote every Republican candidate out. They are a useless do nothing party. They are holding America Back. Give Obama a mandate to do get something accomplished.
As for Europe. Don’t worry about Europe. Once again the problems are purely political. Germany is really the biggest problem. They are not leaders the way America is. They don’t want to shoulder the risk of their southern neighbors because they don’t have the leadership or vision to realize or understand that its in their best interests to make sure that Portugal, Spain, Italy and Greece prosper. Their short sighted solutions are creating a depression. Eventually, when Germany goes into recession and then depression it will realize that it should be doing exactly the opposite of what they are doing. They need to show a commitment to Europe the way the United States showed a commitment to Europe after WWII with the Marshal Plan.
In the meantime. America can and will rebound if it banishes fear and greed. If it goes back to basics and realizes that the concept of America as a land of opportunity is still valid. But ordinary Americans must take a stand. They must stand up to the Obscenely wealthy 0.01%. They must think for themselves and not be led by the nose. They must insist that the richest 1% has to pay its fair share and is not entitled to own such a vast portion of the American economy.
All Americans have to do to save themselves is vote out those useless Republicans. Then you will make progress.
Richard Gordon,
You and the people that think and vote like you is what broke the country and started the long slide toward this path of socialism / marxist. Both the Democrats and the progressives in the Republican parties have gotten us there! The Republican party has been taken back by the American people and is the last best hope to fix what’s broken. It isn’t greed that got us here. It is the lack of accountiblity of do gooder progressive government policies that got us here. It is the constant spending of money that we don’t have and the Democrat economic class warfare that is being waged on the American people.
You should vote Democrat and leave the American people decide for themselves how to vote. The problem will be fixed this next election without you or Obama’s help. You know it and I know it.
HEY…………………..RICHARD GORDON WHAT……………..socialist demoncrat……… rock did you crawl out of ……………..you sound like the run of the mill (unified educational sytem teacher or professor)……….THE PROBLEM WITH YOU PEOPLE IS YOU KNOW NOTHING your saying the biggest problem is this country is political I AGREE but you got it wrong the tea party is the best thing that has come to this country since this countrys beginnings …………..THE TEA PARTY PEOPLE ARE THE REAL AMERICANS not liberal trash like you WE NEED …….. to flush out the liberals who are destroying this country with their massive unstainable debt in this country……….we need to flush them all down the drain to the sewer where they belong and that includes you THAT BLUE FIST IN THE AIR THAT ALL YOU LIBERALS SEEM TO LOVE you know that sign that people like you think represents real democrats look at it closely that fist was first with the black panthers and now the democrats adopted it but made the black fist blue WHAT DOES THAT BLUE FIST REPRESENT it represents MOB RULE + ANARCHY socialists like you and obama think the same MEANWHILE all you do is break down the fundamentals of this country and trying to destroy the constituiton and the bill of rights…………..im sure communist lenin is proud of you………….and this is for you richard gordon …………………………………………………………. ALL AMERICANS HAVE TO DO TO SAVE THEMSELVES IS VOTE OUT THOSE USELESS DEMOCRATS…………THEN WE WILL ALL MAKE PROGRESS …………….VOTE OUT the useless brown turd OBAMA IN 2012 and all the other socialist progressives
Not a clue…this cat doesn’t have a clue…..never did..
This market is like taking candy away from a baby…….
he just doesn’t ‘get” what is happening around him….its repeated over and over like clockwork and he just is not picking up on the telegraphed clues…
what a schmuck
Mike: Your negative bias has played a role in my investment approach and has helped produced terrible returns while the stock market has rolled upward over the last 4 years!
It is time to come clean. Are you just writing these articles to appeal to our human fear in hopes you can sell your product? Do you actually believe a stock market crash will occur within weeks, maybe this week or is this intended to inflame our fear?
Not sure how you might respond, but give it a try.
Bill
Sooner or later stock markets will crash as well as everything else … the question is when. So Mike has been right all these 4 years I guess )))
Flailing at the GOP is no prescription at all. Neither party deserves
anything but early retirement. Warren Buffet’s prescription
for resructuring Congress, which is circulating in chain-letter
form as I write, would rectify the political realm. (if it can be accomplished
before Obama, et al, transform this country into a police state,
which took a big leap forward with the recent suppression of
habeus corpus).
But the main trouble is that we haven’t been one country
since Vietnam, and we’re getting more acrimonious and divided
by the month. If enuf state governors give up on Washington
and call the second Constitutional Convention, for the purpose
of restructuring the USA into 4 independent countries,
the debate is over. We’d be happier and more secure that
way (no military adventures abroad, hence merely a mutual
defense treaty between the New Four), and partisan politics
would effectively end. Don’t laugh. It’s a natural out-
growth of the Libertarian movement (Ron Paul, so to speak)
and Washington would become a monument to a broken
system — which it already is; all it lacks is an effective
spokesman to speak the obvious, namely that our debts
are insurmountable and our loyalties more local than national.
They got this way because our jerkwater government sent
50,000 kids to SE Asia to die for a lie, i.e. that a Commie
Vietnam was a threat to US security. (The Pentagon
cannot survive without wars a-plenty.)
In any event, money printing will ruin us no matter
who wins in Nov. Romney would merely be a reprieve.
If Obama wins, he will be the last American president.
You saw it here first.