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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (9436)	7/17/2004 12:10:12 PM
From: Haim R. Branisteanu	Read Replies (1) \| Respond to of 116555

Wonder how 7.8% rimes with 5.6 % official unemployment

To: Knighty Tin who wrote (9436)	7/17/2004 2:54:19 PM
From: mishedlo	Respond to of 116555

Shack asked me from a FA point of view (he is strictly technical and Ewave) if I knew of any specific fundamental reason for this weakness and/or if there was any SPECIFIC reason to suspect we might crash. Here was my reply to him. ===================================================================== Shack I know of nothing SPECIFIC. There is a rumor repeated both yesterday and today by Todd Harrison of a hedge fund blowup and forced liquidation. There is no doubt that sentiment has changed but most people are either looking for a bounce to short, scared to short, or foolishly intent on buying the dip. I will also point out the COTs on the spoos. The commercials are short, the hedge funds(big specs)are short, and the small specs are long. Finally take a look at the VIX. Someone posted on my SI board what they thought was a bullish interpretation. Well plunging stock prices and a plunging VIX is hardly bullish IMO. Let's consider another angle. Bush is not doing very well. The market is clearly rooting for a Bush win but it is becoming more and more likely every day IMO that he is going to lose. He just lost the state of Florida in one of the better respected polls. It is still nearly 50-50 supposedly but then you can make the argument that the market does not like uncertainty. The war in Iraq could hardly be going worse for Bush than it is. On a fundamental basis we have rising interest rates, earnings that have peaked (IMO) and it should be obvious the peak of this chip cycle has long past with the buildup in inventory all over the place. Furthermore the only thing holding up this economy is housing and inventory of unsold houses is rapidly building in some parts of the country. Imagine all the housing related jobs that go kaput if housing stalls. It will not even take a decline in home prices, just a construction stall. Look at all the trade jobs (plumbers, painters, electricians, etc etc etc that would be looking for work if housing stalls. Well what better time for housing to stall than rising interest rates? Greenspan is in a very very tough situation here and he made a huge mistake. Greenspan made a huge series of mistakes going all the way back to Y2K, LTCM, the 2000 bubble, and one percent interest rates now. He should not have lowered rates as fast as he did or as far as he did, and the starting point should have been quite higher because he should have been raising not lowering rates around Y2K time. That is water under the damn however. But look at profits. Something like 70% of S&P profits is the financial sector. Historically it is closer to something like 30%. That financial sector is tied to housing as well. Look at Washington Mutual. Will this HUGE company even survive? It is laying off thousands and thousands of workers. Has that affect even been felt yet? WAMU is just one of many! How much consolidation in the home finance industry is coming? It hasn't even started yet! How many jobs will be lost in that consolodation? Everyone (or nearly so) thinks deflation is preposterous. Not me. Stagflation has arrived and it is here and now. When it goes into full blown deflation is just a matter of time IMO. The trend towards outsourcing is nowhere near complete. Nearly every job that can go overseas will. There is worldwide glut of cheap labor that no one can deny. Real falling wages in an "expansion" is unheard of. Yet it happened. I look for Greenspan to find excuse after excuse to delay hikes after the next one. The wildcard in this whole mess is China. If China's internal demand picks up it is good night nurse. Commodity prices will stay high and we will be losing jobs, and housing as I said is ready to stall. It can not get much worse than that. The US desperately needs China to slow IMO. That will cool some inflation but higher energy prices are likely here to stay. The fundamental picture is very bleak and I do not see how we avoid a recession in 2005. Perhaps the market is coming to that conclusion. Bush tax credits expire in DEC but have probably already been totally spent, home refis are toast, personal tax cuts have been spent and all three of those headwinds are GONE! Factor in real falling wages, higher than stated CPI, and extremely anemic job growth, and no more using the house as an ATM to spend and you have a nightmare. The miracle to me is how the market kept going as long as it did. I guess the market needed to see the earnings and hear the warnings. One more thing I just thought of. Money is leaving the US for emerging markets and/or foreigners just getting sick of stagnant markets and falling US$ and pulling out. I believe that trend has just started. I am trying to figure out IF we bounce. Since everyone seems to be looking to "buy the dip" perhaps we do not bounce at all. Other than a huge gap up on Monday, not much would surprise me. This market could use a big flush of lock limit down two days in a row IMO otherwise we are just going to grind lower and lower on decreasing volume. It does not have to be that way but that is most likely IMO. That TRIN has been very very high for several weeks now. That is real distribution IMO, unlike the fake scares we had about a year ago. Once that process starts it usually runs to conclusion. Where that is right now I do not know, and the complacency of the corporate bond sector is still amazing. There are people that I respect that think unless corporates deteriate, stocks are likely to head back up. I am not so sure, but that model has worked for 2 years. Is it time for a trend change on that model? I believe all that I wrote is tangible and current. The weakness as of late reflects all of those items IMO. I do not think there is ONE specific thing. Mish