Bad News Is Good News...As Always
Stocks bit it again last week as the major indices all plunged to new 1-1/2 month lows. The dollar fared no better with the Dollar Index finishing the week out a 3-1/2 month low while gold chopped around well above the $400 level. Crude oil futures, obviously on a long-term mission to make the so-called "experts" look foolish, exceeded $41.
Lately I’ve been getting hate mail from some folks for "never" having anything bullish to say. Ever-eager to serve the public as I am, I thought I’d save those folks some trouble by mentioning straight off that this here’s gonna’ be another bearish one.
Oddly enough, there really IS a reason why I’m bearish and have been for some time. If you’re not sure what that reason is, take a gander at a chart of the stock market. Notice that it’s not making new highs? Notice that it’s falling? That it’s in negative territory for the year? That’s why I’m bearish.
If you want bullish, head on over to CNBC and tune back in to the Rostenko Channel WHEN WE ENTER A NEW BULL MARKET. More than likely, I’ll be bullish. Until then, please be advised that I’m not a cheerleader, (I look horrible in short skirts, trust me) and I’m not here to blow sunshine up anyone’s bum. I calls ‘em as I sees ‘em.
Last week’s action lent a whole lot of support to my outlook that the mini-bull market has topped out and that we’re on our way toward a test of the correction low at 1076 on the S&P 500. Consistent failures to put in a new high along with progressively lower lows don’t make much of a case for a bull market.
But like I’ve been saying, don’t expect the downside to come easy. If and when 1076 is breached, mark my words, we will stand witness to a huge battle between the powers that be and the traders who recognize the exceptionally bearish implications of the breach of that low. Expect a lot of money to be tossed at the S&P futures market that day. I don’t see any reason why the pattern of the past year or so would change this time around.
Evidence that the so-called recovery is little more than so-called continues to pour in. Disappointing earnings news drove the market lower last week. The inflation data didn’t seem to help much even as we saw some of the lowest readings of the year. Naturally the media ignored the rising trend of prices and fixed upon the data to conclude as always, that one month of not-so-horrible data must surely mark the beginning of a new trend. The markets, the only opinion that counts, apparently had a different spin on the numbers.
Naturally and again as always, the friendly folks at the Fed assure us that this is simply a momentary pause in what is surely the next huge cyclical economic upturn. To that point I must pose the questions: "So how come the market is trading lower than it was when the data actually turned bullish? Where are the new highs? "
The feds can prattle on all they wish but it’s money that really talks. And money, as measured by the progress of the market, is obviously highly reluctant to support the feds’ conclusions.
And while the economy slows, crude oil prices remain on the rise, now poised to set new all-time highs. Not a good thing for an economy so highly dependent on petroleum and its byproducts. Of course there are those "experts" who argue that high prices will cause demand to drop, thereby bringing prices back down to earth. Trouble is, oil is priced in dollars and dollars are in decline. For the rest of the world, oil isn’t all that much more expensive. There’s a whole lot of demand that will feel no need to slacken. So in the meantime, the American economy takes a double-whammy hit to the bottom line.
In the meantime the market’s focus will remain on the earnings data and this week, particularly on Greenspan’s testimony before Congress. Lots of folks are speculating on what might be said. Let me give you the 100% accurate formula for forecasting Uncle Al’s comments: Take a look at what the market is concerned about and what it most wants to hear. And then you’ll know exactly what our kindly Uncle will say.
Greenspan’s job in the 21st century is telling the markets whatever they want to hear, whatever will prevent them from skidding lower, Right now the market is concerned about inflation, rising rates and a seeming slowdown in the economy. How best to tie all these factors together and spew them forth in a bullish light? Expect the testimony to go something like this:
"Recent weakness in the economic data does NOT suggest that the recovery is off course and in fact is a good thing because it will allow us to continue fighting inflation with a measured pace of increasing interest rates."
There you have it. Weak numbers are good numbers, never mind that destructive force behind the curtain – it’s not really inflation, and interest rates don’t really need to rise by much. A 3-bagger. All is good, bad news is good news and the Fed gets to keep rates low. The magic formula for sustaining the credit, stock and real estate bubbles, and thereby sustaining the illusion that all is well with the U.S. economy.
I told you we can’t afford higher interest rates and no matter what sort of jawboning the Fed is up to this week, they don’t want to raise rates. Current conditions will make it easy for the Fed to justify a "measured pace" while continuing to ignore inflation. The important question is how long the market will continue to believe this drivel?
Well, from the looks of it, the market may already be getting hip. "Strong economy" and "we’ll handle inflation" have not translated into new highs. If the economy really is on course to do so well, if inflation really isn’t a threat, the market should be exuberant, no? If all that news hasn’t pushed it higher, WHAT WILL IT TAKE? Obviously much, much better news. What do you think the odds are, with crude oil at new highs, inflation OBVIOUSLY on the rise, job growth stalling once again, earnings disappointing, that we’re on the verge of much, much better news?
Like I wrote months ago, the good news is out and the market will need great news to make new highs. Take a whiff around you. Smell the makings of great news? Then buy stocks.
Mark M. Rostenko
editor@sovereignstrategist.com |
