Daily Wisdom

August 16, 2010

Is a Crash Coming? Ten Reasons to Be Cautious

From Bret Arends at the Wall Street Journal...

Could Wall Street be about to crash again? This week's bone-rattlers may be making you wonder. I don't make predictions. That's a sucker's game. And I'm certainly not doing so now. But way too many people are way too complacent this summer. Here are 10 reasons to watch out.

1. The market is already expensive. Stocks are about 20 times cyclically-adjusted earnings, according to data compiled by Yale University economics professor Robert Shiller. That's well above average, which, historically, has been about 16. This ratio has been a powerful predictor of long-term returns. Valuation is by far the most important issue for investors. If you're getting paid well to take risks, they may make sense. But what if you're not?

2. The Fed is getting nervous. This week it warned that the economy had weakened, and it unveiled its latest weapon in the war against deflation: using the proceeds from the sale of mortgages to buy Treasury bonds. That should drive down long-term interest rates. Great news for mortgage borrowers. But hardly something one wants to hear when the Dow Jones Industrial Average is already north of 10000.

3. Too many people are too bullish. Active money managers are expecting the market to go higher, according to the latest survey by the National Association of Active Investment Managers. So are financial advisers, reports the weekly survey by Investors Intelligence. And that's reason to be cautious. The time to buy is when everyone else is gloomy. The reverse may also be true.

4. Deflation is already here. Consumer prices have fallen for three months in a row. And, most ominously, it's affecting wages too. The Bureau of Labor Statistics reports that, last quarter, workers earned 0.7% less in real terms per hour than they did a year ago. No wonder the Fed is worried. In deflation, wages, company revenues, and the value of your home and your investments may shrink in dollar terms. But your debts stay the same size. That makes deflation a vicious trap, especially if people owe way too much money.

5. People still owe way too much money. Households, corporations, states, local governments and, of course, Uncle Sam. It's the debt, stupid. According to the Federal Reserve, total U.S. debt—even excluding the financial sector—is basically twice what it was 10 years ago: $35 trillion compared to $18 trillion. Households have barely made a dent in their debt burden; it's fallen a mere 3% from last year's all-time peak, leaving it twice the level of a decade ago.

6. The jobs picture is much worse than they're telling you. Forget the "official" unemployment rate of 9.5%. Alternative measures? Try this: Just 61% of the adult population, age 20 or over, has any kind of job right now. That's the lowest since the early 1980s—when many women stayed at home through choice, driving the numbers down. Among men today, it's 66.9%. Back in the '50s, incidentally, that figure was around 85%, though allowances should be made for the higher number of elderly people alive today. And many of those still working right now can only find part-time work, so just 59% of men age 20 or over currently have a full-time job. This is bullish?

(Today's bonus question: If a laid-off contractor with two kids, a mortgage and a car loan is working three night shifts a week at his local gas station, how many iPads can he buy for Christmas?)

7. Housing remains a disaster. Foreclosures rose again last month. Banks took over another 93,000 homes in July, says foreclosure specialist RealtyTrac. That's a rise of 9% from June and just shy of May's record. We're heading for 1 million foreclosures this year, RealtyTrac says. And naturally the ripple effects hurt all those homeowners not in foreclosure, by driving down prices. See deflation (No. 4) above.

8. Labor Day is approaching. Ouch. It always seems to be in September-October when the wheels come off Wall Street. Think 2008. Think 1987. Think 1929. Statistically, there actually is a "September effect." The market, on average, has done worse in that month than any other. No one really knows why. Some have even blamed the psychological effect of shortening days. But it becomes self-reinforcing: People fear it, so they sell.

9. We're looking at gridlock in Washington. Election season has already begun. And the Democrats are expected to lose seats in both houses in November. (Betting at InTrade, a bookmaker in Dublin, Ireland, gives the GOP a 62% chance of taking control of the House.) As our political dialogue seems to have collapsed beyond all possible hope of repair, let's not hope for any "bipartisan" agreements on anything of substance. Do you think this is a good thing? As Davis Rosenberg at investment firm Gluskin Sheff pointed out this week, gridlock is only a good thing for investors "when nothing needs fixing." Today, he notes, we need strong leadership. Not gonna happen.

10. All sorts of other indicators are flashing amber. The Institute for Supply Management's manufacturing index, while still positive, weakened again in July. So did ISM's new-orders indicator. The trade deficit has widened, and second-quarter GDP growth was much lower than first thought. ECRI's Weekly Leading Index has been flashing warning lights for weeks (though the most recent signals have looked somewhat better). Europe's industrial production in June turned out considerably worse than expected. Even China's steamroller economy is slowing down. Tech bellwether Cisco Systems has signaled caution ahead. Individually, each of these might mean little. Collectively, they make me wonder. In this environment, I might be happy to buy shares if they were cheap. But not so much if they're expensive. See No. 1 above.



Add to that Fed Chairman Ben Bernanke's statement that the outlook for the economy is "unusually uncertain" (a real confidence builder there). Then there's the recent flattening of the monthly employment numbers that had been steadily improving. And on top of that, an unusual event occurred last week known as the "Hindenberg Omen"...

The blog Zero Hedge, writing in a vein that seems made for professional boxing or WWE pay-per-view event hype, describes the Hindenburg Omen as "Easily the most feared technical pattern in all of chartism (for the bullishly inclined). Those who know what it is, tend to have an atavistic reaction to its mere mention."

In case you hadn't heard, Thursday's action on the New York Stock Exchange registered a technical anomaly known as the Hindenburg Omen. Read: just like the doomed German airship, the markets are fated to crash and burn. Still worse, Wednesday's trading action almost sparked Hindenburg Omen conditions. It takes two Hindenburg Omen trading days within a 36 day window to trigger the end of life in the markets as we know it...

The Hindenburg Omen occurs when an unusually high number of companies in the New York Stock Exchange reach 52-week highs and lows at the same time. The proportion of NYSE stock highs and lows must both exceed 2.2% of the total listed on the exchange. The Hindenburg Omen last occurred in October 2008, according to UBS data.

Additionally, the Hindenburg Omen is only valid in a rising market -- as measured by the NYSE composite rolling average over the past 10 weeks; the number of stocks at a 52-week high must not be more than twice those stocks at a 52-week low...

--Eric Rosenbaum, Hindenburg Omen: Is a Stock Market Crash Imminent?, 13 August 2010

Watch your wallets and purses my friends.

8 Comments:

At 8/16/2010 5:29 PM , Blogger Nick - The Survival Guru said...

..."Or why I've never been in the Stock Mkt."

Have you all noticed that even though the economy is tanked, prices keep rising for consumer goods, including food. We quit going to Sams Club when their prices for food were higher than a Union workforce Grocery store?
Now they say their rolling back items...so that's how it works?
Gouge the public then after your profit soars rool back the price until its still higher before the "Shaft the customer campaign!"

Reminds me of a few famous quotes: "The love of money is the root of all evil.", "The wealth of the wicked is layed up for the righteous." Hey the last one, that's us.

So if your not prepared for a week or more with food and water on hand, don't say you forgot. When the lord said, " Don't lay up treasures for youself on earth, but rather lay your treasure in heaven...." He wasn't talking about food and water.

Blessing to all, and get up to 35% off at www.survivalsupplies4u.com
Just put coupon code: aug10 on the order page. That is lower case, aug10.
angus the scot/ nicky j.

 
At 8/16/2010 5:48 PM , Blogger Nick - The Survival Guru said...

Why do some wealthy individuals give millions away? The understand the Proverbs. Where as George Soroesbutt uses his to ovethrow the US.

 
At 8/16/2010 9:51 PM , Blogger Hawkeye® said...

Nick,
I don't have much in the stock market either. A little bit, but that is now in the negative for the year. I think it's going to tank again. So much for the "Summer of Recovery".

Best regards...

 
At 8/17/2010 3:46 AM , Blogger camojack said...

My 401K has been rather schizophrenic for the past couple of years...

 
At 8/17/2010 10:01 AM , Blogger jasmine said...

hi i like this post ,this is really informative, Anemometer ,thanks

 
At 8/17/2010 10:34 AM , Blogger Hawkeye® said...

Camo,
I lost money in the last crash: more than a lot of people make in a year... sigh.

Best regards

 
At 8/20/2010 6:50 PM , Blogger radar said...

Aye, carumba or something like that. I got out of the stock market and my biggest investment is in my house and my office equipment. If it gets much worse and I cannot pay the house payments? My name is legion. We need the Repubs to take over both houses and stop all the taxes the Dems intend to push on us in 2011 and to keep the tax cuts we have. Then someone needs to hypnotize Obama into drilling for oil and natural gas, mining for coal and being friendly to businesses again.

 
At 8/20/2010 11:49 PM , Blogger Hawkeye® said...

Radar,
Amen. The best thing that could happen in November is that Republicans take over both houses of Congress. Obama needs to be totally neutered politically.

(:D) Best regards...

 

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