Thursday, February 28, 2013

Fragile Economy, Fragile Markets

Evidence is growing that the insouciance about the US economy's ability to withstand the sequester is looking like a top in the economy.  Gas prices are near records for the date.  Charles Biderman of TrimTabs is so alarmed by the tax withholding data he is seeing that he is calling a recession as being underway (that may be beyond his capabilities.)  Investor's Intelligence shows a very high bullish consensus of advisers beginning to roll over.  It is that rollover that has preceded every serious stock market decline since the 2009 bottom.  Gallup's daily polling of consumers continues to show no growth in the key hiring/not hiring metric.  This has flat-lined or even trended slightly downward for the past year.  Europe is not fixed, China has recently instituted monetary tightening, Japan is not fixed, Brazil is not fixed, Canada is not fixed.  Australia is not fixed.  India and Russia may or may not be OK in their high-inflation ways, but they are too small to matter.

Yet the Russell 2000 sells close to 30X earnings when negative earnings are taken into account (IWM ETF's measurement), yet the 5-year annual earnings growth rate is only 5%.  That is, BTW, worse than the P/E/G of the SPY at the peak in 2000.  This is a small stock bubble as sure as the NAZ was in a bubble in 1999 and 2000.

Commodities look toppy, except for gold, which has been declining for 5 months in a row.  This is approximately how it acted last year, culminating in a stock market correction to the low of the year.  That correction was bailed out by Draghi's talking, leaks of QE 3, and Apple/Google.

The authorities are already on Internet bubble 2.0 and housing bubble 2.0.  There is a limit to the number of bubbles that can be blown.  Isn't there?

In addition, it may be in the President's political interest to see a stock market correction/crash here.  Then he could call the R's the party of Herbert Hoover.

Meanwhile, even though the sequester is fiscally responsible on its face, Treasuries are selling off overnight on the futures board.

The combination of rising bond rates, high gasoline prices, wild speculation in small stocks as well as bubble stocks such as AMZN, and a bear move in gold (a mark of global liquidity) argue for a correction.  There are also high levels of insider selling in many stocks.

The one "but" re stocks is that patient money may simply prefer stocks such as IBM and CVS, yielding about 1.9%, over a 10-year T-bond yielding 1.9%.  Ten years from now, assuming the Fed stays the money-printing course if "necessary", those stocks likely will see their dividends double; but said dividends could go much higher if each company ceased shrinking shares outstanding via buybacks.  Both CVS and IBM could easily be yielding 5% right now if they stopped buying back shares.

Strong free cash flow positive dominant companies are decent buy and hold vehicles now.  So is cash.  Exposure to Treasuries and gold makes sense.  All of the above assume no leverage and the ability to wait out a period of lower prices.

Powerful forces are at work in this period that is in the interior of Extremistan.

OK, back to the back end of Taleb's "Antifragility".

Let's see if we are moving back to a period resembling 2011 or even 2008 where you go to sleep with markets up a lot and by the next morning they have shifted to down a lot, or up a lot more; or vice versa.  Thus anything you think about the economy or markets is right and wrong almost simultaneously.

No one ever said things would always be simple.

OK, back to the back end of Taleb's "Antifragility".

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