Once upon a time, the “Tech Strategist” Fred Hickey used to be part of Barron’s Roundtable. Alas, the famed newsletter writer, who accurately predicted the bursting of the 2000 and 2007 bubbles, was deemed too bearish and was cut from the magazine whose hyperbolic covers have long been used as contrarian inflection point signal by the markets.
How bearish? As the following excerpt from his latest excellent monthly newsletter titled “Last Gasps of a Dying Bull Market (and economy)” reveals, the answer is “about as bearish as Hickey has ever been.”
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Last Gasps of a Dying Bull Market (and economy)
Deteriorating market breadth and herding into an ever-narrower number of stocks is classic market top behavior. Currently, there are many other warning signs that are also being ignored. The merger mania (prior tops occurred in 2000 and 2007), the stock buyback frenzy (after the record amount of buybacks in 2007 buybacks were less than one-sixth of that level at the bottom in 2009), the year-over-year declines in corporate sales (-4% in Q3 and down every quarter this year) and falling earnings for the entire S&P 500 index, the plunges this year in the high-yield (junk bond) and leveraged loan markets, the topping and rolling over (the unwind) of the massive (record) level of stock margin debt… and I could go on.
It was very lonely as a bear at the tops in 2000 and 2007. I was just a teenager in 1972 so I was not an active investor, but just a few days prior to the early 1973 January top, Barron ‘s featured a story titled: “Not a Bear Among Them.” By “them” Barron ‘s meant institutional investors. I do vividly remember my Dad listening to the stock market wrap-ups on the kitchen radio nearly every night in 1973-74. It seemed to me back then that the stock market only went in one direction — and that was DOWN.
The global economy is in disarray. It’s the legacy of the central planners at the central banks. China’s economy has been rapidly slowing despite all sorts of attempts by the government to prop it up (including extreme actions to hold up stocks). China’s economic slowdown has cratered commodity prices to multi-year lows and helped drive oil down to around $40 a barrel.
All the “commodity country” economies (and others) that relied on exports to China are suffering. Brazil is now in a deep recession. Last month Taiwan officially entered recession driven by double-digit declines (for five consecutive months) in exports. Also last month Japan officially reentered recession. Canada and South Korea’s governments recently cut forecasts for economic growth. Despite the lift from an extremely weak euro, Germany’s Federal Statistical Office reported last month that the economy slowed in Q3 due to weak exports and slack corporate investment. The German slowdown led a slide in the overall eurozone economy in Q3 per data from the European Union’s statistics agency. The recent immigration and terrorist problems make matters worse. Tourism will suffer. ECB President Mario Draghi is expected to react later this week by providing even more QE (money printing) and driving interest rates to even deeper negative levels (unprecedented).
Here in the U.S., the economy appears relatively healthier only because the rest of the world is so awful. That has driven the U.S. dollar skyward (DXY index over 100), hurting tourism and multinational companies exporting goods and services overseas. Last month the U.S. Agriculture Department forecast that U.S. farm incomes will plummet 38% this year to $56 billion – the lowest level since 2002. Yesterday’s ISM (Institute for Supply Management) manufacturing index for November fell into contraction territory at 48.6, the lowest reading since the 2009 recession. Economists expected a reading over 50. Industrial production fell in October from September. It was the ninth month-to-month drop in the ten months of the year.
Ports around the country have been reporting declining exports and imports all year. Last month the nation’s busiest port (Los Angeles) reported that loaded exports were down 15% for the year and empty container volumes in October were up 13% year-over-year. Empty containers are shipped overseas to be sent back to the U.S. filled with goods. The Cass Freight Index (primarily measures truck and rail shipments) dropped 5% in October from September and 5% year-over-year. Last month trade researcher Zepol Corp. reported that for the first time in at least a decade, imports in both September and October (the peak shipping season) at each of the three busiest U.S. seaports fell. They didn’t just fall. They dropped by more than 10% between August and October. The three ports handle over 50% of the goods entering the U.S. by sea.
With freight shipments slowing, carriers are cutting way back on capacity additions. According to the Railway Supply Institute, North American railcar orders plunged 83% year-over-year in the third quarter, the biggest drop in at least 27 years. ACT Research reported last month that trucking companies ordered 44% fewer large trucks year-over-year in October. The causes of this are falling industrial production and lower consumer demand, which has led to an unwanted buildup in inventories. American Trucking Association (ATA) chief economist Bob Costello recently said (in an ATA statement): “I remain concerned about the high level of inventories throughout the supply chain.” The gap between wholesale inventories and wholesale sales (as reported by the U.S. Census Bureau) is greater than what was seen prior to the 2009 recession.
Despite plunging gasoline prices (below $2 a gallon in some places), sales reports from most of the major U.S. retailers have been soft for several months. The latest round of reports released last month continued the trend. Target, Macy’s. Dick’s Sporting Goods, Best Buy, Nordstrom, Kohl’s, Tiffany (in other word, the gamut) and many more reported disappointing sales results. A Nordstrom exec on the conference call: “All we can tell you is, in our business, we saw a slowdown. And it was across the board.” Wal-Mart’s existing store sales grew 1.5% in its latest quarter, but profits fell 11% due to higher costs. Macy’s and Kohl’s spoke of excess merchandise inventories at the end of their quarters that needed to be cleared. Dick’s inventories jumped 13.1% from a year earlier while sales grew just 7.6% in the quarter.
Last week the Wall Street Journal wrote a story titled: “Retailers Ring Alarm Bells for the Holiday Season.” Two weeks earlier the Journal’s story was: “Retailers’ Full Shelves May Force Holiday Discounts.” Yesterday, the Atlanta Fed reported that its GDPNow model is forecasting just 1.4% seasonally adjusted annual GDP growth in Q4, down from the prior 1.8% forecast. Part of the reason for the Q4 slowdown is the anticipated hit to growth coming from the necessary inventory reductions.
There are pockets of strength in the economy, namely auto sales and housing. However, auto sales appear to be peaking out at just above the 18 million annual unit mark (extremely easy credit can only take the industry so far). In general, the majority of U.S. consumers are being squeezed by a combination of higher expenses and stagnant (or lower) real incomes. Due to rapidly rising rents (renters are paying the highest percentage of their income on rent ever per Zillow), high levels of consumer debt (record auto and student loans outstanding), and for many (including my family), sharply higher (record) healthcare costs (see chart below sourced from Meridian Macro Research); it doesn’t matter if there are lots of low-paying healthcare and service industry (hamburger flipping) jobs available. The U.S. consumer is under siege.
The Final Straw?
When the Fed was printing money (quantitative easing) in 2008-2014, the Fed itself described QE as the equivalent of monetary easing. Therefore, stopping quantitative easing (more than $1 trillion annually at its peak) as the Fed did late last year is tightening even though Wall Streeters are loath to admit it. As the result of this tightening, we’ve watched the broad stock markets slowly break down all year and the economy steadily weaken.
The Fed should have raised rates from the emergency zero-bound level long ago. However, since the economy never reached “escape velocity” as the Fed expected (all of the Fed’s forecasts have been wrong), they never got up the gumption to pull the trigger, despite leading people on that they were about to do it – over and over again. In 2015 there’s one last Fed meeting (December 15-16) remaining and next year there will be a presidential election, so in order to save face, it appears the Fed will try to pull off one tiny, quarter point rate hike and talk as dovishly as possible in order to minimize the damage. But remember, this is tightening on top of the prior tightening in an aging, though wretched, seven-year “recovery,” that’s worsening by the day.
Moreover, as noted earlier, the stock market is giving every indication that it’s about to collapse. Looks like bad timing to me. The Wall Street Journal’s Jon Hilsenrath issued the following warning two months ago: “In the seven years since the world’s central banks responded to the financial crisis by slashing interest rates, more than a dozen banks in the advanced world have tried to raise them again. All have been force to retreat.” Assuming they can pull it off, the Fed will rescind this hike too — but not before there’s a lot of damage to the stock market.