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Posts Tagged ‘John Mauldin’

Are we heading towards a double dip recession?  Take a look at the numbers:

May new home sales plunged -32%.

Mortgage delinquencies are up 36% since last year

The Baltic Dry Index has dropped -40% since May 26, 2010.  This index is considered a leading indicator of the future growth of the economy.

Manufacturing index plunged in May
May housing starts fell -10%
May retail sales post biggest decline since September 2009
May existing home sales fell unexpectedly?

Pile on top of those statistics the fact we have a major landscape change occurring in the Gulf of Mexico that will negatively affect the economy and that region as well as continued climbing unemployment and a decline in consumer spending, I just don’t think that a double dip recession is avoidable.

John Mauldin pointed out in his excellent weekly writing Frontline Thoughts that the index of weekly leading economic numbers has turned negative.  There was a -23% decline.  Then he showed this chart of what this type of drop has signaled in the past.

   

For all of those in the financial services community wanting you to drink “the everything is OK” Kool-aid, they are going to have a tough time spinning out from underneath these deteriorating numbers.

In addition these numbers are showing a renewed decline in real estate.  As I have stated before, it will be tough to turn the Titanic around without a recovering real estate market. 

This is Evidence that Economic Numbers could be Rigged

Either these numbers are rigged or their methodology is flawed or they were able to actually hand pick and find a few thousand happy people.  Now with all of the above bad news that is coming up along with high unemployment and a stock market that has been in the tank since April…The University of Michigan Consumer Sentiment Index jumped to its highest level in 2 years.  Are you kidding me?  If you believe that you might also believe that British Petroleum has the problem in the Gulf under control.  Really, there is no way that could be accurate.   

On Friday the ever so important unemployment numbers are coming out.  That should give us an interesting piece of the puzzle.  I just wonder how many jobs the Government will create out of thin air this time?   

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This should be an interesting week in the markets.  We have the end of the quarter which typically produces some volatility for the market.  We also have the very important unemployment report that will be due out on Friday.  The unemployment indicator has become one of most important monthly indicators.  Although employment is considered a lagging indicator (an indicator that is one of the last to recover), its continued weakness might be signaling a bigger problem.  In his weekly newsletter John Mauldin wrote about the unemployment situation from another perspective.  To sign up for John’s free newsletter go to www.frontlinethoughts.com

He wrote that it takes the creation of 15 million jobs just to get us back to normal employment around 5%.  He makes that estimate by assuming the monthly job destruction will soon becoming to an end.  I think that he estimates another 500,000 jobs will be lost.  He writes, “that means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month.  As an Average!!”   

Then he states these statistics:

“If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.”

I equate the destruction in employment much like a perfect storm.  The damage has been so great that it will take a long time to recover.  Both the Bush and the Obama Administrations allowed the unemployment situation to get this bad without doing anything about it.  In fact, I still don’t see anything in the works to fix this problem.  The stimulus bill will create mostly government based jobs.  However, I don’t think it will create enough to even put a dent in these numbers.

So, do you think that the market already expects the unemployment situation to remain this ugly?  Of course, there is the notion of a job-less recovery (which that has never made sense).  However, I think that this situation goes well beyond a typical unemployment problem.  Can the market continue to remain positive in the midst of so many people being affected by lack of employment?  I personally think that we see this problem manifest slowly and at some point the markets feel the impact. 

I know that this is far from positive but it is important to see all sides so that you can make prudent decisions with retirement dollars.

Levels to Watch on the S&P 500

From time to time, I like to point out important price levels on the S&P 500. 

Above 1080 – Positive

Between 1080 and 1043 – Neutral

Below 1041-Negative

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Wall Street (which drives me crazy) calls even the smallest bit of good news “green shoots.”  The analogy is that grass starts to grow in the form of a “green shoot.”  Well, I have many “green shoots” in my yard right now.  Unfortunately, these green shoots are weeds more than anything.  John Mauldin made a very good observation in his latest writing.  He said:

“My premise for uttering the heresy “This Time It’s Different*” is that the fundamental nature of the economic landscape has so changed that comparisons with post-WWII recoveries is at best problematical and at worst misleading.”

His point is that Wall Street is looking at this recession through the lens of past recessions since WWII.  It is like comparing apples to oranges when you think of what makes up the problems that we face today.  Last week, the S&P cut their investment ratings on 22 banks.  Banks depend on strong investment ratings so that they can attract investor money.  The Consumer Price Index saw its largest drop since 1950.  Once again, it looks a lot like deflation more than inflation.  The reality is that there is a higher probability that we are in the throws of a deflationary problem which is something that only time can solve.  The problem with the weeds in my yard is that I cannot do anything about them unless I want brown spots all over my yard.  I will have to wait until next year and make sure that they don’t come back.  This is unlike any recession since the 1930’s. 

This week will have some interesting events.  The Federal Reserve Board meeting, that always makes for an interesting day.  The Treasury is set to sell billions of dollars of Government Bonds on the open market.  It will be interesting to see how interest rates hold up.  Once again, a rising interest rate environment is the last thing that a debt laden economy can handle.

As I write, the S&P 500 is below a critical price level of 900.  If the market were to close below that level, we would want to watch the next couple of days very carefully.  Once again, we want to evaluate whether this stock market rally is the beginning of a new bull market or nothing more than a bear market rally.  It is my view that this is nothing more than a bear market rally.  Thus, you want to be monitoring your risk very closely right now.  I will update more frequently this week as it warrants.

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Brand New Prudent Money Blog – May 12 -Could the Government be Under-reporting the Jobless by 50%?

There is an old saying in the stock market that you should sell (stocks) in May. It is based on the notion that stocks perform better the 6 months leading up to May (November to April) than the 6 months following May.  There are some interesting statistics that support that notion.

John Mauldin’s newsletter is something every investor should be reading.  He writes a weekly newsletter that he publishes for free.  The content is excellent and he should be charging for this newsletter.  For more information, go to www.frontlinethoughts.com.   He had an excellent newsletter that highlighted this same notion but looked at it when the stock market was in a bear market.  First he took a look at the average returns since 1950 in the S&P 500.

You can see the big difference in returns when looking at separate 6 month periods.

Now take a look at these same numbers but looking at it when the stock market was in a bear market.

The numbers on average are much lower.  It illustrates to me that we could be heading for a rough period, for the market, if historical norms hold up.  If you see what history has to say, you look at the warning signs, the indicators are flashing and considering that we are in the worst bear market since the Great Depression, the risk level is getting higher

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