A Broader -- and More Ominous -- January Barometer
A big deal is being made now of the fact that the stock market ended the month of January with losses across all major indices; losses which accelerated as the month wore on. The Pollyannas insist, though, that there's a one-in-three chance that their bullish prognostications can still win out for the year, since the so-called "January barometer" is not always right.
Behind the perpetual jousting between the bulls and the bears, though -- refreshed by stocks' recent swoon -- lies a bigger and broader story. And that is, the January decline was caused by a host of factors; ones which seem all but certain to continue for the foreseeable future, if not the entire year. The debate about where stocks go from here must go well beyond the merely technical fact that stocks declined for January, and instead assess -- and reassess -- the reasons why.
We'll start a brief exercise of this by revisiting my ANTI-Predictions for 2010; still available on the front page of our web site.
In that, my own version of a 2010 forecast that we posted back on January 1, I listed five main areas in which I disagreed with what seemed consensus predictions for the New Year. I'll list those, and briefly discuss their impact on the past month's trading, and what I think still lies ahead:
ANTI-Prediction # 1: There is NO "exit strategy."
The rallies in stocks and commodities in the last quarter or so of 2009 owed themselves to a few factors; but none more than the notion that the U.S. economy -- and the rest of the world -- were out of the woods and would resume a growth trajectory. Accordingly, it was believed that the Federal Reserve (in our case) would adopt and implement an "exit strategy" from its massive supporting of the financial markets very soon.
It is just now starting to dawn on the country, though, that the Fed (and the government itself, led by the Treasury and its various appendages of Fannie Mae, Freddie Mac, the FHA, etc.) cannot exit from their various activities. That would be akin to pulling mechanical life support from a patient who is all but clinically dead.
Last year, Fed actions and governmental direct stimulus brought cheers, relief and rising prices for risk assets. 2010 is a different matter; it is now BAD news that the economy on its own and without all that help is morte. With all the other ways that market sentiment has been changing (and not for the better!) this change we have seen in 2010's first several weeks will intensify: as the realization grows that there will be no significant exit strategy, it will galvanize the bearish sentiment and other associated fears among investors and markets.
ANTI-Prediction # 2: The Federal Reserve will NOT raise interest rates
The Federal Open Market Committee this week announced that they still intend to keep their federal funds rate at or near zero for "an extended period."
Maybe at the next meeting they'll repeat the prediction made by Yours Truly in my ANTI-Predictions, tweaking their post-meeting statement to say, "The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate until the next time the Chicago Cubs win the World Series."
To be sure, the Fed did point out this past week that there was some improvement in the form of business spending on inventories and such. But it shockingly added a formal admission that credit continues to contract for consumers. Given the latter, and the still-high levels of foreclosures and joblessness, it won't be too much longer before all the remaining prognosticators of imminent Fed rate hikes have to change their tune.
As with the above, it had been good news that the Fed was supposedly contemplating an ability to hike interest rates. It will be increasingly deemed as bad news that they can't.
ANTI-Prediction # 3: The market WILL NOT raise interest rates further; at least, in the near term.
2010 began with the bellwether 10-year Treasury note having moved up to yield nearly 4%; this level approached its highs of last summer. As I write this, that yield is back closer to 3.6%, and would be lower were it not for the almost universal fear over all manner of sovereign debt these days.
This wasn't supposed to happen; virtually everyone said that U.S. government bonds were dead. They were the next big bubble to break. They could go nowhere but down (in price.)
Yes, America's finances are a shambles. Yes, there is record--and rapidly growing--issuance of debt the world over. But in an arena including the likes of Japan and the U.K....Greece, Portugal, Italy and Spain casting doubt over the euro's health....and the generally increasing aversion to what the market considers risk, Treasury debt doesn't look so bad. Indeed, we have on a couple occasions in recent days again seen some short-term Treasury paper "selling" at a negative yield. That means, you pay the government to hold onto your cash!
To be fair, I think the chances have lessened that we'll see a plunge in bond yields to the crisis lows of late 2008 (where the 10-year Note was down to about 2%.) Indeed, even as stocks and commodities continued their decay in the week just past, it was noteworthy that bonds got little help (I explain why--and the startling ramifications--in the current issue of The National Investor.)
Still, though, with most other assets being fled, Treasuries will continue to get at least sufficient support to help them avoid their newest danger; and market yields should stay fairly flat.
ANTI-Prediction # 4: The U.S. dollar will STRENGTHEN for much, if not all, of the year.
Here's another one where I was in a vocal but small minority as 2009 closed. Yet the dollar has been on a tear. What's more important (as I also explain in our latest issue for subscribers) is how the greenback's rally has managed to accelerate after once again breaching a key technical level.
As you all know, stocks ended the week failing to muster any kind of a rally. This in spite of the Senate's Thursday confirmation of Ben Bernanke (well, OK, there's one prediction I was wrong on!) and Friday's boffo initial GDP number. As I wrote to a subscriber when he asked why the market so utterly failed to regain any lost ground (and, indeed, lost more) I said the answer was contained in two words: THE DOLLAR!
The carry trade has begun to unwind; ominously, as the week closed, with greater speed and greater collateral damage.
ANTI-Prediction # 5: China will be a BANE, rather than a boon, to the markets.
Before the dollar started doing a greater share of the damage to stocks and commodities, they were already in trouble due to rumblings from China. That country -- in order to keep things from getting too far out of hand inflation-wise--is taking incrementally bolder steps to slow things down to a simmer from a rapid boil.
This is good for them; but bad for the markets. The latter, you see, have bid up all manner of prices on the crazy notion that a nation accounting for less than one-tenth of world GDP was able to carry everyone else (as well as speculators' bloated portfolios) on their backs.
They neither want nor need that job.
In fact, as I have been warning for months, China will be doing its best in the months ahead to bolster its own "portfolio." To do so most effectively, they will need a higher U.S. dollar and lower commodity prices.
Markets may bounce from their oversold positions; maybe as early as this week (unless the dollar's rally REALLY gets going, and everything else just goes down in a straight line.) But the lesson from our look at OUR "January barometer" is this: All the factors that caused stocks to swoon recently will, if anything, intensify in the weeks and months ahead.