Market Pulse
As I bit of history, I issued a cash call the week ending February 25, 2011 and reiterated that call in my last newsletter, which was for the week ending April 1, 2011.
At the time of my initial cash call, the Standard & Poor's 500 index as measured by the exchange traded fund SPY was at $132. As of today, SPY stands at $133. Whoop de do.
You can argue and rightly from short term trader’s perspective that by staying on the sidelines, I gave up trading a lot of volatility. For example, after my cash call, SPY bottomed at $126 on March 16 and went up 10 points by April 29. So I suppose you could have made a few bucks there.
But to be clear, short term trading isn’t really my bag. What I try to do is determine the market trend based on both big picture macro fundamentals and confirming technical indicators – and loyal readers will know that I have done that with some significant success.
In this case, after a solid move off the March lows of 2009, I saw the market back in February settling into a longer term sideways (and possible down) pattern. Here is the macro backdrop that now continues to motivate my cash call:
The fiscal and monetary stimuli in both Europe and the U.S. have largely run their course – and helped stimulate the investment led recovery we have witnessed. However, that stimuli was not sufficient to bootstrap either consumers or exports up to the status of follow-through on the investment led recovery.
The bearish factors in the U.S. now include:
- Chronically low consumer confidence supported by stagnant income growth, continued high unemployment, a moribund housing market,
- The continued offshoring of business investment to China and elsewhere
- A squeeze on local and state government spending because of budget crises
- The aforementioned end to the fiscal and monetary stimuli
- Most importantly, the continuation of the large trade deficit with China that saps our economic strength and zaps our manufacturing base.
In other words, in the U.S., nothing has really changed structurally to breed great optimism.
The bearish factors for Europe include:
- Hey, it’s frigging Europe. Slow growth is the norm.
- The PIIGS remain in trouble, with fiscal austerity measures likely to kick in with a vengeance in Greece, Portugal, and Ireland.
- The continuation of China’s fixed peg to the U.S. dollar; with a falling dollar, this is killing Europe, which runs an even bigger trade deficit with China than the U.S.
The bearish factors of Asia include:
- The failure of China to structurally revamp its GDP growth equation to reduce its export dependence and create a more self-sustaining, consumer-led economy.
- The folly of China using higher interest rates and higher reserve requirements to fight inflation rather than allowing the yuan to strengthen. This is DUMB beyond belief.
- The as yet unrealized fact that Japan’s tsunami is proving highly disruptive to the global supply chain.
Bottom line: If the U.S. and Europe aren’t strong enough to support China’s growth and China’s consumers aren’t strong enough to buy exports from the U.S. and Europe, it will be difficult for the global economy to boom.
I don’t see a recession at this point. I do see the same kind of sub-par growth rates in the U.S. and Europe we witnessed in the last decade and flat market characterized by bursts of optimism.
So please don’t shoot the messenger. I have always made my best money in periods where the trend has been strong – and such periods are getting rarer. So just be patient; and at some point, I hope I will have better news.
