It doesn't look good
"Ronald Reagan's memory celebrated with sharp budget deficit increase."
- theonion.com, a U.S. satirical website
On Tuesday, June 29 the New York-based Conference Board's consumer confidence index rose to 101.9 from a revised 93.1 in May. The figure exceeded the highest estimate of a Bloomberg News survey of economists. The percentage of consumers that said they saw jobs as hard to find was at the lowest level since September 2002.
Also on that day the retail sector was hit hard after both Wal-Mart and Target announced that same-store sales would be below expectations, and mortgage related stocks were down after Washington Mutual warned of lower than expected profits due to rising mortgage rates.
On Wednesday, June 30, the Federal Reserve decided to begin to tackle inflation at a "measured" pace and increased interest rates by 0.25 percent, laying to rest an economic era that has lasted for almost 25 years. Interest rates in the USA rose as high as 20 percent in 1980 and began to fall in the early years of the first Reagan Administration to a 46-year low in June of last year. Yet the U.S. inflation rate (CPI inflation as measured by the Commerce Department) is running at around three percent per year. If the Fed were serious about protecting America from rising inflation rates, you would expect it to lend money for no less than actual inflation. But at 1.25 percent, it will still be giving money away - but to fewer and fewer takers.
On the same day, one possible cause for concern to the Fed was revealed by the National Association of Purchasing Management Index for the Chicago area. The index stood at 68 in May. A reading greater than 50 signals growth and the index compares with an average of 54.6 in 2003. Last month's reading was the highest since July 1988 and 52 economists polled by Bloomberg expected it to decline to 64. Economists watch the Chicago report for clues about the strength of U.S. manufacturing in the 10 largest U.S. counties; only Los Angeles has more manufacturing jobs than Cook County (which includes Chicago), a region that produces 40 percent of the nation's motor vehicles, 35 percent of the nation's steel and almost half of its farm equipment.
Another, greater danger, rarely featured in the press, was provided by the weekly Mortgage Applications Index released by the Mortgage Bankers Association of America. Total mortgage applications are down 63 percent over the last year and mortgages for refinancing purposes (REFI) are down by 82 percent. The current expansion has been driven by consumer spending, which has depended on income other than wages and salaries. Tax cuts, the lengthy period of extremely low interest rates that created soaring asset values, a record level of debt, and hundreds of billions of dollars of REFI cash-outs were the driving force. With the dramatic decline of REFI activity, no further tax cuts on the horizon and an increase in interest rates, the credit bubble may soon implode.
One source of independent opinion that I avidly follow can be found at www.comstockfunds.com. Their evaluation of the present situation is as follows:
The current condition of the stock market bears many similarities to that of the last presidential election year in 2000. The S&P 500 trading pattern in both years followed bubble-type environments including over-valuation, record consumer debt, large trade deficits and massive equity mutual fund purchases. To that list we can now add a serious housing bubble.
The S&P 500 peaked early in the year 2000 and then fluctuated sharply until finally breaking down in September. So far we have been witnessing a similar pattern as the S&P 500 peaked in March at 1163 and has been fluctuating ever since. If the S&P 500 continues to follow the year 2000 pattern, a major breakdown of that index could be close at hand.
The outrageous economic and financial bubble of the late 1990s will probably not be repeated for many years to come, as the S&P 500's PE multiple exceeded prior market peaks by over 50 percent and the PE of the NASDAQ Composite was off the charts at 245 times earnings. However, with that said, the year-long 50 percent rally that peaked in March appears to be a mini-version of the late surge in the late 1990s, as the lowest priced and lowest quality stocks were by far the best performers. In fact, the highest PE stocks did exceptionally well while the stocks that had no earnings did even better. We believe that the 2003-2004 rally was a counter-trend move in a secular bear market, similar to the big rallies of the Japanese Nikkei Average while it was headed down about 80 percent in a 13-year period.
Although the excessive over-valuation experienced after the financial mania of the late 1990s may not be exceeded for a long time, the condition was far from fully corrected in the bear market of 2000-2002. And with the rally of 2003, the market valuation parameters have just returned to the valuation levels reached at historical market peaks prior to 2000.
The excess consumer debt has been discussed so much we don't have to go into further detail, but suffice it to say that the debt build-up in the financial mania of the 1990s only got worse during the latest recession and bear market. In fact, it was the only recession on record where consumer debt did not decline.
Since the public always buys 'what they just missed,' equity mutual fund inflows of $309 billion in 2000 exceeded the prior record of $87 billion in 1997. This year we were on track to exceed the $309 billion record in mid-March when the S&P 500 peaked at 1163. In fact, inflows were $43 billion in January and $16 billion in February. Estimated inflows were heavy in the first half of March and looked as if they would exceed the January number, but abruptly changed to outflows when the market began to pull back. After the huge downturn in the 2000-2002 bear market, the public apparently learned to play the market as long as it was rising, but to get out quickly if stocks started to decline. In the end, March ended up with net equity fund inflows of $16 billion. With April inflows coming in at $23 billion and May being flat, one can see the rate of gain for the first three and four months of this year were on track to exceed the 2000 record.
All in all, current comparisons to the year 2000 are eerily similar on a number of key parameters, and if this continues, it doesn't bode well for the rest of this year or 2005.
- theonion.com, a U.S. satirical website
On Tuesday, June 29 the New York-based Conference Board's consumer confidence index rose to 101.9 from a revised 93.1 in May. The figure exceeded the highest estimate of a Bloomberg News survey of economists. The percentage of consumers that said they saw jobs as hard to find was at the lowest level since September 2002.
Also on that day the retail sector was hit hard after both Wal-Mart and Target announced that same-store sales would be below expectations, and mortgage related stocks were down after Washington Mutual warned of lower than expected profits due to rising mortgage rates.
On Wednesday, June 30, the Federal Reserve decided to begin to tackle inflation at a "measured" pace and increased interest rates by 0.25 percent, laying to rest an economic era that has lasted for almost 25 years. Interest rates in the USA rose as high as 20 percent in 1980 and began to fall in the early years of the first Reagan Administration to a 46-year low in June of last year. Yet the U.S. inflation rate (CPI inflation as measured by the Commerce Department) is running at around three percent per year. If the Fed were serious about protecting America from rising inflation rates, you would expect it to lend money for no less than actual inflation. But at 1.25 percent, it will still be giving money away - but to fewer and fewer takers.
On the same day, one possible cause for concern to the Fed was revealed by the National Association of Purchasing Management Index for the Chicago area. The index stood at 68 in May. A reading greater than 50 signals growth and the index compares with an average of 54.6 in 2003. Last month's reading was the highest since July 1988 and 52 economists polled by Bloomberg expected it to decline to 64. Economists watch the Chicago report for clues about the strength of U.S. manufacturing in the 10 largest U.S. counties; only Los Angeles has more manufacturing jobs than Cook County (which includes Chicago), a region that produces 40 percent of the nation's motor vehicles, 35 percent of the nation's steel and almost half of its farm equipment.
Another, greater danger, rarely featured in the press, was provided by the weekly Mortgage Applications Index released by the Mortgage Bankers Association of America. Total mortgage applications are down 63 percent over the last year and mortgages for refinancing purposes (REFI) are down by 82 percent. The current expansion has been driven by consumer spending, which has depended on income other than wages and salaries. Tax cuts, the lengthy period of extremely low interest rates that created soaring asset values, a record level of debt, and hundreds of billions of dollars of REFI cash-outs were the driving force. With the dramatic decline of REFI activity, no further tax cuts on the horizon and an increase in interest rates, the credit bubble may soon implode.
One source of independent opinion that I avidly follow can be found at www.comstockfunds.com. Their evaluation of the present situation is as follows:
The current condition of the stock market bears many similarities to that of the last presidential election year in 2000. The S&P 500 trading pattern in both years followed bubble-type environments including over-valuation, record consumer debt, large trade deficits and massive equity mutual fund purchases. To that list we can now add a serious housing bubble.
The S&P 500 peaked early in the year 2000 and then fluctuated sharply until finally breaking down in September. So far we have been witnessing a similar pattern as the S&P 500 peaked in March at 1163 and has been fluctuating ever since. If the S&P 500 continues to follow the year 2000 pattern, a major breakdown of that index could be close at hand.
The outrageous economic and financial bubble of the late 1990s will probably not be repeated for many years to come, as the S&P 500's PE multiple exceeded prior market peaks by over 50 percent and the PE of the NASDAQ Composite was off the charts at 245 times earnings. However, with that said, the year-long 50 percent rally that peaked in March appears to be a mini-version of the late surge in the late 1990s, as the lowest priced and lowest quality stocks were by far the best performers. In fact, the highest PE stocks did exceptionally well while the stocks that had no earnings did even better. We believe that the 2003-2004 rally was a counter-trend move in a secular bear market, similar to the big rallies of the Japanese Nikkei Average while it was headed down about 80 percent in a 13-year period.
Although the excessive over-valuation experienced after the financial mania of the late 1990s may not be exceeded for a long time, the condition was far from fully corrected in the bear market of 2000-2002. And with the rally of 2003, the market valuation parameters have just returned to the valuation levels reached at historical market peaks prior to 2000.
The excess consumer debt has been discussed so much we don't have to go into further detail, but suffice it to say that the debt build-up in the financial mania of the 1990s only got worse during the latest recession and bear market. In fact, it was the only recession on record where consumer debt did not decline.
Since the public always buys 'what they just missed,' equity mutual fund inflows of $309 billion in 2000 exceeded the prior record of $87 billion in 1997. This year we were on track to exceed the $309 billion record in mid-March when the S&P 500 peaked at 1163. In fact, inflows were $43 billion in January and $16 billion in February. Estimated inflows were heavy in the first half of March and looked as if they would exceed the January number, but abruptly changed to outflows when the market began to pull back. After the huge downturn in the 2000-2002 bear market, the public apparently learned to play the market as long as it was rising, but to get out quickly if stocks started to decline. In the end, March ended up with net equity fund inflows of $16 billion. With April inflows coming in at $23 billion and May being flat, one can see the rate of gain for the first three and four months of this year were on track to exceed the 2000 record.
All in all, current comparisons to the year 2000 are eerily similar on a number of key parameters, and if this continues, it doesn't bode well for the rest of this year or 2005.
