Macros, Technicals or Gut Feel?

Am I the only person who notices that things aren’t as rosy as the market is making it out to be? And I am not just talking about stocks and commodities – I am talking about everything.

It is extremely obvious at this time that events around the world now do not support any sort of bullish appetite. Prices of staples are ridiculously high and getting further out of control all over the world. This coming Wednesday’s USDA crop report is likely to show up a shortage across most grains and softs. The last report on 12 October reported a build on inventories but this build was never going to be enough to sustain the growing demand for such commodities. Weather conditions have made things in Asia worse by flooding Thailand. Rice has risen in a sharp spike and the longer term future for this Asian staple looks bleak as prices are expected to rise further as shortages in the coming months will take its toll on all the major rice-consuming economies, Singapore included.

As a matter of fact, the high prices of commodities traded in the last twelve months are taking its toll on our pockets today. While prices of live cattle and cattle feeder continue to break to new all time highs., prices of oats, corn, wheat, soy, sugar, coffee and FCOJ remain at their highs from a year ago. Copper, cotton and cocoa prices have dipped but that is all that has come down. Although off their highs, gold and silver remain at elevated levels from a year ago as with WTI, RBOB gasoline and heating oil.

In the meantime, Asian economies trudge along like there is nothing to worry about. Inflation is rampant everywhere in the East but the higher income earners have taken on a blase attitude toward it and continue to support these high prices with their ceaseless buying. This is slowly but surely putting pressure on the lower income earners who can’t afford these sky high prices.  And while all this is happening, there are those who pretend they can afford it by leveraging on debt which in itself, is going to be a major issue when this bubble pops.

Singapore‘s growth rate expanded in Q3 albeit at a very modest pace. This was a convenient side-step away from a Technical Recession but it does not take away the fact that growth has slowed and is expected to slow further in the next two to three quarters.

So here are the stats; growth is slowing and is expected to continue slowing … inflation continues to rise and is almost surely going to rise some more … the central bank is lowering the currency rate in a bid to encourage growth (instead of raising the rate to fight inflation) … the banks continue to keep the borrowing rate low to further encourage spending and support inflation … the markets are flat for more than two years and lower from a year ago … doesn’t all this spell “Stagflation“?

The only saving grace is that unemployment is at 2.1%, slightly down from the 18-year average of 2.48% (Historical low was 1.3% in 1997, historical high was 4.8% in 2003). Having said that, the last few weeks have seen as many as 6,600 people lose their jobs from various industries of the financial and manufacturing sectors on the Little Red Dot.

The Singapore economy is on the verge of a major slow down. Jobs are becoming a premium. Property prices are stalling again. Manufacturing has been slowing and car prices continue to soar.

Times are getting tougher but we don’t feel it. And the reason we don’t feel it is because this is a Slow Bleed. In a slow bleeding situation, you don’t know you’re dying because life seeps out of you so slowly and before you know it, you’re on the edge of death. Some are already feeling the pain … six bodies in a reservoir in four months says a lot.

I am still maintaining the same sentiment that I have held over the past year and a half when I wrote, Balloon, Not A Bubble, Inflation – The Shit Hits the Fan, Singapore Beware and The Little Red Dot Gets More Expensive.

Over in the U.S., economic data would have us believe that the economy is on the mend having bottomed out over the last quarter. Overall earnings in the current Q4 earnings season have been impressive and guidance hasn’t been too disappointing. However, within the S&P 500, there have been 65 negative fourth-quarter earnings preannouncements against 19 positives so far. This makes it a negative-to-positive ratio of 3.4 which is the highest negative ratio since the 3.7 ratio in the second quarter of 2001, just after the start of a recession. The S&P500’s YonY fourth-quarter earnings growth estimate is now 10.8%, down from 15% on Oct. 3. This means that even as the market has rallied, the outlook for earnings has gotten worse. And lest my graduates forget, earnings has a quarterly effect on the market going forward

Employment too, it would seem, is improving … or is it?

The more important data that seemed to be lost was that the Fed slashed growth estimates significantly for 2011, 2012 and 2013 while making steep upward revisions in the unemployment rate for all three years.

It is notable that the FOMC Central Tendency Forecasts slashed GDP growth by 1.1% in 2011, 0.8% in 2012 and 0.6% in 2013.  It also raised its estimates for the unemployment rate by 0.3% in 2011, 0.6% in 2012 and 0.7% for 2013.  These are highly significant revisions from the previous forecast.  Even as late as 2014 the Fed estimated the unemployment rate at 6.8%-to-7.7%.

In its most recent policy statement on Wednesday 2 November 2011, the FOMC kept its target interest rate at 0.00% to 0.25% for “an extended period of time“. This, after Ben Bernanke had broadly hinted that rates may have to be hiked sooner rather than his mid-2013 deadline. The day after that policy statement on Thursday 3 November 2011, at the European Central Bank‘s latest meeting, members decided to become more accommodative by trimming the key lending rate by 25 basis points to 1.25%. The day after that, the Eurozone reported another month of contraction in their October Services PMI at 44.6 vs 46,0. This adds to other major economies’ manufacturing and services PMIs all falling across the globe in October; Chicago’s PMI fell to 58.4 vs 58.9 from September’s 60.4 … Britain’s Services PMI 51.3 vs 51.9 expected (52.9 previous), Britain’s Manufacturing PMI disappointed 47.4 v. 50.0 … China October Non-manufacturing PMI dipped 57.7 vs 59.3 in Sep … Eurozone October Manufacturing PMI slipped to 47.1 vs 47.3,

FYI, a PMI read below 50.0 reflects a contraction while a read above 50.0 shows an expansion.

That lead us to Europe, whose problems are never going to go away and will only get worse and worse. After Greece, if Greece ever gets done, we have a REAL problem … Italy. And we still haven’t addressed the Spanish and Portuguese issues. There is much more debt than cash floating around in Europe now and we haven’t even considered the “smaller” threats like Belgium, Finland and Ireland.

I don’t want to revisit this region because enough of it can be found all over the internet and frankly, having been bankrupt myself, there is no way out for a region that is already deep in insolvency. It is a simple equation in life –

So why are countries any different from people or companies? If banks are allowed to fail now, shouldn’t countries be allowed to fail too?

Now shouldn’t Germany be allowed to raid Greece to break the country up for all its assets then sell the little pieces off to help recoup the monies that are owed? You can’t say that it is merciless and the people shouldn’t be griping about it because it was the people that got the country into that mess in the first place. What Greece really needs now is Zeus letting loose the Kraken and Medusa on Greek ass for being idiots. Now their ignorance is costing the whole world a lot of pain. And it’s not fair.

Here’s the best part … we’re going to have to play out the whole scene again for Italy, Spain, Portugal, etc, etc, etc … this is the beginning of the end of the European Union and the Euro.

Technically speaking, the U.S. equity market is looking shaky again after an amazing and record breaking October run. DOW at 12,250 is looking daunting especially if Q1 and Q2 of 2008 replays itself now …

The VIX is back up above 30.00 and the TRIN has been ticking higher on average in the past week.

Bond yields are once again down at near their 52w lows with the 5yr yield twice under-par again and the 10 and 30 year yields not far behind from also dropping 2X under par as well.

The technical indications are there to support another possible correction/sell-off. It won’t take much to set the market spiraling into another major sell-off. The question is whether it will crash. The economic circumstances are there to support a crash – they have been there since 2009 – and if it happens, it will be long overdue anyway.

I mentioned in my Facebook account on Thursday 3 November 2011;

I can’t explain it and I don’t know why I did it but I liquidated ALL my Option positions yesterday except for LMT. I suddenly felt odd seeing the market rally and something about what I was seeing on CNBC (words like slowdown, downturn, pullbacks, shrinks, etc) and what I saw on my charts (optimism).

We rallied because the ECB dropped their Policy Rate – isn’t that a confirmation that the ECB is addressing a very serious problem? Then why are we rallying on the confirmation of bad news?

My portfolio is now hedged again. Like I said in Facebook, I can’t explain it. It’s not the technicals, it’s not the macros … something in my bones is telling me that something is not right. If I am wrong, so be it. But I would hate to be right and be on the wrong side of the trade.

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Comments

Conrad, very well written. Working within the fund management firm. I’ve seen many different analyst report and by far the most complete report that I’ve seen is here in this post.

You don’t just mentioned about the economics data, not just about earnings, not just about interest rates or technical bounce, etc etc….

You’re talking in a way that is a mixture of art and science combining knowledge with experience and a little bit of something within you that other people – even the one with qualification are not able to compete.

It shows that you really like what you do and you’re good at it. I’ve been to some nonsense GURU talk that shows people nothing but profits… You’re different…

I’m proud to be your student.

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