You Think US Stock Market Headed Upside:  Are You Sure?

The world stock markets dropped significantly on friday of the news that the UK bond market credit rating drop from AAA. The UK stock market dropped nearly 3% and the Dow Jones was down significantly before pairing losses to 1.5% at the close. Why? The US bond credit rating is also under the stress but unlikely at this time to be lowered. More likely it is a future likelihood due to the great debt and money printing we are doing. Consider that China is still buying US Treasuries at its high and usual rate, but the US needs to sell even more. The overall Chinese rate as a percentage share is contracting as our needs to borrow rise quickly. Gold has been rocketing upwards too. What is all this economic data telling us now?

We have had an overall stock rally in US markets. However many areas do not support a continued movement upward. Chart analysis suggests from Fibonacci numbers that the next move will be to an S&P around 1000 and then back down. Feldstein says the economic numbers are too optimistic and the recession is far from over. He cites decreased industrial production, rising unemployment, decreased housing starts and bad retail numbers as evidence.

The chief economist of Gluskin Sheff, David A. Rosenberg, wrote on May 20th that the consumer is essentially dead. That’s my interpretation of his work. He demonstrates rising delinquencies (rates in the quarter) in bank loans to 5.6%, consumer loans at 4.7%, credit card delinquencies at 6.5% rate, and residential home loans up too. These are high rates in delinquency have not been seen in decades. He expects commercial loans to disappoint soon also.

Finally, the Forex markets do not support this rally as being long term and substantial. The Forex exchange, which trades currencies, has a daily volume of three trillion dollars in trades. It is ten times bigger than the US stock markets. Cliff Wachtel in his May 21 article in Seeking Alpha states that people, governments and businesses use currencies as a hedge against risk. When the stock market is strong and moving in an upward trend, they move to riskier currencies trades to earn more because they feel safer. Now, he sees the opposite. The yen is a safe haven and it is gaining strength against the US dollar. The dollar/yen exchange has decreased from 100 to 95 yen/dollar recently. This says this rally is not going anywhere.

Unlike other economists, this interpretation suggests an “L” shaped market movement and not a “W” or “V”. Safe havens may still be the preferred option for the prudent investor.