It looks like they pushed this week one day too far.
Oddly enough, investors seem shocked this morning that the EU GDP was a 10% miss, falling 2.5% for the quarter and 4.6% for the year, the worst ever recorded. They were led down by Germany's 3.8% quarterly decline vs. forecasts of a 3.2% drop. We knew this was coming on Wednesday, when I mentioned right in the morning post the the EU March Industrial Production figures indicated a certain miss in the GDP report and, of course, that's how our members played the markets into the close yesterday. What is really baffling is how is it that other people can't figure this stuff out until they see the actual data? Who are these economic "experts" they keep polling, who have yet to be right about anything this year?
Anyway, let's keep our head in the game. CNBC has a parade of oil bulls on this morning trying to counter the facts but clearly this is a major disappointment for the commodity pushers, who were counting on jacking us back over $60 a barrel for the holiday weekend next week, the traditional start to "summer driving season." Well, bad news kids, summer may be canceled as it's kind of hard to sell a turn-around story for Q2 when Europe's Q1 was 78% worse than Q4 (-1.4%). That is NOT what they call getting worse more slowly. I may not be one of the "expert" economists polled by the WSJ but I do know some basic physics and it's kind of hard to point to a 78% quarter over quarter acceleration to the downside as a sign of a summer turnaround.
Note the graph on the left doesn't include this quarter so you have to imagine another red line that breaks below the bottom of the chart and stops 1 more segment below the -2.0 line – THAT'S today's number. Don't worry though, Cramer tells us that yesterday's anemic performance (in which we failed to take back our levels and sold off into the close off a very weak bounce) means the bull rally is back! Meanwhile, also on CNBC – Marc Faber of the "Gloom, Boom and Doom Report" warned us this morning that Capitalism itself may be collapsing. Faber says a sustainable recovery will occur only when the corporate system will be cleaned of losses and capitalism risks collapsing if this does not happen. "The central banks will continue to print money at full speed, but long-term this strategy will lead to a fall in purchasing power and living standards, especially in developed countries," Faber said:
I think the final low in markets will occur when the system is cleaned out. Unless the system is cleaned out of losses, the way communism collapsed, capitalism will collapse. The best way to deal with any economic problem is to let the market work it through. The Federal Reserve's policy of printing money is destabilizing the markets and creating enormous volatility. The US government for sure will go bust. That I guarantee you. Not tomorrow, but it will go bust. I think this is the beginning of a long-term bear market. And I think the government will have to keep interest rates artificially low because deficits will be too high. People said fundamentals are bad and markets are going up for no reason. But money printing is a reason. The worse the statistics will be, the more money will be printed. Believe me, globally all the central banks will print money like there's no tomorrow.
So happy Friday to you! I hate to say it but Faber is not wrong. I've been saying for ages that the markets are moving up simply because there is more money to go into the markets. Unlike Faber though, I see that stocks are a commodity too and inflation does not necessarily lead to a bear market as corporate profits inflate along with everything else, especially if inflation on finished goods begins to outpace commodities as they continue to suffer from overall low demand. Zimbabwe is an example of this. A gallon of milk in Zimbabwe now costs about $70,000,000 but that's just 2 American dollars. The milk company still gets it out of a cow which, fairly or not, received no raise to compensate for inflation and that company used to make 10 cents selling a gallon of milk but now makes 3.5M Zimbabwe dollars. Do you think their stock is still the same price? That is why Warren Buffett is laughing – he sold shorts on the S&P, not because he thought the economy was going to turn around, but because the inevitable inflation that's coming down the pipe like a high-speed train is going to drive the markets to unimaginable levels.
This has been the end game I've pointed to ever since Hank Paulson was appointed as Treasury Secretary in 2006 when I wrote that the government was going to "Burn Dollars to Fight Gravity" and I expanded on my inflation is good premise in my "Inflation Nation" article. I won't rehash it all here but how else did you think we were going to pay back $13Tn (so far) in debt and why else do you think the government really doesn't care what it spends on bailouts and other programs? It's easy to take on debt today when you know your assets and income will increase tomorrow. That was how we bought homes out of the recession in the 70s – once people believe that their salaries will double every 5 years, they won't be shy about making 30-year mortgage commitments on houses that double in value every 5 years as well. Of course inflation is dangerous and can quickly get out of control but we'll cross Faber's bridge when we come to it. Meanwhile, I'll be catching up on my Marx – just in case!
Asia went up last night as they clearly didn't get my 2:32 Alert to Members where I called the dead top of the market for the day saying: "Still, with expected bad news in Europe tomorrow and BS stick save they had today, I have to stay naked on long DIA puts into close but pretty much all cash otherwise other than the hedged positions of course." Somehow that must translate into BUYBUYBUY in Japanese as the Nikkei jumped 2% despite a weaker dollar, led by bank shares as Japanese Machine Orders fell less than expected and sparked a celebratory rally that took them all the way back to just down 200 points for the week. The Hang Seng added 250 points (1.5%) and is down "just" 600 for the week while Bombay hit the 2.5% rule and finished near the week's high as the elections this weekend are shaping up to be a non-event, which the markets tend to like.
Europe is down about a point ahead of our open and our futures are down about the same just ahead of our CPI data – and here it is: CPI came in 50% higher than expected by our always amazing experts, up 0.3% with the cored CPI up 1.9% for the month but still down 7% for the year (the biggest year over year decline since 1955). We did get a much better than expected Empire (NY) Manufacturing Index – down "just" 4.55% in May vs. down 14.65 in April. That is giving the futures a short-term boost, recovering about 1/2 of their losses after just 5 minutes but there's nothing to celebrate here and we'll have to see what happens at the open.
As it's option expiration day, almost anything can happen. Looking more closely at the CPI, I have to question how they are measuring a 2.4% decline in consumer energy prices from March to April when oil averaged $46 in March and $50 in April (up 8.6%). The only logical explanation there is that the actual demand for oil is so far below the price of crude that the supply chain is taking a huge hit to turn those massive stockpiles of barrels into something consumers are actually willing to buy. THIS IS NOT A GOOD THING FOR THE ECONOMY! It is certainly not a good way for the energy sector to begin second quarter earnings and it only goes to show you what a manipulated sham the energy sector is. Household fuels and utility prices slid 1.7% in April so there's another sector we can go short on…
Once again, average weekly earnings failed to keep up with the 0.3% monthly inflation, rising just 0.1% in April. Again, not something that is likely to lead to higher profits for corporate America since consumer spending makes up 70% of their income. The media is trying to paint this CPI report as a sign that deflation is off the table and the economy is heating up but that is total BS. Buried in the WSJ's account of the CPI is the fact that Owner's Equivalent Rent rose 0.1%, which doesn't seem like a big deal but it makes up 29% of the core CPI so 1/3 of the "good number" is due to the fact that housing prices went down while the costs of owning the home (mortgage, taxes, repairs) stayed the same so the OER calculation pushes that through as an economic positive as it's meant to measure willingness of people to buy or rent homes but is now measuring the pain of people trapped in homes they can no longer afford – a total joke!
So I'm glad we're short and I advocate more shorts into the open if they insist on this ridiculous pre-market pump (down just .25% at 9 am), especially in the over-hyped Agriculture industry, which could not be up for stupider reasons. We just got the TIC data that shows $23.2Bn of treasuries were scooped up by foreigners last month (inflow) vs. an outflow of $92Bn last month so only 3 more months to get that money back in! Of course that data is for March and doesn't reflect April, where we already know the Fed had to step in and buy a tremendous amount of Treasury notes at auctions that did not go well at all (remember the day the 10 and 30 years jumped 10%?).
We'll see how the day goes. We are mainly in sideline mode and will certainly be pressing our Dow shorts into the weekend as I really can't imagine how all this bad news can't lead to some bad headlines in the press. We're patiently waiting for a nice correction so we can hit our Buy List and deploy some more cash but, as I said to members yesterday about tech stocks – nothing is very attractive at these levels until our indexes prove they can take out our breakout lines and hold them – so far it's been close but no cigar. So, let's continue to be careful out there.
Have a nice weekend,
– Phil
